On August 24, 2018, the Korea Fair Trade Commission (“KFTC”) announced a proposal for a comprehensive amendment to the Monopoly Regulation and Fair Trade Law (the “FTL,” and the proposal, the “Proposed Amendment”), which contemplates substantial relaxation of the holding requirements currently imposed on venture holding companies (“VHCs”) to encourage corporate investment into venture firms.

 In the past, the use of VHCs as a vehicle of venture firm investment has been stymied due to stringent holding requirements, but the Proposed Amendment, if passed, is expected to vitalize such use.  

 Details:

 Specifically, the Proposed Amendment eases VHCs’ holding requirements under the following three scenarios.

 1. VHC as a holding company 

 A key advantage of a VHC under the existing FTL is that it is required to hold at least 20% of the shares in any of its subsidiaries (as opposed to “at least 40%” for ordinary holding companies).  This advantage, however, was not often enjoyed due to the restriction on holding companies from holding more than 5% share in unaffiliated domestic companies (which also applies to VHCs).  Under the Proposed Amendment, VHCs will no longer be subject to such 5% cap.

 2. VHC as a first-tier subsidiary 

 The current FTL requires a VHC that is a subsidiary of a holding company to hold at least 40% shares in its subsidiaries (by virtue of a rule applicable to all companies that are first-tier subsidiaries).  However, under the Proposed Amendment, a first-tier subsidiary VHC will only be required to hold at least 20% shares in its subsidiaries.

 3. VHC as a second-tier subsidiary 

 The current FTL prohibits a VHC that is a second-tier subsidiary to a holding company from holding shares in an affiliated entity, unless it holds 100% shares in such affiliate (by virtue of a rule applicable to all companies that are second-tier subsidiaries).  The Proposed Amendment eases this requirement for second-tier subsidiary VHCs by requiring them to hold 50% or more of their subsidiary’s shares.

 Other Aspects to Monitor:

 The changes made in the Proposed Amendment was in large part discussed at the Third Ministerial Meeting on Innovative Growth hosted by the Korean government on August 2, 2018 (the “Ministerial Meeting”), which provided a good indication as to the government’s policy direction with respect to VHCs.  

 The following proposals, while discussed during the Ministerial Meeting, were not included in the Proposed Amendment (but they will likely be considered in future amendments of the FTL or in its Enforcement Decrees): 

•  Reducing the minimum asset requirement applicable to VHCs from KRW 500 billion to KRW 30 billion;
• Counting the shares of “R&D focused” small-to-medium-sized enterprises (“SMEs”) toward calculating the ratio of venture firms held by VHCs (the FTL currently requires the aggregate value of shares held in venture firm shares by a VHC to be 50% or more of the aggregate value of shares held in all of its subsidiaries);
• A two-year grace period from fulfilling the current requirement of holding 50% or more of the aggregate value of shares as stated above; and 
• Extending the grace period (from seven years to ten years) for the incorporation of venture companies (that became a subsidiary of a VHC) into “large business groups.”  

 For starters, a plan to adopt the proposal of reducing the minimum asset requirement applicable to VHCs as part of the amendment to the Enforcement Decree of the FTL was specifically mentioned in the KFTC press release announcing the Proposed Amendment.  We can expect other proposals listed above to appear in subsequent KFTC-issued press releases.

 If passed, the Proposed Amendment may substantially improve and foster the VHC regime.  It is advisable to monitor the Proposed Amendment (and the Enforcement Decrees), and analyze the impact and opportunities they present to the business community.