Seoul court denies US fund's request to stop Samsung merger

Staff Writer
Columbus CEO

SEOUL, South Korea (AP) — A South Korean court Wednesday denied an American hedge fund's request to stop Samsung from combining two of its companies, a largely expected ruling that gives South Korea's biggest business group a boost in an upcoming shareholder vote on the merger.

The Seoul Central District Court said the proposed takeover of Samsung C&T by Cheil Industries is legal and fair. It turned down all requests from Elliott Associates, including its request to order Samsung not to put the merger to a shareholder vote.

Elliott, Samsung C&T's third-largest shareholder, filed injunction requests last month, saying the proposed deal significantly undervalues the construction and trading firm and therefore hurts its shareholders. The merger of the two firms would benefit Samsung founding family members who own a majority stake at Cheil, at the expense of C&T shareholders, it said.

A three-judge panel at the Seoul court didn't accept the argument. Chief judge Kim Yong-dae said there was no evidence to conclude the deal would serve the founding family only, and mentioned that the stock price of C&T rose after the deal was announced.

The court's decision will likely strengthen Samsung's stance on the merger ahead of a shareholder vote scheduled for July 17. The court threw out several claims that could have undermined the legitimacy of the merger.

During the month before the merger plan was announced in May, C&T shares were trading near a five-year low, while Cheil shares were near a record high. Rumors and speculation were ripe in the markets about what was behind the low level of C&T stock prices. Its stock price was so low that its market capitalization became even smaller than the combined value of the shares at Samsung Electronics and other Samsung affiliated firms that C&T owned.

Based on a South Korean law that determines a merger ratio by the average stock price of each company, C&T shareholders will receive just 0.35 shares at Cheil for every C&T share they own. That makes Lee Jae-yong, the Samsung chairman's son, the largest shareholder in the combined entity, putting the C&T-owned 4.1 percent stake at Samsung Electronics under his control. It would cost him $7 billion if he had to buy the shares on the market.

The judges said there were no grounds to believe that the stock prices of C&T were unlawfully manipulated. They also said the value of the Samsung affiliated companies' stocks that C&T own is just one of many factors that determine its stock prices.

Samsung announced the deal in May, saying it was necessary for the future of the two companies. Construction and trading businesses needed new revenue sources, while Cheil, which operates businesses in fashion, catering and resort parks, needed to enter global markets. It said combining the two companies would let them boost existing businesses. Cheil would be able to bring its fashion and other domestic businesses to global markets through C&T's networks, for example, it said.

The deal was announced at a time when Lee, 47, was widely expected to succeed his ailing father to lead the business group. After his father was incapacitated with a heart attack more than a year ago, Samsung has accelerated various business restructuring and initial public offering plans of affiliated companies that had made the 47-year-old a billionaire. Many in the markets saw those moves as steps toward succession that would pave the way for the chairman's son to strengthen his control at key Samsung firms, such as Samsung Electronics Co., the group's crown jewel. The younger Lee has little holding at Samsung Electronics and inheriting his father's stake at the smartphone maker or other Samsung firms would incur heavy inheritance taxes.

After Elliott beefed up its fight to thwart the deal at Samsung and other shareholders spoke up against the merger plan, Cheil and Samsung C&T have stepped up an offensive to charm shareholders to secure enough votes to pass the deal.