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Samsung to Simplify Ownership Structure, Loosening the Lee Family's Ties

SEOUL—Samsung plans to drastically simplify the conglomerate’s ownership structure in coming months, according to people familiar with the matter, untangling a controversial web that has long been criticized for benefiting the ruling Lee family at the expense of minority shareholders.

Two Samsung affiliates intend to sell off their roughly $1 billion stake in the conglomerate’s de facto holding company,

Samsung C&T
Corp.


028260 -1.07%

, the people said. The moves are pending board votes at the two affiliates,

Samsung Electro-Mechanics
Co.


009150 -2.47%

and

Samsung Fire & Marine Insurance
Co.


000810 0.75%

, with timing of the sale to be determined by financial-market conditions, they said.

Samsung officials have shared the plans with large South Korean and foreign investors in recent weeks, the people said.

The move—one of several continuing overhauls at Samsung—would ultimately weaken the grip of

Lee Jae-yong,

the 49-year-old

Samsung Electronics

vice chairman and grandson of the conglomerate’s founder, who was recently released from prison with a suspended sentence in connection with a wide-ranging corruption scandal in South Korea.

Unwinding the Samsung affiliates’ stakes in the de facto holding company, the people familiar with the matter said, will dissolve the last four examples of Samsung’s circular shareholdings, an opaque ownership structure that has come under fire from foreign investors and South Korean regulators. Samsung has been gradually reducing the cross shareholdings since 2013, when there were about 80 such significant arrangements, which gave the Lee family wide leverage to indirectly exert power across the whole conglomerate.

The Samsung revamp marks a significant development in South Korea, where family-run conglomerates, or chaebols, have erected complex ownership frameworks that were necessary to fuel business expansion after capital markets tightened following the 1997 Asian financial crisis.

More recently, critics have said, the ownership labyrinths have given ruling families a way to avoid the country’s hefty inheritance tax and transfer power to younger generations using intra-conglomerate mergers, spinoffs or other complex tactics.

With Mr. Lee’s own succession planning, the most likely option is pretty straightforward, according to people familiar with the situation. His father, Lee Kun-hee, the chairman of Samsung, has been incapacitated since suffering a stroke in 2014, and when he dies, a multibillion-dollar inheritance tax of at least 50% will be levied.

A Samsung spokeswoman said, “All taxes related to the inheritance will be transparently paid as required by law.”

The most likely scenario, according to a person familiar with the situation, is that Lee Jae-yong will cover the tax bill by selling his father’s sizable stakes in key Samsung affiliates. Doing so would leave the younger Mr. Lee—a billionaire whose own wealth is largely held in shares of Samsung affiliates—with far less control over the business empire than his father enjoyed when leading the conglomerate.

The younger Mr. Lee owns 0.65% of Samsung Electronics, while his father ranks as the company’s fifth-largest shareholder with a 3.86% stake worth roughly $12 billion. The elder Mr. Lee is the wealthiest South Korean, with an estimated net worth of roughly $20 billion.

The younger Mr. Lee, Harvard-educated and trilingual, has tried to overhaul Samsung’s opaque culture. He has viewed South Korea’s family-run system as being too sprawling, conservative and corrupt, telling those around him that “the chaebol system is done,” according to people familiar with his thinking.

The practice of circular shareholdings has been targeted by the Korea Fair Trade Commission, which is led by

Kim Sang-jo,

a former governance activist. Over the past year, the number of circular shareholdings among South Korea’s big conglomerates has fallen 85%, the Korea FTC said recently.

Samsung over the past year has boosted dividends, diversified a board that previously consisted of nine Korean men, and said it would cancel some $35 billion in treasury shares, a type of holding that has long concentrated voting power in the hands of ruling conglomerate families.

Yet even with the moves, the Lee family retains significant control of Samsung Electronics, the conglomerate’s crown jewel, through a roughly $26 billion stake held by a life-insurance affiliate.

Samsung Life Insurance
Co.

is the electronics giant’s second-biggest shareholder, an ownership stake that isn’t considered a circular shareholding. No decision by Samsung has been made on this life insurer’s holding, according to people familiar with the matter.

Mr. Lee has run into his own share of legal problems. He was convicted and jailed last year for offering bribes to a close friend of the former president of South Korea in exchange for government backing of a merger of two Samsung affiliates.

He has denied wrongdoing and was released from prison in February on a suspended sentence. His case is set to be heard by South Korea’s Supreme Court, though no trial date has been set.

The merger at issue, between Samsung C&T and

Cheil Industries
Inc.,

was viewed by some foreign investors and governance advocates as a way for Mr. Lee to consolidate his power. In late December, at the final testimony for his appeals trial, Mr. Lee sought to dismiss any notion he sought presidential support to push through the affiliates’ merger.

“Having the CEO title of Samsung or increasing my shares of affiliate companies holds little meaning to me,” Mr. Lee told the judge. He said he wants his role as Samsung’s leader to be judged on his performance, not the size of his ownership stake.

Since leaving prison, Mr. Lee has kept a low profile. He hasn’t attended a Samsung Electronics board meeting since his release, and the full board has yet to be briefed on what his ultimate role will be, according to people familiar with the situation.

Write to Timothy W. Martin at timothy.martin@wsj.com

Appeared in the April 30, 2018, print edition as ‘Samsung to Mold Simpler Setup.’

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