Chaebols' Related-party Transactions
Following growing public opinion, the government finally made a concession regarding its legislation plan which some believe could hamper business activities. However, the economic community continues to argue that the restriction will compromise the efficiency of their business management.
The National Policy Committee of the National Assembly discussed the amendment to the Monopoly Regulation and Fair Trade Act on June 24 with regards to how to put a brake on enterprise owners’ and their family members’ reckless and illegal profit taking. The most controversial issue of this was whether to add extra regulatory provisions to Article 3, which concerns the prevention of a concentration of economic power.
Article 5 of the law, which bans unfair trade practices, stipulates that any violation of the fair trade order caused by such practices must be proven by the Fair Trade Commission. This means that actions less related to limiting competition, e.g. unfair support for owners’ individual family members and the usurpation of corporate opportunity, can often go unpunished. As a result, there have been growing calls for the necessity of additional provisions.
However, ruling and opposition parties have agreed that such an addition could make it more difficult to determine the legality of economic power concentration, thus prohibiting inter-company transactions from the get go. Ruling Saenuri Party lawmaker Kim Yong-tae was at the vanguard of the opposition.
At present, the consensus is that Article 5 of the Act should be reinforced. Specifically, the parties are planning to put restrictions on three types of actions -- transactions with significant more preferential conditions than normal, the signing of large-scale contracts without a proper decision-making process, and the provision of profitable business opportunities to owners’ families. They also agreed to include firms benefitting from unfair trade, as well as those directly involved, as well as prohibiting big businesses’ practices of only taking profits through subcontracting and not making any economic contribution to their subcontractors.
The business community is claiming that these regulations will affect the domestic economy by disrupting even normal intra-company transactions. “These types of transactions are concentrated in a small number of industrial segments, such as advertising and transport logistics, where they are necessary for various reasons. These transactions have increased corporate management efficiency by means of vertical integration, incorporation and so forth,” said an official at the Federation of Korean Industries, adding, “Tighter restrictions on inter-company transactions will result in greater benefits for foreign companies only.”
In the meantime, the National Policy Committee passed revisions to the Financial Holding Companies Act and the Banking Act on the same day, and which are designed to reduce industrial capital shareholding in banks from 9% to 4% and strengthen the separation between banking and commerce. In 2009, the government had eased related regulations in an attempt to enhance the competitiveness of the banking sector.
Furthermore, the parties came to a consensus regarding the Act on Reporting and Use of Certain Financial Transaction Information, so that the parties to a transaction can be given a notice when the Financial Intelligent Unit (FIU) submits their financial transaction data to the National Tax Service or the like. Another meeting is scheduled for June 25 to decide on the specific scope of the notification.
Nevertheless, they failed to concur on the issue of franchise protection, a ban on new circular equity investment, and how to improve the evaluation of the eligibility of major shareholders in the non-banking sector. These matters are scheduled to be handled in the National Assembly session in September.