Wednesday, November 13, 2019
Holding Companies' Subsidiaries to Be Prohibited from Co-investing in New Sub-subsidiaries
To Enhance Transparency of Corporate Governance
Holding Companies' Subsidiaries to Be Prohibited from Co-investing in New Sub-subsidiaries
  • By Yoon Young-sil
  • October 24, 2019, 11:18
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A holding company’s subsidiaries will be banned from jointly investing in its new sub-subsidiary from next year.

The Korea Fair Trade Commission (KFTC) announced on Oct. 23 that a holding company’s subsidiaries will be banned from jointly investing in its new sub-subsidiary from next year onward. In addition, every holding company must disclose data each year on its business consulting fees and real estate rents that constitute its non-dividend income received from its subsidiary or sub-subsidiary and mandatory board voting and public disclosure are applied to every internal transaction between a holding company and a subsidiary or a sub-subsidiary that is five billion won or more in size.

Until now, subsidiaries of holding companies have taken advantage of the loophole in the current law that lets them set up one sub-subsidiary by joint investment on condition of the same investment ratio. This loophole has been criticized as undermining the local holding company system for the enhancement of corporate governance transparency. For instance, CJ Group governed its sub-subsidiary CJ Logistics via CJ Cheil Jedang and KX Holdings before correcting the structure in 2017.

The mandatory board voting and public disclosure will be applied to holding companies belonging to conglomerates with a total asset of five trillion won or more. This is because information provision and monitoring have been insufficient with regard to frequent internal transactions between holding companies and their subsidiaries and sub-subsidiaries, most of which have been based on private contracts.

The KFTC revised its total asset criteria applied to holding companies from 100 billion won to 500 billion won in 2017 while postponing the application of the new criteria until June 2027 in the case of holding companies with a total asset of 100 billion won or more and less than 500 billion won. However, a regulatory loophole was created and holding companies could maintain their status by not reporting to the KFTC after a decrease in total asset to less than 100 billion won. In this regard, the KFTC is going to revise related regulations so that a change in status becomes effective at the moment of such decrease.