This country-specific Q&A provides an overview to merger control laws and regulations that may occur in South Korea.
It will cover jurisdictional thresholds, the substantive test, process, remedies, penalties, appeals as well as the author’s view on planned future reforms of the merger control regime.
This Q&A is part of the global guide to Merger Control. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/merger-control-4th-edition
The Monopoly Regulation and Fair Trade Act (“MRFTA”) is the relevant legislation that controls and regulates business combinations in South Korea. Article 7(1) of the MRFTA prohibits “business combinations” that substantially restrict competition in the relevant market. Article 12(1) of the MRFTA imposes a merger reporting obligation for business combinations that meet certain thresholds to the Korea Fair Trade Commission (“KFTC”).
The main enforcement authority in Korea is the KFTC. The KFTC has established and currently enforces several guidelines and standards, including the “Guidelines for M&A Review”, “Guidelines for M&A Notification” and “Guidelines for M&A Remedies”, etc.
In Korea, if a merger satisfies the thresholds, notification to the KFTC is mandatory. Business combinations are classified as either being subject to pre-merger notification or post-merger notification depending on the total assets or annual turnover of the parties involved in the business combination. In the case of a business combination subject to pre-merger notification, the KFTC must finish the review within 30 days from the notification. However, this 30-day period may be extended, if necessary, at the discretion of the KFTC. The merging parties may request a preliminary review from the KFTC in advance, prior to the designated time period for notification. In such case, the merging parties still need to file a formal notification with the KFTC upon the arrival of the mandatory reporting period.
A majority of the business combinations reported to the KFTC have been determined as having no anticompetitive concerns, and only a minority of business combinations have been issued with remedial orders. When imposing a remedial order, the KFTC generally imposes structural remedies, and only imposes behavioral remedies in exceptional cases.
Is notification compulsory or voluntary?
Notification is mandatory for any transaction that meets the thresholds.
Is there a prohibition on completion or closing prior to clearance by the relevant authority? Are there possibilities for derogation or carve out?
Reporting to the KFTC regarding a business combination is divided into pre-merger notification and post-merger notification (please refer to question 16). In the case of a business combination subject to pre-merger notification, completion or closing of the proposed merger is prohibited before the KFTC grants clearance or the waiting period expires.
In the case of a business combination subject to pre-merger notification, exceptions to the prohibition of completion or closing such as derogation or carve out are not recognized.
What are the conditions of the test for control?
Under Article 12 of the MRFTA, the following types of transactions constitute business combinations that are subject to notification to the KFTC:
- acquisition of 20% or more of the shares of an existing company (or 15% for companies listed on the Korea Exchange);
- acquisition of additional shares in a company where the acquiring party already holds 20% or more of the shares in the company (15% for companies listed on the Korea Exchange) and the acquisition results in the acquiring party becoming the largest shareholder;
- statutory merger;
- acquisition of all or a substantial part of the target company’s business or fixed assets;
- participation as the largest shareholder in the establishment of a new company or a joint venture; and
- interlocking directorate, that is, occupation by a director, an officer or an employee of a large company (a company which has total assets or annual turnover greater than KRW 2 trillion) of a position as a registered director or its equivalent of the target company, while such person maintains his or her position in the acquiring company (except for an interlocking directorate between affiliated companies).
Even if a transaction does not fall under any of the above-mentioned categories subject to notification, the KFTC may ex officio investigate whether or not such transaction is an anticompetitive business combination.
Meanwhile, control is not a factor that is considered in determining whether a particular business combination is subject to the reporting obligation. There are cases where a business combination may still be subject to the reporting obligation even if the acquiring party cannot control the target company after the business combination as a result of not acquiring enough shares. However, control is a factor that is considered in determining whether anticompetitiveness exists. That is, a business combination that does not involve acquisition of control in principle is presumed as not being anticompetitive. A business combination that does not involve acquisition of control qualifies for a simplified review and will be granted clearance from the KFTC within 15 days from the date of the merger filing in principle. Control is determined based on the following standards.
- A statutory merger or acquisition of a business in itself will be regarded as control.
- In the case of stock acquisition and participation in the establishment of a new company, ownership ratio of 50% or more will be regarded as control. In addition, even though the acquiring party’s ownership ratio in the target company is below 50%, the acquiring party will be regarded as having control over the target company if the acquiring party may have substantial influence on the general management of the target company.
- In the case of an interlocking directorate, control is recognized if the number of interlocking directors is one-third or more of total directors of the target company, or one or more of the interlocking directors is appointed as a representative director who may have substantial influence on the general management of the target company.
- Even though the acquiring party cannot exercise sole control over the target company, if it has the ability to exert material influence over the target company jointly with a co-acquiring company or the incumbent shareholding company, the acquiring party is deemed to have control over the target company. The KFTC will identify joint control by weighing in various factors including without limitation: ownership stake, power to designate directors and officers, power to veto key business decisions, and a contractual commitment to jointly exercise voting rights.
What are the conditions on minority interest in your jurisdiction?
An acquisition of a minority interest is subject to notification if the filing thresholds are met (please refer to question 4). For example, for an acquisition or ownership of another company's shares, the party that acquires or owns at least 20% of another company (or at least 15% for companies listed on the Korea Exchange) must notify the merger with the KFTC even if such party is a minority shareholder.
What are the jurisdictional thresholds (turnover, assets, market share and/or local presence)?
A transaction is subject to notification if a party to the transaction has total assets or annual turnover greater than KRW 300 billion and the other party has total assets or annual turnover greater than KRW 30 billion, or vice versa.
A transaction is subject to pre-merger notification if a party to the transaction has total assets or annual turnover greater than KRW 2 trillion.
There are no different thresholds that apply to particular sectors.
The Act on the Structural Improvement of the Financial Industry, Financial Holding Companies Act and Telecommunications Business Act require the approval of the Financial Services Commission (“FSC”), or notification or approval from the Ministry of Science and ICT (“MSIT”) with regards to certain business combinations in the finance, broadcasting and telecommunications sectors. In such cases, the MSIT or the FSC is required to consult with the KFTC. In accordance with the above laws, if the KFTC receives a request from the FSC or the MSIT for consultation and conducts a review of such business combination, the relevant party is exempted from its obligation to notify the KFTC.
How are turnover, assets and/or market shares valued or determined for the purposes of jurisdictional thresholds?
Jurisdictional thresholds are calculated based on worldwide total assets or annual turnover.
“Total assets” refers to the total amount of assets displayed in the balance sheet as of the end of the previous fiscal year, and “annual turnover” refers to the amount of total sales displayed in the income statement for the previous fiscal year.
In order to determine if a party and the other party has total assets or annual turnover greater than KRW 300 billion or KRW 30 billion respectively, is calculated by adding the total assets or annual turnover of companies that maintain the status of an affiliate company before and after the transaction. However, in a business transfer, when calculating the total assets or annual turnover of the company that transfers the business, the total assets or annual turnover of an affiliate is not added.
Is there a particular exchange rate required to be used for turnover thresholds and asset values?
The exchange rate as of the end of the year immediately preceding the fiscal year of the merger is applied to the total assets, paid-in capital, and total shareholders’ equity. Meanwhile, the average exchange rate of the immediately preceding fiscal year is applied to the total turnover and net profit.
Do merger control rules apply to joint ventures (both new joint ventures and acquisitions of joint control over an existing business?
Participation in the establishment of a new joint venture: If the total assets or annual turnover of the largest investor and another partner meets the thresholds described in question 6 (i.e., if the largest investor has total assets or annual turnover greater than KRW 300 billion and another partner has total assets or annual turnover greater than KRW 30 billion respectively, or vice versa) such transaction is subject to a reporting obligation. The share ratio acquired by each partner is irrelevant (therefore, must be notified even if the largest shareholder acquires less than 20% of total shares). However, if only affiliate companies participate in the establishment of the joint venture, such transaction will not be subject to a reporting obligation.
Acquisition of joint control over an existing company: if an acquiring party jointly acquires 20% or more of the shares of the target company (15% for companies listed on the Korea Exchange) and the total assets or annual turnover of the acquiring party and the target company meets the threshold described in question 6, such transaction is subject to a reporting obligation. Also, if the acquiring party jointly acquires additional shares of the target company and become the largest shareholder while already jointly owning more than 20% of the target company’s shares (15% for companies listed on the Korea Exchange), such transaction will be subject to a reporting obligation.
In relation to “foreign-to-foreign” mergers, do the jurisdictional thresholds vary?
For the case of foreign-to-foreign mergers and Korean-to-foreign mergers, each party to the transaction must have annual Korean turnover of KRW 30 billion or more (including the annual Korean turnover of affiliate companies) in addition to satisfying the general thresholds described in questions 6 and 7.
The additional requirements in order to be subject to such reporting obligation are not applicable to foreign-to-Korean mergers.
For voluntary filing regimes (only), are there any factors not related to competition that might influence the decision as to whether or not notify?
What is the substantive test applied by the relevant authority to assess whether or not to clear the merger, or to clear it subject to remedies?
According to Article 7(4) of the MRFTA, a horizontal merger between competitors is presumed to substantially restrict competition when any of the following conditions are satisfied.
(1) if all of the following conditions are satisfied:
(a) the combined entity possesses a market share of 50% or more (or the top three market players, including the combined entity, possess an aggregate market share of 75% or more);
(b) the collective market share of the combined entity is the largest in the relevant market; and
(c) the market share difference between the combined entity and the second largest company is greater than 25% of the collective market share of the combined entity.
(2) when a merger conducted directly by a large company (a company which has total assets or annual turnover greater than KRW 2 trillion) or through its specially related person meets all of the following condi¬tions:
(a) the merger is in a business area where aggregate market share of small and medium enterprises is at least two thirds of the entire market; and
(b) the merger will result in the large company possessing at least 5% of market share.
Under the KFTC Guidelines for M&A Review, a merger is not considered to restrict competition, if the market concentration and the degree of change after the merger falls under any of the following.
For horizontal mergers, if any of the following applies:
- the post-merger Herfindahl-Hirschman Index (“HHI”) is less than 1,200;
- the post-merger HHI falls between 1,200 and 2,500 and the HHI increase between the pre- and post-merger is less than 250 points; or
- the post-merger HHI exceeds 2,500, and the HHI increase is less than 150.
For vertical and conglomerate mergers, either of the following applies:
- the post-merger HHI is less than 2,500 and the market share of each party is less than 25% in each of the relevant markets; or
- Each party ranks no higher than 4th in each of the relevant markets.
In addition to the above presumptions, in order to determine whether or not competition is substantially restricted due to a merger, the following factors are considered:
- to determine whether a horizontal merger substantially restricts competition, factors such as market concentra¬tion before and after the merger, unilateral effects, coordinated effects, level of foreign and global competition, the possibility of new entrants, the existence of substitute products and adjacent markets are taken into consideration.
- to determine whether a vertical merger substantially restricts competition, factors such as market foreclosure effects and coordinated effects are taken into consideration.
- to determine whether a conglomerate merger substantially restricts competition, factors such as the hampering of potential competition, exclusion of competitors, and the effect of enhancing entry barriers are taken into consideration.
There are no different tests that apply to particular sectors
Are non-competitive factors relevant?
First, even if a merger restricts competition, if the effect of enhancing efficiency that results from the merger is larger than the negative effects that result from restricting competition, the KFTC may possibly permit such merger. The effect of "enhancing efficiency as a result of a merger" refers to:
- the enhanced efficiency in the areas of production, sales, and R&D; or
- the effect of enhancing efficiency on the national economy as a whole. In this regard, the KFTC takes into consideration, among other factors, job creation, development of regional economies, development of forward- and backward-related markets, stabilization of the nation’s economy.
However, such enhanced efficiency is only recognized if it is clear that it will occur in the near future as an effect that cannot be achieved by means other than a merger.
Second, certain exemptions are available notwithstanding the fact that a business combination may seem to substantially restrain competition such as where the merger involves a failing company. In order to be exempted, all of the following conditions must be satisfied:
- the failing company will be insolvent in the near future;
- there is difficulty in continuing to use the company’s production facilities in the relevant market without a merger; and
- there is difficulty in forming a business combination that is less restrictive of competition than the proposed merger.
Are ancillary restraints covered by the authority’s clearance decision?
There are no provisions regarding this issue provided in the MRFTA nor in any KFTC guidelines. Accordingly, a clearance decision by the KFTC for a particular business combination does not necessarily mean approval of the ancillary restraints as being lawful. As such, the possibility cannot be completely excluded that the KFTC will raise an issue in the future regarding whether the ancillary constraints are lawful.
For mandatory filing regimes, is there a statutory deadline for notification of the transaction?
In principle, within 30 days after the closing of the transaction (e.g., the date in which the ownership of shares was transferred in the case of a share transfer), the acquiring party must report such transaction to the KFTC.
However, if a large company (with total assets or annual turnover of 2 trillion KRW or more) is involved in the business combination, the pre-merger notification must be filed any time after the date of signing the agreement and before the closing date. Furthermore, in a pre-merger-notification transaction, the acquiring company may not complete the transaction before the KFTC grants clearance or the waiting period expires (please refer to questions 19 and 20). The pre-merger notification requirement does not apply to an interlocking directorate.
What is the earliest time or stage in the transaction at which a notification can be made?
Formal Notification. In the case of a post-merger notification, the earliest time at which a notification can be made is the closing date. In the case of a pre-merger notification, the notification can be filed after the execution of the transaction agreement.
Voluntary Preliminary Notification. A voluntary preliminary notification can be filed even before the aforementioned earliest time in which a formal notification can be made if the parties can demonstrate to the KFTC their intention to enter into an agreement—e.g., based on a MOU, a letter of intent or a draft of the transaction agreement. A voluntary preliminary notification is a request to the KFTC to conduct a preliminary review of the proposed transaction in advance.
After submission of the filing to the KFTC, the KFTC must issue its decision on whether to grant clearance within 30 days. However, the 30-day period may be shortened or extended by up to 90 days at the discretion of the KFTC.
The notifying party still needs to file a formal notification with the KFTC upon the arrival of the mandatory reporting period, even if it undergoes a preliminary review. In other words, even if a voluntary preliminary notification was submitted to the KFTC and the KFTC issued a preliminary clearance upon execution of the MOU before execution of the transaction agreement, a formal filing must still be submitted after the parties enter into a definitive transaction agreement. In this case, if there are no substantial changes in the transaction after the preliminary clearance, quick clearance may be obtained with regards to the formal notification.
What is the basic timetable for the authority’s review?
The review period is 30 days from the date of filing of the notification. If the KFTC requests additional information or materials during its review, the time period between the date when such request is made and the date when a response to such request is submitted will not be counted in calculating the review period.
Under what circumstances the basic timetable may be extended, reset or frozen?
If deemed to be necessary, the KFTC has discretion to extend the review period up to an additional 90 calendar days following the expiration of the initial 30-day period. If the KFTC requests additional information or materials during its review, the time period between the date when such request is made and the date when a response to such request is submitted will not be counted in calculating the review period.
Are there any circumstances in which the review timetable can be shortened?
The following mergers are presumed to not substantially restrict competition and therefore subject to a “simplified review.” Hence, the KFTC only reviews the facts of the notified case based on the documentation provided and informs the company of the results within 15 days from the date of notification:
- merger between affiliates;
- transaction in which a controlling relationship has not been established between parties;
- conglomerate merger that does not involve a large company that has worldwide assets or annual turnover of KRW 2 trillion or more (including those of its affiliates);
- conglomerate merger which is not substitutive or complementary;
- merger with a clear purpose of investment;
- if a formal filing is made regarding a particular merger which has already been cleared based on a voluntary preliminary notification; and
- participation in the establishment of an overseas joint-venture company that is unlikely to affect the Korean market.
However, if the KFTC requests additional information or materials during its review, the time period between the date when such request is made and the date when a response to such request is submitted will not be counted in calculating the 15-day period.
Which party is responsible for submitting the filing? Who is responsible for filing in cases of acquisitions of joint control and the creation of new joint ventures?
The acquiring company is responsible for submitting the filing. In the case of an establishment of a new company, the party which participates in establishing a company and becomes the largest shareholder is responsible for submitting the filing.
What information is required in the filing form?
The KFTC provides notification forms for 5 different types of transactions in its Guidelines for M&A Notification (acquisition of shares of a company, participation in the establishment of a new company, statutory merger, acquisition of the target company’s business or fixed assets, interlocking directorate). A business entity subject to the notification requirement must submit the relevant notification form along with the supplementary documents which are required by the form.
Information required includes key corporate and financial information for the merging parties, such as the name, establishment date, shareholders, affiliates, main business lines, as well as the details of the business combination, the status of the relevant market, and an opinion on anticompetitive effects.
Which supporting documents, if any, must be filed with the authority?
The reporting party must submit supporting documents such as transaction agreements (e.g., share acquisition agreement, merger agreement), the interlocking directorate plan, a copy of corporate registration and the annual audit report (or equivalent) of the merging parties.
Is there a filing fee? If so, please specify the amount in local currency.
There is no filing fee for the notification or the KFTC’s review.
Is there a public announcement that a notification has been filed?
The KFTC, in principle, does not publicize a merger notification. However, the KFTC occasionally publicizes a merger notification if it is in the public interest.
The KFTC publicizes the result of its review if it is in the public interest.
In addition, if the KFTC makes a decision to issue a remedial order because it determines that the merger will restrict competition, such decision will be posted on the KFTC’s website; however, confidential information such as trade secrets are redacted.
Does the authority seek or invite the views of third parties?
If the KFTC deems necessary, it can consider the opinions of third parties such as competitors or interested parties. Competitors or interested parties may submit their opinions or related information/data to the KFTC. In addition, as part of the review, the KFTC may allow third parties to attend a hearing and present their opinions at the hearing.
What information may be published by the authority or made available to third parties?
If the KFTC deems publication as necessary, the KFTC may publicize certain information, such as the fact that the merger filing was made, the status of its review, and the results of its review, via media reports. If the KFTC decides that the merger is anticompetitive and makes a decision to issue a remedial order, the KFTC will post such decision on the KFTC’s website.
If the KFTC seeks third party opinions during the review process, the KFTC may provide the necessary information to the third party. In addition, interested third parties may request access to information regarding the KFTC’s decision, in which case the KFTC must provide such information if the consent of the party submitting the information is obtained or access is deemed necessary due to public interest.
However, in any case, the KFTC must keep information such as trade secrets confidential, and such confidential information cannot be provided to third parties.
Does the authority cooperate with antitrust authorities in other jurisdictions?
The KFTC cooperates with antitrust authorities in other jurisdictions in its review of mergers, if necessary.
What kind of remedies are acceptable to the authority? How often are behavioural remedies accepted in comparison with major merger control jurisdictions, such as the EU or US?
The KFTC may impose various remedies including (Article 16(1) of the MRFTA):
- prohibition of the transaction;
- disposition of all or part of the shares acquired;
- resignation of an officer;
- transfer of business; and
- restrictions on the business method or business scope of the merging parties.
According to the KFTC’s “Guidelines for M&A Remedies,” the KFTC does in principle, impose structural measures against anticompetitive mergers. In the event that a remedy is imposed, the remedy must be structural, and behavioural remedies can only be imposed with the structural remedies to supplement the implementation of the structural remedies. However, if structural remedies are impossible or ineffective, only imposing behavioural remedies is permitted.
What procedure applies in the event that remedies are required in order to secure clearance?
In the case of a merger where the KFTC’s examiner determines remedies are necessary due to anticompetitive concerns, the KFTC’s examiner will submit an examiner’s report to the Commissioners and also send the report to the merging parties which contains the examiner’s findings of facts, determination of illegality, and comments regarding remedies. The merging parties may submit their responses to the examiner’s report. The KFTC will then hold a hearing to listen to the opinions of both sides (i.e., the KFTC examiner and the merging parties) and make a final decision. The KFTC will notify the merging parties of its final decision and the merging parties must implement the remedies as prescribed in the final decision.
What are the penalties for failure to notify, late notification and breaches of a prohibition on closing?
The MRFTA imposes an administrative fine of up to KRW 100 million for failure to make a timely and correct notification and, in the case of pre-merger notification, for breach of a prohibition on closing. The KFTC’s “Guidelines for imposing fines for violation of merger reporting regulations” details the criteria for calculating fines.
What are the penalties for incomplete or misleading information in the notification or in response to the authority’s questions?
If the details of notification or attached documents are incomplete or misleading, the KFTC may request the party to supplement or correct the information or materials. In such a case, the review period will be suspended until all the sufficient information is submitted.
In addition, for misleading information, the KFTC may impose an administrative fine of up to KRW 100 million.
Can the authority’s decision be appealed to a court? In particular, can third parties who are not involved in the transaction appeal the decision?
Any party subject to the KFTC decision can file an appeal with the Seoul High Court within 30 days of receiving the decision being challenged if dissatisfied with the KFTC decision. If the party is dissatisfied with the result of the Seoul High Court’s decision, the party can file an appeal to the Supreme Court.
What are the recent trends in the approach of the relevant authority to enforcement, procedure and substantive assessment?
The South Korean economy is highly dependent on innovation-based industries such as semiconductors and information technology (IT) devices, however, there are no specific criteria with regards to such so-called dynamic anticompetitive effects caused by M&A in innovation-based industries. Therefore, in February 2019, the KFTC revised its Guidelines for M&A Review in order to enhance the predictability of companies propelling M&A, while at the same time so that the KFTC could conduct reviews on innovation-based industrial M&A more effectively.
The revised Guidelines includes the provision of:
- the definition of “information assets”;
- the standards for defining the relevant market and assessing anticompetitive effects in reviewing M&A in innovation-based industries;
- the standards for calculating the degree of market concentration in innovation markets; and
- factors for consideration in reviewing M&A on information assets.
Are there any future developments or planned reforms of the merger control regime in your jurisdiction?
The KFTC proposed an amendment to the MRFTA in late 2018. The proposed amendment is currently being reviewed by the National Assembly. The proposed amendment recommends:
- abolishing criminal penalties for anticompetitive business combinations; and
- imposing a notification obligation when a specific transaction amount (acquisition amount) is met, regardless of the current thresholds for total assets and annual turnover, in order to remedy the issue regarding big data companies, which entail important value in the Korean market regardless of their small size, being possibly excluded from review.
However, there is uncertainty whether the above proposed amendment will be passed by the National Assembly.