At the fifth meeting of the Emergency Economic Council held on April 22, 2020, the Korean government announced a detailed plan for the Key Industry Stabilization Fund (the “Fund”) of KRW 40 trillion to be administered by the Korea Development Bank (the “KDB”).  By providing fiscal stimulus to businesses in certain key industries facing financial difficulties brought by the COVID-19 outbreak, the government aims to deal with the current economic crisis and the damaged labor market.  Accordingly, amendments to the Korea Development Bank Act (the “KDB Act”) and the Enforcement Decree thereof have been enacted to establish the Fund.

1.   Key Details of the Amendments to the KDB Act and the Enforcement Decree Regarding Establishment of the Fund

The National Assembly passed the proposed amendments to the KDB Act to establish the Fund during the plenary session on April 29, 2020, and the amendments became effective as of May 1, 2020.  In addition, the Cabinet Council approved the proposed amendments to the Enforcement Decree of the KDB Act, which contains details of the administration of the Fund, including businesses eligible for assistance and bond issuance by the Fund, and the amendments became effective on May 12, 2020.  We summarize the key details of the aforementioned amendments as follows.

1)    Key Amendments to the KDB Act

• Legal grounds for establishment of the Fund and eligible businesses 
  The amendment provides legal grounds for establishment of the Fund and the Fund Management Deliberation Committee in the KDB (Articles 29-2 (1) and 29-6).  The amendment also provides that the following industries may receive assistance for their material significance to the national economy, nation-wide job security and national security: (i) the defense industry, (ii) businesses restricted from receiving foreign investment, (iii) emergency resources manufacturing, (iv) businesses holding national core technology, and (v) essential public service businesses (Article 29-2 (2)).

• Operation of the Fund, including funding sources and conditions and means of assistance
  The KDB Act, as amended, provides that the Fund will be funded by government loans and bond issuance (Article 29-3).  The Fund will provide assistance to eligible businesses by provision of loans, acquisition of bonds issued by eligible companies and capital contribution (including subscription of security-linked bonds such as convertible bonds and bonds with warrant) (Article 29-4).  As a pre-condition to receive the Fund’s assistance, businesses may be required to retain employees, improve management and implement measures to prevent moral hazard (Article 29-5).

2)    Key Amendments to the Enforcement Decree of the KDB Act

• Businesses eligible for assistance 
  Under the amended Enforcement Decree, (i) businesses in the air transportation industry and the air transportation support services industry and (ii) businesses in marine transportation, port and other marine terminal operation industry, and marine cargo handling industry are eligible for assistance from the Fund.  The Financial Services Commission (the “FSC”) may designate additional businesses eligible for assistance based on discussions with relevant departments and consultation with the Ministry of Strategy and Finance (Article 28-2).

• Procedure for bond issuance by the Fund
  The amended Enforcement Decree provides that the Fund will issue bonds pursuant to the procedure for issuance of industrial finance bonds prescribed under the KDB Act (Article 28-3).

• Exercise of voting rights in exceptional cases
  Under the amended Enforcement Decree, the KDB will not exercise voting rights attained as part of the administration of the Fund, save for the following exceptional occurrences to safeguard the Fund’s properties: (i) matters that may materially affect the value of the relevant equity securities held by the Fund and (ii) commencement of corporate restructuring procedures or work-out arrangements with respect to the business which received assistance from the Fund (Article 28-4).

• The Fund Management Deliberation Committee
  The amended Enforcement Decree also provides details of the composition and operation of the Fund Management Deliberation Committee (Article 28-5).

2.   Observation on the Administration of the Fund

In the draft of the proposed amendment to the Enforcement Decree of the KDB Act, seven industries (aviation, shipping, machinery, automobile, shipbuilding, electricity and telecommunication) were initially designated as eligible for assistance from the Fund.  The eligible industries were subsequently narrowed to aviation and shipping, based on comments from the relevant departments.  However, as the amended Enforcement Decree allows the FSC to designate additional industries eligible for assistance if necessary, businesses in industries other than aviation and shipping may also receive assistance from the Fund if the difficulties brought by the COVID-19 outbreak continue.

As critics point out unclear eligibility criteria and insufficient mechanisms to properly monitor management of the Fund, it remains to be seen how the Fund will be managed.  While the FSC stressed the importance of ensuring autonomous management of the businesses which have received the Fund’s assistance by minimizing the instances of the Fund’s exercise of voting rights over such businesses, the amendments to the KDB Act and the Enforcement Decree allow the Fund to exercise voting rights in some exceptional cases.  We will need to closely monitor the implications of the operation of the Fund on businesses and the society at large.