Exceptions to Work Concentration When 'Urgency' Is Proven... Will It Apply to 'New Coronavirus' Cases?

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[Sejong=Asia Economy Reporter Joo Sang-don] Due to the spread of the novel coronavirus infection (Wuhan pneumonia), domestic companies with factories in China are also on high alert. Samsung Electronics and LG Electronics have suspended operations at their Chinese factories or delayed the resumption of production schedules. In the case of Hyundai and Kia Motors, disruptions in the supply of Chinese-made parts have brought the risk of production suspension, prompting them to seek alternative procurement of parts from domestic and Southeast Asian sources. However, if alternative parts are procured through affiliated companies in which related parties hold certain shares, it may be considered as unfair internal transactions. Nevertheless, exceptions may be granted if 'urgency' is recognized.

Earlier in November last year, the Fair Trade Commission (FTC) announced the 'Draft Guidelines on Unfair Profit Provision to Related Parties,' specifying the exclusion criteria for unfair internal transactions. According to this, even if reasonable consideration or comparison procedures are not followed for substantial transactions with related-party companies, it is not considered a violation of the law if efficiency, security, or urgency is recognized.

The FTC defines transactions requiring urgency as "unavoidable transactions due to urgent business needs caused by external factors such as sudden economic changes, financial crises, natural disasters, hacking, or computer virus-induced system failures." External factors refer to incidents caused by forces outside the company that are unforeseeable (lack of foreseeability) or unavoidable even if foreseeable (lack of avoidability).

The FTC cites examples such as "when a significant portion of key materials, parts, or equipment for product production is imported from foreign countries or foreign companies, and a natural disaster occurs in that foreign country or the foreign government imposes export regulations on the Republic of Korea, causing disruptions in normal supply."

The novel coronavirus can be considered an external factor to the company, thus potentially qualifying as an exception to unfair internal transaction rules based on urgency.

However, to apply this exception, the company must prove certain conditions. Regarding 'urgent business needs,' the guidelines define it as "a situation where there is no time to reasonably consider or compare other business partners during the selection process." This includes ▲ cases where the disruption must be restored in a short period, and ▲ cases where, considering the nature of the product or market conditions, selecting a business partner would take considerable time, causing disruptions in achieving business objectives such as production, sales, or technology development.

To avoid unfair internal transactions, the company must prove that it is difficult to find alternative suppliers other than affiliated companies for production.

An FTC official stated, "For example, if due to the closure of Chinese factories caused by the novel coronavirus, production is carried out at a domestic affiliate, urgency may be recognized. However, since it must be proven that not conducting transactions through the affiliate urgently would cause irreparable damage or that there is no alternative means to replace this transaction, whether urgency is recognized will vary depending on the case."

This content was produced with the assistance of AI translation services.