The Seoul District Court has found Everland executives guilty of breach of trust for selling Lee Jae Yong of Samsung Electronics and other children of Samsung chairman Lee Kun Hee convertible bonds at less than the market price. The bonds are estimated to have been worth W80,000 each, but they were sold to Lee Kun Hee's four children at W7,700 and in doing so incurred losses for the company and a court has finally recognized that. The acquisition of Everland bonds by chairman Lee's children is an archetypical example how the Samsung group hands down managerial authority to the next generation. It means that Lee Jae Yong, his only son, has become the real majority shareholder of Everland, which is at the top of the circular cross-unit equity investment structure of the Samsung group that begins with Everland and links Samsung Life, Samsung Electronics, Samsung Card, and then ultimately Everland all over again.
Samsung's "taxless inheritance" was not the direct object of the sentencing, but you would be right to view it has having lost legitimacy now that a court has recognized the illegality of the key part of that process. Common sense had already issued its judgment. All Lee Jae Yong paid on his way to the top echelons of the Samsung group's management was W1.6 billion. That was the inheritance tax paid on the W6.08 billion his father gave him as seed money at the end of 1995. Samsung then sold him shares in unlisted subsidiaries at far below market prices so as to inflate that money, and eventually his personal assets reached the trillions. The group's assets had landed in Lee Jae Yong's hands. There are serious suspicions about sneaky methods and immoral behavior, and the harm to society caused by that irregular inheritance process went way beyond what was considered "common practice." What jaebeol and what regular citizen will want to pay the proper taxes after they've seen what happened? The question that had remained was whether legal force would be applied, and a court has now said that it will.
Saying that Everland executives are guilty of breach of trust is another way of saying that chairman Lee Kun Hee's children received wrongful profit. The prosecution has hesitated to take action in the way of an all-out investigation while it just watched to see what the court would find, and so it will be interesting to see what the prosecution chooses to do at this point. The fact that there were aspects of the way Everland decided to issue convertible bonds that were illegal must not be overlooked either, because it opens up the potential for a debate about whether the issuing of those bonds was valid in the first place. Whatever the legal directions this takes, Samsung needs to feel moral responsibility.
It's time for Samsung to say something. It is not honorable on Samsung's part to argue that this was only the first trial, and that the judgment does not mean the court found illegalities in Lee Jae Yong's acquisition of his shares. It is also not right for it to ignore the fact that its executives continue to end up criminals as the chairman's family carries out its roundabout inheritance. We call on Samsung to make a profound decision that meets the country's expectations. There have to be ways to keep corporate activity up and to protect the rightful property rights of individuals. Only chairman Lee Kun Hee can make the right decision. Family succession of management rights might become more difficult. But there could be many answers as long as Samsung abandons its attachment to the feudal structure known as "emperor-tycoon."
Other jaebeol's are not going to be free from this same issue. Others have studied Samsung and handed over group ownership to the next generation without paying any taxes, using unlisted companies and convertible bonds. That, too, must be sorted out so the wrongs are set straight. Calling even that endeavor "anti-business sentiment" and saying that it would be about making companies have a hard time is a distortion that should not be allowed. The Korean economy can advance to the next stage even if the inheritance methods of jaebeol-owning families becomes transparent. The government shouldn't be so far behind all the time. It should instead seek ways to completely prevent illegal inheritance, but jaebeols should take the initiative and resolve to walk the straight and narrow.
The Hankyoreh, 5 October 2005.
[Translations by Seoul Selection (PMS)]
[Editorial] Samsung's Chairman Must Make the Right Decision |
