With the conviction of Samsung BioLogics Co., Ltd.,(“BioLogics”), longstanding suspicions surrounding Samsung Group (the “Group”), BioLogics’ parent and South Korea’s biggest family-ruled conglomerate, have once again risen to the surface.
On November 13, 2018, the Securities and Futures Commission (“SFC”), Korea’s financial regulator, suspended BioLogics shares from trading, and imposed a fine of KRW 8 billion. The SFC also requested a criminal investigation and ordered Korea Exchange to review the possibility of delisting the company.
The SFC concluded that in 2015, BioLogics intentionally violated accounting standards to deliberately overstate the value of its subsidiary, Samsung Bioepis. At the time, Samsung Bioepis was evaluated to have net profit of KRW 1.9 trillion despite continued losses since 2011. This valuation in turn spiked the value of BioLogics Co., Ltd.
This ruling is particularly notable as it may relate to a bigger scandal involving the Samsung Group. Currently the Group is undergoing succession, and the heir apparent, LEE Jae Yong, is accused of involvement in South Korea’s recent political scandal. The accusation states he used his ties with then-President PARK Geun Hye to pressure major shareholders to support a merger between Samsung C&T and Cheil Industries. The merger provided LEE with an even bigger presence in Samsung Group, helping to secure his leadership position.
The merger took place when 46.3% of BioLogics Co., Ltd., was owned by Cheil Industries. If BioLogics was overvalued in 2015, as the SFC concluded, it would have inflated Cheil Industries Inc.’s value as well. Consequently, in the proposed merger of Cheil Industries Inc. and Samsung C&T Corporation, the share exchange ratio may have failed to accurately represent the intrinsic values of the participating firms.
The stakeholders of Samsung C&T (including the activist shareholder Elliott Associates LP) raised questions about the accuracy of Cheil Industries’s economic worth and the potential influence of the “diversification” that seemed to exclusively benefit Cheil Industries. Elliott Associates LP urged the board to comply with all applicable governance standards and properly address the benefits attributable to both parties’ shareholders. Despite the unusual degree of external criticism, the transaction was approved.
It has been reported that once the SFC’s requested case is assigned, the prosecutors will thoroughly investigate the complicated dynamics of the suspected connection between the scandals. That could pose a threat to LEE Jae Yong’s position.
Considering Samsung Group’s scope of influence in the South Korean economy, this case represents a potentially severe market setback that holds symbolic meaning for the country’s future governance development. As a leading corporate group of the Korean economy, Samsung has been a global player, attracting large amounts from international investors. Their wide clientele put them under significant pressure to enhance their governance practices up to satisfy their global investors’ standards. Despite this, they appear to have committed accounting fraud — breaking the foundational trust between the company and shareholders. Furthermore, the connections between the accounting scandal and other larger issues, namely the forced merger transaction and jockeying for succession, can be seen to represent a significant corporate governance failure.
As the full extent of the issue have yet to be confirmed, shareholders should continue to closely monitor the legal proceedings and the Group’s actions – and cross their fingers that the scandal could serve to help end the market’s long-lived chain of problems involving family-owned conglomerates.
Kelly is an analyst covering the Korean market.