'Hana Financial M&A' Holding Companies OK, Securities Firms NO?…Financial Authorities' Approval Dilemma (Comprehensive)

Financial Services Commission: "Application of the Holding Company Act... Major Shareholder Eligibility Issues Do Not Constitute Grounds for Review Suspension"
Different from Hana Financial Investment M&A... Points Out Legal Contradictions in Licensing Regulations

[Asia Economy Reporters Haeyoung Kwon, Minyoung Kim] Hana Financial Group has applied to financial authorities for approval to incorporate The-K Non-Life Insurance as a subsidiary. Initially, concerns over the suitability of Hana Financial Group’s major shareholder were expected to hinder the licensing process, but since the Financial Holding Companies Act, rather than the Financial Company Governance Act, applies, it is unlikely to become a major obstacle. Some argue that the financial authorities have exposed a 'legal contradiction' in licensing regulations, as they have suspended the merger and acquisition (M&A) review of Hana Financial Investment’s asset management company?an affiliate of Hana Financial Group?for over two years due to the major shareholder suitability issue.

According to financial authorities and the financial sector on the 16th, Hana Financial Group submitted an application for approval to incorporate The-K Non-Life Insurance as a subsidiary to the Financial Services Commission on the 9th and is currently under review. Last month, Hana Financial signed a stock purchase agreement to acquire 70% of The-K Non-Life Insurance shares from the Korea Teachers’ Credit Union for 77 billion KRW.

A Financial Services Commission official stated, "We are currently reviewing Hana Financial Group’s application to incorporate The-K Non-Life Insurance as a subsidiary," adding, "Major shareholder suitability issues are not grounds for suspension in this review, so in principle, they should not affect the examination."

Initially, the financial sector viewed the major shareholder suitability review by financial authorities as one of the biggest hurdles in Hana Financial Group’s acquisition of The-K Non-Life Insurance. This is because Chairman Kim Jung-tae of Hana Financial Group was reported to the prosecution by the People’s Solidarity for Participatory Democracy in June 2017 over allegations that he gave preferential promotions to a Hana Bank employee who managed funds related to the Choi Soon-sil scandal, and the prosecution investigation is still ongoing. Previously, the Financial Services Commission delayed approval for over two years for Hana Financial Investment’s acquisition of a 51% stake in Hana UBS Asset Management, a deal with Swiss UBS AG, citing this issue. Therefore, it was expected that approval for the acquisition would not be easy in terms of consistency and fairness of licensing reviews. However, unlike with Hana Financial Investment, the Financial Services Commission has decided not to suspend the subsidiary incorporation review for Hana Financial Group.

The reason for the differing stances of financial authorities regarding M&A licensing reviews for two companies within the same financial group is due to the different laws applied. Hana Financial Investment is subject to the Financial Company Governance Act as an individual law, whereas Hana Financial Group is governed by the Financial Holding Companies Act.

A Financial Services Commission official explained, "The Financial Company Governance Act includes provisions allowing suspension of major shareholder suitability reviews under certain circumstances, whereas the Financial Holding Companies Act does not," adding, "The Financial Holding Companies Act will be applied to Hana Financial Group’s review of The-K Non-Life Insurance subsidiary incorporation, and the presumption of innocence applies to unresolved matters, so the review will proceed accordingly."

In this context, some in the financial sector point out a legal contradiction in licensing regulations. Financial authorities apply the Financial Holding Companies Act when the asset size exceeds 100 billion KRW during subsidiary incorporation reviews, and apply the Financial Company Governance Act as an individual law if below that threshold. The problem is that grounds for suspending reviews due to major shareholder suitability issues exist in the Financial Company Governance Act but not in the Financial Holding Companies Act. Particularly, since financial holding companies and banks are excluded from the scope of the Financial Company Governance Act, holding companies do not undergo separate major shareholder suitability reviews during subsidiary incorporation.

As a result, paradoxically, holding companies with much larger asset sizes do not undergo major shareholder suitability reviews, while smaller individual companies must undergo such reviews and may be unable to obtain M&A approval for over two years. This highlights the need to amend the Financial Company Governance Act.

A financial sector official commented, "In the case of Hana Financial Group, which faces controversy over major shareholder suitability, the financial authorities’ stance on M&A for the holding company and its subsidiaries should be consistent from the perspective of regulatory uniformity," adding, "Regardless of whether it is appropriate to restrict the urgent M&A activities of the financial holding company due to ongoing prosecution investigations stemming from civic group complaints, the current Financial Company Governance Act exposes many legal contradictions and thus requires legislative review."

Since financial authorities pledged last year through the Financial Supervisory Innovation Plan not to deliberately delay licensing reviews, it is expected that review delays will be difficult unless there are special reasons. However, there remains a possibility of variables, as Hana Bank’s relationship with the Financial Supervisory Service has been strained after deleting internal documents prior to the FSS’s inspection of overseas interest rate-linked derivative-linked funds (DLF) last year.

Si-yeon Lee, a research fellow at the Korea Institute of Finance, said, "There is a definite need to supplement the excessively relaxed standards for major shareholder suitability of bank holding companies," but also noted, "As control weakens further down the chain to subsidiaries and sub-subsidiaries, there are calls to strengthen control over subsidiaries, so it may be difficult to apply the same suitability standards for bank holding companies as for other subsidiaries."

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