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PSPD  l  People's Solidarity for Participatory Democracy

  • Socio-Economic
  • 2001.09.15
  • 514
How Samsung family members accumulate their wealth (2)
Mr. Lee junior profited irregularly from the transaction of a group affiliates' CBs 
Participatory Economy Committee

Through '94~'95, the 33-year-old heir was given USD 4.8 Mil. by his father, Mr. Gun-hee Lee, and paid USD 1.27 Mil. in gift taxes. Out of the remaining USD 3.48 Mil. USD, 1.82 Mil. was, in 1995-end, used for buying equity in S1 corp. from Everland, the nation's biggest amusement park and a Samsung affiliate. S1 Corp is the nation's largest security business, promising and profitable, and Everlands is a governing company of the Samsung group through which the Lee family controls the group. On January 13, 1996, shortly after the Lee junior's acquisition, S1 Corp was listed at a price of USD 11.86 Mil. in equity. Six months after the listing, the security unit traded over the range of USD 237.3 Mil. equity, which brought Mr. Jae-yong Lee USD 27.8 Mil. won of profit-taking.

Related to the S1 Corp case, two questions have been pointed out. The first problem is that Mr. Lee junior bought 121,800 of the security business equities just before the listing, and the second one is he didn't have to pay income tax for the profit-taking. In fact, it is a regular tactic for owners of local conglomerate or their heirs to exploit internal information to buy equity of affiliates right before listing, for irregular profit-taking. Mr. Jae-yong Lee followed suit. He bought S1 Corp equities, before their listing, from Everland, which brought about losses for Everland's shareholders. 

If it had not sold S1 Corp equities to Mr. Lee junior, Everlands would have earned USD 27.8 Mil. itself. In consequence, shareholders of the amusement park operating business saw losses. For example Cheil Ind, Samsung's textile unit, then owning a 14.1% stake in Everland, saw 5 billion won of losses, which translates into USD 0.237 of losses to investors. The textile business is listed, which means lots of individual investors were burdened with the losses. In short, Mr. Lee junior's fortune eventually came from individual investors' pockets. Regarding income tax, Korea's tax regulations do not impose income tax on transactions of listed equity unlike that of unlisted equities. The Samsung group heir used this loophole in the tax system, buying unlisted equities and selling them after the listing. 

Mr. Lee junior used the same tactics in the Samsung Engineering case. He bought 470,000 of then-unlisted Samsung Engineering equities for 1.9 billion won and made an undisclosed gain by profit-taking after the listing. Sure, no income tax also. In order to prevent such a misuse, the government established a regulation at the end of 1999 that specially related persons who are given or relinquished unlisted equities have to be pay a gift tax if the share are sold within 3 years. But that's not enough, because the Samsung group heir, afterwards, has still gained a huge amount by exploiting different tactics. 

While buying equities for profit-taking after the listing in the cases of S1 Corp and Samsung Engineering, the Samsung group heir used private placement of CB (Convertible Bonds) in the cases of Cheil Comm.Inc, Samsung's advertising unit, and Everlands. Those affiliates planned to be listed soon, and using privately placed CBs is more professional than the acquisition of equity, in that the latter is conspicuous. Because of those advantages, the tactics preferred by conglomerates' owners or their heirs is that they buy privately placed CBs of group affiliates where their group plans to focus their energy and investments and convert them into equities shortly before listing or at critical times for their managerial right. Mr. Jae-yong Lee bought privately placed CBs of Cheil Comm. worth USD 1.4 Mil. at the conversion price of USD 79.1 an equity on March 22, 1996. He had converted the CBs into equity shortly before the listing on March 3, 1998 and sold all the equities to realize a profit-taking of USD 10.3 Mil. This time also, he did not pay income tax at all. 

While most other cases were for profit-taking, the Everlands case was related to the corporate governance of the Samsung group. Control over conglomerates through listed companies is troublesome for conglomerate owners because of individual investors' watch and government regulations. An unlisted company is much preferred. Lee junior came to take stronger control over the Samsung empire by holding the largest stake in the amusement park operating company. 

Everlands, then Central Construction, issued about USD 7.9 Mil. worth of CBs through private placement at the conversion price of USD 6.09 an equity, and 99.7% of the volume was placed for Mr. Jae-yong Lee. He converted the CB into equity immediately, emerging as the largest shareholder, with a 31.9% stake. Combined with his sisters' equity of 31.8%, the Lee siblings came to own about 64% of the company. Although Mr. Lee junior's equity was diluted after the right offerings, the Lee siblings still remain the largest shareholders of Everland, with a 55% stake. At the time of the CB issuance, then Central Construction was capitalized at just USD 7.75 Mil., with total assets of USD 663.3 Mil.. But the company was the nation's largest owner of real estate, possessing several golf courses and Yongin Everlands. The current net asset of the amusement park operating unit is 4.4 trillion won when the current value of the real estate that Everlands owns is estimated to amount to about 5 trillion won. Consequently the Lee siblings acquired USD 2.2 Mil. of assets with cash of just 10 billion won, and most of all, came to take solid control over the Samsung group through Everlands. 

How could it happen? Because established shareholders of Everlands gave up their rights to buy the CBs for the sake of the Samsung heir. Among those are The Jung Ang daily newspapers (18.2%) and Jeil Texture (14.1%), which gave up buying the CBs. Thanks to that support, Mr. Lee junior positioned himself at the top of corporate governance, and is expected to smoothly succeed to his father's title. The Jung Ang Ilbo saw about USD 1,044 Mil. of losses, which translates into USD 401.8 of losses per equity. Jaeil Texture also witnessed losses of about USD 306.1 Mil., bring about USD 18.8 of losses an equity. 

Meanwhile, the government couldn't levy tax on the Lee siblings as it had no regulations for tax imposition on irregular profit-taking through private placement of CBs. In late December 1996, the government hurried to establish a regulation which imposes tax on profit-taking that results from the conversion of CBs into equity if the CB is bought from specially related persons. But this measure had loophole in it, turning it into a paper tiger, because tax is not imposed when a CB is bought from an issuer itself, not from specially related persons like relatives, related companies, or their executives. Thanks to this loophole, in the next year, 1997, the Samsung heir earned huge profits through acquisition of Samsung Electronics' CBs. In its last report, the PSPD will deal with the Samsung Electronics case.

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