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:
- interlocking directorate;
- share acquisition;
- business transfer (i.e., asset acquisition); and
- 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:
- 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
- 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. In share acquisitions, formation of a new company, and mergers, the size-of-party test is satisfied if either party to the transaction had consolidated worldwide assets or sales of 300 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 30 billion won or more during the most recently ended fiscal year. On the other hand, in business transfer transactions, the seller or transferor's size is calculated on a standalone basis (i.e., the worldwide assets or turnover of the specific entity whose business is being transferred without regard to its affiliates' assets or turnover). These two thresholds (i.e., 300 billion and 30 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 30 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 30 billion won or more during the most recently ended fiscal year. When calculating a foreign entity's Korean sales, intra-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:
- the MRFTA and the Enforcement Decree of the MRFTA;
- the Guidelines on Methods of Business Combination Notification (KFTC Merger Notification Guidelines);
- the Guidelines on Standards of Business Combination Examination (KFTC Merger Review Guidelines);
- the Guidelines on Standards of Imposition of Fines for Violation of Rules on Business Combination Notification;
- the Guidelines on Standards of Imposition of a Corrective Order Regarding a Business Combination; and
- the Guidelines on Imposition of Fines for Non-Performance of a Corrective Order Regarding a Business Combination.
ii YEAR IN REVIEW
In 2018, the KFTC reviewed a total of 702 transactions, which represents a 5.1 per cent increase from 2017. (However, the total transaction value decreased by 4.5 per cent from 509.4 trillion won in 2017 to 486.6 trillion won in 2018.) Of these transactions, 570 (approximately 81.1 per cent) were Korean entities' acquisitions of Korean or foreign entities, while the remaining 132 transactions involved foreign entities' acquisitions of Korean or foreign entities. Of these 132 transactions, 37 were foreign companies' acquisitions of Korean entities, while the remaining 95 were foreign-to-foreign transactions that affected the Korean market, thus requiring merger filing in Korea.4
In October 2018, the KFTC granted conditional clearance in connection with the proposed merger of equals between two global industrial gas producers – Praxair Inc of the United States and Linde AG of Germany. After defining the relevant market as various separate industrial gas markets, the KFTC required the merging parties to divest all of the assets relating to the tonnage and bulk oxygen, nitrogen and argon supply business owned either by Linde or Praxair in Korea. The KFTC further required the merging parties to divest all of the assets relating to excimer laser gases owned either by Linde in New Jersey in the United States or by Praxair in Korea. Finally, the KFTC required the merging parties to divest a certain part of the helium assets owned by Linde and Praxair relating to the helium wholesale business.5
In January 2018, the KFTC allowed Qualcomm's acquisition of NXP Semiconductors. However, in order to address competitive concerns raised by the acquisition, the KFTC imposed both structural and behavioural remedies. Qualcomm Incorporated agreed on a deal to acquire NXP Semiconductors NV through Qualcomm River Holdings BV (Qualcomm) on 27 October 2016, and notified the proposed transaction. Qualcomm and NXP are global semiconductor manufacturers headquartered in the United States and the Netherlands respectively. Qualcomm, a leader in mobile semiconductor sector, sought to expand into new sectors such as smart cars and internet of things through the acquisition of NXP that has a strong foothold in the automotive and security semiconductor sectors. The KFTC was particularly concerned the merger would restrict competition by allowing Qualcomm to (1) unilaterally change NXP's licensing policies on NFC patents and (2) technically or contractually link the sales of its baseband chipsets with NXP's NFC and secure element chips. The KFTC noted that this bundling would lead to (1) Qualcomm's increased market dominance in the baseband chipset market and (2) weakened innovation in the mobile device market because Qualcomm's competitors may lose an incentive to invest. Accordingly, the KFTC imposed both structural and behavioural remedies to resolve potential competitive concerns. First, the KFTC's structural remedy ordered Qualcomm to divest NXP's standard essential NFC patents and a part of NXP's non-standard essential NFC patents to a third party. In addition, the KFTC's behavioural remedy was to prohibit Qualcomm from linking the sale of NFC chips to licensing terms for standard essential NFC patents. On 26 July 2018, however, Qualcomm and NXP Semiconductors NV terminated the proposed transaction, and Qualcomm withdrew its merger filing. Subsequently, in November 2018, the KFTC rescinded as moot its previously granted conditional clearance.
The recent line of cases shows that the KFTC, in an attempt to address competitive concerns, is increasingly imposing even behavioural remedies in addition to more traditional structural remedies. Moreover, the KFTC is strengthening cooperation with foreign competition authorities, particularly in assessing global M&As and devising remedial measures so as to coordinate the structure, duration and timing of imposed measures.
In 2018, the KFTC imposed fines amounting to 327 million won with respect to 23 transactions that were not reported or that were reported late, and two additional transactions that were properly reported but the parties implemented the reported transaction without observing mandatory applicable waiting period or clearance requirements. The figures represent a 10.7 per cent decrease in the number of such 'failure to file' cases as compared with 2017, when the KFTC imposed 577 million won in fines with respect to 28 transactions that were not reported or that were reported late.
Other noteworthy merger transactions that the KFTC reviewed in 2018 include the following transactions: Disney/Twenty-First Century Fox; Takeda/Shire; UTC/Rockwell Collins; King (Cayman) Holdings/Thompson Reuters; AXA/XL Group; Starfruit Finco/Akzo Nobel Chemicals; Safa/Zodiac Aerospace; Sumitomo Corporation Global Metals/Sumitomo Corporation; and Renesas Electronics/Integrated Device Technology.
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 KFTC Merger Review Guidelines provide a 15-day waiting period, in principle, for the following types of transactions that may qualify for the simplified review process:
- transactions between affiliates;
- transactions that do not form any controlling relationship (within the target);
- 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);
- a conglomerate merger where no product or service substitutability or complementarity exists between the parties due to the particular nature of the relevant market; or
- participation in the establishment of a private equity fund or transaction involving an asset-backed securitisation company.
In addition, under the recently revised KFTC Merger Review Guidelines, 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,6 provided that the facts and the market conditions have not 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.On 20 December 2017, in an effort to make its review process more efficient, the KFTC announced an amendment to its Merger Review Guidelines. Following the amendment, the KFTC is now required to complete within 15 calendar days of the filing date its review of foreign joint ventures with no effects in the Korean market, but that technically meet the jurisdictional thresholds, including the 30 billion Korean sales (or local Korean nexus sales) requirement. However, except for in very obvious cases, it may not be as simple to qualify for the newly expanded fast-track review because in some cases the threshold question (i.e., no effect in the Korean market) itself may require a substantial amount of substantive analysis and review. In addition, the KFTC tends to grant clearance sooner if a given transaction has no conceivable effect in the Korean market in any event regardless of the transaction type and whether it is nominally marked as a fast-track case or normal process case.
Furthermore, on 31 May 2018, the KFTC further amended its Merger Notification Guidelines under which a company that has consolidated worldwide assets or sales of at least 2 trillion won would be required submit a post-merger filing only, and not a pre-merger filing if it acquires shares in another company by way of conversion of investment under the Debtor Rehabilitation and Bankruptcy Act. This was done in an effort to ease the burden on companies in transactions when the target is in bankruptcy proceedings under the supervision of the bankruptcy court.
The KFTC also revised its substantive merger review and competitive effects analysis modes. Specifically, effective 27 February 2019, the revised KFTC Merger Review Guidelines also include two new important concepts: innovation markets and information assets.7 First, defining 'innovation markets' as markets where companies rely heavily on their research efforts to stay ahead of competition, the KFTC seeks to apply a whole new set of criteria when assessing such innovation mergers. According to the KFTC's revised Merger Review Guidelines, the KFTC may define an innovation market if the industry requires research and development and if one of the merging companies is a competitive innovator in the sector. Further, deeming it difficult to calculate market share in the innovation market purely based on sales, the KFTC seeks to assess market concentration levels based on a number of additional factors, such as research and development expenditure, number of patents and number of competitors. Lastly, the KFTC will assess a proposed merger as harmful for innovation based on the following criteria: whether merging companies have the ability to restrict innovation and have the incentive to do so after the merger; whether there is a sufficient number of innovative competitors after the merger, and whether merging companies are significantly more capable of innovation than competitors.
Second, the revised KFTC Merger Review Guidelines attempt to assess anticompetitive effects arising out of companies' use of 'information assets', which have the same definition as 'Big Data'. After an extensive consultation period, the KFTC decided not to adopt a separate analytical standard to review such mergers, but instead decided to recognise simply that, in certain mergers, information assets can be a unique and critical factor. In such cases, the KFTC will carefully review factors such as: whether the merging companies would have an advantage in systematically collecting, managing, analysing, and using data for various purposes; whether the merging companies would be able to limit competitors from accessing such data or information assets; whether the merging companies would be able to lower the quality of service related to data protection and security; and whether the merging companies would be able to increase entry barriers by the size of the dataset or the network effect.
Meanwhile, the KFTC Merger Notification Guidelines exempt companies that qualify for the simplified review process from submission of market status data. For a conglomerate merger, the KFTC simplified the reporting process by requiring the market status data for the top product only.
With respect to confidentiality issues, the materials submitted to the KFTC at the time of filing of the notification and thereafter 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:
- prohibit the relevant transaction altogether;
- order the total or partial disposal of assets, shares or both;
- restrict the scope or method of operation of the relevant entity;
- order the resignation of relevant directors;
- order the transfer of business;
- order the relevant parties to disclose the fact that they have received the corrective order; and
- 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 transaction amount per 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. 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 (or local sales test), which requires both foreign entities to achieve turnover or sales in or into Korea of 30 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 seek provisional clearance by filing a provisional merger notification before the execution of the relevant agreement, as long as they submit a signed letter of intent, MOU or other equivalent documents with 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 recently revised KFTC Merger Review Guidelines 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
On 10 November 2017, the KFTC Task Force for Enhancing Law Enforcement System (KFTC TF) released an interim report that includes various recommendations for improving antitrust and consumer protection regulations in Korea. Then, on 23 February 2018, the KFTC TF released the final version of the report by fine-tuning the previously discussed agenda and adding seven new additional topics. While this comprehensive legislative reform initiative focuses mostly on non-merger issues, there are talks on improving the merger control regime as well. Thus, as part of the most far-reaching statutory reform initiative since the MRFTA was initially enacted in 1980, pending before the National Assembly is a proposal to add an alternative merger filing threshold based on the value of the transaction at issue, similar to the revised merger notification rule recently adopted in Germany and Austria. Citing the Facebook/WhatsApp transaction as a prime example of how its current asset/turnover size-based merger-filing thresholds may fail to subject certain global transactions with potentially significant effects on Korean commerce to its mandatory merger notification regime, the KFTC hopes to fill what it sees as a loophole and strengthen its ability to review large global mergers before they are consummated.
Furthermore, the KFTC is strengthening inter-competition authority cooperation with foreign competition authorities, particularly in the assessment of global M&As. In particular, for the Dow/DuPont case, the KFTC made clear that it closely cooperated and discussed the review process with its foreign counterparts such as the US FTC and JFTC to impose structural remedies.11 The KFTC also recently cooperated with foreign competition authorities with respect to essentially all of the major global transactions, including the Praxair/Linde transaction where the KFTC imposed substantial divestiture obligations similar to the EC and US FTC's signification divestiture requirements in that transaction. This kind of close coordination with foreign competition authorities, especially those in the European Union and United States, is expected to grow even more and play an exceedingly important role in the future.
Therefore, parties to global transactions triggering merger filings in multiple jurisdictions including Korea should expect the KFTC to be in even closer contact with other competition authorities that are also reviewing the same transaction.
1 Sai Ree Yun is the honorary managing partner, 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 Keon Woong Kim, Young Lan Yea and Hee Jin Yun, associates, and Geary Choe, foreign associate, 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.
3 These two thresholds were recently amended in 2017. Under a 2017 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 (5 March 2019), available in Korean at www.ftc.go.kr/www/selectReportUserView.do?key=10&rpttype=1&report_data_no=8098.
5 KFTC press release (2 October 2018), available in Korean at www.ftc.go.kr/www/selectReportUserView.do?key=10&rpttype=1&report_data_no=7942.
6 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.
7 KFTC press release (26 February 2019), available in Korean at www.ftc.go.kr/www/selectReportUserView.do?key=10&rpttype=1&report_data_no=8094.
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.'
11 KFTC press release (7 April 2017), available in Korean at www.ftc.go.kr/www/selectReportUserView.do?key=10&rpttype=1&report_data_no=7251.