By Kim Jae-kyoung
Staff Reporter



Lee Kun-hee Lee Jae-yong

Samsung Group has hit a roadblock in its move to transfer chairman Lee Kun-hee’s wealth to his only son Jae-yong, as a court Tuesday convicted two of the group’s executives for assisting in the wealth transfer through illicit bond deals a decade ago.
The ruling, the latest in a series of blows to the nation’s largest conglomerate, is paving the way for the prosecution to investigate the Lee Kun-hee family for various stock and other asset transactions among family members. The ruling is expected to have immense implications for the ownership and governance structure of Samsung Group going forward.

The decision is also likely to force chairman Lee remain abroad to avoid possible questioning, causing a management vacuum in the nation’s largest family-owned chaebol.

The Seoul Central District Court sentenced Her Tae-hak, president of Samsung Petrochemical, and Park Ro-bin, president of Samsung Everland, to three and two years in prison, respectively, with suspension of five and three years.

They are charged with incurring losses of around 97 billion won to the theme park operator by helping Jae-yong buy Everland convertible bonds (CBs) at prices lower than market value in 1996, enabling him to take the controlling stake of the conglomerate’s de factor holding firm.

Her served as president of Everland at this time, while Everland president Park was then vice president of the company.

Everland issued CBs worth nearly 10 billion won ($9.8 million) in November 1996, but most of the shareholders gave up purchasing the bond issues. Then, Jae-yong bought the CBs at a price of 7,700 won per share, less than one tenth of the market value estimated at around 85,000 won.

Thanks to the illegal deal, the junior Lee could become the largest shareholder of Samsung Everland. Jae-yong and his three sisters own a combined stake of 62.5 percent in the theme park operator.

With the court siding with the prosecution, Samsung is likely to suffer from setbacks in handing over chairman Lee’s reins of the group to Jae-yong and maintaining its ownership structure.

``The ruling itself will not directly affect the Samsung’s ownership structure because it is only possible when the CB issuance is invalidated,’’ a market analyst said.

``But since the court considered the Samsung’s attempt to transfer wealth as `guilty,’ the ruling is expected to taint the Lee family’s morality and to become a big obstacle to the group’s wealth transfer plan,’’ he added.

Samsung Everland is at the center of the group’s cross investment structure designed to protect the group’s managerial rights through a web of interlocking shareholdings.

Samsung Everland currently owns 19.34 percent of Samsung Life Insurance, which in turn holds 7.23 percent of Samsung Electronics, Korea’s largest company by market value. The electronics maker holds 46.9 percent of Samsung Card.

In the meantime, Samsung is expected to appeal against the court ruling on the group’s CB transfer case.

Following the announcement of the court decision, Samsung said, ``We are embarrassed at the court ruling. We will decide whether to appeal or not after thoroughly reviewing the ruling.’’

The group maintained that it has not collaborated with Everland shareholders to transfer the CB issues to Jae-yong and the CB deal was not found to have brought losses to Everland.

It has claimed that the CB issuance was designed to raise much-needed capital for the company, denying it was intended for the wealth transfer from chairman Lee to his son.

In June 2000, civic groups lodged a complaint with the prosecution against Samsung chairman Lee for handing over his conglomerate’s managerial control to his only son through the illegal deal.

The court ruling has come amid growing calls for Samsung to reform its corporate governance from the government and lawmakers.

In a recent meeting with business editors, President Roh Moo-hyun said that Samsung should have come in line with the government move to reform chaebol ownership structure, despite its disagreement with the regulatory measures.

Roh chided Samsung Group for its challenge of the government’s effort to reform the conglomerates’ corporate governance, saying, ``I think there is a problem with Samsung’s attitude on this issue.’’

kjk@koreatimes.co.kr