Blocking CVC Fund Loophole Investments and SPC Debt Guarantees... Fair Trade Commission Amends Enforcement Decree of Fair Trade Act

Strengthened Regulation of Illegal Practices Related to Holding Companies and Business Groups
Revisions to Address Kinship Independent Management System and More

The Fair Trade Commission is cracking down on regulatory loopholes and illegal practices by corporate venture capital (CVC) arms of large conglomerate holding companies, such as circumventing investment bans by channeling funds through external investment vehicles or effectively guaranteeing the debts of affiliates through special purpose companies (SPCs). The regulatory gray area that allowed control groups to exploit family split offs and reinstate relatives as executives to evade rules against private interest appropriation is also being addressed.

CVC Fund Loophole Investments and SPC Circumvention of Debt Guarantees Clearly Defined as Illegal Practices

On July 23, the Fair Trade Commission announced that it has drafted an amendment to the Enforcement Decree of the Monopoly Regulation and Fair Trade Act, which will be open for public comment until September 1. The amendment significantly strengthens the regulation of illegal practices related to holding companies and business groups and focuses on improving the independent family management (kinship separation) system.

First, the types of illegal activities related to CVCs under general holding companies will be newly defined. Currently, under eased regulations on the separation of industrial and financial capital, holding CVCs is permitted. However, investments in companies owned by the same individual (control group head) and their relatives, other affiliates, or those belonging to designated business groups are strictly prohibited. Until now, only direct investments by a CVC or through funds where the CVC acts as the general partner (GP) were restricted. It was challenging to regulate indirect investments where a CVC would participate as a limited partner (LP) in an external fund that would then invest in companies related to the control group family.

The Fair Trade Commission, through this amendment, will explicitly define as an "illegal practice" any CVC acting as an LP in a fund whose main investment purpose is to invest in restricted companies. This aims to fundamentally block the misuse of such structures as tools for expanding control.

Efforts to curb circumvention of debt guarantees by affiliates of business groups subject to cross-shareholding limitations will also be reinforced. While current law prohibits affiliates from guaranteeing each other’s debts when borrowing from financial institutions, some major conglomerates have exploited SPCs by having them procure funds from banks and lend to affiliates, with other affiliates agreeing to assume the SPC’s debt--effectively circumventing the restriction. The Fair Trade Commission is amending the enforcement decree to additionally prohibit and define as illegal such arrangements using SPCs.

Grounds Established for Canceling Kinship Independent Management... Eliminating Gray Areas in Private Interest Appropriation

Regulatory loopholes enabling families of control groups to evade private interest appropriation rules through manipulations of the kinship independent management system will be closed. Currently, if a relative company that had previously gained independence through recognition of kinship separation is later re-acquired into the group and that relative becomes a director at an affiliate of the control group, existing statutes prevented reclassification of the relative as a "related party" if the violation occurred before December 30, 2021 (under the rule prohibiting retroactive application). As a result, even if the family’s total shareholdings exceeded 20%, the relative could be excluded from related-party status, thus evading regulation on the prohibition of providing undue benefits to specially related persons (private interest appropriation restriction) under the Fair Trade Act.

The Commission is now establishing grounds to revoke recognition of kinship independent management when a previously excluded relative is appointed as an executive at an affiliate. This will also apply to executive reappointments and term extensions, effectively closing off avenues to evade the regulation.

Meanwhile, the Commission will delete provisions on reward payments for reports related to unfair trade practices at large-scale retail establishments, which have become obsolete since the enactment of the Distribution Industry Development Act. Other legal terminology is also being updated, such as changing "balance sheet" to "statement of financial position."

The Fair Trade Commission stated, "We plan to thoroughly review the opinions of stakeholders and relevant agencies submitted during the comment period, then finalize and implement the amendment after undergoing review by the Ministry of Government Legislation."

This content was produced with the assistance of AI translation services.