Can National Pension Service, a Samsung C&T shareholder, file a damages suit after 'not guilty in first trial'?

Kim Taehyun Chairman "'Lee's 1st Trial' Followed by Review of Damages Lawsuit"
Lee Acquitted of Charges Including Unfair Merger of Samsung C&T and Cheil Industries

Lee Jae-yong, Vice Chairman of Samsung Electronics, who was indicted on charges including the unfair merger of Samsung C&T and Cheil Industries, was acquitted in the first trial, drawing attention to whether the National Pension Service (NPS) can claim damages.

According to the legal community on the 12th, on the 5th, the Seoul Central District Court Criminal Division 25-2 (Presiding Judges Park Jeong-je, Ji Gwi-yeon, Park Jeong-gil) acquitted Lee, who was charged with unfair trading practices and market manipulation under the Capital Markets Act, and breach of duty. All 13 others tried together, including former Samsung Group Future Strategy Office head (Vice Chairman) Choi Ji-sung and former deputy head (President) Jang Chung-gi, were also acquitted.

One of the biggest issues in this trial was the verdict on the charge of "providing false information to the National Pension Service and inducing former President Park Geun-hye to exert undue influence." This charge was critical in determining the possibility of the NPS claiming damages against Lee. In October last year, at the National Assembly Health and Welfare Committee’s audit of the NPS, Kim Tae-hyun, the NPS director, stated, "The first trial regarding Lee’s case related to the Samsung C&T and Cheil Industries merger is ongoing," and added, "Once the verdict is out, we plan to prepare a damages lawsuit against Lee, former Minister Moon Hyung-pyo, and former director Hong Wan-seon."

So far, the prosecution has argued that the merger ratio of 1 to 0.35 between Cheil Industries and Samsung C&T in 2015 was set to facilitate an "illegal succession of management rights." Cheil Industries’ largest shareholder, Lee, who held no shares in Samsung C&T, benefited because Samsung C&T’s value was evaluated at about one-third of Cheil Industries’ value. Samsung C&T essentially functions as the holding company of the Samsung Group. Since Samsung C&T held about 4% of Samsung Electronics shares before the merger, Lee was able to strengthen his control over Samsung Electronics after the merger.

The prosecution also claimed, "When deciding the merger timing that determines the merger ratio, the interests of Samsung C&T and its shareholders were completely disregarded, and the timing was chosen solely for the benefit of Lee, the largest shareholder of Cheil Industries."

In fact, the National Pension Service approved the merger despite the unfavorable merger ratio. Initially, the NPS held 11.61% and 5.04% stakes in Samsung C&T and Cheil Industries, respectively, but the value of shares in the merged Samsung C&T decreased compared to the combined value of the two companies’ shares. Civic groups claimed that depending on how the merger ratio was set, the estimated damages to the NPS could range from 70 billion to 490 billion KRW.

On the other hand, Lee’s side argued during the trial that the merger ratio was determined based on the average stock price over a certain period, so there was no problem with the ratio calculation. They claimed that shareholders’ interests were sufficiently considered and that there was no illegal stock price manipulation. Lee also asserted his innocence, stating that he was not informed of most details regarding the merger process.

The first trial court judged the Samsung C&T and Cheil Industries merger as a "legitimate business activity driven by management needs." The court stated, "Based on various evidence and facts, the purpose of this merger cannot be seen solely as strengthening Lee’s management rights and Samsung Group succession," and added, "The interests and intentions of Samsung C&T and its shareholders were not disregarded during the merger process. Rather, strengthening group control and stabilizing management through the merger appears to benefit Samsung C&T and its shareholders."

Regarding the charge of providing false information to the National Pension Service, the court said, "There was no false explanation to the NPS that the Anjin report was used as a discussion material for the board of directors. This was also confirmed through objective documents and recorded phone calls at the time." The Anjin report was prepared by Anjin Accounting Corporation at Samsung C&T’s request to review whether the 1 to 0.35 merger ratio was appropriate.

The court also found insufficient evidence to deem the purpose, process, ratio, or timing of the merger as unfair. Furthermore, it stated, "Claims that the NPS’s voting rights were induced through former President Park are merely allegations already rejected in other cases." In addition, Lee was acquitted of all 19 charges, including accounting fraud allegations related to Samsung Biologics.

With the unanimous acquittal, the prosecution’s appeal raises the possibility of a prolonged criminal trial. On the 8th, the Seoul Central District Prosecutors’ Office said, "There is a significant difference in views between the first trial verdict and the prosecution regarding the purpose and circumstances of the group control succession through the merger, as well as fact-finding and legal judgment," and stated it would seek a second trial. They also argued, "There are many contradictions between the current verdict and past Supreme Court rulings that recognized the succession of group control." Following Lee’s acquittal, the NPS’s claim for damages is expected to face some setbacks. An NPS official said, "After obtaining the verdict, we will analyze the damages caused to the fund by the merger and prepare a response plan," adding, "Claims for damages will be carefully reviewed after analyzing the verdict."

Meanwhile, former Minister Moon was sentenced to 2 years and 6 months in prison after being tried for charges including pressuring the investment committee to approve the merger plan through former director Hong before the Samsung C&T merger shareholders’ meeting during the Park Geun-hye administration. Former director Hong was also convicted and sentenced to 2 years and 6 months in prison for pressuring committee members, causing significant losses to the NPS.