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Samsung mulls CEO vacuum as heir appeals

Aug 29,2017
Jailed Samsung Electronics Vice Chairman Lee Jae-yong’s lawyers filed an appeal Monday of the five-year prison term handed down by a Seoul court last week on five convictions, including for bribing the ex-president.

The ruling by the Seoul Central District Court “mistakenly judged legal principles and facts,” the petition of appeal said, according to legal community insiders.

Immediately after the ruling last Friday, Song Woo-chul, one of lawyers representing Lee and four former Samsung executives, told reporters that the ruling was “unacceptable and an appeals trial will clear all the charges against Lee.”

Lee, the heir apparent and de facto leader of Korea’s biggest business group, was convicted of bribery, embezzlement, illegal transfer of assets abroad, concealment of criminal profits and perjury at a National Assembly hearing.

The four former Samsung executives - Choi Gee-sung, Chang Choong-ki, Park San-jin and Hwang Sung-soo - were sentenced to seven to 10 years in prison. They also filed appeals on Monday.

Independent counsel Park Young-soo, who acted as the prosecution in the trial, was also expected to file an appeal Monday seeking a longer jail term for Lee. He earlier recommended the court give the only son of bedridden Chairman Lee Kun-hee 12 years in prison.

The Seoul High Court appeals trial will center around whether there was an implied favor exchanged between Lee Jae-yong and impeached former President Park Geun-hye to facilitate his assuming of control over Samsung from his father. It will also reexamine Samsung’s financial support for the equestrian training of the daughter of Park’s confidante Choi Soon-sil.

The initial appeals hearing is expected to take place in September and Lee will be detained until then. His first trial began in April and Lee has been under physical detention throughout.

Earlier Monday, Samsung Electronics Vice Chairman and CEO Kwon Oh-hyun sent an email message to all employees.

“Everyone must be hugely dejected at the initial ruling of the Seoul Central District Court on Aug. 25,” he said, “We, the management, feel the same way. Our defense lawyers have decided to file an appeal. The uncertainties of the situation are regretful but let’s hold our ground and wait for the truth to come out.”

Kwon, who also chairs Samsung’s board of directors, went on to encourage employees to “unite the power and wisdom to push through such an unprecedented crisis,” citing difficult circumstances Samsung faces both within the company and from without.

For the time being, he and two president/CEOs are expected to fill the void left by Lee. Kwon is in charge of the device solutions division, which makes semiconductors and displays; President and CEO Shin Jong-kyun runs the IT & mobile communications division, which makes smartphones and tablet computers. President and CEO Yoon Boo-keun runs the consumer electronics division, which makes air conditioners and televisions.

It doesn’t appear that Lee’s absence will deal an immediate blow to the company. Samsung Electronics shares declined 1.96 percent to end at 2,305,000 won ($2,057) Monday, but the downward trend won’t last long, analysts say.

“The verdict on Lee won’t rattle Samsung’s fundamentals,” said Lee Se-cheol, an analyst at NH Investment and Securities. “Prospects are still bright largely thanks to rising demand for semiconductors.”

No global agency has lowered Samsung’s credit rating. Fitch Ratings said in a release on Friday that it does not expect the conviction of Lee “to significantly disrupt the day-to-day operations of Samsung Electronics or negatively affect the company’s credit profile.”

But analysts worry about the long-term risks if Lee is away for years amid constant changes in the global tech industry. Industry titans such as Google and Apple have been snapping up start-ups with cutting-edge, innovative technologies, which often requires leadership from the top.

Until Samsung spent $8 billion to acquire automotive audio component producer Harman International Industries last November - the biggest overseas deal ever for Samsung - Lee had spearheaded a handful of mergers, acquisitions and takeovers since May 2014. Under Korea’s unique corporate structure, owner families who also succeed top posts over generations are the ones that make key management decisions, including massive mergers and acquisitions.

“Structural reforms at Samsung such as selling off of non-core subsidiaries are secondary,” said Lee Byung-tae, a professor of business administration at the Korea Advanced Institute for Science and Technology. “What’s most serious is that the operation to secure new growth engine has stalled.”

Fitch also said Lee’s imprisonment could increase longer-term business risks by delaying necessary strategic decisions and major investment plans for the company.

Korea has seen top tycoons spend years in prison, mostly on bribery and embezzlement charges, without the management vacuums hurting the companies seriously. But the situation with Samsung is different.

“Samsung is such a globally recognized corporate entity and Lee has symbolic value on the business scene,” said Joo Dae-young, a senior research fellow at the Korea Institute for Industrial Economics and Trade, a state-run think. “His absence means a massive loss of visibility for Samsung.”

Regarding speculation that Lee Boo-jin, Jae-yong’s younger sister and CEO of Hotel Shilla, could take over his role at Samsung Electronics, Joo brushed off the idea. Her specialty is services in the domestic market, which is “an entirely different story from doing a manufacturing business in the global arena.

“The upbeat business results now being spotted at Samsung are a result of the business decisions on M&As, R&D projects and investments made up to five years before,” he said.

Meanwhile, Samsung, which in July leapfrogged Intel to become the world’s top chip maker by sales, confirmed in a regulatory filing on Monday its plan to add NAND memory chip production capacity at its existing facility in Xian, China.

BY SEO JI-EUN [seo.jieun@joongang.co.kr]