Unlisted Companies with Less Than 20% Ownership by the Controlling Family and Assets Under 10 Billion Won Are 'Exempt from Disclosure Obligations'

The Entire Amendment to the Enforcement Decree of the Fair Trade Act Passed at the Cabinet Meeting

Clarification of Disclosure Standards for Overseas Affiliates
Asset Threshold for Recognition as Venture Holding Company Reduced from 500 Billion KRW to 30 Billion KRW
Up to 40% External Funding Allowed for CVCs
PEF-Exclusive Groups Excluded from Large Business Group Designation

[Sejong=Asia Economy Reporter Joo Sang-don] Going forward, small unlisted companies with total assets under 10 billion KRW that are not subject to self-dealing regulations because the controlling family’s shareholding is below 20% will be exempt from disclosure obligations related to ownership structure, financial structure, and significant management activities. Additionally, public interest corporations must obtain board approval and disclose if internal transaction amounts exceed 5% of either total net assets or basic net assets, or 5 billion KRW.

The Fair Trade Commission announced that the "Enforcement Decree of the Fair Trade Act (complete revision)" containing these provisions passed the Cabinet meeting on the 21st.

The previously amended Monopoly Regulation and Fair Trade Act (Fair Trade Act) mandates disclosure of stock ownership status of overseas affiliates directly or indirectly invested in by the controlling family holding 20% or more in overseas and domestic affiliates. The specific disclosure contents, scope of indirect investment, and exemption reasons were delegated to be defined in the Enforcement Decree.

Accordingly, the revised Enforcement Decree requires the controlling person to disclose general information of overseas affiliates (company name, country of incorporation, establishment date, business details), shareholder status, and affiliate investment status. It also includes companies that indirectly own shares of overseas affiliates by connecting shareholdings among one or more overseas affiliates that directly own domestic affiliate shares. However, disclosure obligations are exempted in cases such as the controlling person’s unconsciousness, missing person declaration, or commencement of adult guardianship. Also, if the laws of the country of incorporation prohibit providing shareholder registers, relevant shareholder information may be excluded from disclosure.

The scope of public interest corporations required to obtain board approval and disclose was also specified. The amended Fair Trade Act mandates public interest corporations belonging to disclosure-target business groups to obtain board approval and disclose when acquiring or disposing of domestic affiliate shares or conducting internal transactions, delegating the criteria for internal transaction amounts to the Enforcement Decree. The revised Enforcement Decree sets the internal transaction amount subject to board approval and disclosure as transactions exceeding 5% of the larger amount between total net assets (capital) or basic net assets (capital stock), or 5 billion KRW. The counterparties in goods and services transactions are defined as companies owned 20% or more by the controlling family (including subsidiaries under the Commercial Act).

Furthermore, the revised Enforcement Decree exempts disclosure obligations for significant matters of small unlisted companies with controlling family shareholding of 20% or more and that are not self-dealing regulation targets owning more than 50% of shares, if their total assets are under 10 billion KRW.

The investment requirement for the "Executive Independent Management" system, which excludes companies separately controlled by executives of large business groups from the group designation if they are unrelated in terms of executive dual roles, investment, or debt guarantees, has been relaxed. The current system prohibits investment between executive-side affiliates and controlling person-side affiliates, which has been criticized for limiting large business groups from utilizing experienced and capable entrepreneurs. The revised Enforcement Decree allows up to 3% shareholding (15% for unlisted companies) in controlling person-side affiliates held prior to appointment when appointed as non-executive directors only.

The requirements for the "Venture Holding Company System," designed to promote investment in venture companies, have also been eased. The revised Enforcement Decree reduces the asset threshold for recognition as a venture holding company from the current 500 billion KRW to 30 billion KRW and allows subsidiaries of venture holding companies to include small and medium enterprises (SMEs) with annual R&D expenditures of 5% or more of sales, in addition to venture companies. Considering that SMEs which are subsidiaries of venture holding companies (venture companies and SMEs with R&D expenditures of 5% or more of sales) require a considerable period to realize corporate value, the period for deferring affiliate inclusion into large business groups has been extended from 7 years to 10 years. However, to prevent self-dealing issues, venture holding companies cannot be established if the controlling family holds shares in the holding company’s subsidiaries, grand-subsidiaries, or great-grand-subsidiaries, and venture holding companies must submit annual reports on internal transactions with holding, subsidiaries, grand-subsidiaries, great-grand-subsidiaries, and related parties to the Fair Trade Commission.

The cap on external funding for corporate venture capital (CVC) held by general holding companies is set at 40%, the maximum level allowed by the amended Fair Trade Act. Also, the deferral period for affiliate inclusion of SMEs invested in by CVCs, similar to subsidiaries of venture holding companies, has been extended to 10 years.

A new provision excludes private equity fund (PEF)-exclusive groups from designation as large business groups. The current Enforcement Decree excludes financial and insurance business-only groups (financial-exclusive groups) from large business group designation, but PEF-exclusive groups were not excluded despite low concerns about economic concentration. The revised Enforcement Decree stipulates that "PEF-exclusive groups" and groups composed only of financial, insurance companies, and PEF-related companies are excluded from large business group designation.

The revised Enforcement Decree also requires notification of business combinations when the transaction amount based on merger amount or other transaction amount is "600 billion KRW or more" and the acquired company sells or provides goods or services to "1 million or more customers monthly in the domestic market" or has "annual domestic R&D expenditures of 30 billion KRW or more."

Additionally, the scope of information subject to the prohibition of information exchange collusion is defined as cost, shipment volume, inventory volume, sales volume, transaction conditions, or payment terms related to goods and services. The amended Fair Trade Act allows cancellation of penalty mitigation benefits granted to those who voluntarily report collusion if they provide statements in court that differ from those during investigation. The Enforcement Decree specifies cancellation reasons as: ▲denial of important statements or submitted materials during trial ▲submission of false materials ▲failure to testify or appear in court without justifiable reason ▲filing lawsuits denying the voluntarily reported collusive acts.

New penalty criteria for written fact-finding investigations have also been established. The revised Enforcement Decree allows imposition of fines up to 100 million KRW on businesses and up to 10 million KRW on executives for failure to submit materials or submission of false materials related to written fact-finding investigations, with amounts differentiated based on violation frequency and intentionality.

A Fair Trade Commission official stated, "This complete revision of the Enforcement Decree rationally improves large business group policies by considering regulatory necessity and corporate burden, enhancing regulatory effectiveness and efficiency. It is expected to strengthen the foundation for innovative growth by creating conditions for revitalizing venture investment through venture holding companies and CVCs. The Fair Trade Commission plans to complete the enactment and revision of 47 administrative rules related to the Fair Trade Act before the revised law takes effect."

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