Answer by Wonwhee Kim:
The answer is: a) the holding company structure is how the Lees currently maintain control over the Samsung Group, b) BUT their control is definitely not absolute.a) Analyzing company ownership structures in Asia is actually one of the ways equity analysts incur the most brain damage.One time I asked a Korean equity analyst at Morgan Stanley about the ownership structure of Hyundai and she literally facepalmed herself and shut down in the middle of a meeting.The reason is that Samsung, like most Korean conglomerates, is held by the founding family through two types of ownership: direct stakes by individual family members, as mentioned in the question/article, and indirect stakes through companies that they control.Here’s the latest clear chart (as of Feb 2016) I could find below with some annotations, which includes the cats cradle-type ownership origami activities the group has done over the last two years. Since the last chart was made in Anonymous’ answer, the Group has done a conversion of its circularity into a holding company structure, and also merged a few entities.If you see below, note that the Lee family directly owns 31% of Samsung C&T. This is essentially the holding vehicle through which control over all the other companies is kept. Now it is probably more clear if you look at a specific example. Take the Group’s (rapidly diminishing) flagship Samsung Electronics.Note here that Samsung C&T, which is controlled by the Lees, owns 4% of SS Electronics. SS Life owns 7%, and SS Fire & Marine (grey untranslated box) owns 1.3%, for a total of about 12-13% owned by other SS Group companies.So how does the family actually control it?First, as of yesterday (Feb 15), Lee Kun-Hee owned 3.44% of SS Electronics directly, which is not shown here as the diagram is only B2B relationships. That means about 18% of the outstanding shares were controlled by the family + family-controlled companies.Next, this 18% of the outstanding shares actually represents more than 22% of voting shares. This is because SS Electronics holds treasury shares that it hasn’t retired (which have no voting rights), and the company also has another class of common shares that have no voting rights. Eliminate these and the family’s stake is 20%+ in voting.Your first question is, back up, how, then, does the family control SS Life, SS Fire, and SS C&T?Assume for now that the family controls C&T. C&T owns 19% of SS Life. Lee Kun-Hee separately owns more than 20% of SS Life, and other family-controlled entities such as the Samsung Cultural Institute (not pictured here) combine stakes for more than 47% by the family.SS Fire is similarly controlled about 18% by the family, 15% of it through C&T, and another 3% through the cultural institute.Now your next question is how the family maintains control over these companies with such low stakes? Take SS Electronics again – even if the company is 22% controlled by the family, 78% of the shares are owned by others!First, Korea’s National Pension Service, a long-term investor if there ever was one, owns a 8% block of the company and cannot be counted on to vote or move against company management (more on this later), leaving only 70% that is effectively distributed over thousands of individual investors.Now, in the case of Samsung Electronics, even if someone wanted to, it would be almost impossible to amass a large enough position to match the 20%+ control that the family holds to oppose or overrule their vote – this is because it is prohibitively expensive (20% of the $160b USD market cap is more than $30b) and would be even more expensive as you started buying; you cannot buy a stock in such vast quantities without alerting everyone on the street and you would start getting matched by the Lee family or others would pile on as well, driving up the $30b price tag to…however high it can go.So – although it is not immediately obvious, that 22% voting share control is a de facto control over the company and its decisions. And this -> is the case for virtually every company in that chart you see above. In one way or another, the family exercises control over the decision-making through indirect control via C&T, direct ownership stakes (as in Lee Kun Hee’s 20% ownership of SS Insurance), indirect ownership through secondary/tertiary controlled companies like the cultural institute, embedded managers loyal to the family, hidden treasury shares that actually help inflate the voting stake, and large passive investor blocks like the NPS or big mutual funds and/or sovereign wealth funds.And back to the first assumption about C&T; the family owns a 30% stake in it directly and other Group companies own 9% (look at the arrows pointing in). Yes, there is still some circularity. But the total stake that the family + Group companies have in C&T is 40%. Which is much larger than that 22% above and is basically firm control.This is not absolute control. But it is control.Because the shrewder minds among you might think, ok, there are plenty of other companies within the Group that are less expensive that might be worth targeting, if you wanted to wrestle control away from the Lee family right?b) That is exactly what. It held about 7% of Samsung C&T, which up to then was just another group company. So to go back to that chart above, Cheil Industries was the entity at the top, and Samsung C&T was elsewhere in the constellation and actually owned by SS SDI and SS Fire & Marine.Before the merger, Elliott’s 7% stake was even more than Lee Kun-Hee’s individual 1.4% stake. However, note that if you added up the stakes of SS SDI and SS Fire & Marine, the family effectively controlled 14% a la the above. In May, Cheil Industries, the family holding vehicle, announced a takeover offer for C&T at a bargain basement price that did not sit well with many investors, Elliott among them.Elliott tried to block the bid and force C&T to hold out for a higher price, but because the whole reason for this merger was to consolidate/solidify family control over the Group, the family fought only as those who are desperate could, using such tactics as calling individual shareholders (housewives) at home, while branding Elliott as just another one of those ‘foreign hedge fund vultures’. The vote barely passed with 69.5% in favor. They needed 66.7%. During the battle, people wondered which way the NPS would vote with their 11% stake; ultimately it was in favor as well.So – their control is not absolute. But it is difficult to unseat them. If even a company that was only about 14% controlled by the Lee family & Group companies was ultimately revealed to be ‘controlled’ by the family, imagine what would happen if someone tried to take control of some of the other companies, crown jewels like SS Electronics or Life among them, controlled in much larger amounts by the family. Probably nothing.I was rooting for Elliott. This is why Korean conglomerates are in trouble; they seem to be spending more time trying to figure out dynastic succession issues and how to avoid inheritance taxes than how to innovate and create value. It’s why ROEs and ROIs are so low and shareholders demand discounts to own them.