Following its announcement on August 11, 2022 regarding the proposed amendment (the “Proposed Amendment”) to the Enforcement Decree of the Monopoly Regulation and Fair Trade Act (the “MRFTA”), which aims to streamline the scope of specially related parties and affiliates of large business groups (i.e., conglomerates), the Korea Fair Trade Commission (the “KFTC”) collected comments from civic organizations, relevant ministries, and relevant stakeholders during the public comment period (August 11, 2022 - September 20, 2022).
Through the Proposed Amendment, the KFTC aims to redefine the standard that delineates the size and scope of a large business group/conglomerate and thereby relieve the business groups of undue regulatory burden associated with their affiliated companies or persons.
1. Scope of Specially Related Parties and Affiliates
Under the MRFTA, “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. The “same person” refers to a person who has substantial control over a group of businesses/conglomerate that is made of “specially related parties.” Under the current law, “specially related parties” refer to a spouse and/or relatives of the “same person.” More specifically, specially related parties are lineal relatives within the sixth degree of consanguinity or relatives within the fourth degree of affinity.
Reflecting modern trends and changes in the perception of “family,” the Proposed Amendment would narrow the scope of specially related parties by limiting the specially related parties to (i) a lineal relative within the fourth degree of consanguinity or a relative within the third degree of affinity; and (ii) a lineal relative within the fifth or six degree of consanguinity or a relative within the fourth degree of affinity who either (a) owns at least 1% of the shares in the company owned by the same person or (b) can have substantial control over the same person by having extended loans or granted a guarantee in favor of the same person.
Additionally, under the Proposed Amendment, the spouse of the same person in a de facto marriage shall be considered as a specially related party only if such spouse is the biological father or mother of the same person’s biological offspring.
2. Exclusion of Companies Controlled by Outside Directors
Under the current MRFTA, 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 imposing unnecessary regulatory burden on business groups and making it difficult for the business groups to recruit outside directors with qualified expertise. Most notably, this system is in conflict with other sets of regulations and laws that require disqualification of an outside director whose company becomes an affiliate of a business group for which he/she acts as an outside director.
The Proposed Amendment addresses this issue 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).
3. Deferring Affiliation of SMEs/Start-up Companies
To encourage large business groups’ investment in small and medium-sized enterprises (“SMEs”) / start-up companies, the current Enforcement Decree of the MRFTA allows large business groups to defer their affiliation with the SMEs/start-up companies they invested in for seven to ten years (i.e., grace period).
The Proposed Amendment further encourages large business groups to utilize this grace period. Until now, the grace period was applicable to large business groups’ affiliation with SMEs/Start-ups whose R&D expenses amount to 5% or more of the sales revenue. However, under the Proposed Amendment, the grace period may apply to affiliations with SMEs/Start-ups as long as their R&D expenses amount to at least 3% of the sales revenue. Further, the Proposed Amendment clearly stipulates that the grace period shall also be applicable to affiliation of the subsidiaries of the relevant SMEs/Start-ups. In addition, the application for the grace period may be filed within one year upon satisfying applicable requirements for the affiliation.
4. Calculating Revenue Required for Filing Application for Officer Independent Management
In order to exclude a company controlled by an independent outside officer from becoming an affiliate of a large business group through filing an application for officer independent management, the percentage of the large business group’s sales revenue that is dependent on the company/the independent outside officer must be less than 50%, and vice versa. Under the current Enforcement Decree of the MRFTA, the generated revenue is calculated based on the revenue generated during the “immediately preceding year” from the date of filing the application for officer independent management. This calculation method has often complicated the calculation process and incurred unnecessary expenses as most companies, in practice, calculate their revenue by fiscal year. To address this issue and simplify the revenue calculation process, the Proposed Amendment stipulates that the generated revenue shall be calculated based on the revenue generated during the “immediately preceding fiscal year” of the year in which the application is filed.
If the Proposed Amendment is passed, the scope of specially related parties and affiliates will be reorganized, and the use of the grace system for small and medium-sized venture companies will be enhanced. Additionally, this is expected to trigger amendments to other sets of regulations and laws that govern affiliates and officers of a company. We will keep you apprised of all important updates and developments.
