An $830,000 horse, a presidential scandal and Samsung succession

Investigators are trying to figure out if Samsung made donations to benefit president's friend

Samsung Group is getting pulled deeper into the scandal engulfing South Korea’s president with prosecutors homing in on whether an $830,000 horse and millions in other payments were made to smooth succession at the top of the country’s largest company.

 

Special prosecutors summoned two top Samsung executives to answer questions Monday about the company’s role in an alleged influence-peddling scheme that has already led to President Park Geun-hye’s impeachment. The vice chairman and president of Samsung’s corporate strategy office have not been accused of wrongdoing, though that status may change, according to a spokesperson for the prosecutor.

 

Investigators are trying to figure out whether Samsung made donations to benefit the president’s friend, Choi Soon-sil, in exchange for political favours. In particular, prosecutors want to know whether the president exerted pressure on Korea’s national pension service, a $452 billion fund with money from 22 million citizens, to support a merger of two Samsung Group companies. The controversial deal, opposed by some investors, was approved in 2015 and will make it easier for heir apparent Jay Y Lee to gain control over the sprawling conglomerate his grandfather founded.

 

“Summoning two top guys at Samsung Group may mean the special prosecutors are carrying out the final checks before calling in Jay Y Lee,” said Kim Sang-Jo, professor at Hansung University. “Samsung stands at the centre of Choi-gate.”

 

Samsung has denied any wrongdoing and has portrayed itself as a victim in the scandal. The company declined further comment for this story. Choi has denied colluding with Park to extract money from businesses.

 

So far, Samsung Electronics Co’s business has weathered the political investigation as well as a crisis over its fire-prone Note 7 smartphones. On Friday, the company reported its biggest operating profit in three years. Its shares rose to a record high in Seoul Monday and have gained more than 55 per cent over the past year.

 

Still, the political scandal has rocked South Korea and its biggest companies. Prosecutors are investigating Choi’s relationship with Park and whether Choi solicited payments from corporations to smooth their dealings with the government. Last month, lawmakers summoned nine business leaders to testify at an unprecedented public hearing, including the heads of Hyundai Motor and Lotte groups.

 

It was Samsung’s Lee who faced the vast majority of questions however. Over the course of ten hours, lawmakers grilled the 48-year-old about Samsung’s gifts to Choi’s foundations. Lee confirmed that Korea’s largest conglomerate provided a one billion won horse used for equestrian lessons by Choi’s daughter. He also acknowledged meeting the president twice but denied any wrongdoing and said he never felt pressured by Park to fund Choi’s foundations.

 

Prosecutors are now stepping up efforts to clarify how the Korean pension fund came to support the contentious merger of Cheil Industries Inc. and Samsung C&T Corp in 2015. After the deal was originally proposed, shareholders including activist Paul Elliott Singer fought against it, arguing the purchase price Cheil offered was too low and would cement the founding family’s control at the expense of minority shareholders.

 

Samsung responded by saying it was trying to create long-term value for investors and the merger was necessary to sustain growth. Korea’s National Pension Service, the largest investor in Samsung C&T, voted in favour of the merger and played a key role in helping the deal win approval by a narrow margin.

 

The combination helps make it easier for Lee to take control over Samsung Group, a sprawling conglomerate of nearly 60 companies, and crown jewel Samsung Electronics. After the merger, Lee ended up with a 17 percent stake in the combined entity, making him the largest shareholder. The merged company, now just called Samsung C&T, in turn is one of the largest shareholders in Samsung Electronics.

 

Lee’s control may grow as Samsung Group continues its restructuring. Analysts think it is likely that Samsung Electronics will be split into an operating company and a holding company, with the latter possibly being combined with C&T. Adding more Samsung shares to C&T will give Lee further control over Samsung Electronics and by extension the whole group.

 

“The C&T merger almost completed the succession process, but the climax is the splitting of Samsung Electronics,” said Park Ju-gun, president of corporate watchdog CEOScore in Seoul.

 

Lee has been the de-facto head of Samsung Group since his father suffered a heart attack in 2014 and is the presumed heir apparent. He has been banned from foreign travel while the investigation is underway.

 

The special prosecutors have previously arrested Moon Hyung-pyo, the former chairman of the pension service. Moon has been suspected of pressuring the fund to support the merger.