The Kaleidoscope of Law and Compliance – the Case of Samsung
Many in South Korea jestingly refer to the country as the “Republic of Samsung.”[1] This reference to Samsung as Korea’s representative should come as little surprise given the country’s peculiar economic structure. For several decades, the economy of South Korea has been dominated by family-run conglomerates or chaebol, with the top five chaebols generating approximately two-thirds of Korea’s gross domestic product.[2] And Samsung, which now boasts more than eighty years of continuous operation,[3] tops the list with an annual turnover that amounts to about one-fifth of the country’s GDP.[4] In fact, some go so far as to envisage that it is very much feasible to pursue a Samsung-only life in Korea:[5] one can live in a Samsung-constructed apartment with Samsung appliances bought on a Samsung credit card, while watching the Samsung-owned professional baseball or basketball team play on a Samsung smartphone or TV.
And what spearheads the Samsung group in overall size, revenue, and global business strategies is the Samsung Electronics Corporation (“SEC”), the group’s flagship entity.[6] SEC employs more than 300,000 employees worldwide,[7] and about ninety percent of the electronic giant’s sales are generated overseas.[8] SEC is headed by Lee Jae-Yong, who is Harvard-educated[9] and came to the helm when his father Lee Kun-hee, Chairman of SEC, suffered an abrupt heart attack and became incapacitated in 2014.[10]
For the past few years, JY Lee has taken measures to cement and consummate his succession. This has included an $8 billion merger of two Samsung affiliates, Samsung C&T and Cheil Industries, in 2015 (“Merger”),[11] which enabled JY Lee to assume de facto control of Samsung.[12] Unfortunately, triggered by the impeachment of President Park Geun-hye on account of abuse of power, bribery, and dereliction of presidential duties, JY Lee was arrested on February 15, 2017 and incarcerated on a number of charges including bribery, embezzlement, and concealment of assets overseas, until his release in February 5, 2018.[13]
Recently, the Samsung group is once again in turmoil as South Korean prosecutors filed for an arrest warrant for JY Lee “on suspicion he was involved in price manipulation and illegal trading” during the Merger.[14] Interestingly, the legality of the Merger (or lack thereof) is the subject of ongoing arbitration proceedings (“Arbitration”) between the South Korean government (“GOK”) and two United States-based hedge funds, Elliott Associates L.P. (“EA”) and Mason Capital Management (“MCM”).[15]
In relation to the Arbitration, in July 2018, EA and MCM filed their letters of intent against the GOK with a view to initiating investor-state dispute settlement (“ISDS”) proceedings under the Free Trade Agreement between the Republic of Korea and the United States of America. They are seeking USD 770 million and USD 175 million in damages, respectively, against the GOK. In particular, EA’s key claim is that the GOK had allegedly made an unlawful intervention in the Merger and thereby caused pecuniary losses to the claimant.[16] Such alleged GOK intervention was made possible, EA asserts, through orchestrating the vote of the National Pension Service (NPS), a then C&T shareholder, and a public entity with the casting vote, in favor of the Merger. At the time of the Merger, NPS held 11 percent and EA held 7 percent in Samsung C&T, while MCM held 2.2 percent in the same entity. EA opposed the Merger, arguing that “shares in Cheil were not only high but significantly overvalued, while shares in (S)C&T were not only low but significantly undervalued.”[17] The Merger was therefore arguably oppressive towards EA.
The GOK’s position in the Arbitration appears to be denial of any illicit or undue involvement with the Merger. According to the GOK’s written response to the notice of arbitration, the Merger proceeded on purely commercial considerations, one of which being much needed realization of synergies between C&T and Cheil.[18] In support of this defense, the GOK claims that, at the time of the Merger, market gurus dispensed positive views on the prospective merger; in fact, as elaborated in the prospectus, the merger was to provide a strategic platform for the two corporate bodies to consolidate and grow into a “global leader in fashion, food and beverage, construction, leisure and biotech industries, allowing them to offer premium services” and products across the board.[19]
In addition, the GOK points to the fact that the local courts ruled in favor of the Merger over EA’s injunctive relief, which sought to prevent the Merger from going forward. The adjudicating trial court specifically held that EA had no legal standing to be granted interlocutory remedies relating to the Merger while ruling the purpose of the Merger to be overall reasonable and legally compliant. These holdings of the court of first instance were subsequently upheld by the appellate court, and EA ultimately dropped the suit against C&T.
In buttressing the legality of the Merger, the GOK also notes that NPS voted in favor of the Merger after duly observing all relevant internal protocols and decision-making guidelines. Besides, a slew of other shareholders including the Government of Singapore Investment Corporation, the Saudi Arabian Monetary Agency, and the Abu Dhabi Investment Authority joined suit in supporting the Merger by casting their votes of confidence.[20] Furthermore, it is claimed, the Merger preceded any collusive dealings with criminal implications between Lee and the former President Park with little room for the consolidation to be tainted by significant elements of illegality.[21]
As noted above, insofar as the Arbitration is concerned, the GOK is asserting that the Merger was a product of sound commercial considerations and prudent corporate practices by Samsung and among the conglomerate’s shareholders. How this GOK stance may be reconciled with the Korean prosecution’s charges against JY Lee, including alleged manipulation and illegal boost of stock prices, remains to be seen. A key point of contention between JY and the prosecution in this regard may be whether there was any illegality in the process leading up to the Merger. What is of particular interest is whether Bioepis, a biopharmaceutical joint venture between Samsung BioLogics, a listed Korean company (“SBL”) and Biogen, a listed United States entity (“BIIB”), had engaged in any accounting fraud to jack up the value of Cheil.[22]
The reviewing court turned down the prosecutor’s arrest warrant this time around.[23] While, if indicted, JY Lee will have a day in court to contest the validity of another wave of criminal charges against him, it will be interesting to observe how the criminal proceedings of JY Lee unfold and whether Samsung’s good name will hold up again. In the meantime, it would undoubtedly be a prudent move for the electronics multinational to toe the line from top-down when it comes to various compliance issues.
I.Y. Joseph Cho was formerly General Counsel at a Samsung entity. He is currently serving as a legal advisor for a top conglomerate in Korea. The author would like to thank his late father, JW Cho, for many valuable lessons he taught regarding life, family and love. The opinions expressed in this publication are solely the author’s.
This is a guest blog post and in no way represents the views of the Fordham International Law Journal.
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[1] Exploring the World's Digital Future, AL JAZEERA (Feb. 18, 2017, 8:16 AM) http://www.aljazeera.com/programmes/countingthecost/2017/02/exploring-world-digital-future-170218094645156.html.
[2] See William Pesek, Living in the Republic of Samsung, BLOOMBERG OPINION (June 23, 2014, 6:03 PM) https://www.bloomberg.com/view/articles/2014-06-23/living-in-the-republic-of-samsung.
[3] See Jaewon Kim, The Samsung empire at 80, NIKKEI ASIAN REVIEW (Feb. 15, 2017, 6:45 AM) http://asia.nikkei.com/Spotlight/Samsung-on-the-spot/The-Samsung-empire-at-80; see also Samsung C&T Global PR Manager, Celebrating Samsung C&T’s 80-year Journey of Innovation (Mar. 22, 2018) http://news.samsungcnt.com/celebrating-samsung-cts-80-year-journey-innovation/.
[4] See Olivia Solon, Samsung HQ Raided by Prosecutors as South Korean Political Scandal Deepens, GUARDIAN (Nov. 8, 2016) https://www.theguardian.com/technology/2016/nov/08/samsung-scandal-south-korea-president.
[5] See Chico Harlan, In S. Korea, the Republic of Samsung, THE WASHINGTON POST (Dec. 9, 2012), https://www.washingtonpost.com/world/in-s-korea-the-republic-of-samsung/2012/12/09/71215420-3de1-11e2-bca3-aadc9b7e29c5_story.html?utm_term=.2e0cd7147cb6.
[6] See Park Ga-young, Samsung Electronics Maintains No. 1 Sales Ranking for 17th Year, THE INVESTOR (Jan. 13, 2019), http://www.theinvestor.co.kr/view.php?ud=20190113000129.
[7] Iain Marlow, South Korea’s Chaebol Problem, THE GLOBE AND MAIL (Apr. 24, 2015), http://www.theglobeandmail.com/report-on-business/international-business/asian-pacific-business/south-koreas-chaebol-problem/article24116084/.
[8] Michael Herh, Why Is Samsung Electronics Beefing Up Global Communications?, BUSINESSKOREA (Feb. 26, 2018), http://www.businesskorea.co.kr/news/articleView.html?idxno=20679.
[9] Samsung Scandal: Who is Lee Jae-yong?, BBC (Feb. 5, 2018), https://www.bbc.com/news/business-39191196.
[10] See Mark Scott and Brian X. Chen, Samsung Leader Stable after Heart Attack, N.Y. TIMES (May 11, 2014), https://www.nytimes.com/2014/05/12/business/international/samsungs-chairman-has-surgery-after-heart-attack.html?_r=0.
[11] Jonathan Cheng and Min-Jeong Lee, Samsung Shareholders Back $8 Billion Merger, in Blow to U.S. Hedge Fund, THE WALL ST.J. (July 17, 2015, 4:00 AM) https://www.wsj.com/articles/samsung-c-t-shareholders-approve-8-billion-merger-with-cheil-industries-1437105075.
[12] Seonjin Cha and Rose Kim, Samsung’s Lee Tightens Grip on Chaebol in $9.3 Billion Deal, BLOOMBERG (May 27, 2015, 8:41 PM) https://www.bloomberg.com/news/articles/2015-05-25/cheil-industries-to-acquire-samsung-c-t-in-all-stock-deal.
[13] See Paul Armstrong, Samsung Scion Lee Jae-yong In Surprise Release from Jail After Appeal, FORBES (Feb. 5, 2018, 4:41 AM) https://www.forbes.com/sites/armstrongpaul/2018/02/05/samsung-scion-lee-jae-yong-in-surprise-release-from-jail-after-appeal/#e4d2a757c009.
[14] Samsung Heir Lee Jae-yong Avoids Arrest over Controversial Merger, THE JAPAN TIMES (June 9, 2020) https://www.japantimes.co.jp/news/2020/06/09/asia-pacific/crime-legal-asia-pacific/samsung-lee-jae-yong-avoids-arrest-merger/#.Xu1aDmgzY2w.
[15] See Elliott Advisors (HK) Limited Statement on Notice of Arbitration, businesswire (July 13, 2018), https://www.businesswire.com/news/home/20180713005119/en/Elliott%C2%A0Advisors-HK-Limited%C2%A0Statement-Notice-Arbitration.
[16] See Notice of Arbitration and Statement of Claims at ¶¶ 2, 86, Elliott Associates, L.P. v. Republic of Korea, PCA Case No. 2018-51 (July 12, 2018) (Heiskanen, Garibaldi & Thomas, Arbs.), available at https://www.italaw.com/sites/default/files/case-documents/italaw10501.pdf.
[17] Claimant’s Amended Statement of Claims at ¶ 28, Elliott Associates, L.P. v. Republic of Korea, PCA Case No. 2018-51 (Apr. 4, 2019) (Heiskanen, Garibaldi & Thomas, Arbs.), available at https://www.italaw.com/sites/default/files/case-documents/italaw10504.pdf.
[18] Response to Notice of Arbitration at ¶ 24, Elliott Associates, L.P. v. Republic of Korea, PCA Case No. 2018-51 (Aug. 13, 2018) (Heiskanen, Garibaldi & Thomas, Arbs.), available at https://www.italaw.com/sites/default/files/case-documents/italaw9971.pdf.
[19] Id.
[20] Id.
[21] Statement of Defence at ¶ 72, Elliott Associates, L.P. v. Republic of Korea, PCA Case. No. 2018-51 (Sept. 27, 2019) (Heiskanen, Garibaldi & Thomas, Arbs.), available at https://www.italaw.com/sites/default/files/case-documents/italaw11061.pdf.
[22] See Maggie Lynch, Questions Mount over Samsung Accounting Case, BIOPHARMA-REPORTER.COM (June 12, 2019) https://www.biopharma-reporter.com/Article/2019/06/11/Executive-arrested-at-Samsung-over-accounting-case. For more details on the proposed SBL/BIIB merger, see Samsung Group planned to manipulate market prices ahead of Cheil/Samsung C&T merger, hankyoreh (Nov. 28, 2019 5:18 AM) http://english.hani.co.kr/arti/english_edition/e_business/918904.html.
[23] Samsung: Court rejects Lee Jae-yong Arrest Warrant Request, BBC(June 9, 2020) https://www.bbc.com/news/business-52960676.