Family feud may disrupt Samsung succession plans
A family feud at Samsung Group, parent of the world's largest electronics company by revenue, could upset the smooth handover of control of a smartphones-to-ships conglomerate whose $234 billion annual sales are bigger than the economy of Singapore.
Lee Kun-hee, South Korea's richest man and chairman of Samsung Electronics <005930.KS>, on Wednesday defends three lawsuits from his elder brother, Lee Maeng-hee, a sister and another relative, who claim $1 billion of assets - mainly shares in Samsung Life <032830.KS>, an insurance company at the heart of a web of Samsung Group cross-shareholdings. Lee Kun-hee is unlikely to attend the case at the Seoul Central District Court.
There's little chance of Lee losing control of Samsung, but the legal wrangling over a small part of the Samsung fortune - a day after the enthusiastic launch of Samsung's latest Galaxy S3 smartphone - may dent plans to eventually hand over the reins to his only son, Jay Lee.
The hearing may also shed more light on how the Lee family maintains its grip on a sprawling group, some details of which emerged in a 2008 lawsuit when Kun-hee was found guilty of financial wrongdoing and tax evasion that eventually led to the current suit.
"It's generally not in one's favour to bet against the House of Samsung and the chairman for domestic legal issues - where such influence often transcends economic borders into legal ones," said Jasper Kim, a professor of international business law and finance at Ewha University's graduate school.
In an unusually public spat at the top of one of the country's famed chaebol - the family-owned industrial groups that wield huge economic and political clout - Maeng-hee, who is in his 80s, has called his younger septuagenarian brother "greedy" and "childish". Kun-hee retorts that Maeng-hee was turfed out of the family and not judged fit to lead Samsung by their father Lee Byung-chull, who founded the group in 1938.
The Samsung Group is effectively controlled by Samsung Everland, a small zoo and theme park company with equity capital of just $10.7 million.
If Kun-hee's stake in Samsung Life falls below Everland's, under South Korean law Everland would be considered a financial holding company, requiring it and companies under its control to sell stakes in non-financial companies, including Samsung Electronics.
Maeng-hee, the eldest son of Samsung's founder, and his sister are seeking a quarter of Kun-hee's stake in Samsung Life. Kun-hee is the biggest shareholder of Samsung Life, with a 20.76 percent stake, followed by Everland with 19.34 percent. As part of the web of cross-holdings, Samsung Life owns 7.21 percent of Samsung Electronics, which owns 35.29 percent of Samsung Card <029780.KS>, which holds 8.64 percent of Everland.
"Lee (Kun-hee) would prefer to settle in cash because losing some of his stake in Samsung Life could spark a bigger ownership restructuring in key Samsung companies," said Jun Yong-ki, an analyst at Hyundai Securities.
Buying more Samsung Life shares would be an expensive option for Kun-hee and Jay Lee. It would be simpler, and cheaper, to have Everland sell its Samsung Life stake to other group entities so the family remains the top shareholder of Samsung Life, maintaining their ownership structure, analysts say.
Samsung declined to comment on the litigation, which is a personal, civil case. Kun-hee has hired three of the country's biggest law firms to defend him.
Lee Maeng-hee was chosen to lead Samsung in 1967 when his father retired, but his aggressive management style caused friction with the founder's confidants, according to several books about Samsung. Ties were finally severed after a coup by the founder's second son, Chang-hee, who told the presidential office his father had a $1 million slush fund overseas. Lee Byung-chull believed his eldest son was also involved in the plot to discredit him. He exiled Chang-hee to the United States, and returned as chairman himself. In 1976, when diagnosed with cancer, he decided Kun-hee should take over the business. Chang-hee died in 1991.
In a recent book on Maeng-hee, "Prince Sado of Samsung", Lee Yong-u, no relation, wrote that Maeng-hee failed in his succession bid due to a conspiracy by the founder's inner circle, which included Kun-hee's father-in-law.
"My brother (Maeng-hee) had his own personality and the chairman had in his mind his successor should have a certain set of qualifications. I was able to become his successor partly because I am his son, but if I didn't have the qualifications he had in his mind, I wouldn't be able to make it," Kun-hee was quoted as saying in a 2010 book, "The Lee Kun-hee story".
As and when Jay Lee takes over, there is likely to be closer public scrutiny amid growing anger over chaebols' dominance in an economy where wealth gaps are widening.
"It's not clear whether the share transfer scheme to Jay Lee will be clawed back by the courts at this point, from a legal purview," said Ewha's Kim.
Jay Lee, 43, has yet to make any significant mark on the business, beyond a failed e-commerce venture during the dotcom bubble. Critics say he lacks his father's charisma, business insight and entrepreneurship. The snappily dressed and bespectacled Lee has a degree in East Asian history from Seoul National University, an MBA from Keio University in Japan and also attended the doctoral programme at Harvard Business School. He has two children and went through one of Korea's highest profile divorce cases.
The Lee family has long been under attack by activist shareholders over its obscure share dealings.
"Right now, the reason why Korean stocks tend to sell at a discount is because of this problem (of limiting the say of minority shareholders). I'd say that's the single most important factor," said Mark Mobius, executive chairman of Templeton Emerging Markets Group.
Longer term, there is a risk that a focus on keeping it in the family may damage Samsung Group.
"The current Samsung Group transfer of power dynamics resembles the Roman Empire at or near its peak," said Ewha's Kim.
"What history has shown us is that what brought down the Pax Romana dynasty was over-expansion and over-spending. In this sense, history could very well repeat itself with the iconic Samsung corporate dynasty - its areas are simply too stretched and its resources spent too far away from its traditional areas of core competencies."