A Law-and-Economics Review of the Current State and Problems of the Monopoly Regulation and Fair Trade Act’s Designation of the

Under the Monopoly Regulation and Fair Trade Act (Fair Trade Act), the Korea Fair Trade Commission designates each May business groups subject to disclosure (business groups with total assets of KRW 5 trillion or more) and business groups subject to restrictions on cross-shareholding (business groups with total assets of KRW 10 trillion or more) for the purpose of curbing concentration of economic power. Business groups subject to disclosure are required to disclose the status of the business group and related matters, while business groups subject to restrictions on cross-shareholding are subject to equity investment regulations and various conduct regulations, including bans on cross-shareholding, circular shareholding, and debt guarantees. In addition, in the designation process, the natural person or legal entity that controls the business group is designated as the “same person,” and natural persons and legal entities deemed to have an economic interest with the same person are designated as related parties of the same person.

Although the designation of the same person and related parties of the same person plays a central role in regulations on concentration of economic power as a means of determining the scope of regulation, academic experts and practitioners at regulated firms have pointed out various problems with the current same person designation system. Given space limitations, only a few are listed here. First is the system’s arbitrariness and ambiguity. For example, although the “same person” and “control” are core elements of the system, the definitions of these concepts are ambiguous, creating regulatory arbitrariness. The statutes contain no provision defining the same person, and while quantitative (equity stake) and qualitative criteria for control are specified in the statutes, a flexible interpretation becomes possible when equity ownership and control do not coincide. Second is the appropriateness of the scope of related parties of the same person. Related parties of the same person are premised on jointly controlling the business group with the same person because they share the same economic interests, but criticism has arisen that this scope is excessively broad in light of contemporary socioeconomic conditions. Related parties of the same person include “blood relatives within the sixth degree and relatives by marriage within the fourth degree.” However, as the nuclear family has become the norm, contact among relatives has become infrequent and family-management practices have faded, making it difficult to expect active compliance with the obligations of related parties of the same person from extended relatives. In addition, “outside directors” are included among related parties of the same person, but under the Commercial Act, outside directors are understood as a mechanism to check arbitrary management, creating a logical conflict with the Fair Trade Act. In light of these points, there is a need to reduce or realistically adjust the scope of related parties of the same person. Third is the punishability and proportionality of sanctions. Under current law, if related parties of the same person submit false information or fail to submit information, criminal punishment of the same person is possible. As noted above, related parties of the same person may fail to cooperate with the same person’s fulfillment of obligations, making it possible to criticize the current punishment provisions as harsh. Fourth is the limitation of extraterritorial regulation. Most countries, including Korea, have adopted open economies, so multinational corporations often operate within the regulatory jurisdiction, but regulations applied to domestic firms cannot be applied to them consistently. For example, although there was a natural person who effectively exercised control over Coupang affiliates under a holding company structure, the Korea Fair Trade Commission did not designate him as the same person on the grounds that he was a foreign national. In areas such as taxation, security, and trade, the scope and content of extraterritorial regulation are arranged through treaties between states, but regulations on concentration of economic power do not extend abroad.

Among the above issues, this study empirically approached the normative validity of the same person designation system and the effectiveness of the current scope of related parties of the same person. As a methodology for the empirical analysis, it adopted the “centrality index,” which is frequently used in network theory within the statistics literature. The centrality index has also been used in the domestic corporate governance literature. This study found that, over the past 20 years, major business groups have been shifting from circular shareholding to holding company structures in line with the government’s policy of encouraging conversion to holding companies, producing results qualitatively consistent with previous research. This suggests that, as a significant number of business groups subject to the same person designation system have shifted to corporate-centered holding company structures, the normative premise of the current system—which regards the same person, a natural person, as the apex of the governance structure—needs to be reconsidered. In addition, the study divided the scope of related parties of the same person into three groups—blood relatives including up to the sixth degree, blood relatives including up to the fourth degree, and spouse plus first-degree blood relatives—and calculated the centrality index. The results showed that even when the shares of blood relatives up to the sixth degree were treated as friendly shares of the same person, they did not have a meaningful effect on maintaining the same person’s control structure. This may be seen as scientific evidence supporting the recent proposed amendment to the Enforcement Decree of the Fair Trade Act.

Regulation of governance structures is one of the core elements of regulating economic power, designed and implemented to remedy the ill effects of national economic power being concentrated in the hands of a small number of economic actors. However, because the regulatory environment is changeable, the validity, appropriateness, effectiveness, and rationality of regulation must be continuously reviewed. In that sense, the findings of this study suggest that Korean business groups are converting their governance structures to holding company systems, and that the equity holdings of relatives whom the regulatory authorities view as sharing economic interests with the controlling owner may not make a meaningful contribution to maintaining the control structure for that controlling owner.

I. Introduction

1. Research Background

2. Research Purpose and Method

II. Review of the Same Person System

1. Background of Same Person Regulation

2. Overview of the Same Person Designation System

3. Issues Concerning the Same Person Designation System

III. Conversion to Holding Companies and Regulation

1. Purpose of the Holding Company System and Regulatory Objectives

2. Current Status of Holding Companies

3. Empirical Analysis of Conversion to Holding Companies

4. Interim Summary

IV. Testing the Validity of the Scope of Related Parties of the Same Person

1. Current Status of Equity Ownership Structure and the Contribution of Related Parties of the Same Person to the Governance Structure

2. Current Status of Ex Post Regulation

3. Simulation of Narrowing the Scope of Related Parties of the Same Person

V. Conclusion

References

Original title: 공정거래법상 동일인 지정제도 현황과 문제점에 대한 법경제학적 소고

Author: In-yeop Ji

Date: 2022-09-06

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=report&pn=2&idx=24941