Samsung facing changes in governance structure

By Kim Bo-eun

The likelihood of regulatory changes is a complicated matter for Samsung, as this would force the conglomerate to overhaul its governance structure.

According to the Insurance Business Act, stocks held by an insurer of an affiliate company should be limited to 3 percent of the insurer's total assets.

The proposed revisions state that the stake an insurance business holds in an affiliate company should be calculated according to market value rather than book value.

Ruling Democratic Party of Korea (DPK) lawmakers Park Yong-jin and Lee Yong-woo proposed these revisions to the insurance business act in June.

The lawmakers contend that if a company holds an excessive portion of another firm's stocks, this exposes it to risks if the stock price tumbles. Because Samsung Life is an insurer, this exposes policyholders to risks.

This is not the first time such revisions have been proposed, but this time they are likely to be passed, considering the DPK now holds the majority of National Assembly seats. The bill will be discussed at the Assembly later this month.

The passage of the revisions will require Samsung Life to sell a huge amount of Samsung Electronics stocks it holds. Samsung Life's total assets came to 317.82 trillion won in its report for the first half of this year, posted last month. Three percent of its total assets totals 9.5 trillion won.

This means Samsung Life cannot hold more than 9.5 trillion won of Samsung Electronics stocks.

By book value, Samsung's life insurer holds 544.4 billion won in Samsung Electronics shares, but by market value this amounts to 29 trillion won.

Samsung Life, therefore, would be required to sell 20 trillion won in Samsung Electronics shares. Samsung Fire & Marine Insurance also holds close to 5 trillion won in Samsung Electronics shares. Under the new regulations, it would have to sell about 3 trillion won of Samsung Electronics shares.

The stocks need to be sold to another Samsung affiliate, and Samsung C&T, the group's arm in construction and trading, is seen as the most likely entity to take over the shares.

Samsung C&T is seen as being able to purchase the stocks worth 20 trillion won, by selling Samsung Biologics shares it owns.

Samsung Biologics' market capitalization has grown to 52 trillion won, from 9.5 trillion won as of the end of 2016, when the manufacturer of bio-healthcare products was listed.

Samsung C&T holds 43.44 percent of Samsung Biologics shares, which amounts to 23 trillion won. Samsung Electronics is likely to take over Samsung Biologics' stocks from Samsung C&T. Samsung Electronics already holds 31.49 percent in Samsung Biologics stocks. Samsung Electronics is the only company within the group that is capable of buying 23 trillion won worth of stocks.

Under the current system, Samsung Electronics Vice Chairman Lee Jae-yong is exercising management rights at Samsung Electronics with 5.01 percent of the electronics unit's shares held by Samsung C&T and 8.51 percent of shares held by Samsung Life.

Lee holds 17.33 percent of Samsung C&T stocks. Samsung C&T holds 19.34 percent of shares in Samsung Life, and Samsung Life holds 8.51 percent of shares of Samsung Electronics.

If Samsung C&T takes over Samsung Electronics stocks from Samsung's insurance units, this simplifies the ownership structure for Lee, who would hold Samsung Electronics shares via Samsung C&T.

The transfer of Samsung Electronics stocks from Samsung's life and non-life insurance units to Samsung C&T is estimated, however, to give rise to up to 5 trillion won in corporate tax.

Samsung is also set to come under greater regulation, with the expected enactment of a law governing the financial health of non-holding financial groups.

Uncertainties have grown, with the indictment of the Samsung heir, Tuesday, over the merger of the group's two business units in 2015. Lee was charged with offenses including stock manipulation and breach of trust in the process of merging Samsung CT and Cheil Industries.