FTC considers forcing Samsung to sell stakes

Samsung C&T, the de facto holding company of Samsung Group, is taking fire from the anti-trust agency about its merger with Cheil Industries in September.

The Fair Trade Commission (FTC) announced on Thursday that it is in the final stages of reviewing the cross-shareholdings that resulted from the merger, which could be in violation of a revised law introduced last year that regulates corporate governance structures.

“We haven’t finalized or notified [Samsung on the issue],” the FTC said in a statement released Friday. “Under the current law, the newly created cross-shareholdings and the strengthening of existing ones that resulted from any merger can be considered an exceptional case.

“As a result, even if new cross-shareholdings have taken place, they’re not necessarily in violation of the law.”

Still, it has been reported that the FTC is eyeing just two options: force Samsung Group to immediately sell certain shares to resolve the new cross-shareholdings, or give it until March 2016 to do so.

Last year’s law regulates the cross-shareholdings that result from new mergers, but existing ones are grandfathered in.

The cross-shareholding system is commonly practiced among major Korean conglomerates, including Samsung, Hyundai Motor and LG Group.

With the system, each affiliate owns another affiliate as its majority stakeholder, which allows the founding family to tightly manage the overall group without having to own a controlling stake in each individual company.

In recent years, the government has been encouraging Korean conglomerates to convert to a holding company governance system under the banner of more transparent management. The cross-shareholding system has often been criticized for being vulnerable to hostile speculators when it comes to defending management rights.

Additionally, the interconnections mean that when one company crumbles, other affiliates quickly tumble like dominos.

Some conglomerates, such as the nation’s leading airliner Hanjin Group, have successfully converted to the holding company system. Others, including the heavily scrutinized Lotte Group, have announced intentions to do so.

But many still remain reluctant to change, as the cross-shareholding system is less expensive to maintain and allows for management decisions to be implemented faster.

When Samsung C&T, the construction and trade arm of Korea’s biggest conglomerate, and Cheil Industries, its fashion and materials development affiliate, merged in September, two new cross-shareholdings emerged.

Before the merger, Cheil Industries held stakes in Samsung Life Insurance, which owned shares of Samsung Fire & Marine Insurance, which in turn owned Samsung C&T and circulated back to owning Cheil Industries.

In the first new cross-shareholding, the newly merged Samsung C&T owns shares in Samsung Electronics, which owns Samsung SDI and circulates back to owning Samsung C&T.

The second has a stronger grip on the group’s financial businesses, with Samsung C&T having stakes in Samsung Life Insurance, which owns Samsung Fire & Marine Insurance, which has stakes in Samsung C&T.

If forced to clean up its act, Samsung is predicted to sell the 1.4 percent stake that Samsung Fire & Marine Insurance has in Samsung C&T.

When asked about the issue, a Samsung official said the group will follow the decision of the FTC.

BY LEE HO-JEONG, CHO HYUN-SOOK [lee.hojeong@joongang.co.kr]