The Samsung Case

The Samsung Case

On December 27 2001 the Suwon District Court held nine former and current directors of Samsung Electronics Co Ltd jointly and severally liable for W90.28 billion (approximately $70 million) for neglecting their duties.

The court's landmark decision concerned the so-called 'business judgement rule', which the defendants attempted to use in their defence. According to the rule, company directors are not liable for honest mistakes in judgement that result in financial loss if they exercise reasonable care and make decisions in good faith that are not unauthorized. The rule has been applied in few cases, although it is strongly supported by Korean legal academics.

The court's major findings are outlined below.

Losses for acquisition of majority stake in a financially unstable company
In early 1997 the directors decided that Samsung would purchase a majority stake in Lechon Electric Co Ltd by purchasing existing and new shares. Lechon was in serious financial difficulties at the time of its acquisition and by the end of 1998 was virtually bankrupt. The directors decided that Samsung would sell the shares at a huge loss. Samsung's total losses from the acquisition and subsequent cash injections totalled W200 billion.

In defending their decision to acquire, the directors argued that the Lechon takeover would be beneficial to Samsung in three ways. First, Lechon had an abundance of skilled engineers which Samsung lacked, in an industry that it was trying to penetrate. Second, by acquiring Lechon's base of expertise Samsung could drastically reduce its product development time. Third, the Lechon purchase would ultimately allow Samsung to increase substantially its overall market share in the industry.

The court rejected these assertions and their business judgement rule defence. The court ruled that, although there may have been several compelling reasons in favour of acquiring Lechon, the directors had failed to analyze the risks of the acquisition and so their decision-making process was negligent.

The directors were held liable for W27.62 billion (a proportion directly relating to the acquisition itself out of the W200 billion total losses) for neglecting to exercise the level of care required to decide whether a takeover of Lechon was truly beneficial for Samsung. The court stated that thorough analyses of Lechon's financial position and Samsung's other options should have been undertaken.

Losses for payment guarantee
In June 1998, after Lechon's financial position became increasingly serious, the directors decided to guarantee Lechon's debt payments and provide Lechon with W170.9 billion in the form of new share purchase in order to prevent Samsung's guarantee being called. The directors' decision was based on the fact that, had they not done so, Samsung would have been blacklisted by its own banks as a dangerous credit risk, being the controlling shareholder of a subsidiary that would have defaulted in loan repayments.

The directors were absolved of any liability for their subsequent decision to guarantee Lechon's debt payments and purchase its new shares, despite the fact that this subsequent decision was the direct result of the initial decision (for which they were held liable). The court found that the directors had exercised reasonable care in making their subsequent decision to guarantee Lechon's payments and purchase its new shares.

Sale of shares at below market price
On December 17 1994 the directors decided to sell 20 million shares of Samsung General Chemicals (SGC) to two other Samsung affiliates. Although the selling price of the shares was W2,600 per share, their market value was estimated to be around W5,733 per share. In addition, Samsung had originally purchased the shares over the course of six years (between July 1988 and April 1994) at the price of W10,000 per share.

The directors argued that the W2,600 price per share was justifiable, given that it was calculated on the basis of a reputable accounting firm's share appraisal report and in accordance with a formula prescribed by the Corporation Tax Act.

The court noted that the formula prescribed by the act was one of several ways in which the directors could have calculated the share price and that a more accurate method should have been chosen.

The actual share price could not be readily quantified as the shares were not listed on any exchange but the court listed several other factors which, in totality, led to liability. These factors were as follows:

  • The directors' decision to sell the shares was made in a very short time and caused Samsung to lose its majority stake in SGC;
  • Between July 1988 and April 1994 Samsung had consistently purchased the shares at a price of W10,000 per share; and
  • In June 1993 Hansol Paper, a subsidiary of Samsung Enterprise Group, sold its holdings of SGC shares to another subsidiary of Samsung Enterprise Group at a price of W6,600 per share and SGC's profitability had improved since then.

The directors submitted two other arguments in their defence, namely that the proceeds of sale were sorely needed for investment purposes and that they were protecting Samsung from possible anti-trust prosecution. The court rejected these arguments and held the directors to be jointly and severally liable for a total of W62.66 billion, which is the difference between the price for which the court felt Samsung should have sold the shares, less the price for which they were actually sold.

Another issue considered by the court concerned a series of payments in the amount of W7.5 billion which Lee Kun-hee, a director of Samsung and the chairman of Samsung Enterprise Group, allegedly ordered to be paid on behalf of Samsung to former President Roh Tae-woo between March 1988 and August 1992.

In his defence, Lee argued that the payments were made to enhance Samsung's business development and were well within the amounts normally allowed by Samsung's established internal regulations. In addition, Lee argued that such amounts were approved by Samsung's shareholders as part of the financial statements presented to them at their annual general meetings.

The court noted that bribery is a crime, and that a director who commits criminal acts cannot be regarded as acting reasonably and in the best interests of any company. Consequently, Lee was ordered to repay the full amount.


The court's ruling marks a potential turning point in the way in which corporate governance will be conducted in the future. Despite the fact that the decision will almost certainly be argued again in higher level courts, directors are no longer safe to make blind decisions (often based solely on the whims of the chairman of a conglomerate) without exercising their reasonable judgement.

For further information on this topic please contact Hee Chul Kang at Woo Yun Kang Jeong & Han by telephone (+822 528 5200) or by fax (+822 528 5300) or by email ([email protected]).