SKorea's Samsung in rough patch with arrest request, recalls

AP News
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Posted: Jan 16, 2017 6:16 AM
SKorea's Samsung in rough patch with arrest request, recalls

SEOUL, South Korea (AP) — A request by South Korean prosecutors to arrest Lee Jae-yong, the 48-year-old vice chairman and de facto leader of Samsung Electronics, has added to the troubles for the country's most valuable company after a spate of recalls last year.

Lee faces allegations he offered $36 million in bribes to a friend of President Park Geun-hye, who has been impeached. Prosecutors say they also suspect him of embezzlement and lying under oath. A Seoul court will review the request for his arrest Wednesday and will likely decide on it within this week.

Here is what you need to know about the entanglement of the world's largest smartphone maker in the scandal:

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SAMSUNG'S LINK TO THE SCANDAL

Samsung is alleged to have made substantial donations to nonprofit foundations controlled by Choi Soon-sil, a confidante of Park's who has been jailed and is on trial for allegedly using her connections with the president to extort money and favors from companies and unlawfully interfere with government affairs.

South Korean prosecutors say the company agreed to pay more than $18 million to a company Choi set up to finance equestrian training of her daughter in Germany. It also helped pay for a winter sports center run by Choi's niece. Of four Samsung executives prosecutors have questioned Lee is the only one they have asked to arrest. The prosecutors say they plan to summon Park for questioning as a possible suspect.

The company has said it never made donations to win favors.

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LEADERSHIP SUCCESSION

Since Lee Jae-yong's father suffered a heart attack in May 2014, the company has been trying to accelerate a leadership succession from the 72-year-old father to his son.

The younger Lee has held various executive positions at Samsung Electronics but owned less than a 1 percent stake in the company in 2014. Inheriting his father's 3-percent stake would cost him billions of dollars in inheritance taxes. To strengthen his control over the company without having to lay out a fortune in either taxes or share purchases, the Samsung group chose in 2015 to merge two of its member companies, Samsung C&T and Cheil Industries.

Lee was the biggest shareholder in Cheil. The merger made him the biggest shareholder in Samsung C&T, increasing the share of Samsung Electronics shares that he effectively controls to about 5 percent.

Minority shareholders of Samsung C&T, including the U.S. hedge fund Elliott Management, opposed the merger, saying it benefited the Lee family at their expense.

Prosecutors have indicted a former health minister, Moon Hyung-pyo, for allegedly abusing his power in asking the national pension fund to support the Samsung merger plan at Park's request.

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EXPOLDING PHONES AND WASHERS

Just weeks before Samsung was dragged into the political scandal, the company discontinued its flagship smartphone, the Galaxy Note 7, after finding it was prone to overheat and catch fire. The recalls began shortly after the smartphone was launched in August.

Samsung has estimated the total cost of the recall at at least $5.3 billion and slashed its third-quarter profit forecast.

The recalls and safety concerns stung, and company officials say they plan to soon announce a definitive conclusion on why the phones were overheating.

In another upset, about a month after the Note 7 was discontinued, nearly 3 million Samsung washing machines were recalled in the U.S. following several reports of injuries — including a broken jaw — due to "excessive vibration."

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PROFIT MACHINE

Samsung has postponed the personnel reshuffle it usually announces every December. An arrest for Lee also might slow decision making on big investments and long-term strategy. But Lee is not involved in day-to-day management, so the company's smartphone and chip sales would be unlikely to suffer much immediate damage from his absence.

The company remains a profit machine thanks to its formidable business in making microchips for computers and mobile devices. Earlier this month, Samsung said its October-December operating profit jumped 50 percent to $7.8 billion, its best performance in more than three years. It is due to give more details on its earnings in a conference call scheduled for Jan. 24.

Before prosecutors requested Lee's arrest, Samsung Electronic's share price had been setting record highs, with shareholders anticipating generous dividends. On Monday, it fell 2 percent.

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