Asialaw can reveal that the Korean government’s takeover of the Korean Exchange (KRX) on January 29 2009 is illegal. The nationalisation of the exchange would violate shareholders’ proprietary rights and the exchange’s business rights.
State authorities officially took over the exchange following the Board of Audit and Inspection’s (BAI) announcement last September that it would make it a public institution and take on a managerial role.
Now the bourse is nationalised and expected to accede to government regulation. The BAI has not yet disclosed what measures, if any, it will take.
The government claims the action was necessary because the KRX was becoming an unchecked, monopolistic power. The Korean media had complained about the exchange’s excessive wages and lax management with the Korea Times describing it as: “a workplace that even God would love to work in”.
The government also accused the KRX of breaching the country’s anti-monopoly laws. Following the 2005 merger between the Korea Futures Exchange and Korean Securities Dealers Automated Quotations the new exchange became the country’s only bourse with its stocks and bond trading facilities
The KRX strongly opposes the government’s move, calling it unconstitutional.
And lawyers in Korea have deemed the move illegal. “The designation is illegal even though it is based upon the Act on Management of Public Institution,” said Shin & Kim partner Tae-Yong Seo.
If the government directly controls the business of the KRX by deeming it a public institution, constitutionally it may violate the shareholders’ proprietary rights and the exchange’s business rights, said Seo.
This strikes at the heart of the Exchange’s condemnation that it is a private corporation with 90% of its shares owned by private sector securities companies. The government holds no stake in the company.
The KRX is seriously considering taking legal actions like filing a petition with the Constitutional Court and proceeding with administrative actions to protect its shareholders’ rights.
Despite the government’s action being based upon the Act on Management of Public Institution, because the KRX has filed a petition with the Constitutional Court, it could be decided the Act is in violation of the constitution and invalid. “That’s why I can say the government’s action is illegal,” said Seo.
Despite the government’s anti-monopoly argument against the KRX (which was curiously brought up three years after the exchange’s inception), Seo explains it had not breached any laws. The exchange had always satisfied the conditions that entitled it to the monopolistic business right under the Securities and Exchange Act.
If the exchange was illegal, authorities would have shut it down much earlier. However, since the Ministry of Strategy and Finance made the bourse a public institution last year as an indirect reprimand, it was, in turn, acknowledging the legality of the exchange.
According to the Act on Management of Public Institution the government can designate an institution public if it makes an income of 50% or more from its monopolistic business.
Candice Mak