Late last year, a comprehensive amendment to the Monopoly Regulation and Fair Trade Law (the "FTL"), Korea's primary competition law, was passed. Among the changes, the amended FTL included a new size-of-transaction threshold test to the existing merger filing thresholds to potentially capture transactions that would not have otherwise been caught under the existing rules. The details of the test, however, were not fleshed out until this past summer when the Korea Fair Trade Commission (the "KFTC") announced the proposed amendment to the Enforcement Decree to the FTL (the "Proposed Amended Decree").
In detail, the Proposed Amended Decree set the transaction value at KRW 600 billion and established a separate local nexus test to ensure that the target entity had a "substantial level" of activity in the Korean market based on any one of the following: (i) having sold or provided products or services in the Korean market to at least 1 million persons on a monthly basis, (ii) having an annual budget of KRW 30 billion related to leasing R&D facilities or using R&D personnel in Korea, or (iii) other factors similar to (i) or (ii) as further notified by the KFTC.
Although the Proposed Amended Decree remains pending, early this September, the KFTC announced further clarification to the new threshold as part of the proposed amended Guidelines for Reporting Business Combinations (the "Proposed Amended Guidelines"). Notably, the draft sets out further details to calculate the transaction value prong of the new test based on the various types of business combinations (i.e., mergers, share acquisitions, formation of a new joint venture ("JV") and business transfers). According to the draft, the calculation method is based on the following: (i) the sum of total transaction amount (i.e. the price for the shares), and book value of the relevant shares (if the acquirer holds shares of the target before the contemplated transaction) plus the assumed liabilities in the case of a share acquisition transaction, (ii) sum of the value of the issued shares (i.e., merger price per share multiplied by the number of issued shares) and cash consideration (if applicable), plus the assumed liabilities for a merger, (iii) aggregate purchase price plus assumed liabilities for a business transfer, and (iv) investment amount of the largest shareholder for a JV formation business combination.
As for the local nexus test, the Proposed Amended Guidelines provide that for internet-based services, the test should be based on monthly active users ("MAU"), with a user visiting or using a target's internet services multiple times during a single month to be counted only once. As for targets that could trigger a filing obligation based on R&D activity, the Proposed Amended Guidelines state that the threshold amount of KRW 30 billion should be calculated based on the annual ordinary R&D cost and development costs (intangible assets) of the target.
According to the KFTC's press release announcing the Proposed Amended Guidelines, these changes have been proposed to shore up any potential "blind spots" that could result in the application of the new size-of-transaction test to help provide clarity to parties looking to execute business combinations with start-ups. The press release also confirms that the aim of the new threshold test is transactions involving emerging and nascent players at high transaction prices due to perceived high growth potential and ability to potentially impact markets.
As the Proposed Amended Guidelines remain open for public comment, they could be further amended by the KFTC to reflect certain submitted opinions and/or to align with any additional proposed edits to the Proposed Amended Decree, which remains pending and subject to additional changes as it makes its way through the Korean legislative process. As such, interested parties are advised to closely monitor the developments in Korea.
The KFTC has opened the public comment period for the Proposed Amended Guidelines through September 28, 2021. Public comments can be submitted by mail, fax or email to the KFTC.
