Regulations Going
On May 27, the Korean government unveiled legislation guidelines for the special act it is working on for the promotion of business activities. “The guidelines disclosed today will form the basis of the draft of the special act,” said Konkuk University professor Kwon Jong-ho, who led the feasibility study for the act, dubbed One-shot Act.
According to the guidelines, a company reorganizing its business structure can have a four-year grace period with regard to cross-shareholding regulations, joint investment in a sub-subsidiary is allowed, and a sub-subsidiary’s minimum shareholding ratio in a sub-sub-subsidiary is to be lowered from 100 percent to 50 percent. In addition, shares in a non-affiliate can be owned for four years, and even a business group with 5 trillion won (US$4.5 billion) or more in total assets and subject to the ban on mutual investment is allowed to guarantee its affiliates' debt on the condition of business restructuring.
Also, short-form mergers are facilitated, the procedure of shareholders’ meetings is simplified for prompt business reorganization, and a merging company’s minimum shareholding in a merged company is adjusted from 90 percent to two-thirds. Regarding stock option limits, the mandatory stock purchase period is extended from a month to three for listed corporations and from two to six months for non-listed ones.
Companies reshaping their business structures can make use of the policy financing means, including the 30 trillion won (US$27 billion) Corporate Investment Promotion Program of the Korea Development Bank. Tax incentives are slated to be prepared through tax law revisions, too. In short, the guidelines can be seen as a series of business support measures covering the Commercial Law, the Fair Trade Act, and many more.
The guidelines also include clauses for forestalling controversy over preferential treatment. For example, the special act is only applied to companies in the industries in an oversupply state. The state of demand and supply is going to be measured by industry. And, the supply glut is going to exist when the recent three-year average of the ratio of operating profits to sales is much lower than the average for the 10 preceding years, the rate of increase in raw material costs exceeds that in product prices, and the oversupply is predicted to continue for a while due to difficulties in cost reductions.
Even companies in those industries have to meet at least one of three productivity index requirements and achieve a certain level of financial soundness in order to benefit from the act. Specifically, the three requirements refer to a 5 percent increase in added value per employee, a 3 percent increase in ROE, and a 3 percent increase in tangible fixed asset turnover at the end of business reorganization. When it comes to financial soundness, the interest coverage and current liability ratios should not fall below 100 or 200 percent, respectively.