"Regulation on Holding Company Shareholding Ratio Causes Loss of 240,000 Jobs"…Business Community Submits Opinion Letter Urging 'Cautious Introduction' of Fair Trade Act Amendment

Five Economic Organizations Including KEC Submit Opinion Letter Urging Cautious Introduction of Fair Trade Act Legislative Notice "Includes Many Regulations That Suppress Economic Activity"

[Asia Economy Reporter Kim Hyewon] Five economic organizations, including the Korea Employers Federation, have requested the Fair Trade Commission to carefully review the Fair Trade Act amendment bill, which the government announced for legislative notice last month, stating that it contains numerous regulations that generally suppress economic activities.

On the 20th, economic organizations such as the Korea Employers Federation, the Federation of Korean Industries, the Korea Association of Mid-sized Enterprises, the Korea Listed Companies Association, and the KOSDAQ Association announced that they submitted a joint opinion letter from the business community containing these points to the Fair Trade Commission.

The recently announced Fair Trade Act amendment bill mainly includes ▲strengthening regulations on holding company shareholding ratios ▲expanding the scope of unfair profit appropriation regulations ▲abolishing exclusive prosecution rights ▲raising the upper limit of fines.

These economic organizations argue that the amendment bill is a regulation-focused law that hinders corporate investment and job creation. A representative example is the increase in mandatory shareholding ratios for subsidiaries and sub-subsidiaries of holding companies. The amendment requires newly converted holding companies or existing holding companies newly incorporating subsidiaries and sub-subsidiaries to raise their shareholding ratios by 10 percentage points from the current 20% for listed companies and 40% for unlisted companies, respectively.

However, the business community points out that when general business groups convert to a holding company system, the cost of acquiring shares increases, inevitably reducing the capacity for new investment and job creation. Based on last year’s data, among 34 mutual investment-restricted business groups, if 16 non-holding company business groups convert to holding companies, approximately KRW 30.9 trillion would be additionally required just to secure shares. Assuming this cost is invested, it is estimated that 244,086 jobs could be created.

For example, if SK Telecom is subject to the shareholding ratio regulations under the Fair Trade Act amendment, SK Telecom would need to invest KRW 6.2 trillion to purchase additional shares of SK Hynix. It is estimated that the same investment could create about 40,000 jobs.

This conflicts with the government’s policy, which has encouraged conversion to holding companies. Since introducing the holding company system in 1999, the government has actively promoted the transition of business groups to holding company structures through continuous deregulation. These economic organizations stated, "The sudden change in the long-standing policy of deregulating holding companies undermines trust in government policies and causes side effects such as deterioration of the business environment." It is known that no other country in the world regulates holding company activities in advance as South Korea does.

Concerns have also been raised that expanding the scope of unfair profit appropriation regulations under the legislative notice will reduce transactions between vertically integrated affiliates, lowering transaction efficiency. If the controlling family sells shares held in affiliates to comply with regulations, it may be perceived as a signal to downsize or abandon business, causing stock prices to fall and minority shareholders to suffer. When the unfair profit appropriation regulation was introduced in 2013, the proportion of internal transactions of regulated companies was 15.7%, but it decreased to 11.2% last year.

Strengthening holding company shareholding ratios and expanding the scope of unfair profit appropriation regulations may cause conflicts between systems. The expansion of unfair profit appropriation regulations encourages reducing shares in subsidiaries and sub-subsidiaries, whereas strengthening holding company shareholding ratios requires increasing their shares. These economic organizations appealed, "Holding companies already face more regulations than general business groups, and if the amendment passes, they will suffer from damages caused by conflicts between systems."

Additionally, if exclusive prosecution rights are abolished under the legislative notice, anyone will be able to directly report companies to the prosecution without going through the Fair Trade Commission. This could pose significant risks to small and medium-sized enterprises with insufficient legal response capabilities. According to statistics from the Supreme Prosecutors’ Office, there were 488,954 complaints and accusations in South Korea in 2018, whereas Japan, with twice the population, had only about 10,000 cases annually. These economic organizations said, "In a society where abuse of complaints and accusations is severe enough to be called a 'complaint and accusation republic,' abolishing exclusive prosecution rights may cause considerable confusion due to indiscriminate accusations by competing businesses and overlapping investigations by the Fair Trade Commission and prosecution."

There are serious concerns that the private party’s injunction system could cause irreparable damage to corporate management due to frivolous lawsuits. In manufacturing, where various cooperating companies and processes are interconnected, the suspension of operations by some companies leads to the halt of the entire process, greatly increasing damage caused by private party injunctions. For example, in the automobile industry, the entire process?from steel (raw materials) → parts manufacturing → assembly → logistics → sales?is organically connected, so if one process stops, production and distribution of products are paralyzed. Even if operations resume after being cleared of charges, the revenue loss and credit deterioration that occurred are practically irrecoverable. There is also a constant risk that competitors may abuse the system to harm others and file excessive lawsuits.

These economic organizations stated, "South Korea already imposes strong sanctions on legal violations, including criminal prosecution, corrective measures, fines, and civil damages, in addition to fines." They pointed out, "If fines are raised according to the legislative notice, corporate resources will inevitably focus on managing judicial risks rather than new investments or discovering growth engines." They added, "It is also worth noting that South Korea is the only country in the world where criminal penalties and administrative penalties (fines) are imposed simultaneously for competition law violations."

The legislative notice raised the upper limits of fines according to the type of legal violation. Cartels will increase from 10% to 20% of sales, abuse of market dominance from 3% to 6%, and unfair trade practices from 2% to 4%, respectively.

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