Disclaimer: The following is a totally unauthoritative personal translation of an article appeared in <The Pressian> on Feb. 23, 2012, reporting an in-depth analysis of the row between Samsung and CJ, two sibling conglomerates with the same root in Korea, resparked by a recent tailing of CJ chairman Jae-hyeon Lee incident by a Samsung employee and its possible future repercussion. Disputes among founding family members of a Chaebol (conglomerate) are nothing new in Korea but there’s truly something special in the current row between Samsung and CJ. Depending on the result of current dispute, the whole management structure of Samsung can change from the current one drastically. All rights regarding this post stay with the author of the original article or with <The Pressian> and this post will be scrapped immediately at their request. In the post, I tried to match the English translation of names of people / institutions / positions to their authentic ones as much as I can but, inevitably, some of them may be different. Original article of this post (in Korean) can be found in the link at the bottom.
Notes added later: 2nd daughter of Samsung founder Byeong-cheol Lee, Ms. Sook-hee Lee is also known to have filed an inherited property split lawsuit against Samsung chairman Kun-hee Lee. 삼성家 소송 확산… 어디까지 영향줄까
New variable to Samsung control structure .. the key is taxation and corporate transparency
Reporter Hyeon-seok Seong 성현석 기자
The aftermath of a Samsung employee tailing CJ chairman, Jae-hyeon Lee, is nothing but trivial. However, it is all the more pitiful that legal issues concerning the shares of Samsung sibling companies managed under borrowed names do not draw their fair share of attention.
An over-reaction from Samsung who were pressed by Maeng-hee Lee’s lawsuit?
It is known that this tailing incident was committed by a deputy manager of Samsung Engineering Audit Team known as Mr. Kim. However, no one considers it as a personal incident; rather, most seem to agree with CJ’s claim that “it was an act conspired by the Samsung group and its chairman Kun-hee Lee” because the incident temporally overlaps with the property split lawsuit by the oldest son of the late founder of Samsung, Byeong-cheol Lee, against the incumbent chairman of Samsung, Kun-hee Lee. It was on 12th when Mr. Maeng-hee Lee filed the lawsuit and it was on 14th when the press covered the story. And it was on 17th when the chauffeur of CJ chairman Jae-hyeon Lee first noticed the hunch of someone tailing them. CJ judges that, feeling pressed by the lawsuit by Mr. Maeng-hee Lee, Samsung must have over-reacted.
Samsung management succession that brought about illegal lobbying and dereliction of duty scandals; will it be shaken from the root?
After all, this means that the old row between Samsung and CJ explodes again. Depending on the result of the feud, the management structure of Samsung, the biggest Chaebol of Korea, will be shaken up completely. Since mid 1990s, one thing that Samsung and chairman Kun-hee Lee spent most of their efforts was the succession of management to Jae-yong Lee, the CEO of Samsung Electronics.
Scandals that are familiar to us like the issuance of scrap value Samsung Everland CB, the issuance of scrap value Samsung SDS BW all happened during the course. Samsung’s efforts to change laws and systems with all their influence were all focused on the management succession; those were about clearing legal obstacles that hampered the succession of management from chairman Kun-hee Lee who dominates the whole Samsung conglomerate with a mere 1% of share to his son CEO Jae-yong Lee. However, all the efforts of Samsung management succession project that went through numerous abnormal scandals and censured legal battles can turn into nothing depending on the result of the lawsuit by Mr. Maeng-hee Lee.
If Mr. Maeng-hee Lee wins, Samsung Life Insurance should sell shares of Samsung Electronics.
The view that chairman Kun-hee Lee sees this issue very seriously is, for this reason, reasonable. If Mr. Maeng-hee Lee wins the legal battle, dominant shareholder of Samsung Life Insurance Inc. changes from chairman Kun-hee Lee to Samsung Everland Inc.
In this case, according to the current law on financial holding company, Samsung Everland becomes an insurance holding company and Samsung Life Insurance, as a subsidiary of Samsung Everland, should sell all possessing shares of Samsung Electronics since a financial company that is a subsidiary of an insurance holding company cannot control non-financial company (Samsung Electronics). This means the severance of the central link in the ‘Samsung Everland → Samsung Life Insurance → Samsung Electronics → Samsung Card’ control scheme. It can loose the control on Samsung Electronics, the ‘star’ company of Samsung conglomerate. Considering the fact that Samsung could control things in Korea to a level that expressions like ‘Samsung republic’ or ‘Samsung kingdom’ were more or less natural owing to the existence of Samsung Electronics, the representative export company of Korea, one can gauge the sheer impact of the lawsuit.
Deep-rooted family dispute … reaction from other siblings is another variable
More horrific scenario to chairman Kun-hee Lee is when other siblings of chairman Lee get involved in this dispute. If they press him under the cause of returning Samsung management to the oldest descendent of founding father, it can be a substantial burden to chairman Lee.
In fact, Mr. Maeng-hee Lee is known to claim that “the late chairman Byeong-cheol Lee intended to inherit Samsung conglomerate to the third son Kun-hee Lee for the time being but, eventually, wanted to hand it over to the oldest grandson chairman Jae-hyeon Lee.” Also, CJ chairman Jae-hyeon Lee has been claiming his status as the oldest grandson persistently. The bust of the late chairman Byeong-cheol Lee in CJ headquarter building is the symbol. It was CJ chairman Jae-hyeon Lee who was holding the portrait of late chairmen Byoeng-cheol Lee at his funeral, and it was also CJ chairman Jae-hyeon Lee who took care of late Doo-eul Park, the mother of Maeng-hee Lee and Kun-hee Lee brothers, till her death. All these things back up the logic of chairman Jae-hyeon Lee’s legitimacy. On top of that, the fact that chairman Kun-hee Lee did not attend the funeral of late Doo-eul Park, his own mother, is another weak point to him. At that time, chairman Lee raised lung cancer treatment as the reason. But, everyone was backbiting about his absence. If other siblings who were discontented with chairman Kun-hee Lee gather together, no one can easily predict the outcome of the dispute.
Maeng-hee Lee & Kun-hee Lee brothers fight over other’s money?
However, really important issue is different. Why chaebol brothers fight with each other is a matter of gossip. To the society as a whole, ‘taxation’ is the real issue. People’s Solidarity for Participatory Democracy (PSPD) picked this issue very succinctly on 17th. At that time, PSPD pointed out “The real issue is how the shares under borrowed names were first built, if the change of hands of borrowed-name shares was legal, if there were any illegalities such as tax evasion during that course, if Samsung-family brothers are evading the duty of paying taxes or National Tax Service (NTS) is negligent on its duty to collect such taxes.”
Also, there is a claim that the property under fake name Maeng-hee Lee and Kun-hee Lee are fighting for is, by its own account, someone else’s money. In a word, it is as if they are fighting for something that was robbed from someone else. Solidarity for Economic Reform (SER) pointed out many times that “the number of Samsung Life Insurance shares under borrowed names that were transferred to their real owners in two split rounds is by now 9,781,200. But the number of shares inherited from prior chairman Bueong-cheol Lee was only 4,914,000. The rest 4,867,200 shares have nothing to do with inheritance; they are simply other shares under borrowed names.”
Of course this claim is in direct confrontation with the official result of special prosecution in 2008. At that time, special prosecution called all of Samsung Life Insurance shares under borrowed names as inherited property from prior chairman Byeong-cheol Lee. The ground Mr. Maeng-hee Lee could file a lawsuit was also the official result of special prosecution at that time.But, many experts including lawyer Yong-cheol Kim who had paved the way to Samsung special prosecution and SER pointed out that the official result of Samsung special prosecution was marred by faults. And that was why there were voices “it’s like special prosecution handing over stolen property back to the thief.”
Whoever wins, gift tax issue remains
Even if we accept the official investigation result of then special prosecution, issues still linger. Representative Jung-hee Lee of Unified Progressive Party, a lawyer, sent an official letter to NTS on last 15th urging it to impose gift tax to chairman Kun-hee Lee.
According to the result of special prosecutions investigation, Samsung Life Insurance shares under borrowed names are actually shared property of coheritors including Maeng-hee Lee, Kun-hee Lee. But, if all of these shares were put under chairman Kun-hee Lee’s name through another round of name-borrowing, she said, this should also be taxed for gifting. In the official letter, Rep. Lee said “all children of the late chairman Byeong-cheol Lee can claim inheritance (of the share) and chairman Kun-hee Lee should pay the 2.3 trillion KRW gift tax that incurred during the course of changing owner names of borrowed name shares to their real owners’ ones.
Byeong-cheol Lee’s three sons and five daughters, their brief life stories
The late founder of Samsung Byeong-cheol Lee and his wife the late Doo-eul Park had three sons and five daughters. They were In-hee, Maeng-hee, Chang-hee, Sook-hee, Soon-hee, Deok-hee, Kun-hee, Myeong-hee in their age order. Though he left other children with Japanese wives, only those between the late Doo-eul Park are known to public.
Mr. Maeng-hee Lee is the second child but the oldest among sons and chairman Kun-hee Lee is the seventh child but the third among sons. At first, it was Maeng-hee Lee who was supposed to inherit major companies of Samsung; third son current chairman Kun-hee Lee was supposed to inherit only media-related companies like TBC (currently, KBS 2). In fact, the first job of chairman Kun-hee Lee was at TBC.
Why the successor of Samsung Group suddenly had to be changed from the first son to the third son is a complicated story including private lives, but the saccharin smuggling incident in 1966 was decisive. Because of this unprecedented economic crime in modern Korean history, chairman Byeong-cheol Kim had to withdraw from all major group management posts.
Also, the second son the late Mr. Chang-hee Lee, taking up the whole legal responsibility, had to serve jail terms; Mr. Maeng-hee Lee and Chang-hee Lee were overseeing the whole saccharin smuggling crime at that time. As chairman Byeong-cheol Lee retreated himself from Samsung management and Mr. Chang-hee Lee was arrested, Mr. Maeng-hee Lee naturally spearheaded Samsung management. But, just after Mr. Chang-hee Lee was released from prison, an incident in which a memo detailing organized economic crimes of Samsung drafted by Mr. Chang-hee Lee was delivered to the Blue House. In it were ‘foreign currency smuggling out of the country’ incidents which was a serious crime incurring severe prosecution at that time. Also in it was a clause that chairman Byeong-cheol Lee should relinquish Samsung management forever. This memo was delivered to president Jung-hee Park through former president Doo-hwan Chun who was an army lieutenant major at that time and Jong-kyoo Park, the chief of presidential security.
Knowing this incident, chairman Byeong-cheol Lee got infuriated and turned frosty to Mr. Chang-hee Lee and Maeng-hee Lee. Although it was Mr. Chang-hee Lee who dropped the memo to the Blue House, chairman Byeong-cheol Lee was known to have suspected that Mr. Maeng-hee Lee must have something to do with the incident as well.
Finally, chairman Byeong-cheol Lee drafted a will that he would leave Samsung management to the third son Mr. Kun-hee Lee, current chairman, in 1971. The will read ‘the oldest son Maeng-hee does not have any interest in management and second son Chang-hee does not want to run many companies. Third son Kun-hee first declined my suggestion but accepted it after all. As I decided to elect Kun-hee as my successor of Samsung Group, everyone should help him run Samsung steadfast.”
Five years later in 1976, just before the gastric cancer operation, chairman Byeong-chul Lee made an explosive announcement to Mr. Maeng-hee Lee couple: ‘I will let Kun-hee Lee to lead Samsung Group from now on.’ It was known that Mr. Maeng-hee Lee couple were tremendously shocked at that time. Following this, chairman Kun-hee Lee succeeded the chairmanship of Samsung in Dec. 1987 after the death of chairman Byeong-chul Lee.
Mr. Maeng-hee Lee, being pushed aside from group management power struggle, got himself involved only in running the Cheil Jedang; even that, he was not so enthusiastic. Cheil Jedang spun out of Samsung Group in 1993. Currently, it changed its name as CJ Group.
After the memo dropping incident, Mr. Chang-hee Lee lived in US for a long time and reconciled with his father. He founded and ran Saehan Media but suddenly died in 1991. Later, Saehan Media Group got bankrupt and dissolved; the fate of his children overturned drastically after that. One of Mr. Chang-hee Lee’s sons, the late Jae-chan Lee committed suicide in last 2010. Although he was a grandson of chairman Byeong-cheol Lee and a niece of chairman Kun-hee Lee, he was known to suffer from economic hardships until his death and public opinion was sympathetic for that.
Meanwhile, among five daughters of chairman Byeong-cheol Lee, only Ms. In-hee Lee, the advisor of Hansol Group (the first and the oldest daughter) and Ms. Myeong-hee Lee, the chairperson of Shinsegye Group (the last daughter) are doing business now. All others are not involved in any business activity after marriage. Ms. Sook-hee Lee married to the third son of LG Group founder In-hoe Goo, Ja-hak Goo, currently the chairman of OurHome Group. Ms. Deok-hee Lee married to a great landlord family of Gyeongnam province and Ms. Soon-hee Lee married to a university professor.
Reporter Hyeon-seok Sung 성현석 기자
- Original article of this post (in Korean) can be found in the following link: 삼성 vs CJ…’가문의 전쟁’ 어디로 가나?