[THE INVESTOR]  South Korean proxy advisory firm Sustinvest on Monday advised shareholders of Samsung Electronics to oppose the nomination of Vice Chairman Lee Jae-yong to the company’s board of directors.

This is considered the first call of opposition to Lee’s nomination, which has been supported by a major shareholder of Samsung Electronics and other foreign proxy advisory companies.

The shareholders’ meeting on Lee’s nomination is to be held Thursday.

“Lee is not qualified to be an internal director because he is a beneficiary of (an unfair business practice) which gives a lump sum of business to affiliates including Samsung SDS and Everland (currently Samsung Engineering & Construction),” Sustinvest said in a letter to shareholders.

The proxy advisory firm viewed that the Samsung Group’s ownership family has amassed their fortune by unfairly giving a lump sum of their business to the group’s affiliates, increasing sales, value and stock prices of the companies.

“Such business action can damage a company’s value because it basically excludes the possibility of better transactions,” the statement said.

The controlling shareholders, who are responsible for such actions and benefit from it, are liable for damaging shareholder value, Sustinvest said.

According to the company, Samsung SDS’ business transactions with the group’s affiliates accounted for more than 85 percent of its total sales last year.

Samsung SDS’ sales dependence on Samsung Electronics has been around 35 percent on average over the last decade, Sustinvest said. This means the dependence is highly likely to have damaged the shareholder value of Samsung Electronics.

Sustinvest said sales of Samsung SDS reached 7.9 trillion won ($7 billion) last year -- based on the business transaction with its affiliates -- from 1.2 trillion won in 2000.

As for Samsung Everland, its sales, which were made from business transactions with its affiliates, exceeded 45 percent of total sales before it was merged with Samsung C&T.

Meanwhile, the US-based Institutional Shareholder Services and the world’s third-largest pension fund National Pension Service agreed to Lee’s nomination this month.

The 48-year-old heir of the tech giant was nominated to join the board last month.

Lee, currently vice chairman of Samsung Electronics, will be taking formal charge of Samsung’s business decisions for the first time, with potential plans to turn Samsung Electronics into a holding company.

The nomination also signals the succession of control of South Korea’s largest conglomerate from Samsung Electronics Chairman Lee Kun-hee, who has been hospitalized since 2014 after suffering a heart attack.

Samsung has about 70 affiliates in various fields including shipbuilding, construction and life insurance.

The imminent challenge facing the younger Lee is helping Samsung Electronics survive the Galaxy Note 7 debacle after its decision to discontinue the smartphone after a series of explosion cases reported in different parts of the world.

Lee is also tasked to improve the conglomerate’s governance structure.

Earlier this month, US activist hedge fund Elliott Management called for a split of Samsung Electronics into holding and operating units, with a Nasdaq listing of the latter.

The proposal by Elliott Management has been considered favorable for Lee to reshape the firm’s structure. He currently holds 0.59 percent of shares in Samsung Electronics.

By Shin Ji-hye/The Korea Herald (shinjh@heraldcorp.com)