Samsung Electronics’ governance structure is being affected by the Park Yong-jin Act

Chung-Ho Kim(Adjunct Professor, Graduate School of Economics, Sogang University)

Have you heard of the ‘Park Yong-jin Act’? The proposed revision of the Insurance Business Act by Park Yong-jin of the Democratic Party is being called that. Samsung may be affected because of this. After looking at why this is happening, I will review at the reason behind this and the implications.

The Park Yong-jin Act refers to the amendment to Article 105 of the Insurance Business Act. It is a provision that regulates the asset management of insurance companies. It is called the Park Yong-jin Act because Assemblyman Park Yong-jin took the initiative in proposing the amendment. This clause stipulates that an insurer cannot exceed 60 percent of its equity or 3 percent of its assets if it holds shares of subsidiaries of large shareholders. Until now, compliance has been measured at acquisition cost, but Park Yong-jin’s revision calls for measuring at market value, not the acquisition cost.

This law is also called the Samsung Life Act because Samsung Life Insurance will be the most affected. This could threaten Samsung Electronics’ management rights, which Vice Chairman Lee Jae-yong has exercised through Samsung Life Insurance. Let’s see how this revision can change Samsung Electronics’ governance structure.

Lee Jae-yong’s family has a 6.15 percent stake in Samsung Electronics. If you look at it individually, the National Pension Service, which holds 9.99 percent of shares, is Samsung Electronics’ largest shareholder. Nevertheless, the reason why Lee Jae-yong’s family, not the National Pension Service, can exercise Samsung Electronics’ management rights is because other subsidiaries, including Samsung Life Insurance, hold shares in Samsung Electronics.

Samsung Electronics’ Major Shareholders

Samsung Life Insurance has an 8.5 percent stake in Samsung Electronics, Samsung Fire & Marine Insurance has 1.5 percent, and Samsung C&T has 5.01 percent. The three subsidiaries are controlled by Lee Jae-yong’s family, so they can make moves with 21.16 percent of shares including their personal 6.15 percent shares.

However, Article 11 of the Monopoly Regulation and Fair Trade Act (MRFTA) limits shares held by financial firms and insurers to exercise voting rights up to 15 percent that are combined with other shares. The purpose of this is to prevent these customers from controlling subsidiaries with their money. Under this clause, 6.15 percent of Lee Jae-yong’s family and Samsung C&T’s 5.01 percent, not the insurance company, a total of 11.16 percent of the shares can fully exercise its voting rights, but the 11.16 percent shares combined by the shares held by the two insurance companies can only exercise its voting rights up to 15 percent. Samsung Life Insurance and Samsung Fire & Marine Insurance have a 10 percent stake in Samsung Electronics, but can only exercise 3.84 percent in voting rights. They can only receive dividends for the remaining 6 percent stake that fails to exercise their voting rights. So, Lee Jae-yong’s family exercises management control over Samsung Electronics with that 15 percent stake.

Now, let’s see how the Park Yong-jin Act, which states that the holding of shares of subsidiaries cannot exceed 3 percent of assets based on the market price, can change Samsung’s governance structure. As of the end of 2020, Samsung Life Insurance’s total assets were 337 trillion won and 3 percent of it is 10.1 trillion won. The value of Samsung Electronics’ shares held by the company is 46.8 trillion won, so 36.7 trillion won, which exceeds 10.1 trillion won, must be sold. Shareholder’s voting rights cannot be exercised before the sale. The target amount of 36.7 trillion won is 6.7 percent of Samsung Electronics’ market value of 550 trillion won (as of May 4, 2021). In this case, Samsung Life Insurance’s stake in Samsung Electronics will be reduced from 8.5 percent to 1.8 percent. Based on the same calculations, Samsung Fire & Marine Insurance’s stake in Samsung Electronics will be reduced from 1.5 percent to 0.5 percent. If it is revised according to the Park Yong-jin Act, the share of Samsung Electronics, which can be held by the two insurance companies, will be reduced from 10 percent to 2.3 percent.

Samsung Insurance companies’ stakes in Samsung Electronics when the law is revised: 10% 🡪 2.3%

As a result, Samsung Electronics’ stake controlled by the Lee Jae-yong family will be reduced from 21.16 percent to 13.51 percent.

Samsung Electronics’ Major Shareholders (After the revision of the Insurance Business Act)

However, this is not everything. There’s also the issue of the inheritance tax. The total inheritance tax to be paid by the Lee Jae-yong family is said to be between 12 trillion won and 13 trillion won. They’ve already paid 2 trillion won and the rest will be paid in installments for 5 years. They probably paid it through loans and dividends.

However, I believe that they will have to eventually sell off a large portion of their shares. They will have to pay back the money they borrowed. There is also a limit to the dividends received. Samsung Electronics’ total dividend in 2020 was 20.3 trillion won. It’s twice as much as the total dividend of 9.6 trillion won in 2018 and 2019. Vice Chairman Lee Jae-yong’s family’s 6.15 percent stake is totaled at 1.2 trillion won. Even if they continue to allocate that huge amount over the next five years, it’s 6 trillion won. And the remaining 6 trillion won will still be unresolved. I believe that they have no choice but to solve it by selling their shares. 6 trillion won is equivalent to 1.1 percent of Samsung Electronics’ total shares. Taking this into consideration, the voting rights that Vice Chairman Lee Jae-yong’s family can exercise will be at 12.41 percent.

Samsung Electronics’ Major Shareholders (After the revision of the Insurance Business Act and paying the inheritance tax)

Wouldn’t this be a threat to how it’s being managed? The most likely threat is the National Pension Service. Even now, the National Pension Service holds 9.99 percent of shares in Samsung Electronics. The total national pension fund is 785 trillion won. Since Samsung Electronics has a market value of 550 trillion won, it won’t be a problem to increase its stake by 3-4 percent if they should decide to do so.

It’s not just domestic. Currently, BlackRock, which owns 5 percent of Samsung Electronics’ shares, has an operating asset of 9,500 trillion KRW. It is always possible to spend about 50 trillion won and increase it to 15 percent. Chinese capital also has great financial power. In a situation like this, lawmakers such as Park Yong-jin and others were impatient to take away the shareholder’s voting rights.

Of course, if the law itself is justified, it would be right to pursue the revision. However, it’s not fair at all. There seem to be two reasons of imposing restrictions on the asset management of insurers. First, is to not put insurer’s assets at risk by investing heavily in one, and secondly, to not control subsidiaries with other people’s money.

For the interest of the first reason, the Park Yong-jin Act must be discarded. Targeted investment is dangerous because the stock price could fall, and the entire insurance company could be affected. The problem is when the stock price of the invested company falls. If the stock price rises, no matter how large the ratio is, there is no problem. Rather, it’s something to applaud. In that sense, it is right to base the acquisition cost on the 3 percent regulation to prevent risk.

Let’s say you bought shares of the subsidiaries at the time of the acquisition at the 3 percent limit on assets. If the stock price falls due to the failure of the investment, the market value of the stock will be less than 3 percent, so you can just hold onto it. On the other hand, if the investment is a success and the stock price rises, the market value will exceed 3 percent and the excess will have to be sold. If you assess your stock holdings at the market price, you will be able to sell the successful stocks and will have to hold onto the failed stocks. From the perspective of the insurer, it only makes them bear the burden of losses. The Park Yong-jin Act is a corporation that insurers should oppose. 

According to the Korea Life Insurance Association, Japan is the only country with such regulations other than Korea, and even Japan is based on acquisition costs. Wouldn’t it be proof that even if we acknowledge the legitimacy of regulating asset ratios, it would be more reasonable to do it by the acquisition cost method? Rep. Park Yong-jin and others think that they will take away Lee Jae-yong’s voting rights, so the damage to the customer is invisible. Or it could be ignorance.

This regulation also states not to control the company with the customer’s money. In fact, this does not make sense. The reason why the customer leaves the money to the insurance company is to receive the insurance money in the event of an accident. It’s up to the insurance company to decide where to invest the money. The attitude that companies are not allowed to invest in their own subsidiaries but investing in other companies is okay is nothing other than the intention to shackle the conglomerate owners because they are disliked.

Even if the need for the regulation for that purpose is recognized, Article 11 of the MRFTA already plays that role. As it was mentioned above, shareholder’s voting rights held by financial and insurance subsidiaries are prevented from exceeding 15 percent combined with other shares. This is the only regulation of its kind in the world, and it is too much to apply the Park Yong-jin Act only onto Samsung Life Insurance. Should it affect Samsung Electronics’ management rights because we are blinded by jealousy or groundless suspicion? The Park Yong-jin Act should be disregarded.

Dr. Chung-Ho Kim is an adjunct professor of Graduate School of Economics, Sogang University. He is running on Youtube. He had been the President & CEO of the Center for Free Enterprise during 2003 and 2012. He served as a member of the Presidential Committee for Regulatory Reform of Korea. He has two doctoral degrees. He earned his doctoral degree in Economics at the University of Illinois-Urbana/Champaign in 1988 and that in Law at Soongsil University in 2003. He frequently appears in the Newspapers and TV Show’s in Korea. His current research interests include economic analysis of law and land economics. His publications include 『Plain Economics of Korean Law(2015, Free Economy Books)』, 『Who Locks in Consumers(2007, Kyobo)』, 『Land Is A Private Property(2006, Nanam)』. – He can be reached at kim.chungho@gmail.com