Indirect Transactions Also Subject to 'Total Owner Family Private Interest Appropriation'... Excluded If Urgency, Efficiency, and Security Are Recognized

Fair Trade Commission, 'Establishment and Implementation of Guidelines for Reviewing Unfair Benefit Provision to Special Related Parties'

[Sejong=Asia Economy Reporter Joo Sang-don] Going forward, the Fair Trade Commission (FTC) will include not only direct transactions but also indirect transactions through third parties as subjects for judging unfair profit provision acts to the controlling family. However, transactions recognized for urgency, efficiency, and confidentiality will be excluded.

The FTC announced that it has established the "Guidelines for Reviewing Unfair Profit Provision Acts to Special Related Parties," which will be implemented starting from the 25th.

The review guidelines clarify which cases constitute illegal acts under current law when the FTC enforces the law, and they do not introduce new regulations. Previously, after the enactment of Article 23-2 of the Fair Trade Act (effective February 2014), the FTC established the "Guidelines for Prohibiting Private Interest Appropriation by Controlling Families" in December 2016. Subsequently, in response to demands for clearer legal standards for determining violations, the FTC created these review guidelines in the form of administrative rules.

The prohibition on unfair profit provision acts to special related parties does not ban all transactions among affiliated companies within publicly disclosed business groups. It prohibits ▲ companies where special related parties (the same person and relatives) hold 30% or more shares in listed companies or 20% or more in unlisted companies ▲ and transactions that confer unfair profits to special related parties through significantly favorable terms, provision of business opportunities, or transactions of considerable scale without reasonable consideration or comparison.

The guidelines specify that whether the provider and recipient qualify as such is judged based on the time the profit provision act occurred. The application period starts from the date the provider or recipient receives designation as a business group or notification of affiliation, and it reflects the supplementary provisions that exempt transactions ongoing at the time of law enforcement (February 14, 2014) from regulation for one year. Shareholding ratios are calculated including only direct shares for special related parties, but in cases of nominee or indirect holdings, these are also considered direct shares.

In particular, the guidelines explicitly state that unfair profit provision acts can occur through both direct transactions between the provider and recipient and indirect transactions mediated by third parties. Ryu Yong-rae, head of the FTC’s Internal Transaction Monitoring Division, explained, "After the administrative notice in November last year, there were objections to including indirect transactions, so we requested a legal interpretation from the Ministry of Government Legislation. As a result, the Legal Interpretation Review Committee also judged that the scope of applicable transactions includes not only direct transactions but also indirect transactions mediated by third parties."

Regarding transactions under significantly favorable conditions, which serve as judgment criteria for violation types, the calculation of normal prices for capital and labor transactions applies the normal interest rates and normal salary calculation methods from the "Guidelines for Reviewing Unfair Support Acts." For asset, goods, and service transactions, according to precedents, the price is sequentially applied as ▲ the price between independent parties without special relations in the same transaction case ▲ and the price adjusted reasonably for differences in transaction conditions in similar cases.

Whether a business opportunity constitutes a considerable benefit is judged based on the provider or the company controlled by the provider, and passive provision such as voluntarily giving up promising business opportunities is also included.

For transactions of considerable scale without reasonable consideration or comparison, detailed criteria for reasonable consideration and comparison are presented, and if a substantive competitive bidding process has been conducted, it is presumed that reasonable consideration and comparison have occurred.

However, cases where the difference from the normal price is less than 7%, and the total transaction amount between parties in the relevant year is less than 5 billion KRW (20 billion KRW for goods and services), or where the total transaction amount between parties in the relevant year is less than 20 billion KRW and less than 12% of the counterparty’s average sales, are excluded from application.

Transactions recognized for efficiency improvement, confidentiality, and urgency are also excluded from regulation. Efficiency exclusion is limited to cases where procedures such as competitive bidding or receiving proposals themselves cause inefficiency to the extent that the effect of efficiency improvement is objectively clear. For transactions requiring confidentiality, even if they appear to fall under the scope, comprehensive consideration is given to whether security measures are prepared in advance to maintain information security and whether there are cases of transactions with independent external companies in the market. In particular, urgent business needs are defined as situations where there is no time to conduct reasonable consideration and comparison in the counterparty selection process, and it is specified that this only lasts for the period required to find alternative trading partners.

Director Ryu said, "We plan to conduct customized explanations and promotions targeting companies belonging to publicly disclosed business groups and related workers," adding, "We will continue to monitor to prevent violations of the law stipulated in the review guidelines and strive to prevent unfair profit provision acts to special related parties."

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