The Monopoly Regulation and Fair Trade Act (MRFTA) is the primary antitrust statute and governs the merger control process in Korea. Under the MRFTA, the Korea Fair Trade Commission (KFTC) is the government agency that oversees the merger control process in Korea.2 Article 7(1) of the MRFTA sets forth the types of transactions (i.e., business combinations) for which a merger filing with the KFTC may be required. In addition, Article 12 of the MRFTA sets forth transactions that trigger a pre-merger filing requirement and those that trigger a post-merger filing requirement. In general, whether a merger filing is required under the MRFTA is examined under two jurisdictional tests: the size-of-transaction test and the size-of-party test. Whereas the size-of-transaction test applies only to certain types of transactions, the size-of-party test applies to all transactions. Under the MRFTA, there are five types of transactions:
- a interlocking directorate;
- b merger;
- c share acquisition;
- d business transfer (i.e., asset acquisition); and
- e formation of a new company (e.g., a joint venture).
Among these five types of transactions, interlocking directorates, mergers and the formation of a new company are not subject to the size-of-transaction test.
The size-of-transaction test applies to share acquisitions and certain business transfers. With respect to a share acquisition, the size-of-transaction test is satisfied if:
- a the number of shares acquired pursuant to the proposed transaction is 20 per cent (or 15 per cent if the target company is a Korean entity and is publicly traded) or more of the total issued and outstanding voting shares of the target company; or
- b the acquirer becomes the largest shareholder of the target company, holding 20 per cent (or 15 per cent if the target company is a Korean entity and is publicly traded) or more of the total issued and outstanding voting shares of the target company, pursuant to the proposed transaction.
A business transfer involving the transfer of only a portion, and not all, of the business at issue is also subject to the size-of-transaction test, which is satisfied if the value of the business transfer is 5 billion won or more, or 10 per cent or more of the total assets of the transferor according to its financial statements at the end of the most recent fiscal year. On the other hand, a business transfer involving the transfer of all of the business at issue is not subject to the size-of-transaction test.
Even if a proposed transaction meets the size-of-transaction test, a merger filing with the KFTC is not required unless each of the relevant parties meets the size-of-party test. The size-of-party test is satisfied if either party to the transaction had consolidated worldwide assets or sales of 200 billion won or more during the most recently ended fiscal year; and the other party to the transaction had consolidated worldwide assets or sales of 20 billion won or more during the most recently ended fiscal year. These two thresholds (i.e., 200 billion and 20 billion won) have been established by the Enforcement Decree of the MRFTA.3
In addition, a local nexus test applies to a transaction where both parties to the transaction are foreign entities, or where the party with the filing obligation is a Korean entity and the counterparty is a foreign entity. Where both parties to a transaction are foreign entities (i.e., as in a foreign-to-foreign transaction), the local nexus test is satisfied if each party had Korean sales of 20 billion won or more during the most recently ended fiscal year. Where the counterparty to the party with the filing obligation is a foreign entity, the local nexus test is satisfied if the foreign counterparty had Korean sales of 20 billion won or more during the most recently ended fiscal year. When calculating a foreign entity’s Korean sales, inter-group sales between the foreign affiliate and its Korean affiliates are excluded to avoid double counting.
However, a transaction that satisfies the jurisdictional and local nexus tests need not be reported to the KFTC if it qualifies for an exemption under the MRFTA. The three most notable exemptions are for an interlocking directorate between affiliates, a share acquisition of which the parties are all specially related persons (i.e., affiliates), and a transaction where either the acquirer or the target is an investment company or a fund that satisfies certain conditions.
Where a transaction satisfies the jurisdictional and local nexus tests and does not qualify for an exemption, a pre-merger or post-merger filing with the KFTC is required. A pre-merger filing is required for a merger, business transfer, share acquisition or establishment of a new company where either the acquirer or the target has consolidated worldwide assets or sales of at least 2 trillion won. However, in a business transfer transaction, the assets or sales of affiliates are not included in calculating the assets or sales of the target. For all other transactions, a post-merger filing is required. For a tender offer transaction, only a post-merger filing is required, even if the transaction satisfies the pre-merger filing requirement; specifically, the merger filing for a tender offer transaction must be made within 30 days after closing and does not trigger any waiting period.
A pre-merger filing may be made any time between the execution of the transaction agreement and prior to the closing date as long as the KFTC’s clearance is obtained prior to the closing date. If the parties to a transaction close the transaction prior to the KFTC’s clearance (gun-jumping), they may be subject to an administrative fine imposed by the KFTC. Furthermore, the KFTC may also review a transaction on its own initiative even where the transaction does not satisfy the jurisdictional and local nexus tests if it determines that the proposed transaction may have a significant impact on the Korean market.
If the parties to a transaction fail to file a merger notification in violation of the Korean merger regulations, they are subject to a maximum fine of 100 million won under Article 69-2(1) of the MRFTA. The specific amount of a fine imposed by the KFTC is determined in accordance with the Guidelines on Standards of Imposition of Fines for Violation of Rules on Business Combination Notification.
With respect to merger filing and review, the applicable statutes, regulations and guidelines are as follows:
- a the MRFTA and the Enforcement Decree of the MRFTA;
- b the Guidelines on Methods of Business Combination Notification;
- c the Guidelines on Standards of Business Combination Examination;
- d the Guidelines on Standards of Imposition of Fines for Violation of Rules on Business Combination Notification;
- e the Guidelines on Standards of Imposition of a Corrective Order Regarding a Business Combination; and
- f the Guidelines on Imposition of Fines for Non-Performance of a Corrective Order Regarding a Business Combination.
II YEAR IN REVIEW
In 2015, the KFTC reviewed a total of 669 transactions, which represents a 17.2 per cent increase from 2014. Of these transactions, 534 (approximately 79.8 per cent) were Korean entities’ acquisitions of Korean or foreign entities, while the remaining 135 transactions involved foreign entities’ acquisitions of Korean or foreign entities. Of these 135 transactions, 32 were foreign companies’ acquisitions of Korean entities, while the remaining 103 were foreign-to-foreign transactions that affected the Korean market, thus requiring merger filing in Korea.4
In contrast to 2014, the KFTC did not block any transactions in their entirety in 2015. However, it rendered several decisions imposing structural remedies such as divestiture: Bayer/Merck and NXP/Freescale.
In the Bayer/Merck case, Bayer AG agreed to acquire the global OTC drug business of Merck & Co, Inc. In October 2014, Bayer Korea notified the planned transaction to the KFTC. The transaction involved acquiring the related rights and assets of four different drugs (oral contraceptives, nasal allergy medicine, nasal spray and steroidal dermatological medicine) from MSD Korea as part of the overall global merger. In March 2015, after concluding that the merger would likely eliminate competition in the Korean oral contraceptive pill market, the KFTC required Bayer Korea to divest the oral contraceptive pill assets and rights it would acquire from MSD Korea to a pre-approved buyer not already handling Bayer Korea’s oral contraceptives. Moreover, Bayer Korea is prohibited from having the third-party divestiture purchaser of the MSD Korea’s oral contraceptive business, or a distributor already distributing of MSD Korea’s competing oral contraceptives, also distribute Bayer Korea’s competing oral contraceptives pills. The KFTC did not find any competitive concerns for the other three OTC drugs at issue, and granted unconditional clearance.5
In the NXP/Freescale case, the global semiconductor manufacturer NXP entered into an agreement to purchase all of Freescale’s outstanding shares. On 5 June 2015, NXP notified this transaction to the KFTC. There were overlaps between the parties in six product markets: general micro-controller unit (MCU), general digital signal processor (DSP), automobile MCU, automobile DSP, automobile analog-power integrated circuit (IC) and radio frequency (RF) power transistor. For the RF power transistor market in particular, the KFTC found that the transaction would likely restrain competition because the parties’ combined market share would amount to 61.7 per cent, creating a significant gap with the second-biggest competitor. The KFTC granted clearance conditioned on the divestiture of NXP’s RF power transistor business.
In the Microsoft/Nokia case, Microsoft initially filed a pre-merger notification with the KFTC in 2013. After easily obtaining clearance in the US and Europe, and securing conditional clearance in some other jurisdictions, in response to continuing difficulties and delays in Korea, the merging parties restructured the transaction to render it a non-reportable transaction in Korea and promptly consummated the transaction. Unfazed, the KFTC continued its investigation, but this time as a post-consummation merger investigation. To resolve the matter, Microsoft, the acquiring party, formally requested that the KFTC open consent order proceedings in 2014. On 4 February 2015, the KFTC granted the request. This marked the very first time that the KFTC decided to use a consent order in merger cases. On 19 May 2015, the KFTC announced a proposed consent order. After a public comment period, the KFTC finally adopted the consent order. 6
In addition, the KFTC also imposed behavioural remedies in several other cases, including Hanwha Chemical’s share acquisition of Samsung General Chemicals and Lotte Shopping’s asset acquisition of Daewoo Department Store. In the first case, Hanwha Chemical and its affiliate Hanwha Energy entered into an agreement to purchase 27.6 per cent and 30 per cent, respectively, of Samsung General Chemicals’ outstanding shares. On 16 December 2014, Hanwha Chemical notified the transaction to the KFTC. After defining the relevant product market as four polyethylene (PE) products including ethylene vinyl acetate (EVA), the KFTC found that the transaction would likely restrain competition because the parties’ combined share in the EVA market would amount to 68 per cent, creating a significant gap with the second-biggest competitor. Therefore, the KFTC limited the parties’ EVA price increase and decrease rates in Korea to export price increase and decrease rates.
In the second case, Lotte Shopping acquired the two department stores, one located in the greater Changwon area and the other in Busan, operated by Daewoo International. Because the acquisition of the Changwon store would raise Lotte Shopping’s market share in the department stores in the region to 64.2 per cent, the KFTC found that the transaction would likely generate vertical anticompetitive effects with respect to brands and suppliers operating mainly in the greater Changwon area. Hence, the KFTC prohibited Lotte Shopping from raising, for three years, lease or commission fees charged to brands with stores in the Changwon department store and its suppliers. This is the first case in which the KFTC restricted commission fees charged to stores within a department store or its suppliers.
Among the cases for which the KFTC granted unconditional clearance in 2015, the Daum Communications/Kakao transaction was notable. In this case, Daum, the second-biggest internet portal service provider, absorbed and merged with Kakao, the overwhelmingly leading player in the mobile messenger market. During the KFTC’s review, the parties showed that:
- a there were no real overlaps between the parties as Daum and Kakao focused primarily on PC-based portal services and mobile-based messenger services, respectively;
- b the transaction would in the long term create a competitive pressure capable of curbing anticompetitive unilateral conduct by Naver, the formidable leader in the internet portal service market; and
- c the transaction would enhance efficiencies by enabling new services such as Kakao Taxi, an Uber-like cab service, and thereby also providing consumers with greater choice.
In 2015, the KFTC imposed fines amounting to 336 million won with respect to 16 transactions that were not reported or that were reported late. The figures represent a 58 per cent decrease in the number of such cases as compared with 2014, when the KFTC imposed 570 million won in fines with respect to 38 transactions that were not reported or that were reported late.
Some noteworthy KFTC merger cases to date in 2016 include the merger between Dell Inc and EMC. In this transaction, Dell Inc announced its plans to acquire EMC in 2015 and filed a merger notification in Korea in December 2015. Touted as the largest-ever M&A in the technology sector, the Dell/EMC transaction raised questions on (1) potential anticompetitive effect in the external enterprise storage systems market where both parties overlap horizontally; and (2) the potential anticompetitive effect in the vertical relationship between Dell’s server business and server virtualisation Software of VMware (EMC’s subsidiary). Given the merging parties’ extensive worldwide presence, the Dell/EMC transaction was notified in over 20 jurisdictions globally. At least partially due to the high-profile nature of the transaction, the KFTC conducted an extremely thorough investigation before granting unconditional clearance in April 2016.
III THE MERGER CONTROL REGIME
The waiting period for the KFTC merger control review varies depending on the type of merger filing method employed. The Guidelines on Standards of Business Combination Examination provide a 15-day waiting period, in principle, for the following types of transactions that may qualify for the simplified review process:
- a transactions between affiliates;
- b transactions that do not form any controlling relationship (within the target);
- c conglomerate mergers by small or medium-sized companies (i.e., companies that do not belong to a business group whose consolidated total assets or turnover amount to 2 trillion won or more);
- d a conglomerate merger where no product or service substitutability exists between the parties due to the particular nature of the relevant market; or
- e participation in the establishment of a private equity fund or transaction involving an asset-backed securitisation company
In addition, the KFTC revised the Guidelines so that the 15-day waiting period rule also applies when the acquiring party files a formal merger notification after the KFTC’s review and provisional clearance of the parties’ provisional merger notification,7 provided that the facts and the market conditions have nor materially changed since the KFTC’s provisional clearance.
The waiting period for the ordinary pre-merger filing is 30 days from the date of filing of notification, but the KFTC may, on its own initiative, extend the waiting period for an additional 90 days, if necessary. The KFTC’s current practice is that, if it views the case as having no effect of restraining competition, it usually clears the transaction within one month (or two months in certain cases) from the date of filing of the notification.
With respect to confidentiality issues, the materials submitted at the time of filing of the notification and thereafter to the KFTC are protected from disclosure to third parties. If a third party requests access to or a copy of such materials, the KFTC must obtain the prior consent of the submitting parties. The submitting parties are recommended to insert a statement in the notification to such effect.
The KFTC is permitted to impose several remedies if it determines that the transaction restrains competition. Under Article 16(1) of the MRFTA, the KFTC may:
- a prohibit the relevant transaction altogether;
- b order the total or partial disposal of assets, shares, or both;
- c restrict the scope or method of operation of the relevant entity;
- d order the resignation of relevant directors;
- e order the transfer of business;
- f order the relevant parties to disclose the fact that they have received the corrective order; and
- g any other necessary measures.8
If the parties fail to comply with the corrective measures, the KFTC may impose a penalty of not more than 0.03 per cent of the relevant amount of transaction day9 pursuant to Article 17-3 of the MRFTA. Further, under Article 67(6) of the MRFTA, failure to comply with corrective measures is punishable by a prison sentence of up to two years or a criminal fine not exceeding 150 million won.
In certain cases, the parties may apply for reconsideration of the KFTC’s decision to the KFTC or appeal the KFTC’s decision (or reconsidered decision if the parties had applied for reconsideration) to the Seoul High Court. Both options may be instituted simultaneously. The application for reconsideration must be made within 30 days from the issuance of the KFTC’s written decision. The KFTC is required to reconsider its decision within 60 days from the date of receipt of application pursuant to Article 53 of the MRFTA. The relevant parties may also file an appeal before the Seoul High Court within 30 days from the issuance of the KFTC’s written decision or reconsidered decision. The Seoul High Court’s decision may be appealed to the Supreme Court.
Where the transaction falls under the ambit of responsibilities of other government agencies, such as the Korean Communications Commission or the Financial Services Commission, under the relevant statutes, such as the Electrical Communications Business Act or the Financial Industry Structure Improvement Act, Article 12(4) of the MRFTA provides that the merger filing requirements under Article 12(1) of the MRFTA are not applicable to the relevant transaction.10 These transactions do not, however, entirely avoid the review of the KFTC, because those other government agencies are still required, under Article 12(4), to discuss and consult with the KFTC regarding the potential competition-restraining effect of the relevant transaction during the review process.
Meanwhile, the recently enacted statute commonly referred to as the ‘One Shot Act,’ which allows for pre-emptive business reorganisation before insolvency, contains special provisions concerning mergers. For instance, Article 9(5) of the Act simplifies the filing burden on businesses undergoing reorganisation as it allows a business filing for reorganisation to file a reorganisation plan including, where applicable, a merger notification, which the government agency at issue must then forward to the KFTC. Furthermore, the KFTC under Article 10(7) of the Act must consider the views submitted by the government agency on any enhanced efficiencies resulting from the contemplated reorganisation or merger. However, the Act does not modify the substance of the merger control regime in any appreciable way.
IV OTHER STRATEGIC CONSIDERATIONS
When making worldwide merger filings in various countries, including Korea, parties need to consider the specific merger filing thresholds and waiting periods for each country. For example, as explained above, Korea imposes the merger filing obligation for the establishment of a joint venture company if it satisfies the jurisdictional and local nexus tests. As a result, where both parents of the joint venture are foreign entities, if they satisfy not only the size-of-transaction and size-of-party tests but also the local nexus test, which requires both foreign entities to achieve turnover or sales in Korea of 20 billion won or more, the transaction must be filed with the KFTC.
The KFTC in principle reviews the reportability of each transaction or step in a series of transactions that may constitute a ‘single transaction’ in other jurisdictions. As a result, an ancillary transaction (e.g., parties’ joint establishment of a paper company or an acquisition vehicle) preceding a main transaction may require a separate merger filing in Korea even though it may be exempt from merger filing obligations in other jurisdictions. Thus, parties to a series of transactions should check at the very outset whether any of the transactions requires a separate merger filing in Korea.
With respect to foreign-to-foreign transactions, in December 2011, the KFTC issued a manual on cooperation with foreign competition authorities in reviewing cross-border mergers subject to notification in multiple jurisdictions. It provides for a greater degree of cooperation with major competition authorities around the world, including the establishment of a cooperation system and the exchange of relevant information and opinions on market definition, analysis of anticompetitive effects and proposed corrective measures regarding the transaction at issue among the concerned jurisdictions.
The parties to the transaction are recommended to submit as much relevant information as possible regarding the proposed transaction and the relevant market at the time of filing in order to reduce the waiting period. If the parties wish to find out the KFTC’s position on the competitive effect of the proposed transaction earlier than the typical notification period, they may apply for the discretionary advanced or provisional filing procedure under Article 12(9) of the MRFTA. Under this procedure, the parties may be permitted to make a merger filing even prior to the execution of the relevant agreement as long as they submit sufficient information about the proposed transaction. Under the procedure, the relevant parties will be required to file a formal re-notification after the execution of the agreement. However, such re-notification only needs to be brief, and as explained above, the newly revised Guidelines on Standards of Business Combination Examination provide that a shorter 15-day waiting period applies to review of the formal re-notification. This procedure would be useful for parties wishing to close the proposed transaction shortly after the execution of the binding merger agreement.
Finally, the failing firm defence is available in Korea, and the parties may request an expedited review if the filing specifies that the relevant target entity is facing bankruptcy. However, the requirements to avail oneself of such defence are very strict.
V OUTLOOK and CONCLUSIONS
In a September 2015 report to the National Assembly of Korea, the KFTC stressed that it has been, and will be, carefully monitoring, reviewing and imposing appropriate corrective measures against global M&A transactions that will likely have a significant anticompetitive effect on the domestic Korean market. To that end, the KFTC actually imposed structural remedies in the Bayer/Merck and NXP/Freescale cases, and also imposed behavioural remedies in several cases including the Microsoft/Nokia case. Meanwhile, the proposed amendment to the MRFTA, which would have provided for wider merger filing exemptions, has not passed the National Assembly.
Furthermore, the KFTC has previously stated that it will engage in even greater cooperation with foreign competition authorities, particularly those of China and Japan, which are similar to Korea in their industry structures, to reinforce its merger review efforts with respect to global transactions with substantial impact on the Korean market. Indeed, such inter-jurisdictional cooperation is well under way, as the KFTC has cooperated with foreign competition authorities with respect to a number of recent major global transactions, including the Microsoft/Nokia merger, the P3 Network joint venture, the GSK/Novartis transaction, the Applied Materials/Tokyo Electron merger, and the FedEx/TNT merger. Therefore, parties to global transactions triggering merger filings in multiple jurisdictions including Korea should expect the KFTC to be in closer contact with other competition authorities that are also reviewing the same transaction.
1 Sai Ree Yun, Kyoung Yeon Kim and Kyu Hyun Kim are partners and Seuk Joon Lee and Cecil Saehoon Chung are senior foreign counsel at Yulchon LLC. The authors would like to thank Tae Yong Kim, foreign attorney, and Ye Seul Yoo and Hye Yeon Park, associates at Yulchon LLC for their valuable assistance in preparing this chapter.
2 The mergers and acquisitions division of the KFTC is in charge of merger control matters. The contact information for the Mergers & Acquisitions Division of the KFTC is: 95 Dasom-3ro, Sejong, Korea; Tel: +82 44 200 4363; Fax: +82 44 200 4399; www.ftc.go.kr.
3 Under a 2008 amendment to the Enforcement Decree, the thresholds were raised to the current figures to ease regulatory burdens faced by companies undergoing business combinations.
4 KFTC press release (29 February 2016), available in Korean at http://www.ftc.go.kr/common/download.jsp?file_name1=/news/report/2016&file_name2=160229.
5 This matter was previously addressed in the 6th edition (2015) of this publication. However, because this is one of the more important merger control cases of 2015, it is discussed again in this 7th edition.
6 See footnote 5.
7 As described more fully below, the acquiring party may file a provisional merger notification form to obtain provisional clearance when there is not yet a binding merger agreement.
8 On 22 June 2011, the KFTC announced its standard for merger remedies, in which it highlighted its preference for structural remedies over behavioural remedies in merger cases.
9 For example, the value of the relevant business combination refers to the aggregate amount of value of acquired shares and debts in the case of a share acquisition, and the value of the relevant businesses in the case of a business transfer.
10 Article 12(4) of the MRFTA reads as follows: ‘The provisions of Article 12(1) shall not apply if the head of the [other government] administrative agency concerned has consulted in advance with the KFTC regarding the business combination under the relevant statutes.’