"38-Year-Old 'Dongil-in Designation System,' an Outdated Regulation Unsuitable for the Times"

Hankyungyeop Proposes 'Top 20 Policy Tasks in Fair Trade for 2024' to Fair Trade Commission

There are criticisms that the 'Same Person Designation System,' established in the 1980s, no longer reflects the current corporate reality.

The Korea Economic Organization Association (KEOA) announced on the 6th that it had collected opinions from its member companies and proposed the 'Top 20 Policy Tasks in the Fair Trade Sector for 2024' to the Fair Trade Commission.

According to KEOA, the regulation that companies related to fair trade complain about the most is the 'Same Person Designation System.' The system defines the person controlling a corporate group as the same person (mainly the group chairman or largest shareholder) to determine the scope of the corporate group. It has been implemented since 1986 to monitor and regulate ownership or control relationships through relatives, non-profit corporations or organizations, and special affiliates of subsidiaries.

Hankyung Association.
Photo by Asia Economy DB

However, unlike 40 years ago, the current management environment has evolved into a structure where it is difficult for one chairman to make decisions for the entire corporate group. Most corporate groups operate globally, and support among group affiliates has become transparent under legal and monitoring systems, causing the original purpose of the system to largely fade.

KEOA stated, "'Same Person Designation' is a system unique to Korea," and diagnosed that "considering the growth of the national economy and the intensification of global competition compared to the time of its introduction, the 'Same Person Designation System' has already lost its original purpose."

It is also problematic to impose excessive responsibility on the same person. For example, under the Fair Trade Act, corporate groups must report their affiliates annually, and even simple omissions or errors in the data can lead to criminal penalties for the same person (limited to natural persons).

In response, KEOA proposed abolishing the system that designates a natural person as the same person and instead designating the core company of the corporate group, such as the holding company, as the same person.

Regulations on holding companies also require urgent improvement. Under the current Fair Trade Act, holding companies are prohibited from owning financial companies to prevent the expansion of controlling power by major shareholders using customer funds. However, non-deposit-taking credit finance companies (such as card companies and capital companies) are also included in the prohibition, which contradicts the regulatory purpose.

KEOA argued that, in the short term, holding companies should be allowed to own credit specialized financial companies that do not receive customer funds, and in the long term, the principle of prohibiting holding companies from owning financial companies should be fully reconsidered in line with global trends.

Restrictions on investments by affiliates outside the holding company system are also among the regulations companies want to improve. Currently, shares and bonds of venture companies invested in by CVC investment associations of general holding companies are prohibited from being acquired or owned by affiliates outside the holding company system. Therefore, affiliates outside the holding company system have little incentive to invest in CVCs because they cannot acquire venture companies expected to have business synergy later. This contradicts the purpose of introducing the CVC system to channel large corporate funds into the venture industry.

KEOA proposed allowing affiliates outside the holding company system to acquire venture companies invested in by CVCs to remove investment barriers for large corporate affiliates.

Restrictions on voting rights for financial companies and public interest corporations belonging to corporate groups also need improvement. Under the current Fair Trade Act, financial and insurance companies affiliated with large corporations are prohibited from exercising voting rights on shares of domestic affiliates they hold. Large corporate public interest corporations are also generally prohibited from exercising voting rights on domestic affiliate shares due to concerns that controlling power of major shareholders could be expanded through public interest corporations.

KEOA viewed that the restriction on voting rights of public interest corporations, which does not align with global standards, could become an obstacle to large corporations' social contribution activities.

Lee Sang-ho, head of the Economic and Industrial Headquarters at KEOA, said, "So far, the Fair Trade Act has focused more on regulating large corporations than promoting competition, which has weakened the international competitiveness of our companies," and added, "It is time to readjust the regulations on large corporate groups, which are nearly 40 years old, to reflect current realities and global standards to promote economic vitality."

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