In acquiring shares in a Korean entity, foreign investors often neglect to take into consideration that their transactions might be subject to the filing of a report with the Korea Fair Trade Commission (the “KFTC”), especially when the contemplated transaction is not a 100% acquisition. In fact, a transaction which does not involve a merger or 100% acquisition, such as the acquisition of a minority shareholding or establishment of a joint venture, may become subject to the filing of a ‘business combination’ report with the KFTC, a failure of which may lead to an administrative fine as well as the KFTC’s order of corrective measures such as, among others, the prohibition of the transaction, a disposition of shares (ownership interest acquired) or a transfer of business.
In Korea, antitrust issues, including mergers and acquisitions, are governed by the Monopoly Regulation And Fair Trade Act (the “Act”) and the KFTC is the relevant authority that enforces the Act. Article 9 of the Act lists out the types of transactions that are subject to the Act and control by the KFTC (collectively referred as ‘business combination transactions’), and certain business combination transactions require the filing of a business combination report with the KFTC pursuant to Article 11 of the Act.
Under Article 11 of the Act, if a company with total assets or sales turnover in the amount of KRW 300 billion or more (the “Reporting Party”) acquires 20% or more of the total issued and outstanding shares in another company with total assets or sales turnover in the amount of KRW 30 billion or more (the “Target”) (15% or more, if the Target is listed on the Korea Exchange), the Reporting Party should file a business combination report with respect to its acquisition with the KFTC (Subparagraph 1, Paragraph 1 of Article 11, Act; Paragraphs 1-2 of Article 18, Enforcement Decree of the Act). The shares owned by those in special relation to the Reporting Party need to be aggregated when calculating 20/15% shareholding. It should also be noted that the KRW 300/30 billion threshold of assets or sales turnover, in principle, needs to be judged based on total assets or sales turnover of each group that each party belongs to (Paragraph 5 of Article 9, Act). In either case where both parties or the Target is a foreign company, the domestic turnover threshold is must also be considered (Paragraphs 3 of Article 18, Enforcement Decree of the Act).
The Act has recently adopted a new Transaction Value test (the “TV Test”), which, especially, aims at killer acquisitions that had been in the blind spot of outdated regulations and long been in debate not only in Korea but also in many other countries. The TV Test would require the Reporting Party to file a business combination report even in cases where the Target does not meet KRW 30 billion threshold if it meets certain criteria under the TV Test. The TV Test has a two-tier criteria in requiring reporting: (i) the transaction amount (e.g., purchase price, subscription price, etc.) exceed a certain amount (as of now, KRW 600 billion or more), and (ii) the domestic market operation of the Target be at a significant level (Paragraph 2 of Article 11, Act; Article 19, Enforcement Decree of the Act).
If both Reporting Party and Target, as well as the contemplated shareholding, meet the above thresholds, the Reporting Party needs to confirm whether the business combination filing should be made prior to the closing of the contemplated transaction – the pre-closing filing requirement is triggered when the worldwide assets or turnover of either the Reporting Party or the Target amounts to KRW 2 trillion or more (also calculated on a group-basis). Unless a pre-closing filing is required pursuant to the Act, the Reporting Party should file a business combination report with respect to its acquisition with the KFTC within thirty (30) days from the closing of the transaction.
It is also noteworthy that, if the Reporting Party acquires additional shares of the Target subsequently, where the Reporting Party already owns 20% or more of the total issued and outstanding shares (15% or more, if the Target is listed on the Korea Exchange) and becomes the largest shareholder of the Target, such subsequent acquisition will be again subject to the filing of a business combination report with the KFTC.
Other types of transactions that falls under the business combination transactions and, therefore, are subject to the filing of a business combination report with the KFTC under the Act include: (i) interlocking directorate (meaning a director or employee of one company concurrently holding a position as a registered director of another company); (ii) statutory merger; (iii) acquisition of all or a substantial part of another company’s business or fixed operating assets; and (iv) participation in the establishment of a new company or a joint venture as the largest shareholder.
While this article provides a general idea on the filing of a business combination report with respect to an acquisition in Korea with the KFTC, the applicable rules are much more complex with many exceptions and criteria and the filing of a business combination report requires close communication with the KFTC. Jipyong LLC’s Antitrust & Competition Group consists of experts with vast experiences in business combination transactions in Korea and representation of foreign clients before the KFTC. If you need advice on your business combination transactions in Korea, please don’t hesitate to contact us at any time.
