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Samsung C&T Shareholders Back Merger Over Hedge Fund’s Objections
Samsung Fight Exposes Tension in Asia Over Activist Investors
(about 7 hours later)
SEOUL, South Korea — A rare test for shareholder activism in Asia failed on Friday, with the Lee family of Samsung securing its future leadership in a face-off with a big New York hedge fund.
SEOUL, South Korea — Samsung fended off the challenge of a big activist investor on Friday as the founding family tightened its grip over the sprawling South Korean conglomerate.
Shareholders of a subsidiary of Samsung voted in favor of a merger with another Samsung company, an arcane battle that will help enable the transfer of power from father to son in the family that controls Samsung, South Korea’s largest conglomerate.
But the public fight, a rare bout of activism in Asia, also exposed broader concerns about shareholder rights and succession planning in a country dominated by family-controlled conglomerates known as chaebols.
At a meeting Friday, shareholders of Samsung C&T approved a merger with Cheil Industries, with 69.53 percent in favor. The proposal required a two-thirds majority for approval and delivered a crushing defeat to the activist hedge fund Elliott Associates.
The battle centered on the $8 billion merger of two Samsung affiliates, Samsung C&T and Cheil Industries.
Elliott, which owns 7.12 percent of Samsung C&T, had campaigned to scuttle the deal. It argued that Cheil’s $8 billion takeover of Samsung C&T hurt minority shareholders by grossly undervaluing Samsung C&T in an unlawful attempt to help Lee Jae-yong, the son of Samsung’s chairman, Lee Kun-hee, inherit leadership of the conglomerate. The elder Mr. Lee has been incapacitated since a heart attack in May of last year.
The restructuring would allow Samsung to transfer more power to Lee Jae-yong, the son of conglomerate’s chairman. The chairman, Lee Kun-hee, has been incapacitated since a heart attack in May 2014.
“Elliott is disappointed that the takeover appears to have been approved against the wishes of so many independent shareholders and reserves all options at its disposal,” the hedge fund said in a statement. Elliott declined to comment further.
The New York hedge fund Elliott Associates wanted to scuttle the deal, saying it grossly undervalued Samsung C&T and represented an unlawful attempt by the Lee family to consolidate its hold.
In South Korea, where people remain wary of foreign investors — and in particular of hedge funds — Samsung depicted Elliott as a foreign vulture capitalist whose purported activism it said had been timed to disrupt an orderly generational change at Samsung, the crown jewel of the South Korean economy, make a quick profit and exit.
For weeks, both sides tried to drum up support through fierce campaigns that featured lawsuits and front-page newspaper ads. Samsung depicted Elliott, which owns 7.12 percent of Samsung C&T, as a vulture capitalist, out to disrupt an orderly generational change and make a quick profit. Elliott, which is run by Paul E. Singer, filed and lost a pair of lawsuits seeking to block the shareholder meeting.
For weeks, both sides have sought support from other shareholders through fierce campaigns that featured lawsuits and front-page newspaper ads.
In the end, it was close. The merger was backed by 69.53 percent of the shareholders who voted on Friday, narrowly above the amount needed.
The merger plan, first adopted in May, was crucial to determining whether another generation of the Lee family got to run Samsung, which includes the flagship Samsung Electronics, the global maker of smartphones and computer memory chips.
Investor activism like the Samsung fight is relatively uncommon in Asia.
The merger carries implications reaching far beyond the Lee family. Samsung’s 70 subsidiaries, engaged in activities as varied as shipbuilding, home appliances and apartment buildings, generate revenue equaling a quarter of South Korea’s gross domestic product. The group’s influence in the nation is so pervasive that the country is often referred to as a “Republic of Samsung.”
Publicly traded companies often remain under the control of close-knit family groups or state-backed shareholders, and legal protections for minority investors can be patchy. In many cases, activism in Asia plays out over a longer horizon, with players favoring persistent behind-the scenes lobbying over public campaigns.
Hyundai and other family-controlled South Korean conglomerates, known as chaebol, are preparing their chairmen’s children for succession despite a public that is increasingly skeptical of such dynastic transfer of power. Both chaebol and South Koreans watched to see whether Paul E. Singer’s Elliott would manage to disrupt the process at Samsung.
The hedge fund Oasis Management, which built a small stake in the Japanese video game maker Nintendo, spent more than two years arguing that the company needed to move beyond its struggling console business.
Although it lost the vote on Friday, Elliott’s activism appeared to have some effect. Cheil and Samsung C&T have promised to bolster corporate governance by increasing dividends and creating a shareholder rights committee after the merger. Samsung said that the merger of Samsung C&T, a construction and trading arm of Samsung, and Cheil, whose businesses include fashion and theme parks, would create “synergies.” The company to be created through the merger will also lead Samsung’s major push into bioengineering.
In March, Nintendo announced a new partnership to push into mobile games, and in May, it announced plans to bring its video game characters to Universal Parks and Resorts. The company’s shares have risen about two-thirds since the start of this year.
“We will listen to those who opposed the deal and pledge to better engage with our shareholders and be more open to their input and feedback,” Cheil and Samsung C&T said in a joint statement.
“With Nintendo, I got a ‘no’ for a year, and then I got ‘yes,’ and then it took 10 months for them to execute the ‘yes,’” Seth Fischer, Oasis’s founder and chief investment officer, said in an interview. “The answer in Japan is that it works, but it takes time.”
Globally, there are about 465 activist hedge funds with $142.9 billion in assets under management, according to data from Preqin, which tracks the industry. Only $7.1 billion of that total is specifically devoted to Asian investments.
The Wall Street activist investor Daniel S. Loeb of Third Point took on Sony two years ago, pressing for a board seat. He also pushed the company to spin off part of its entertainment arm, which includes a Hollywood film studio and a music label. Mr. Loeb was largely rebuffed and eventually sold his Sony stake.
Investor activism like Elliott’s involvement with Samsung is relatively uncommon in Asia, where publicly traded companies often remain under the control of close-knit family groups or state-backed shareholders, and legal protections for minority investors can be patchy.
For these reasons, many activist hedge funds choose to stay away from Asia, and those taking on companies in the region are often confronted with more difficult fights to win financial returns or concessions from management than they might encounter by going after targets in the United States or Europe. In many cases, activist investing in Asia plays out over a longer horizon and often forgoes lawsuits and publicity campaigns in favor of persistent lobbying of management for changes.
The hedge fund Oasis Management built a small but significant stake in the Japanese video game maker Nintendo — less than 5 percent of its shares — and spent more than two years arguing that the company needed to move beyond its traditional but slumping console business. In March, Nintendo announced a new partnership to push into mobile games, and in May it announced plans to bring its video game characters to Universal Parks and Resorts. The company’s shares have risen by about two-thirds since the start of this year.
“With Nintendo, I got a ‘no’ for a year, and then I got ‘yes,’ and then it took 10 months for them to execute the yes,” Seth Fischer, Oasis’s founder and chief investment officer, said in an interview. “The answer in Japan is that it works, but it takes time.”
That was also the experience for the Wall Street activist investor Daniel S. Loeb, whose company, Third Point, built a substantial stake in Sony two years ago and pressed for a board seat. It also sought to have the company spin off part of its entertainment arm, which includes a Hollywood film studio and a music label. Mr. Loeb was largely rebuffed and eventually sold his Sony stake.
He later invested in Fanuc, the Japanese robot maker, where he was better received. After a recent meeting with the company’s management, Fanuc agreed to double its dividend. “Nobody thought this could be done,” Mr. Loeb told the audience at an investment conference in May.
He later invested in Fanuc, the Japanese robot maker, where he was better received. After a recent meeting with the company’s management, Fanuc agreed to double its dividend. “Nobody thought this could be done,” Mr. Loeb told the audience at an investment conference in May.
Elliott has picked fights with powerful Asian tycoons in the past two years, but its track record in the region has been mixed. Last year, it built up a 2.5 percent stake in the Bank of East Asia, one of Hong Kong’s biggest local banks, which is controlled by the family of David Li. But the hedge fund’s stake was diluted after the bank sold new shares to the Sumitomo Mitsui Financial Group of Japan.
Elliott has previously gone up against powerful Asian tycoons.
Elliott sought to challenge the decision, which some analysts described as a defensive move by the Li family, asking a Hong Kong court to order Bank of East Asia to disclose the reasons for the share placement. But it has so far stopped short of filing a lawsuit against the bank or its directors.
Last year, it built up a 2.5 percent stake in the Bank of East Asia, one of Hong Kong’s biggest local banks, which is controlled by the family of David Li. But the hedge fund’s stake was diluted after the bank sold new shares to the Sumitomo Mitsui Financial Group of Japan.
The vote on Friday offered a major test for Samsung and its heir apparent, Mr. Lee, who holds the title of vice chairman at Samsung Electronics, in gaining recognition from small individual shareholders and foreign investors, who together owned half of Samsung C&T. To win their support, Samsung had dispatched executives on overseas trips and rank-and-file employees on a door-to-door visit to domestic stockholders.
Elliott sought to challenge the decision, which some analysts described as a defensive move by the Li family, asking a Hong Kong court to order Bank of East Asia to disclose the reasons for the share placement. But the hedge fund has so far stopped short of suing the bank or its directors.
Elliott had filed and lost a pair of lawsuits seeking to block the shareholder meeting on Friday. But going into the vote, it had won support from some international investors, like the Canada Pension Plan Investment Board, and outside advisory firms like Institutional Shareholder Services and Korea Corporate Governance Service. Thousands of small local shareholders also rallied online to support Elliott’s activist strategy as a catalyst for better corporate governance at the chaebol.
The face-off over Samsung loomed large in South Korea.
But South Koreans also remained fiercely protective of major home-grown companies. Samsung won the support of domestic institutional investors, including South Korea’s National Pension Service, which was the single largest shareholder at Samsung C&T, with an 11.9 percent stake. As the fight raged between Samsung and Elliott, editorials in leading domestic newspapers suggested that the country allow top domestic companies to adopt dual-class stocks, “poison pills” and other shields against hostile takeover bids by foreign hedge funds.
Samsung’s 70 subsidiaries, engaged in businesses as varied as shipbuilding, home appliances, apartment buildings and mobile phones, generate revenue equaling a quarter of South Korea’s gross domestic product. The group’s influence is so pervasive that the country is often referred to as “Republic of Samsung.”
As the fight raged between Samsung and Elliott, editorials in leading domestic newspapers suggested that the country allow top companies to adopt dual-class stocks, “poison pills” and other shields against hostile moves by foreign hedge funds.
“Samsung’s battle should not be a lonely fight,” Lee Chul-ho, the chief editorial writer of the local mass-circulation daily JoongAng Ilbo, wrote in a recent column. “If Samsung loses, other companies could fall prey to outside predators.”
“Samsung’s battle should not be a lonely fight,” Lee Chul-ho, the chief editorial writer of the local mass-circulation daily JoongAng Ilbo, wrote in a recent column. “If Samsung loses, other companies could fall prey to outside predators.”
Going into the Samsung vote, Elliott did drum up support from big international investors like the Canada Pension Plan Investment Board and outside advisory firms like Institutional Shareholder Services and Korea Corporate Governance Service. Thousands of small local shareholders also rallied online to support Elliott’s activist strategy as a catalyst for better corporate governance at the chaebol.
To win over investors, Samsung dispatched executives on overseas trips and rank-and-file employees on door-to-door visits at home. Samsung won the backing of domestic institutional investors, including South Korea’s National Pension Service, which was the single largest shareholder at Samsung C&T, with an 11.9 percent stake.
“Elliott is disappointed that the takeover appears to have been approved against the wishes of so many independent shareholders and reserves all options at its disposal,” the hedge fund said in a statement.
Although it lost the vote, Elliott’s activism appeared to have some effect. Cheil and Samsung C&T have promised to bolster corporate governance by increasing dividends and creating a shareholder rights committee.
“We will listen to those who opposed the deal and pledge to better engage with our shareholders and be more open to their input and feedback,” Cheil and Samsung C&T said in a joint statement.
