Samsung chief Jay Y. Lee sentenced to a 5-year jail term, convicted of bribery and embezzlement

Key Points
  • A South Korean court found Samsung's de-facto chief Jay Y. Lee guilty of bribery, embezzlement and perjury, according to local reports
  • The court sentenced the vice chairman of Samsung Electronics to five years in prison
  • Lee is expected to appeal the decision and his lawyer is reportedly confident that it will be overturned
South Korean court finds Samsung heir guilty of bribery
South Korean court finds Samsung heir guilty of bribery

A court in South Korea on Friday sentenced Samsung's de-facto chief Jay Y. Lee to a five-year jail term, according to local media reports. The sentencing followed a trial where he was accused of paying bribes to gain government favors for the conglomerate.

Local news agency, Yonhap, said the court found Samsung Electronics vice chairman Lee guilty of giving bribes to get support from ousted President Park Geun-hye. It also convicted him of embezzlement, hiding assets overseas and perjury, Yonhap reported.

Lee is reportedly expected to appeal the decision, and one of Lee's lawyers told reporters that they were confident the ruling would be overturned, according to Reuters.

Samsung C&T shares closed down 1.48 percent in the afternoon session, recovering slightly from an earlier drop of more than 2 percent. Samsung Electronics shares closed down 1.05 percent.

Jay Y. Lee, co-vice chairman of Samsung Electronics Co., right, is escorted by a prison officer as he leaves the Seoul Central District Court in Seoul, South Korea, on Friday, Aug. 25, 2017.
Chung Sung-Jun | Bloomberg | Getty Images

Lee, the 49-year-old scion of the family behind South Korea's largest chaebol, was taken into custody and held by authorities since February. Chaebols are South Korea's large, family-run conglomerates that have historically played an important role in the country's economic development.

Consolidation of power 

The special prosecutor's office accused Lee of bribing a close friend of former President Park to gain government favors for Samsung.

That allegedly included a government approval in 2015 of the merger between Samsung C&T and Cheil Industries. The merger was opposed by Samsung C&T shareholder Elliott Associates, which said the deal greatly undervalued the company and overvalued Cheil Industries.

The deal was part of a corporate restructuring program that was driven by the Lee family to consolidate power, particularly over the prized flagship brand Samsung Electronics, and to avoid paying excessive inheritance tax. Following that merger, the next step was to consolidate both Samsung Electronics and Samsung Life Insurance under the control of Samsung C&T, according to Park Sangin, a professor of economics at Seoul National University.

"But that was not completed yet because of the whole scandal of ex-President Park Geun-hye," Park told CNBC's "Capital Connection" on Friday.

Academic would be surprised if Jay. Y. Lee not found guilty of bribery
Academic would be surprised if Jay. Y. Lee not found guilty of bribery

Both Lee and Samsung denied any wrongdoing in February. The official stance was that Samsung admitted to giving money to foundations at the center of a corruption scandal that ultimately saw President Park removed from power, but the company maintained it received nothing in return.

Lee is not the face of the Samsung brand

Samsung also dismantled its corporate strategy office that handled key decisions for the conglomerate in light of the scandal. Top Samsung executives, including Vice Chairman Choi Gee-sung and President Chang Choong-ki also resigned.

Experts previously told CNBC that the verdict on Lee was unlikely to affect Samsung's day-to-day business. That was because Lee is not the global face of the brand, according to one analyst.

In July, the flagship brand Samsung Electronics reported a second-quarter operating profit of $12.67 billion due to a boom in its memory chip business. Samsung also remained the world's top smartphone vendor by shipment and earlier this week, it unveiled its newest Galaxy Note 8 handset.

If Lee loses his appeal and has to serve his five-year prison term, then it would create some uncertainty over the management of the conglomerate and Samsung Electronics.

"The Samsung Group would need an interim top management arrangement," Hank Morris, Asia adviser at Argentarius Group, told CNBC's "Squawk Box" on Friday morning. "That might be a single senior executive from Samsung Electronics ... or it could be a small committee of senior executives that would include also at least a member of the Lee family."

Future of the chaebols

The guilty verdict is expected to cast fresh light on the future of chaebols that have long enjoyed close relationships with South Korea's political elite.

"It's meant to be a lesson to chaebol heads in general that they can no longer expect a three-year sentence, which is then instantly set aside in favor of a five-year-long parole," Morris said before the verdict was announced, adding, "The Moon administration would want to have the court reflect that it is a new era."

When President Moon Jae-in came into power, he had pledged to rein in the vast influence that chaebols wield in South Korea.

Chaebols control vast networks of companies through a circular holding structure and their control typically exceeds cash-flow rights — that means families often wield undue influence over group companies in spite of small direct shareholdings.

While those conglomerates have been responsible for propping up South Korea's economic growth in the past, many citizens have long demanded political authorities curtail their power.

Low chances for immediate parole for Samsung's Lee: Analyst
Low chances for immediate parole for Samsung's Lee: Analyst

Previously, many chaebol chiefs had been let off with light sentences for crimes including embezzlement, tax evasion and fraud.

Lee's father, Lee Kun-hee, had a three-year suspended sentence in 2008 and was fined 110 billion Korean won for embezzlement and tax evasion. But in 2009, he was pardoned. Former Daewoo Group chairman, Kim Woo-jung, was given a 10 year sentence in 2006 for financial crimes, but he was pardoned in 2007. The Daewoo chaebol was dismantled by the government in 1999.

Friday's verdict will likely signal to chaebol leaders that they should rely more on professional management, according to Morris. "It is a means of signalling that, perhaps in the future, the government will not look so favorably on family management, particularly where they have shown to be incapable of upholding the laws or outright incompetent in business terms."

—CNBC's Nyshka Chandran contributed to this report.