On August 11, 2022, the Korea Fair Trade Commission (the “KFTC”) published proposed amendments to the Enforcement Decree of the Monopoly Regulation and Fair Trade Law (the “FTL”) (the “Proposed Amendments”) aimed at streamlining the scope of specially related parties and affiliates of large business groups (i.e., conglomerates). In the press release, the KFTC expressed its resolve to swiftly complete the enactment of the Proposed Amendments following the Review Period (August 11 - September 20, 2022). Once enacted, the Proposed Amendments are expected to reverberate through other sets of regulations and laws affecting companies and large business groups such as the KCC regulations on listed company outside directors and affiliate transactions.
Key changes to the scope of specially related parties and affiliates in the Proposed Amendments
1. Scope of relatives (Article 4, Subparagraph 1, Item A of the Proposed Amendments)
Under the FTL, “specially related parties” of the “same person” (family, affiliated companies, non-profit corporations and their officers) essentially delineate the scope of a large business group/conglomerate. A conglomerate is a group of businesses substantially controlled by the “same person” and is made of specially related parties. Relatives of the “same person” is a specially related party. Under the current laws, a relative means a spouse, lineal relative within the sixth degree of consanguinity or relative within the fourth degree of affinity. Acknowledging the ways in which the traditional perception of “family” is reshaping, the Proposed Amendments narrow the scope of relatives other than spouse to include only a lineal relative within the fourth degree of consanguinity or a relative within the third degree of affinity, provided a lineal relative within the fifth or six degree of consanguinity or a relative within the fourth degree of affinity will still be included if he/she (i) owns 1% or more of the shares in the company owned by the same person or (ii) can exert substantial control over the same person by having extended loans or granted a guarantee in favor of the same person. The spouse of the same person in a de facto marriage who is the biological father or mother of the same person’s biological offspring under the Civil Code is also a relative.
2. Exclusion of companies controlled by outside directors (Article 4, Subparagraph 1, Item D of the Proposed Amendments)
Currently, an officer of a company is a specially related party of the same person. As a result, when a member of a business group appoints an outside director, any company controlled by the outside director becomes an affiliate of the group by default. Only by filing an application ex post facto for officer independent management can it opt out of becoming an affiliate. This ‘opt-out’ system has been criticized for undermining the very purpose of having an outside director, which is to implant a person within the board of a company who is free from the influence of the largest shareholder. It has also been pointed out as the source for undue regulatory burden on business groups and their difficulties recruiting outside directors with qualified expertise. Most notably, this creates a circular contradiction with Article 542-8 of the KCC and Article 34(4)2(b) of the Enforcement Decree of the KCC, which disqualifies an outside director from acting as such if a company he/she controls is an affiliate of a business group for which he/she acts as outside director. The Proposed Amendments reverse the automatic affiliation and adopts an exclusion by default system such that a company controlled by an outside director is unaffiliated by default unless the requirements for officer independent management are not met (opt-in system).
With the adjustments to the scope of specially related parties and affiliates, the Proposed Amendments are expected to have a broader impact on the legal environment affecting companies and large business groups. Not only will it affect the KCC regulations on listed company outside director disqualifications and restrictions on affiliate transactions, it will likely trigger amendments to the definition of related parties under the KCC, the Financial Investment Services and Capital Markets Act and the Act on Corporate Governance of Financial Companies.
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#SpeciallyRelatedParty #Affiliate #FTL #CorporationLaw #Legal Update