Samsung C&T and Elliott Associates have started a bitter proxy fight to win shareholders’ support ahead of their voting on the proposed merger between the Samsung construction unit and Cheil Industries, the de facto holding company of Samsung Group, next month.

Samsung C&T announced the $8 billion merger plan on May 26, citing business synergies between the two firms. But Elliott, the U.S. activist hedge fund and the company’s third-largest shareholder, is opposing the deal, saying it was not in the best interests of shareholders.

Amid growing doubts of its contentious campaign, Elliott filed two separate injunctions to block the planned merger last week. The first court hearing is scheduled to be held Friday.

One of the key issues is the merger ratio.

Under the merger agreement the ratio is 1-to-0.35. This means each Samsung C&T share will be exchanged for 0.35 of a share in Cheil Industries. The ratio was based on the share prices of the companies in the month before the agreement.

Elliott, however, has claimed that Samsung C&T was undervalued, allegedly asking to raise the merger ratio to 1-to-1.6 based on the values of assets owned by the two companies.

“Cheil Industries is the de facto holding company of Samsung Group and that premium also elevated Samsung C&T’s share prices after the merger plan was announced,” said Shin Jang-sup, professor at the National University of Singapore. 

“Elliott cannot say the decision was made against shareholders’ interest.”

Another industry source also said the court would not accept the plea to readjust the merger ratio that was decided in line with Korean regulations.

“A company’s value can be gauged in diverse ways. That’s why the Korean government adopted the system based on share prices,” he said on condition of anonymity.

“If Elliott claims this is wrong, it should attack the Korean government, not Samsung.”

For now, Samsung C&T is leading the proxy race as it has secured a combined 19.8 percent favorable stakes owned by its sister Samsung companies, owner family and friendly investors, while Elliott holds a 7.12 percent stake.

The National Pension Service, which owns a 9.92 percent stake, is expected to play a key role in the upcoming voting on July 17. The state pension fund said it would decide its stance from a long-term perspective.

Other foreign investors, holding a combined 27 percent stake in the company, are also looking at the situation closely.

In order for the merger plan to get approval, it should be supported by more than two-thirds of attending shareholders and their combined shares should exceed one-third of the company shares.

By Lee Ji-yoon (jylee@heraldcorp.com)