The de facto leader of Samsung, Lee Jae-yong, returned to prison, throwing the South Korean conglomerate into chaos during a generational transfer of power. Samsung’s president, the 52-year-old grandson of Samsung founder Lee Byung-chul, received a 30-month prison sentence from a South Korean court of appeals on Monday in a retrial for his 2017 conviction for bribing former South Korean president Park Geun-hye.
The trial focused on bribing the former South Korean president, seeking government help to close a merger within the conglomerate between two Samsung affiliates that it consolidated. The Samsung president first went to prison in early 2017 and then received a five-year prison sentence that year. A Court of Appeals later lightened the punishment, releasing the Samsung president from prison. In August 2019, South Korea’s Supreme Court ordered a new trial that led to Monday’s verdict.
The Samsung president’s last conviction, a year ago, will count as part of the time served from his current sentence. If he is granted early parole, Lee could walk free next year.
In recent months, Samsung has been trying to rebuild its collective image as a responsible company. The conglomerate created an external compliance committee to capture potential ethical issues. The president of Samsung apologized for the scandals and promised not to pass his position on to his children.
The Samsung leader’s apologies and promises were not enough for the Seoul High Court in its verdict on Monday. Although sentences of up to three years can be suspended, the Court of Appeals said Lee’s punishment needed to include more jail time.
Last week, South Korea’s Supreme Court upheld a 20-year prison sentence for former President Park in the same corruption scandal that led to her impeachment. The affair sparked nationwide protests about the close ties between the political and business elites.
Lee’s sentence hit Samsung like a bucket of cold water
Although the absence of Jae-yong Jr. is not a new problem for Samsung, the arrest comes at a time when the cell phone company is in a precarious situation.
Samsung’s conglomerate comprises dozens of businesses, each with executive directors who run daily operations, but important decisions require Lee’s approval. Because of its importance to the conglomerate, the arrest of the head of Samsung triggered a massive sale of Samsung shares, costing it billions of dollars in market capitalization. Samsung Electronics fell by 3.4 %, battery manufacturer Samsung SDI Co. fell by 4.2 % and Samsung C&T Corp. the de facto holding company of the conglomerate, fell by 6.8 percent.
Unlike 2017, (when Samsung’s president was first arrested), Samsung Electronics, the conglomerate’s crown jewel, is no longer in the midst of a historic race in memory chip prices. That period was so fruitful that it denied the harmful effects of the previous year’s shameful global recall of the Galaxy Note 7 smartphone model.
In early 2020, the pandemic increased computer chips and data servers’ sales as more people worked from home. But now, the industry is rapidly consolidating. While its main rivals are increasing their market share, Samsung has remained in the competition to invest an additional $100 billion in the microchip sector. The search for and approval of major acquisitions are among Lee’s main responsibilities.
Samsung’s last major deal occurred four years ago when it invested $8 billion to buy the U.S. automotive technology manufacturer Harman International Industries Inc. After that deal, Samsung’s president’s legal troubles began.
Meanwhile, Samsung’s smartphone business is under scrutiny by regulators and there is increasing pressure from competitors. Lower-priced Chinese rivals are investigating Samsung’s user base in Europe, India, and elsewhere. Apple Inc. has launched its first 5G-enabled iPhones, negating Samsung’s initial advantage with next-generation devices.
The return of Samsung’s president to prison could slow down the company’s ability to respond quickly and aggressively in times of crisis or opportunity. It could also accelerate a shift from strict family control over decisions to those who are already running operations.
Jae-yong has led Samsung’s conglomerate since his father, Lee Kun-hee, was incapacitated by a heart attack in 2014. With the death of his father in October, Jae-yong was expected to formally take over the Samsung presidency, a transition he will make from prison.
The death of Lee’s father came with a hefty inheritance tax of more than 11 trillion South Korean Won, or approximately USD 10 billion, as he inherited the patriarch’s shares in various Samsung companies. The tax is due to be paid over the next five years.
The Samsung president’s legal troubles are not over, as he remains embroiled in another case involving alleged financial fraud at a Samsung subsidiary with a role in an intra-conglomerate merger in 2015. According to legal experts, that case, with expected appeals, could drag on for several years.