General Holding Company-Owned CVCs Allowed to Raise Up to 40% External Funding

Fair Trade Commission Announces Legislative Notice for Complete Amendment of the Enforcement Decree of the Fair Trade Act

[Asia Economy Reporter Joo Sang-don] External funds can now be injected up to 40% into funds created by corporate venture capital (CVC) held by general holding companies. Additionally, subsidiaries of venture holding companies that are small and medium-sized venture enterprises will have their affiliation with large business groups deferred for up to 10 years.

On the 3rd, the Fair Trade Commission announced that it will open a 40-day legislative notice period until July 14 for the full amendment of the Enforcement Decree of the Monopoly Regulation and Fair Trade Act containing these details.

The Fair Trade Act, which was fully amended last December and is scheduled to be enforced this December, stipulates that the ceiling for external funds invested in funds created by CVCs held by general holding companies?namely, small and medium business startup investment companies and new technology business finance specialized companies?should be set within 40% by the enforcement decree. Accordingly, the amendment to the enforcement decree sets the ceiling for external funds at the maximum level of 40% permitted by law.

The recognition criteria for venture holding companies have also been relaxed. The amendment reduces the total asset requirement for recognition as a venture holding company from the current 500 billion KRW to 30 billion KRW and includes not only venture companies but also "small and medium enterprises with annual R&D expenditures of 5% or more of sales" as subsidiaries of venture holding companies. Furthermore, considering that it takes a considerable period to realize the corporate value of small and medium venture enterprises that are subsidiaries of venture holding companies, the deferral period for their affiliation with large business groups has been extended from the current 7 years to 10 years. The deferral period for affiliation of small and medium venture enterprises invested in by CVCs has also been extended to 10 years.

However, to prevent issues such as private benefit appropriation through abuse of the venture holding company system, if the controlling family of a publicly disclosed business group holds shares in subsidiaries, grandchild companies, or great-grandchild companies, the entity cannot be recognized as a venture holding company. Additionally, venture holding companies are required to submit annual reports to the Fair Trade Commission on internal transactions with holding, subsidiary, grandchild, great-grandchild companies, and related parties.

A new provision excluding institutional private equity fund (PEF)-dedicated groups from designation as large business groups has also been introduced. The existing enforcement decree excludes business groups engaged only in finance and insurance from designation as large business groups, but PEF-dedicated groups were not excluded despite low concerns about economic concentration. Accordingly, the amendment excludes "PEF-dedicated groups" and "business groups composed only of companies engaged in finance and insurance and PEF-related companies" from designation as large business groups.

The criteria for corporate merger notification based on transaction amounts have been specified. The amended Fair Trade Act requires notification of corporate mergers when the transaction amount exceeds a certain level and the acquired company is "substantially active" in the domestic market. Accordingly, the amendment to the enforcement decree stipulates that corporate merger notification is required when the transaction amount is "600 billion KRW or more" and the company either "sells or provides goods or services to more than 1 million people monthly in the domestic market" or "has an annual domestic R&D budget of 30 billion KRW or more."

Additionally, the amendment specifically defines the scope of information exchange collusion to include ▲cost of goods or services ▲shipment volume, inventory volume, sales volume ▲terms of goods or services transactions or payment conditions.

The amendment also includes improvements related to the corporate group system. The current independent management system for executives prohibits investment between executive-side affiliated companies and controlling shareholder-side affiliated companies, which is considered excessively strict and limits large business groups from utilizing professionals with expertise and capabilities. Therefore, the amendment allows a controlling shareholder to hold less than 3% (15% for unlisted companies) of shares in affiliated companies on the controlling shareholder side that were held prior to the appointment of a specific individual as a non-executive director of a large business group company. Furthermore, to strengthen post-management of independent family management, companies newly acquiring control within three years after family separation decisions must also submit relevant data.

Disclosure burdens for small unlisted companies have been eased. Small unlisted companies belonging to publicly disclosed business groups with controlling family shareholding below 20% and total assets under 10 billion KRW are exempt from disclosure obligations regarding ownership and control structure and financial status.

Also, the controlling shareholder (controlling person) must disclose general information (company name, country of location, establishment date, business content), shareholder status, and affiliated company investment status of overseas affiliates. Companies that indirectly own shares of domestic affiliates through one or more investments in overseas affiliates that directly own domestic affiliate shares are also included in the disclosure scope. However, disclosure obligations are exempted in cases of the controlling person's unconsciousness, declaration of disappearance, commencement of adult guardianship, or when the laws of the country of location prohibit providing shareholder registers.

The amended Fair Trade Act mandates board resolution and disclosure for large-scale internal transactions of public interest corporations belonging to publicly disclosed business groups. Accordingly, similar to current large-scale internal transaction board resolution and disclosure requirements, the transaction amount subject to board resolution and disclosure is defined as "transactions amounting to 5% or more of total net assets or basic net assets, whichever is greater, or 5 billion KRW or more," and the transaction counterparties are defined as "companies in which the controlling family holds 20% or more (including subsidiaries under the Commercial Act)."

Additionally, failure to submit written survey data or submission of false data may result in penalties of up to 100 million KRW (20 million KRW for the first violation) for business operators and up to 10 million KRW (2 million KRW for the first violation) for executives.

The Fair Trade Commission plans to complete the amendment after collecting additional opinions from economic circles, civic groups, and related ministries during the legislative notice period, followed by regulatory review, legal affairs office review, and Cabinet meeting.

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