By Elizabeth Koh

Samsung's de facto leader, Lee Jae-yong, avoided a second stint in jail when a Seoul district court judge rejected South Korean prosecutors' request to arrest the business tycoon for financial fraud in a 2015 intra-conglomerate merger.

Wearing a face mask and a purple tie, Mr. Lee, the grandson of Samsung's founder, walked into a Seoul district court for a Monday morning hearing that lasted several hours. Prosecutors had sought arrest warrants late last week for Mr. Lee and two former Samsung executives. The court issued its ruling early Tuesday local time.

Mr. Lee, 51, isn't yet in the clear. Prosecutors, who have investigated more than 100 Samsung officials, can still return with additional evidence and seek another arrest warrant. Three top executives, including a vice president, have already been given jail sentences for hiding or destroying evidence in the probe.

Mr. Lee's legal saga -- now entailing two different, though related, cases -- flows from a controversial merger between two Samsung affiliates five years ago. The latest arrest-warrant decision centers on alleged accounting fraud tied to the deal. He also faces a retrial for his prior conviction of bribing South Korea's former president and her friend, in return for government help approving the deal.

Both of those cases are expected to drag into next year, according to South Korean legal experts. It extends a time of intense legal scrutiny of Mr. Lee and his conglomerate at a time of business distress as Samsung navigates the Covid-19 pandemic global economy.

Samsung has denied both the scope of the bribery charges and any wrongdoing with the merger or Samsung Biologics' accounting. In a statement, it also rejected any claims that Mr. Lee had directed or ordered any illegal activity.

Though prosecutors argued Monday that Mr. Lee and the two other executives needed to be detained, in part to prevent evidence tampering or destruction, a judge declared there wasn't a sufficient basis for granting the warrants.

Many South Korean business tycoons have run afoul of the law -- or even spent time in jail. But the prosecutors' multiyear campaign is unusual in its length, said Chang Sea-jin, a professor at the National University of Singapore, who has written a book about Samsung's rise.

"In most cases it has been very clear-cut," Mr. Chang said. "It's not something dragging on, where the legal team goes back and forth like in this case."

Mr. Lee is formally the vice chairman of Samsung, though he has run the conglomerate since his father became incapacitated after a heart attack in 2014. All key decisions and investments require a signoff from Mr. Lee, who goes by "Jay Y." in the West.

Samsung Electronics executives were once told to "change everything but your wife and children," a stern call for perpetual reinvention. But for the past three years, the company has been stuck in a relative state of paralysis by Mr. Lee's legal woes. Absent have been aggressive bets in new growth areas that could diversify Samsung's reliance on smartphones, televisions and semiconductors.

Mr. Lee -- and his company -- have faced a stream of legal challenges over the controversial 2015 merger between two Samsung affiliates. Through a series of corporate moves, the deal left Mr. Lee with a stronger ownership stake in Samsung Electronics Co., the conglomerate's crown jewel.

In 2017, he was imprisoned, indicted and then charged with bribing South Korea's former president in exchange for help approving the merger. An appeals court reduced his five-year sentence the following year, allowing Mr. Lee to leave prison on a suspended sentence. But that case, after a Supreme Court ruling, now faces a retrial and the prospects of additional prison time for Mr. Lee.

The immediate allegations Monday were tied to a continuing probe into how one Samsung affiliate, Cheil Industries Inc., saw its valuation balloon in the buildup to the merger five years ago with Samsung C&T Corp. The alleged irregularities center on Cheil's holdings in Samsung Biologics Co., which skyrocketed before the deal -- and which Korea's Financial Services Commission said in 2018 deliberately breached accounting rules and referred to prosecutors to investigate.

The legal consequences for Mr. Lee in the coming months could be significant. The potential charges from the probe alone -- such as unfair trading, accounting fraud or other violations of Korea's capital market laws -- would command sizable fines and potentially put Mr. Lee in prison for several years, in addition to the jail time he could serve in connection with the bribery trial, legal experts said.

Prosecutors had signaled activity in the probe for weeks, calling in Mr. Lee twice for several hours of questioning at the end of May.

Samsung said in a statement Sunday that it had cooperated with more than 50 search-and-seizure requests by prosecutors and more than 400 summons by prosecutors over the past 19 months. "The drawn-out investigation by the prosecution has been affecting management normalization," Samsung said.

On June 2, Mr. Lee and his lawyers asked for a panel of outside experts to review the case and determine whether indictments would be called for, in effect sidestepping the judgment of the prosecutors. Two days later, the prosecutors moved to request an arrest warrant. It is unclear if the review committee will be convened, as it is a decision made by the head of the prosecutor's office.

Legal representatives for Mr. Lee said in a statement early Tuesday that they hoped the committee would soon meet to review the investigation and whether indictments are called for. The recommendation of such a panel wouldn't be legally binding but could affect prosecutors' actions.

Samsung had also made efforts in recent months to address criticism of its management and allegations of corruption. It created an outside compliance monitoring committee, at the behest of a judge in Mr. Lee's bribery trial, and Mr. Lee apologized publicly last month for the company's union-busting practices and corruption scandals.

In that apology, he acknowledged the company's legal issues had largely stemmed from "the succession issue" and vowed to end his family's dynastic control over the conglomerate. But critics said he provided little specifics for how he would do so.

"The Korean judiciary is notorious for leniency toward Korean chaebol-controlling families, especially Samsung," said Park Sangin, a professor at Seoul National University, noting Mr. Lee's own father was convicted of bribery and corruption charges twice, yet never imprisoned.

Even if Mr. Lee served more time in prison, its impact on Samsung's future would depend in part on how much time he spent behind bars. Mr. Lee has sought to project decisive leadership, including a recent trip to the company's chip plant in Xi'an, China, that was touted as the first by a major "global businessman" since the pandemic took hold.

But Samsung Electronics' day-to-day operations are managed by a team of three CEOs overseeing its main divisions.

Write to Elizabeth Koh at Elizabeth.Koh@wsj.com