Seoul court denies US fund's request to stop Samsung merger

SEOUL: A South Korean court Wednesday denied an American hedge fund's request to stop Samsung from combining two of its companies, a largely expected ruling that gives South Korea's biggest business group a boost in an upcoming shareholder vote on the merger.

The Seoul Central District Court said the proposed takeover of Samsung C&T by Cheil Industries is legal and fair, clearing ways for Samsung to put the merger to a shareholder vote on July 17.

Samsung said in May Cheil will take over Samsung C&T because construction and trading businesses needed new revenue sources, while Cheil, which operates businesses in fashion, catering and resort parks, needed to enter global markets through C&T.

Elliott, Samsung C&T's third-largest shareholder, filed injunction requests shortly after the deal was announced. It said the proposed deal significantly undervalues C&T while benefiting Samsung founding family members who own a 42-percent stake at Cheil, at the expense of shareholders.

A three-judge panel at the Seoul court didn't accept the argument. Chief judge Kim Yong-dae said there was no evidence to conclude the deal would serve the founding family only, citing that C&T stocks were higher after the deal was announced.

The court threw out other claims from Elliott that could have potentially undermined the legitimacy of the deal.

During the month before the merger was announced in May, C&T shares were trading near a five-year low, while Cheil shares were near a record high. Rumors were ripe about what was behind the low level of C&T stock prices. Its stock price was so low that its market capitalization became even smaller than the combined value of the shares at Samsung Electronics and other Samsung affiliated firms that C&T owned.

Based on a South Korean law that determines a merger ratio by the average stock price of each company, C&T shareholders will receive just 0.35 shares at Cheil for every C&T share they own. That would make Lee Jae-yong, the Samsung chairman's son, the largest shareholder in the combined entity, putting the C&T-owned 4.1 percent stake at Samsung Electronics worth $7 billion under his control.

The judges said there were no grounds to believe that the stock prices of C&T were unlawfully manipulated. They also said the value of the Samsung affiliated companies' stocks that C&T owns is just one of many factors that determine its stock prices.

Samsung C&T welcomed the decision.

"The Court's ruling validates the fairness of the merger ratio and affirms that legal requirements have been met," it said in a statement. "We also agree with the Court's assertion that the merger offers benefits to shareholders of both Samsung C&T and Cheil Industries."

Elliott vowed to continue its efforts to block the deal.

"While we are disappointed with the Court's decision, we continue to believe that the proposed merger is neither fair nor in the best interests of Samsung C&T's shareholders," Elliott said through its public relations agency. "We will continue to seek to prevent the proposed merger from being consummated, and we urge all Samsung C&T shareholders to do the same."

The deal was announced at a time when Lee was widely expected to succeed his ailing father to lead the business group. After his father was incapacitated with a heart attack more than a year ago, Samsung has accelerated various business restructuring and initial public offering plans of affiliated companies that had made the 47-year-old a billionaire and that paved the way for him to strengthen control at key Samsung firms.

After Elliott beefed up its fight to thwart the deal and other shareholders spoke up against the merger plan, Cheil and Samsung C&T have promised a better treatment of shareholders such as increased dividend payouts and creating a governance committee.

The court has not ruled on a separate injunction filed by Elliott to block Samsung's ally KCC from voting on the merger. Samsung C&T recently sold its treasury shares to KCC to win more votes in support of the merger.