"Are We Now a Big Corporation Too?"...Why Some Are Reluctant to Be Designated as a Large Business Group

Regulatory Burdens Including Disclosure Obligations and Restrictions on Private Interest Abuse

Kim Jae-shin, Vice Chairman of the Fair Trade Commission, is briefing on the designation of 76 publicly disclosed business groups this year at the Government Sejong Complex in Sejong City on the morning of the 27th. / Photo by Yonhap News

[Asia Economy Reporter Lim Juhyung] The Fair Trade Commission (FTC) announces the list of large business groups every year based on total assets. Being designated as a large business group means having significant influence and asset size domestically, but not all owners welcome this. Once designated as a large business group, they are subject to various disclosure obligations and oversight by the government and civic groups, and if some data is omitted or falsely submitted, they may face criminal penalties.

Domestic large business groups are broadly divided into Disclosure Target Business Groups (with total assets of 5 trillion KRW or more) and Mutual Investment Restriction Business Groups (with total assets of 10 trillion KRW or more) according to asset size. Disclosure Target Business Groups are subject to disclosure and reporting obligations under the Fair Trade Act and regulations against private interest exploitation by the controlling family (same person), while Mutual Investment Restriction Business Groups are additionally subject to prohibitions on mutual investment, circular investment, debt guarantees, and restrictions on voting rights in financial and insurance companies.

Business groups with total assets of 5 trillion KRW or more are classified as Disclosure Target Business Groups. Since this is the entry point toward becoming a large enterprise, they are sometimes called "quasi-large enterprises." Disclosure Target Business Groups are obligated to disclose important matters according to the Fair Trade Act, and companies belonging to these groups must prepare and disclose key information in prescribed formats.

This includes company overview details such as representatives, establishment dates, and dates of affiliate inclusion, as well as financial status including assets, liabilities, and capital, and the stock ownership status of special related parties. In particular, special related parties are defined under current law as "spouses, blood relatives within six degrees, and relatives within four degrees," but the controlling family must verify and secure data on stock ownership even of distant relatives such as paternal uncles and maternal cousins, which can be a significant burden. If such designated data is omitted or falsely submitted, criminal penalties may be imposed depending on intent.

Regulations prohibiting unfair provision of benefits to special related parties, known as private interest exploitation regulations, also apply. The regulation targets listed and unlisted companies where the controlling family holds 20% or more shares, and subsidiaries where these companies hold more than 50% of shares. The FTC does not ban all internal transactions within large business groups, but changes in assets or internal changes of these companies must be disclosed regularly. Especially for companies with vertical integration between finished products and parts, internal transaction ratios tend to be high, which can be burdensome.

Large business groups with total assets of 10 trillion KRW or more are designated as Mutual Investment Restriction Business Groups. Companies belonging to these groups are subject to enhanced regulations including prohibitions on mutual investment and debt guarantees, as well as restrictions on voting rights in financial and insurance companies, in addition to disclosure obligations.

Accordingly, newly designated Mutual Investment Restriction Business Groups must resolve debts within two years from the designation or inclusion date if they incorporate companies with debt guarantees as new affiliates. This means they may face considerable restrictions when acquiring companies or establishing subsidiaries.

As a result, Mutual Investment Restriction Business Groups may need to drastically reform their governance structures to increase transparency of financial changes in affiliated companies and prevent legal issues in advance.

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