Securities Industry's View on Samsung Group's Governance Structure Scenarios

Low Possibility of Change but Direction Must Be Decided Before April Next Year as Inheritance Has Begun
Chairman Lee's Samsung Life Shares Likely to Be Inherited by Vice Chairman Lee Jae-yong
If Insurance Business Act Is Amended, Samsung C&T's Acquisition of Samsung Electronics Shares Is Key

[Asia Economy Reporter Song Hwajeong] With the passing of Samsung Chairman Lee Kun-hee, market attention is focused on the restructuring of Samsung Group's governance. The securities industry expects that while no major structural changes will occur immediately, changes in governance will be inevitable depending on the inheritance process and the passage of the amended Insurance Business Act.

As of 9:31 a.m. on the 27th, Samsung C&T Corporation was trading at 119,000 KRW, up 0.85% (1,000 KRW) from the previous day. Samsung Life Insurance recorded a 0.31% increase to 65,700 KRW. Samsung Group stocks, which had surged on expectations of governance restructuring following Chairman Lee's passing, mostly showed weakness and stabilized on this day. Only Samsung C&T and Samsung Life Insurance, which are expected to play key roles in the governance restructuring, maintained slight gains.

The securities industry forecasts that Samsung Group's governance restructuring will not happen immediately. Jeong Daero, a researcher at Mirae Asset Daewoo, said, "Vice Chairman Lee Jae-yong exercises management rights over the entire group through the two pillars formed around Samsung C&T, Samsung Electronics, and Samsung Life Insurance by securing the largest shareholder status in Samsung C&T." He added, "In May, Vice Chairman Lee issued a public apology promising to prevent further controversies regarding succession. This means that Samsung Group's decision not to pursue succession reduces the need for Vice Chairman Lee to further increase his control over the holding company Samsung C&T and others." He assessed that the possibility of governance restructuring such as splits and mergers to secure additional control for generational succession has significantly decreased, and the current group governance structure is expected to be maintained even after inheritance.

However, there are also forecasts that governance restructuring will be inevitable due to inheritance and the amended Insurance Business Act. Eun Kyungwan, a researcher at Meritz Securities, said, "Contrary to investors' expectations, the possibility of a full-scale governance restructuring of Samsung Group happening immediately seems low. However, inheritance is different. Since inheritance has begun, the heirs or the direction of Chairman Lee's shares must be decided before April next year."

The direct ownership of Samsung Electronics by the owner family is only 5.8%, but strong control is exercised through Samsung Life Insurance (8.51%) and Samsung C&T (5.01%). The largest shareholders of these two companies are Chairman Lee (20.76%) and the third-generation owners including Vice Chairman Lee (28.43%). It is highly likely that the Samsung Life Insurance shares will be inherited by Vice Chairman Lee. The researcher explained, "The value of Samsung Life Insurance shares is about 2.6 trillion KRW, which is not large compared to Samsung Electronics shares, but since these are major shareholder shares of Samsung Electronics, they are more likely to be inherited by the third-generation owners rather than sold externally. Since a special relationship person must obtain financial authorities' approval to purchase shares in financial companies, and among the third-generation owners only Vice Chairman Lee has received approval, currently only Vice Chairman Lee can inherit Chairman Lee's Samsung Life Insurance shares." Although approval from the Financial Services Commission is required after inheritance, since Vice Chairman Lee is already registered as a special related party, succession is expected to proceed smoothly.

Regarding Samsung C&T shares, interest is relatively lower compared to Samsung Electronics and Samsung Life Insurance. This is because the third-generation owners already have sufficient control over Samsung C&T, and the inheritance amount (about 600 billion KRW) is not large. The researcher diagnosed, "Ultimately, the key issue is the direction of Samsung Electronics shares," adding, "There are three main possibilities: corporate donation of Samsung C&T shares, contribution to public interest foundations, or direct inheritance by the third-generation owners."

The amended Insurance Business Act is also considered a factor influencing governance restructuring. Lee Sangheon, a researcher at Hi Investment & Securities, said, "If the amended Insurance Business Act passes in the National Assembly, Samsung Life Insurance and Samsung Fire & Marine Insurance will have to evaluate their Samsung Electronics stock holdings at market value and dispose of any excess over 3% of total assets within the legal deadline." He added, "This would require Samsung Life Insurance to sell a significant portion of its 8.8% stake in Samsung Electronics, making governance changes inevitable."

If Samsung Life Insurance is forced to sell a significant portion of its Samsung Electronics shares due to the amended Insurance Business Act, it is analyzed that Samsung C&T would have sufficient grounds to purchase Samsung Electronics shares as the de facto holding company of Samsung Group. In this case, how to secure the purchase funds will be a key issue. The researcher explained, "One possible scenario is that Samsung C&T, which holds a 43.4% stake in Samsung Biologics, sells its shares in Samsung Biologics to Samsung Electronics and uses the proceeds to purchase Samsung Life Insurance's Samsung Electronics shares." He added, "Ultimately, how much Samsung C&T secures Samsung Electronics shares will be the core of governance changes, and shareholder-friendly policies such as increased dividends from Samsung Electronics are expected to continue."