Supreme Court Rules "Fair Trade Commission's Fine on Hyosung for Unfair Support to Affiliates Is Lawful"

Supreme Court, Seocho-dong, Seoul.

[Asia Economy Reporter Choi Seok-jin, Legal Affairs Specialist] The Supreme Court has ruled that the corrective order and fine imposed by the Korea Fair Trade Commission (KFTC) in 2018 for unfair support by Hyosung Group to its affiliate Galaxia Electronics (GE) were lawful.

The Supreme Court's 2nd Division (Presiding Justice Cho Jae-yeon) on the 10th dismissed all appeals filed by Hyosung Group Chairman Cho Hyun-joon and Hyosung affiliates against the KFTC’s fine imposition and other cancellation claims, thereby upholding the lower court’s ruling against the plaintiffs.

The key issue in the appeal was whether indirect transactions are included in unfair benefit provision acts to related parties. The question was whether supporting GE through Total Return Swap (TRS) transactions constituted a violation of the Fair Trade Act.

Regarding this, the court stated, "Under Article 23-2, Paragraph 1, Subparagraph 1 of the pre-amended Fair Trade Act, the prohibition on providing benefits to related parties through fund transactions applies regardless of whether the provision of funds or transaction methods are direct or indirect. Therefore, if the actor mediates a third party to conduct fund transactions with the purpose of conferring unfair benefits to the transaction object, and as a result, the transaction object effectively receives benefits, the act’s requirements are met."

The KFTC judged that when GE faced management difficulties in 2014, Chairman Cho instructed the group to prepare support measures at the group level, and that support was provided to enable GE to raise funds using TRS transactions between Hyosung Investment Development and a Special Purpose Company (SPC). In 2018, the KFTC imposed a corrective order to prevent recurrence of such unfair support and levied a total fine of 2.987 billion KRW.

A TRS (Total Return Swap) contract is an agreement where the holder of the underlying asset (protection buyer) pays the total return of the asset to the counterparty (protection seller) in exchange for fixed interest payments, effectively hedging credit and market risks. This transaction assumes credit and trading risks of the counterparty and functions similarly to a payment guarantee.

At that time, the SPC that acquired 25 billion KRW worth of convertible bonds (CB) issued by GE and Hyosung Investment Development entered into a TRS contract, enabling GE to strengthen its capital and avoid delisting.

The KFTC determined that this transaction process constituted unfair support and unfair benefit provision to related parties under the Fair Trade Act’s types of unfair trade practices.

Hyosung argued that the TRS contract was a bilateral obligation contract and a reasonable investment decision, filing a lawsuit seeking cancellation of the KFTC’s corrective order and fine imposition.

In court, Hyosung contended that unlike the KFTC’s judgment, the TRS contract in question had independent benefits including settlement profit expectations at maturity and call options, so it could not be seen as a gratuitous payment guarantee of the CB. Even if the TRS contract enabled CB issuance, it was merely a reflexive or incidental effect of the TRS contract.

However, in January last year, the Seoul High Court Administrative Division 3 (Presiding Judge Lee Sang-joo, Lee Soo-young, Baek Seung-yeop) ruled that the KFTC’s corrective order and fine imposition were lawful, dismissing the plaintiffs’ claims.

The Supreme Court also found no issue with the lower court’s judgment.

Meanwhile, Chairman Cho and Hyosung entities were indicted for violating the Fair Trade Act on the same matter and were each fined 200 million KRW in the first trial in March. They have appealed, and the second trial is ongoing.

A Supreme Court official stated, "This ruling is significant as it explicitly clarified for the first time that regarding the establishment of unfair benefit provision acts under Article 23-2, Paragraph 1 of the former Fair Trade Act, if the actor mediates a third party to conduct fund transactions with the purpose of conferring unfair benefits to the transaction object, and as a result, the transaction object effectively receives benefits, it does not matter whether the provision of funds or transaction methods are direct or indirect."

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