Samsung, Facing Calls for Shake-Up, Offers 'Plan B'

Samsung Electronics Co. surprised investors and South Korean lawmakers on Thursday by saying the conglomerate, held together by a complex web of cross-shareholdings, would cancel some $35 billion in legacy treasury shares and forgo restructuring into a holding company.

Instead, the crown jewel of the Samsung empire decided to keep its ownership structure amid a once-in-a-generation transfer of power, in an unexpected break from conventional methods of succession planning by South Korea's family-controlled conglomerates, known as chaebols, say investors and corporate-governance experts.

Treasury shares are typically repurchased stocks the company holds in reserve. In South Korea, many chaebols have built up large reservoirs of treasury shares that can then be deployed, in conjunction with family members' individual shareholdings, to restructure conglomerates, these corporate-governance experts say.

Samsung's dual moves on Thursday, which came as the smartphone maker reported its second-biggest quarter of operating profit ever, left investors and governance experts wrestling with a new question: How will Lee Jae-yong, the 48-year-old vice chairman of Samsung Electronics, cement his control of South Korea's largest conglomerate?

"Samsung has abolished Plan A for Lee Jae-yong's succession and they just initiated Plan B," said Park Sang-in, an economics professor at Seoul National University, who has advocated for change at South Korea's chaebols.

The holding-company structure has long been the model of choice for corporate-governance advocates. Its clear, pyramidal form is easy to understand, and ownership is transparent and easy to calculate--a contrast to most chaebols' tangled and opaque structure.

Samsung, which had previously declined to comment on a holding-company structure, summarily dismissed those arguments on Thursday, saying that revamping itself along those lines would be costly, and would likely hurt its competitiveness.

The outcome means Mr. Lee, the grandson of Samsung's founder, must forge a different path to gain greater control of the South Korean business empire. Mr. Lee holds a 0.6% stake in Samsung Electronics.

Mr. Lee, who was put behind bars in February while he undergoes trial for his alleged role in a corruption scandal that has gripped South Korea, became the de facto leader of South Korea's biggest conglomerate after his father was incapacitated by a heart attack in 2014. Mr. Lee has denied wrongdoing.

Once Mr. Lee's father, who remains hospitalized, dies, Mr. Lee is expected to face a multibillion-dollar inheritance-tax bill, experts say. Paying the tax would require Mr. Lee to sell his shares in some of the conglomerate's key affiliates, which would loosen his grip on those entities and potentially jeopardize his hold over Samsung Electronics.

One potential approach, Mr. Park of Seoul National University said, would be for the elder Mr. Lee to donate his equity holdings to public foundations affiliated with Samsung, which would carry lower inheritance-tax costs and still allow the younger Mr. Lee to maintain his grasp on the empire. But that approach has already drawn proposed legislation seeking to curb the voting rights of shares held by nonprofit foundations.

Samsung had previously said in 2015 that all taxes related to the inheritance would be paid transparently, as required by law, and that there was no plan to contribute the elder Mr. Lee's shares to foundations for tax advantages.

Whatever the approach, investors cheered the treasury-share cancellation, which will eventually remove about 13% of Samsung Electronics' shares outstanding from circulation and give shareholders more voting clout and a greater share of the earnings.

Samsung Electronics shares rose 2.4% on Thursday, buoyed by the restructuring news and the delivery of the company's best quarterly net profit in more than three years.

"The cancellation of the treasury shares is a very positive sign," said Sanjeev Rana, a Seoul-based senior analyst at brokerage CLSA. "Even though Samsung has never said that these shares will come out to the market, now they will be gone for good."

Samsung first announced that it would look into transitioning into a holding-company structure in November, after demands from investors, including U.S. activist hedge fund Elliott Management Corp.

In Thursday's earnings call, Samsung Electronics' head of investor relations Robert Yi said that the company's decision to not adopt a holding-company structure is definite and final, adding that the firm would explore other ways to simplify its structure.

"Samsung has no plans of converting into a holding-company structure in the future," said Mr. Yi, adding that Mr. Lee had been informed of the decision but didn't have a particular view on it.

An Elliott spokesman said in response that it was "encouraged" that Samsung decided to cancel the treasury shares, calling the move "a major step forward" for the hedge fund's plan for the South Korean tech giant.

"We believe that the recent strong appreciation in the stock price is reflective in part of a progressive initiative to improve shareholder returns," the Elliott spokesman said.

Samsung's moves on Thursday indicate the company's acknowledgment that conventional practices to carry out succession plans are no longer viable, said Chung Sun-sup, head of corporate-governance research firm Chaebul.com.

Samsung has "submitted to the changes of the times," said Mr. Chung, pointing to the continuing South Korean corruption scandal, which has ratcheted up public anger against Samsung and other conglomerates. The leading contender for a snap presidential election set for May has vowed to overhaul chaebols, with a focus on Samsung and the three next biggest conglomerates.

Write to Timothy W. Martin at timothy.martin@wsj.com and Eun-Young Jeong at Eun-Young.Jeong@wsj.com

(END) Dow Jones Newswires

April 27, 2017 08:33 ET (12:33 GMT)