Samsung/Elliott: jail blazers
The possibility of South Korean company’s de facto head serving time should not panic investors
Elliott Management has become a household name in South Korea. Yet five years on, it has little to show for high-profile campaigns against conglomerates like Hyundai and Samsung. The US activist fund blames the government and a local pension fund for its dismal record in the country. Now local prosecutors are strengthening Elliott’s hand.
After an unsuccessful proxy fight with Samsung in 2015, Elliott turned to the investor-state dispute settlement mechanism. This is a system investors use to sue governments for alleged discriminatory practices based on provisions in bilateral trade agreements. Elliott, pugnacious as ever, sued the Korean government two years ago.
The activist fund alleges that government influenced a key vote, destroying shareholder value. The National Pension Service, one of the biggest shareholders of Samsung affiliate, Samsung C&T, supported a controversial merger of two Samsung affiliates, blocking Elliott’s efforts to derail the deal.
This has turned up the pressure on Lee Jae-yong, de facto head of Samsung. He is now fending off local prosecutors too. They are investigating allegations of accounting fraud and stock manipulation that may have facilitated the contentious merger. Earlier this week, a court turned down an application for a warrant to arrest Mr Lee.
Samsung denies the accusations. The investigation continues. If any resulting court case went badly for the conglomerate, it would strengthen Elliott’s position in the arbitration case
The possibility of Mr Lee serving time should not panic investors. He was in jail during 2017, when Samsung proved resilient. Mr Lee turned out to be quite good at managing the company from prison.
Shares in Samsung Electronics surged to a historic high back then, just weeks after he was taken into custody. In the quarters following, Samsung posted its largest ever operating profits.
Today the shares are 9 per cent below their level before Covid-19, at a small discount to the resurgent South Korean market. They are valued in line with LG Electronics, which lacks legal complications. Korean conglomerates may be sluggish. They are also incredibly stable.