Sign in / Join
1956

Samsung’s shady merger led to the arrest of its heir apparent

Samsung Group vice chairman Lee Jae-yong arrives at the Seoul Central District Court, on Feb. 16.

Maybe this was inevitable.

The Friday arrest of Samsung Group Vice Chairman Lee Jae-yong was stunning, because it’s not every day that the de-facto leader of a giant international corporation gets led away by police. But it was also the culmination of a shady merger that was meant to pave the way for Lee to take the corporate reins from his father, but has instead landed him in court.

Here’s how it happened.

Bribery?

Turmoil at the head of Samsung is really just an extension of high-level turmoil that has engulfed the most powerful people in South Korea.

Lee and his company are suspected of paying millions of dollars to a nonprofit organization run by a good friend of South Korean President Park Geun-hye, allegedly to curry favor with the government so a company merger would go smoothly. Park’s friend, Choi Soon-sil, has been arrested on charges of corruption. The company is also accused of financing Choi’s daughter’s equestrian training, which Lee has said he regrets. Choi’s daughter, too, has been arrested.

What is this merger?

It wasn’t supposed to be like this. Lee’s father, the chairman of Samsung Group, hasn’t been serving in that role due to a heart attack. That leaves Lee, who has taken on the role in name only. To build a smooth path toward making his position official, the family wanted to consolidate some of the companies that fall under the umbrella of the Samsung Group, which is controlled by the Lee family.

The plan was to have a Samsung Group company called Cheil acquire Samsung C&T. The Lee family owns a higher stake in Cheil than Samsung C&T, so this makes sense for them. There’s also evidence that the boards of both companies meddled with their own stock prices in the month before the deal in a way that would allow Cheil to acquire the company for less. Once done, the Lee family would control more of the group, and Lee himself would make even more sense as the new chairman.

But the merger needed regulatory approval, which is where those alleged bribes come in. Did the South Korean president order the approval of the merger in exchange for payments to the nonprofit of her friend? That’s the question.

What does this mean for Samsung?

For Samsung, which denies any wrongdoing, the arrest of its vice chairman can at best not matter at all. The company may find itself having to rebuild trust in its brand, but some don’t believe it’ll have much trouble getting customers to buy its products.

Bad as it is for the vice chairman to be arrested on charges of corruption, analysts who spoke with CNBC said Lee’s image isn’t associated with the brand internationally. If customers hear about the arrest at all, it may not matter when they’re weighing a purchasing decision.

What happens now?

South Korean prosecutors now have to make a decision on whether to indict Lee. They’ve got 10 days. If they do decide to indict him, the case would proceed to trial. A court would then have three months to issue a decision about the innocence of Lee and his company.