In South Korea, a familiar pattern has developed over the years.
First, one of the country's mighty chaebol conglomerates – think Samsung, Hyundai or SK Group – will take a short break from powering South Korea's export-oriented economy to briefly commit some incendiary corporate scandal. Usually, this takes the form of corruption, or tax and accounting fraud, but occasionally veers into lavish spending on real estate at the expense of shareholders and the rejigging of a conglomerate's sprawling corporate structure to benefit the second generation taking over from the patriarchs of these still-nominally family run firms.
Second, the nation will indulge in a now very familiar debate centred on this question: Have South Korea's enormous chaebol conglomerates become too powerful? And then, after South Korea engages in a bit of anxious soul-searching, the politicians and executives forgive each other and everyone moves on. Occasionally, some chaebol executives might go to jail – briefly – but they are often simply pardoned.
But now, the cycle is wobbling – due to the sudden appearance of a powerful outsider.
And that's a good thing for South Korea, which is struggling to re-energize an economy that has pushed up against the limits of export-led growth.
On one side of the brawl is the Samsung Group, the country's most powerful chaebol – a vast conglomerate of 67 separate companies that spans smartphones and health technology, hotels and hospitality, as well as ship-building, construction and advertising; on the other is the aggressive U.S. billionaire hedge-fund investor Paul Elliott Singer, and his firm Elliott Associates LP.
At Samsung, the Lee family dynasty is attempting to pass power from the older, ailing patriarch, Lee Kun-hee, to the younger heir, Lee Jae-yong, who is worth roughly $7.8-billion (U.S.). The Korean term chaebol, after all, combines the terms wealth (chae) and family or clan (bol). To consolidate power, Mssrs. Lee and other family members had hoped to use Samsung's de facto holding company, Cheil Industries Inc., to acquire Samsung C&T Corp., the construction arm of the huge chaebol, for roughly $9-billion. Samsung C&T owns about $11-billion worth of shares in the broader Samsung Group, and is a crucial piece of the reordering.
But Mr. Singer – who famously sparred with Argentina over its debts – has a big problem with Samsung's plans. He owns roughly 7 per cent of Samsung C&T, and argues that the Cheil takeover "significantly undervalues" the company – an echo of the constant refrain in South Korea that chaebol bosses enrich themselves at the expense of the other, powerless shareholders. He has said he will vote down the deal, and is urging other shareholders to do the same at a vote next week, on July 17. There is now furious lobbying on both sides, as Mr. Singer tries to persuade big investors – such as APG Groep NV, the world's second largest pension fund – to vote his way, and Samsung, which says the deal is legitimate, uses its heft and tight network in South Korean business to maintain control of the situation.
Predictably, there has been some backlash in the South Korean media to this hard-headed, foreign marauder – not the least because Samsung is one of the most respected conglomerates in the country. But there has also been a significant amount of support for Mr. Singer's plan, not just because others stand to lose out – as he will – but because it has struck a chord with ordinary investors and many South Koreans: To many, this is simply the latest chaebol outrage. It follows the so-called "nut rage" incident, in which the daughter of Korean Air's chairman lambasted a flight attendant for improperly serving her macadamia nuts. And it also comes after Hyundai shelled out an astonishing $10-billion to purchase a plot of land in Seoul's Gangnam district for its new headquarters, a deeply unpopular move that sent its shares down 14 per cent. All of this, of course, follows years of much more serious corruption scandals.
The government, which has lavished protectionary measures and cheap loans on the chaebol in previous decades, fuelling periods of intense growth, has pardoned senior tycoons on the inarguable – but morally flimsy – rationale that they helped build South Korea from a war-ravaged, agrarian economy in the 1950s to a prosperous, modern economy that is now the envy of much of Asia.
So far, the South Korean government has remained silent, but it is very likely that South Korea's giant pension fund will side with chaebol management, as it has done in the past.
It is unfortunate, but rather telling, that it has taken a foreign investor to disturb the cozy, permissive business culture in and around Seoul. If Mr. Singer wins his battle, he will do so by winning over South Koreans to vote with him – and that will mean real change in a country where corporate governance is weak. But if he loses, it would mark a return to the cycle of chaebol scandals and angry backlash, followed by silence.