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The Seoul High Court has handed down three-year jail terms suspended for five and W3 billion (US$1=928) in fines to Her Tae-hak, the former chief executive of Samsung Everland, the amusement park that doubles as the Samsung Group¡¯s de-facto holding company, and incumbent company president Park Ro-bin. The two men have been found guilty of breach of trust for selling Everland shares to Samsung Group chairman Lee Kun-hee¡¯s son, Jae-yong, and others at a knockdown price, causing W8.9 billion in losses to the company.
In 1996, the two Samsung officials issued convertible bonds that could be transformed into shares of Everland at below market prices. Then, Samsung Corp., the JoongAng Ilbo newspaper and other shareholders with rights to acquire the bonds forfeited that right. As a result, the rights to acquire the bonds went to the children of chairman Lee. Prosecutors said this caused W97 billion in losses to the company and indicted the two officials for breach of trust. Jae-yong converted the bonds into shares and became the largest shareholder (25.1 percent). Through his majority stake in Everland, Jae-yong can exercise control of Samsung Life Insurance and Samsung Electronics through cross-shareholding, eventually becoming the controlling stakeholder in the Samsung Group.
The High Court said in its ruling, ¡°The decision by Everland¡¯s board to issue the CBs took place without a quorum and is therefore void, while the issuance of the CB and allotting them to Lee Jae-yong and others constitutes a breach of trust.¡± The court said, ¡°Their behavior breached trust since it went beyond the boundaries of conventional fundraising and affected the ownership structure by hoarding CBs with a third party.¡±
Because the board¡¯s decision was void, the act of issuing the bonds is also void and Jae-yong¡¯s controlling stake in Everland can also be interpreted as void. The court did not make that conclusion, saying in order to protect the sanctity of deals, ¡°there can be instances where completed issuances can be viewed as being valid according to corporate law.¡± But it added since this incident was no conventional transaction and involved the transfer of management control to a third person, ¡°it cannot be concluded that the issuance itself is entirely valid.¡± The court left open the possibility that the CB deal could be voided.
Now, not only the leadership succession but the Samsung Group¡¯s entire ownership structure could be shaken depending on the ruling of the Supreme Court. Even if the situation does not get to that point, the Samsung Group, which represents Korea around the world, has been dealt a huge blow to its image just by the fact that it has been mired in an ethical and legal dispute over the way management control has been transferred. Samsung must take a long good look at itself to see why this happened.
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