660 Billion Won Sacrificed... What Was Lee Jae-yong Trying to Protect? [Business & Issues]

⑪ Activist Fund's Proposal to Increase Dividends Rejected
If Dividends Increased, Largest Shareholder's Dividend Would Be 152.4 Billion KRW
Considering Corporate Financial Burden and High Tax Burden

[Image source=Yonhap News]

Lee Jae-yong, Chairman of Samsung Electronics, is the chaebol leader who earns the most money from dividend income in South Korea. Among the top 10 conglomerate leaders by assets, chaebol.com estimates that Chairman Lee will receive the highest dividend of over 300 billion KRW for the 2023 fiscal year. Chairman Lee receives cash dividends from Samsung C&T, which effectively acts as the holding company at the top of Samsung's governance structure, as well as from Samsung Electronics, Samsung Life Insurance, Samsung SDS, and others.

However, more than 60 billion KRW in additional dividends from Samsung C&T that Chairman Lee could have received vanished in an instant. At the Samsung C&T shareholders' meeting, activist funds' proposals for large-scale dividend increases and share buybacks were rejected, causing the additional dividends that Chairman Lee might have received to disappear. What did Chairman Lee and Samsung C&T try to protect by foregoing these additional dividends?

All activist funds' proposals for dividend increase and share buyback rejected

At last week's Samsung C&T shareholders' meeting, all dividend increase proposals demanded by five activist funds, including the City of London Investment Management, were rejected. Their dividend increase proposal mainly called for dividends of 4,500 KRW per common share and 4,550 KRW per preferred share. They also requested a 500 billion KRW share buyback. The combined amount of cash dividends and share buybacks would have reached 1.2364 trillion KRW.

The activist funds hold only 1.46% of Samsung C&T shares, which is too small to wield significant power. However, the sluggish stock price of Samsung C&T, stuck in a trading range, frustrated minority shareholders, and the government's push to resolve the 'Korea discount' by enhancing corporate value empowered the activist funds' movement. The activist funds gathered support from 23% of total shares, including minority shareholders, at the shareholders' meeting.

The flag hanging at Samsung's Seocho building in Seoul was fluttering on the 6th, the day after Samsung Electronics Vice Chairman Lee Jae-yong was released on probation in the appeal trial. Photo by Hyunmin Kim kimhyun81@

However, major shareholders, including those holding 82% of shares, voted against the proposals. Samsung C&T is owned about 40% by the Lee Jae-yong family and their close associates. They reportedly expressed the view that enhancing competitiveness and investing in new businesses are more necessary. Samsung C&T also expressed concerns about the activist funds' demands for increased shareholder returns in a pre-meeting disclosure. The company stated that if large-scale dividend increases exceeding the company's total free cash flow were implemented, it would be difficult to secure investment funds for future growth engines and strengthening business competitiveness.

If 4,500 KRW per share had been approved, Lee Jae-yong would have received 152.4 billion KRW in Samsung C&T dividends

Of course, the rejection caused some turmoil. After the dividend increase proposal was rejected, Samsung C&T's stock price fluctuated significantly before and after the shareholders' meeting. The stock price, which was 115,400 KRW per share on January 18, surged after news of the activist funds' dividend increase demands and reached 171,700 KRW on February 19. However, after the rejection on the 15th, the stock price fell for three consecutive trading days until the 19th, dropping to 150,000 KRW. It rose 48% over two months but then fell 12.6%. A Samsung C&T official explained, "The dividend increase proposal by some shareholders on the 15th of last month attracted short-term attention. As a result of the rejection, the stock price has stabilized again. Shareholders who demanded the dividend increase have not shown further movements since then."

The dividend announced by Samsung C&T at this shareholders' meeting was 2,550 KRW per common share and 2,600 KRW per preferred share. Accordingly, Lee Jae-yong, the largest shareholder and Chairman of Samsung Electronics, will receive 86.39456 billion KRW based on his holding of 33,880,220 common shares (18.10%). If the dividend had been approved at 4,500 KRW per common share as demanded by the activist funds, it is estimated that he would have received 152.4609 billion KRW in dividends. Simply put, he could have received an additional 66.06634 billion KRW.

Corporate leaders inevitably consider the company's competitiveness and financial situation from a management perspective rather than focusing solely on immediate dividend income. Additionally, the high tax rates applied to large dividends are a burden. Dividend income is originally subject to a dividend income tax rate (including local tax) of 15.4%, but if dividend income exceeds 20 million KRW annually, comprehensive income tax rates apply. Furthermore, if dividend income exceeds 1 billion KRW annually, the highest tax rate of 45% applies, plus an additional 4.5% local tax, resulting in an effective tax rate of 49.5%. Since the actual amount received is halved due to taxes, corporate leaders and major shareholders tend to avoid excessive dividend increases.

"Concerns over employment contraction and profitability deterioration if activist funds intervene in management"

Although rejected, the fact that the activist funds' dividend demands received over 20% support and became a major agenda item at the Samsung C&T shareholders' meeting has delivered a significant shock to companies facing the shareholders' meeting season. This means that many investors in Korea are disappointed with the underperforming stock prices, and as the need for corporate value enhancement grows, similar situations may occur more frequently in the future.

Voices warning against excessive management intervention by activist funds are also rising. The Korea Economic Research Institute (KERI) announced on the 20th that an analysis of the management performance of 67 companies where the top 10 U.S. activist funds succeeded in management intervention during 2018-2019 showed employment contraction and profitability deterioration. The total number of employees at these companies decreased from an average of 56,141 in 2018 to 45,946 in 2022. Net income, which indicates profitability, increased by 26.7% to 1.61 billion USD in 2018 when activist fund intervention began, but decreased by 43.4% to 960 million USD in 2020 when the intervention ended. Operating profit also fell by 29.6% in one year to 1.52 billion USD in 2020.