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KFTC Issues Advance Notice of Proposed Amendment to Merger Review Guidelines for the Digital Economy On November 14, 2023, the Korea Fair Trade Commission (“KFTC”) issued a draft amendment to its Merger Review Guidelines to “modernize” its enforcement manual (the “Proposed Amendment”). Following the Review Guidelines on the Abuse of Market Dominance by Online Platforms adopted earlier this year, the Proposed Amendment defines “online platforms” and adjusts the review guidelines to reflect the distinct features of online platforms that affect competitive analysis, such as zero-price services, multi-sided platforms, and network effects. The public comment period for these changes lasted 20 days, having ended on December 5, 2023. The KFTC plans to finalize and adopt the revised guidelines through resolution at a plenary meeting. The Proposed Amendment includes significant updates to market definition, competitive assessment, efficiencies, and eligibility criteria for fast-track review. For more details on the Proposed Amendment, please refer to the attached file.
2023.11.22

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KFTC Increases Scrutiny of Social Media for Deceptive Advertisements and Manipulation of User Reviews 1. Background As consumers increasingly choose to shop online through social media, advertisements and user reviews on social media are having a growing influence on consumers’ purchasing decisions. Along with this trend, there has also been a rise in unfair advertising on social media, notably, sponsored user reviews that fail to disclose that they are advertisements (deceptive advertising), and fake user reviews about products that were never purchased or used by individuals hired by advertising agencies (user review manipulation). The Korea Fair Trade Commission (“KFTC”) has repeatedly expressed its determination to proactively respond to unfair advertising on social media, including by imposing sanctions, and has mentioned certain areas on which it will be focusing its monitoring efforts. Accordingly, companies that are engaging in or plan to engage in social media marketing in Korea should closely follow related developments at the KFTC. 2. Developments at the KFTC ① Plans to Strengthen Regulations The KFTC has noted in its Enforcement Plan for 2023 and during the first meeting of its Fair Trade Advisory Group Meeting (held on August 28, 2023) that it plans to proactively monitor social media for unfair customer solicitation, and step up efforts to detect deceptive advertising and user review manipulation that is often carried out by small-sized online vendors, and encourage the companies to make voluntary corrections. During a media interview on February 14, 2023, then Director General of the Competition Policy Bureau, Sang Min Song, who is currently the KFTC’s Secretary General for Policy, emphasized that trust is a key component of online transactions in a digital economy, and said the KFTC will strengthen its efforts to inspect and correct deceptive advertising and user review manipulation to foster a safe and reliable consumer environment. ② Annual Monitoring Inspections In 2022, for the second year in a row, the KFTC conducted a monitoring inspection of unfair advertising on major social media platforms and issued a press release announcing the results on February 7, 2023. According to the press release, in 2022, the most prevalent type of unfair advertising regarding disclosure of economic interests was improper location of disclosure (47.2%), followed by ambiguity of disclosure details (41.3%), inappropriate modes of expression for disclosure (23.9%), and non-disclosure (17%). Compared to 2021, while there was a significant decrease in the number of non-disclosure cases in 2022, there was an increase in the number of cases involving ambiguity of disclosure details. Accordingly, the KFTC is expected to focus its next annual monitoring inspection on social media advertisements where economic interests are disclosed but in an ambiguous manner. Of the inspected platforms, the largest number of illegal postings were found on Instagram, followed by Naver Blog and YouTube. In particular, the KFTC noted that it will expand its monitoring of short-form content platforms whose rapid development has led to a surge in the number of illegal postings on such platforms. Further, as the press release mentions that the KFTC will closely monitor platforms for unfair ads for health and hygiene products (e.g., cosmetics) and food and personal preference products (e.g., health supplements), it will be necessary for companies to take necessary precautions when running advertisements for such products. ③ Enforcement Trends In 2019, the KFTC for the first time imposed sanctions against companies for engaging in unfair advertising on social media. In particular, the companies had provided social media influencers economic benefits to post advertisements on their social media accounts for the companies’ products (e.g., weight loss products, cosmetics, small home appliances) but the posts failed to disclose the fact that an economic benefit had been provided to the influencers as compensation. Since then, in 2022 and April 2023, the KFTC imposed sanctions against electronics companies that engaged in a so-called “empty box marketing” scheme, a type of brushing scam, in which recruited individuals were given the right to post customer reviews after placing orders using their personal accounts and receiving empty boxes in lieu of the actual product. 3. Implications As the KFTC has made clear its intention to take proactive measures against deceptive advertising and user review manipulation on social media, companies are advised to inspect their current practices regarding online advertisements, and make improvements where necessary. In particular, companies can benefit from preparing internal guidelines for influencer marketing based on the KFTC’s Handbook on the Disclosure of Economic Interests, which was published in 2020, and conducting an internal review of various issues regarding unfair labelling and advertising that could arise in the process of hiring influencers to run advertisements on their social media accounts. [Korean Version]
2023.10.27

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FSC and KRX Announce Amendment to the Guidelines on Corporate Governance Disclosure On October 12, 2023, the Financial Services Commission (the “FSC”) and the Korea Exchange (the “KRX”) issued a press release (Link) announcing an amendment (the “Amendment”) to the Guidelines on Corporate Governance Disclosure for Listed Companies (the “Guidelines”). Corporate governance disclosure was introduced to encourage listed companies to voluntarily enhance their transparency. Companies are required to disclose their compliance with the core principles of corporate governance and if they fail to comply with such principles, to provide an explanation addressing the reasons therefor (the “comply or explain” approach). When the corporate governance disclosure system was first introduced in Korea by the KRX in 2017, it was a voluntary disclosure system. In 2019, it became mandatory for KOSPI-listed companies with total assets of KRW 2 trillion or more. As we informed you in our prior newsletter, the scope of companies subject to mandatory filing was expanded to KOSPI-listed companies with total assets of KRW 1 trillion or more since 2022 (Link). Currently, the indicators for disclosure consist of ten core principles and 28 detailed principles. According to a review conducted at the end of 2022, the average compliance rate for key indicators among companies with total assets of KRW 2 trillion or more significantly improved to 66.7%, from the previous year’s 63.5%. The scope of companies subject to mandatory disclosure will be expanded to companies listed on the KOSPI market with total assets of KRW 500 billion or more in 2024, and subsequently, to all companies listed on the KOSPI market in 2026. The Amendment incorporates feedback received during the implementation of the system, in line with the upcoming expansion of the scope of companies subject to mandatory disclosure which is slated to take place in 2024. Key details of the Amendment are summarized below. The Amendment will take effect with respect to corporate governance reports submitted in 2024 (deadline for submission: May 31, 2024). The KRX announced that for companies that are requested to make a corrective disclosure for making substandard disclosures of corporate governance reports, it will issue a recommendation for these companies to participate in supplementary instruction, and starting from 2025, pursue measures to disclose the names and specific details of companies that repeatedly file inadequate disclosures despite the KRX’s continuous demand for improvement. 1. Detailed Principles ① As a follow-up measure to the FSC’s plans to improve dividend distribution procedures of listed companies (January 2023) previously noted in our newsletter (Link), the amended Guidelines require a company to disclose whether it has improved dividend procedures by ways such as designating the dividend record date to fall after the date on which the decisions on dividend distribution are made at the ordinary general meeting of shareholders so that investors know the dividend amount before making investment decisions. ② With the recent emphasis on the need to actively engage with minority shareholders/foreign investors, the amended Guidelines require a company to disclose (i) the records of communication between the management and minority shareholders/foreign investors, (ii) whether communication channels for foreign shareholders are in place, and (iii) the percentage of disclosures in English. ③ In consideration of the cases where the stock value of existing shareholders was diluted in the process of capital raising [such as bonds linked with equity (CB, BW, EB, etc.) and contingent capital securities], the amended Guidelines require a company to describe the status of capital raising which may result in a conflict of interest between shareholders, and disclose whether the board of directors considered the interests of minority shareholders when making the decisions on capital raising. ④ As for the standards for disclosure of diversity of the composition of the board of directors, the standards for diversity are expanded to include not only gender, but also age and experience. In addition, a company is required to state whether the board of directors is composed entirely of a single gender, and, in case of any non-compliance with the diversity requirements, the reasons therefor. ⑤ With respect to the adequacy of directors’ remuneration, a company is required to disclose (i) whether it has established remuneration policies that are linked to individual evaluation of directors, (ii) whether it has disclosed remuneration-related policies, and (iii) whether it has subscribed to directors and officers liability insurance, as well as the policies to prevent abuse thereof. ⑥ In order to prevent the appointment of persons who have damaged corporate value as executives, the scope of disclosure of executives’ violations of laws is expanded to include undue benefits/unfair assistance, and violation of accounting standards (previously, the scope of disclosure had been limited to embezzlement/malpractice and unfair transaction). However, the period of disclosure has been adjusted to a limited time frame, starting from the Government’s judgment (including indictment and administrative dispositions), to “five years from the end of the execution (or exemption) of a sentence” (previously, the duration of the disclosure had been indefinite from the point of final ruling). 2. Key Indicators New Items Deleted Items The company provides predictability regarding cash dividends. There is no outside director who has served for more than six years. The board of directors is not composed entirely of members of single gender. The company provides training to the internal audit organization at least once a year. ※ Deleted items that no longer hold significant meaning or have less effect due to amendments to relevant laws and regulations and revised some of the key indicators to reflect policy reforms and global trends. 3. Reform of the Report Format The format of the report is amended from the previous format in which a company provides a simple description for the items presented in the Guidelines to a format in which a company discloses whether it is in “compliance” (by way of providing a brief description) and whether the company has implemented relevant policies (by way of marking O/X) as separate items. Starting from 2024, the above amended Guidelines will take effect, and the scope of companies subject to mandatory disclosure of corporate governance will be expanded as well. In many cases, the status of compliance with the detailed principles and key indicators affects the evaluation of the company’s corporate governance, the exercise of voting rights by institutional investors, and support for the company’s management policies. Although the disclosure deadline is set for the end of May 2024, in order to ensure compliance with each item of the indicators for disclosure, it would be advisable to prepare for the matters that need to be reviewed by the company in advance, such as proposal of the agenda before the ordinary general meeting of shareholders in 2024 (e.g., securing diversity within the board of directors, amendment to the articles of incorporation in relation to change of the dividend record date to ensure predictability of dividend payouts, etc.). Furthermore, the adequacy of directors’ remuneration or the question of whether the interests of minority shareholders were taken into consideration at the time of making decisions on capital raising is related to directors’ obligations and responsibilities, which may pose a risk of dispute. Therefore, we advise caution in preparing for disclosures in this regard. [Korean Version]
2023.10.27

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Updates on Regulatory Trends of FSC and SEC on Corporate Governance The Financial Services Commission (“FSC”) recently held a round table presided over by the FSC’s Vice Chairman, So-Young Kim, and attended by the Financial Supervisory Service, the Korea Financial Investment Association, the Korea Exchange (“KRX”), the Korea Listed Companies Association, six domestic and foreign securities companies and four domestic and foreign asset management companies (FSC’s press release dated October 19, 2023). Each of the participants shared the corporate governance reforms they have been pushing forward, as well as the outlook on major future changes to the capital market. FSC: The FSC is working on measures to (i) strengthen the competiveness of the Korean stock market and (ii) improve regulations governing convertible bonds and treasury stocks in support of fair trade. KRX: The KRX acknowledged that it should, together with listed companies, engage in multi-faceted efforts to boost the attractiveness of the Korean stock market. It is assessing ways to improve the KRX listing system by phase by referring to the example of the Japanese stock exchange. The Japanese stock exchange urged (i) listed companies to increase their corporate value (e.g., upscale their efforts to derive higher returns on equity and stock prices and make public disclosures in English), and (ii) companies listed on the prime/standard market with lower returns on equity (e.g., below PBR 1) to publicly announce their plans to achieve higher returns on equity in January 2023. Korea Listed Companies Association: It emphasized that listed companies have been striving to implement the new dividend rules announced in January 2023, under which year-end dividends are determined before the shareholders who are entitled to the dividends are identified. According to the Association, as of March 2024, approximately 26% (636 companies) of listed companies should be able to implement the new rules in time for their 2024 dividend distributions. It continues to encourage listed companies to adopt the improved dividend distribution procedures. Listed companies should pay attention to the FSC’s efforts to improve the regulations governing convertible bonds and treasury stocks, as well as the KRX’s mandate directed at listed companies to publicly announce their plans to achieved higher returns on equity and make public disclosures in English. These regulatory developments may lead to potential changes in corporate governance regulations, which are likely to affect listed companies’ responses in relation to the minority shareholders’ exercise of their rights and the administration of general meetings of shareholders. As pointed out by the Korea Listed Companies Association, the FSC rules on dividend record dates (our previous newsletter is available here, Link) will be implemented more broadly and affect the 2024 ordinary general meetings of shareholders onwards. Listed companies should examine the rules as they prepare their agendas for ordinary general meetings of shareholders in 2024, in which the shareholders may need to approve amendments to the articles of incorporation. SEC News On October 10, 2023, the U.S. Securities and Exchange Commission (“SEC”) adopted final amendments to the rules governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (the “Amended Rules”) (Link 1, Link 2, Link 3). The SEC’s beneficial ownership reporting rules are comparable to the substantial shareholding filing requirements in Korea. An investor who beneficially owns more than 5% of a voting class of equity securities must publicly report such ownership detailing the source of financing, the purpose of holding the equity securities and the shareholding ratio (Schedule 13D), but an exception is made for a qualified institutional investor or a passive investor with no intention to participate in management, who is eligible for simplified reporting (Schedule 13G). The Amended Rules will come into effect 90 days after publication in the Federal Register. Key terms of the Amended Rules are as follows. Shortening of initial filing deadlines / amendments to Schedules 13D and 13G: (i) The filing deadline for an initial Schedule 13D will be five business days (compared to ten calendar days under the current rules), and (ii) Schedule 13D must be filed within two business days following any material change (compared to a “prompt” filing under the current rules). Clarification of Schedule 13D disclosure requirements for derivative securities: Holders of cash-settled derivative securities have generally not been regarded as beneficial owners. The Amended Rules specifically require derivative securities holders to publicly disclose any interest they beneficially hold through derivative securities (including cash-settled derivative securities) with an issuer’s equity securities as the underlying reference securities (including derivative contracts, agreements, understandings, and relationships related to an issuer’s securities). The Amended Rules also apply to Korean listed companies who invested in minority equity securities registered with the SEC. The Amended Rules are expected to significantly influence Korea’s 5% reporting rules. Questions were raised in the past as to the application of the reporting rules to derivative securities, such as total return swaps and other cash-settled derivative securities. The enhanced disclosure requirements for the holding of equity through derivative securities as well as the trend towards reducing the reporting deadline from five to two business days under the Amended Rules may impact the direction of future amendments to our 5% reporting rules. [Korean Version]
2023.10.24

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National Assembly Passes Amendment to Insurance Business Act for Simplified Medical Indemnity Insurance Claims On October 6, 2023, the National Assembly passed a bill to amend the Insurance Business Act, requiring medical institutions, such as hospitals, clinics, and pharmacies, to electronically transmit medical indemnity insurance claim related records directly to insurance companies, upon patient request. The amendment is expected to affect approximately 40 million Koreans enrolled in medical indemnity insurance plans, significantly easing the burden on consumers who are currently required to directly obtain documents from medical institutions in order to submit them with insurance claims seeking reimbursement for medical expenses. It has taken 14 years for the bill to finally pass at the National Assembly, since recommendations for systematic improvements were first proposed by the Anti-Corruption and Civil Rights Commission. The key details of the amendment are as follows. A. Electronic Transmission of Medical Indemnity Insurance Claim Documents (Article 102-6) Patients can request medical institutions to electronically transmit records required for their indemnity insurance claims (e.g., medical bills, receipts, breakdown of medical expenses) directly to their insurance companies. Medical institutions must comply with such requests, absent other justifiable reasons. B. Establishment of Digital Insurance Claims System (Paragraphs (1), (2), and (3) of Article 102-7) Insurance companies are required to set up and operate a digital system for processing medical indemnity insurance claims, which can be managed directly or through a third party agent prescribed by Presidential Decree, taking into account the requisite “public interest, security requirements, and expertise.” C. Establishment of a Joint Committee by the Healthcare and Insurance Industries (Article 102-7 (4)) Insurance companies (or third party agents entrusted with the operation of digital claims processing) may set up and operate a joint committee with medical institutions and other stakeholders for the smooth operation of digital insurance claims processing systems. D. Privacy Measures (Article 102-7 (5) and Subparagraph 3-2 of Article 202) Persons engaged in the establishment and operation of digital claims processing are prohibited from divulging information or materials obtained in the course of performing their duties, and from using and storing such information or materials for purposes other than the processing of indemnity insurance claim ? violations may be subject to up to three years imprisonment or a fine of up to KRW 30 million. The amendment is scheduled to take effect one year after the date of promulgation (two years after the date of promulgation for clinic-level medical institutions with less than 30 beds and pharmacies). As such, insurance companies will now need to coordinate with healthcare providers and other stakeholders to establish digital insurance claims systems before the effective date. [Korean Version]
2023.10.12

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“Korea Law Firm of the Year” for Eleven Years in a Row

For the eleventh consecutive year, Kim & Chang won the “Korea Law Firm of the Year” award at the ALB Korea Law Awards 2023. Kim & Chang received the highest recognition in 12 categories.
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