“The Prosecution’s Indictment Is Baseless” — It’s All Already Been Revealed

Kim Yiseok, Director of the Market Economy Institution Research Institute

The Samsung Biologics accounting issue was judged multiple times to have posed no problem

How bad must it be for people to say it should have listed on Nasdaq?

The prosecution’s request for an arrest warrant for Samsung Electronics Vice Chairman Lee Jae-yong was dismissed in the court’s warrant review. As a result, the management vacuum at Samsung has been put off for the time being, but the matter is not over yet. It is still unknown whether the Investigation Review Committee requested by Vice Chairman Lee’s defense team will be convened, and if it is, what conclusion it will reach regarding indictment.

It is fortunate that the prosecution’s request for an arrest warrant for Vice Chairman Lee was rejected, but even before that, it is hard to shake the impression that the prosecution itself is “forcing the issue,” given that it is unclear whether Vice Chairman Lee actually committed a crime. The Samsung Biologics accounting issue had already been judged several times under the previous administration as involving no problem. At the time of Samsung Biologics’ listing, there was controversy over “window dressing accounting,” but it underwent an audit by an accounting firm designated by the Financial Supervisory Service and received a definitive confirmation from the Financial Supervisory Service that there was “no problem.”

Nevertheless, in May 2018, the Financial Supervisory Service announced that Samsung Biologics had committed “intentional accounting fraud,” thereby reversing its own 2016 judgment. In response, DS Asset Management, one of Korea’s hedge funds, disposed of all of its Samsung Biologics shares, saying that “political logic had intervened.” Selling by such institutions sent Samsung Biologics’ share price plunging, wiping out 8.6137 trillion won in market capitalization. If this kind of thing is repeated, Korea’s capital market will not be able to function.

The Securities and Futures Commission under the Financial Services Commission, which filed the complaint in this case, and the prosecution argue that Vice Chairman Lee committed the crime of “intentionally manipulating” Samsung Biologics’ accounting in order to illegally transfer control of Samsung’s management.

Their logic is as follows. Samsung Biologics was spun off from the new business division of Cheil Industries, and they claim that its value was “illegally” inflated by changing the accounting treatment of Samsung Bioepis, a Samsung Biologics subsidiary, from a consolidated subsidiary (sole control) to an equity-method affiliate (joint control). They further argue that, by doing so, in the merger between Cheil Industries and Samsung C&T, the interests of Samsung C&T shareholders were “illegally” harmed and the succession was “illegally” made more favorable to Vice Chairman Lee, who held shares in Cheil Industries.

However, the view of Choi Joonsun, Professor Emeritus at Sungkyunkwan University and an expert in commercial law, is the exact opposite. When the Securities and Futures Commission filed a criminal complaint against Samsung in November 2018, he had already pointed out that these claims lacked support both logically and factually. Samsung Bioepis, a subsidiary of Samsung Biologics, had granted the U.S. pharmaceutical company Biogen the right to buy shares at a predetermined price, but before that right was exercised, Samsung Biologics held 85% of Bioepis while Biogen held only 15%, so it was natural for Samsung Biologics to treat Bioepis as a subsidiary. However, after Biogen exercised its call option, Bioepis was no longer solely controlled by Samsung Biologics, so there was nothing wrong with treating Bioepis as an independent company and reflecting in Samsung Biologics’ value only the value of the stake it held in Bioepis.

In short, although Bioepis’ initial investment had been treated as a cost, that cost contained embedded future value. Professor Choi points out that Samsung Biologics merely reflected the equity value of Bioepis in its corporate value upon Biogen’s exercise of the call option, but the Securities and Futures Commission and the prosecution wrongly judged this to be a crime of intentionally inflating Samsung Biologics’ value.

Individual shareholders holding 35% of Samsung C&T shares—the very shareholders whom the Securities and Futures Commission and the prosecution claim had their interests illegally infringed—overwhelmingly supported the merger between Samsung C&T and Cheil Industries. Moreover, holders of Samsung C&T shares who did not agree with the stock swap ratio in the merger were also able to exercise their appraisal rights to demand that their shares be purchased according to a fixed formula based on the average of recent share prices. There was no particular interference with the principle of “private autonomy” in such matters. That is why many accounting experts believe the so-called “Samsung Biologics accounting fraud” controversy is not a matter for criminal investigation.

There may be differing views on accounting treatment. But a supervisory authority should not reverse its decision on such a matter as if turning over the palm of its hand. And it is also strange for the prosecution to define a disputed issue like this as a crime and bring an indictment on the basis of a particular accounting treatment. Is it for nothing that people say Samsung Biologics should have listed on the U.S. Nasdaq rather than on Korea’s stock market? If such talk continues, no promising company will want to list on the Korean stock market. If that is the situation, it would not be too late for the prosecution to decide whether to indict in this case after convening the Investigation Review Committee requested by the defense and allowing a full and vigorous debate there over logic and facts.

Kim Yiseok, Director of the Market Economy Institution Research Institute

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Original title: '검찰 기소는 억지' 이미 다 밝혀졌다

Author: Yi-seok Kim

Date: 2020-06-10

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=21&idx=22835