Behind-the-scenes talks between Samsung Group and the National Pension Service must have occurred to push through the controversial merger between Samsung C&T and Cheil Industries in July 2015, legal sources have claimed. The merger had faced strong opposition from individual shareholders led by US hedge fund Elliott Management.

“There must have been coordination between Samsung and the NPS prior to the shareholders’ meeting on such a huge deal,” a legal source who is familiar with the matter told The Korea Herald.

“NPS‘ support was decisive in moving other institutional investors to back the mega deal.”

There had been widespread speculation that the NPS, the largest shareholder of the former Samsung C&T with 11.2 percent stake, was intent on approving the deal from the beginning of the merger process last year.

The deal was widely seen as a crucial part of Samsung’s succession scenario involving the transfer of power from bedridden Chairman Lee Kun-hee to his only son, Lee Jae-yong, vice chairman of Samsung Electronics.

Individual shareholders led by US hedge fund Elliott Management, however, had strongly opposed the deal, saying it would damage shareholders’ value and that it was a power transfer scheme overstepping shareholders’ rights. The ratio of the merger was also questioned with the critics saying it was disadvantageous for Samsung C&T shareholders.

The NPS then decided on July 10 last year, after a review by an internal committee instead of an independent panel, to endorse the merger. 

“It is mandatory for the NPS to convene a special committee consisting of professional outside advisors when making such investment decisions,” the source said.

“However, the then NPS chairman didn’t even gesture at convening such a committee at the time. I heard some of the internal officials even filed complaints about not holding the special committee.

“In response to the complaints, the NPS held an internal investment committee in order to justify voting for the merger,” the source added.

At a National Assembly hearing of the country’s nine business tycoons on Tuesday, Lee Jae-yong conceded that he had met with working-level officials of the NPS, including Hong Wan-seon, then-chief investment officer, before the pension fund decided on the deal.

Both Lee and Hong denied the meeting was intended to discuss the deal and said it was a customary encounter.

Also during the hearing, the heir apparent of the nation’s largest conglomerate denied there being any manipulation of Samsung C&T’s share value against Cheil Industries, saying, “The stock swap ratio was not artificially set, but determined by the capital market law.”

The swap ratio of shares between Samsung C&T and Cheil Industries was set at 1 to 0.35, which aroused opposition from minor and foreign shareholders citing the “unfairly low” value of C&T shares.

The NPS had reportedly proposed 1 to 0.46 as the swap ratio to Samsung, but was rejected. 

“Swap ratios suggested by the three global advisory firms, including Institutional Shareholder Services, were much higher than that,” the legal source said. “And there has never been a case that an institution defied the ISS.”

Samsung has claimed the swap ratio reflected the relatively low share values of the C&T affiliate at the time, due to worsened performances.

“The swap ratio turned out to be low because it was calculated based on the former affiliate’s share price when it tumbled due to worsened performances,” a public relations officer at the new Samsung C&T said. “And, the fact is the C&T was acquired by Cheil Industries, not the other way around.”

Samsung C&T also denied there being any coordination in advance, saying meetings with the NPS were purely purposed to provide shareholders with details of the company’s merger plan.

“Working-level officials had met about eight times, including (Lee’s) meeting with the former NPS CIO, in order to describe the vision and synergy effects of the merger plan to the shareholder,” a spokesman at Samsung C&T said. “(Samsung) met not only officials of the NPS but also those of other local and foreign institutional investors for the same purpose.“ 

The Samsung spokesman also added holding the special adviosry committee is only limited to cases when ”the internal committee is in a difficult situation to make a judgment."

Prosecutors are currently investigating whether there was any pressure by Cheong Wa Dae to push the NPS to vote in favor of Samsung.

While the NPS continues to deny such speculation, former CEO of Hanwha Investment & Securities Joo Jin-hyeong claimed that he was pressured by Keum Chun-soo, the current vice chairman of Hanwha Group, not to publish negative reports about the Samsung C&T and Cheil Industries merger last year. Joo said he refused the order and published two reports opposing the deal.

“After the second publication, the then-CEO of Hanwha Life Insurance called me and said the situation would have me resign,” Joo said.

Hanwha Investment & Securities held 0.2 percent stake in Samsung C&T and it was the only local institutional investor that went against the deal.

If the prosecution probe concludes any foul play was present in the merger, some legal experts raise the idea that US hedge fund Elliott may file for a suit through a third-party arbitration tribunal under the Korea-US Free Trade Agreement.

“Elliot is a very conservative organization unlike it is described in Korean press,” the source said. “It would be moving very carefully, if it decides to take any action.” 

By Song Su-hyun  (song@heraldcorp.com)