The Korea Fair Trade Commission (the “KFTC”) recently announced proposed amendments to the KFTC’s Review Standard for Business Combination (“M&A Review Standard”) and Guidelines for Reporting Business Combinations (“M&A Notification Guidelines”), as well as the KFTC’s plans to establish a new Global M&A Division in response to the growing number of global M&As. The current proposed changes are the result of efforts by the KFTC’s Task Force on Merger Control Regime Reform, which sought public opinion as well as holding discussions with market participants and academics on the issue from June 2022, to properly reflect and respond to the changes in the recent global M&A trends and the economic environment.
These proposed changes in the rules and the KFTC organizations are expected to have a substantial impact on Korea’s merger control regime, in particular for international M&As with reporting requirements in Korea.
I. KFTC Announces Proposed Amendments to M&A Review Standard and M&A Notification Guidelines
According to the KFTC, the number of M&As reported in Korea increased nearly three times from 413 in 2009 to 1,113 in 2021. To effectively respond to the increasing demand for merger reviews, the KFTC prepared the proposed amendments to the M&A Review Standard and the M&A Notification Guidelines with the goal of expanding the application of simplified notification and review for the transaction types that are not likely to be anti-competitive, as well as expanding the scope of the safe harbor for non-horizontal mergers. In connection thereto, the KFTC solicited opinions from various sectors until November 17, 2022, and it plans to finalize and implement the amendments by December 2022. A more detailed explanation of the major changes in the proposed amendment is as follows:
A. Expanding the Scope of Simplified Notification
Compared to general notification, simplified notification allows filers to condense the contents of the notification and the supporting documents, as well as allowing online notification. The KFTC currently permits simplified notification for the following five types of M&As, and the simplified notification would be permitted for the following four additional types of M&As according to the amended M&A Notification Guidelines.
In particular, the establishment of a PFV, which is a special purpose company established for a specific business and liquidated upon the termination of the relevant business, was added in the proposed amendments because the existing laws that apply to the formation and operation of PFVs are already clear and there is minimal room for any subjective judgment by the KFTC. The other types of M&As were also added to improve the convenience of businesses, as the process of confirming the relevant facts would be clear and simple, with there being minimal need for the KFTC’s in-depth review under such circumstances.
B. Expanding the Scope of Simplified Review
The simplified review system is a fast-track approval system which assumes that the notified merger does not pose any anti-competitive effect, and the KFTC in principle conducts only a fact-finding procedure to end the review within 15 calendar days. The KFTC currently allows simplified review for the types of M&As listed in the table below. The following is a summary of the KFTC’s proposed changes and plans regarding the simplified review process.
The KFTC added additional investments by an LP into PEF as a type of merger subject to the simplified review because the KFTC considered that such merger was conducted for a simple investment purpose in that it is difficult to exert influence on the investment target company by the LP under the relevant laws and regulations. The remaining types were added because the KFTC believed it was clear that there was no anti-competitive effect from such transactions.
In particular, with respect to the situations “where the counterparty is a foreign company and does not have any effect on the Korean market,” the amended standard specified that the impact on the Korean market will be determined based on the factors such as the nationality and business region of the acquiring/target company, target company’s current or future business areas, the Korean turnover amount of the target company, and cited “establishment of a foreign JV to develop natural resources, sale of fixed assets such as overseas power generation facilities” as examples of such circumstances. These changes were intended to address the current issue that there was no specific standard for determining the transactions that would not impact the Korean market, and the KFTC hopes the new changes will add further clarity in determining eligibility for the simplified review process.
C. Expanded Scope of Safe Harbor Regulations for Non-Horizontal (Vertical, Conglomerate) Mergers
The KFTC currently has in place a safe harbor for mergers, for assuming that the competition is not substantially limited if the degree of market concentration and any changes thereto following the merger fall under any of the following categories.
However, since the standards of the safe harbor applicable to vertical and conglomerate mergers were relatively high, there have been many cases where the safe harbor was not applied to non-horizontal mergers with no competitive concerns, such as vertical mergers for expanding a stable supply chain and conglomerate mergers over cooperation in entering new industries. In particular, the proposed amendments now assume lack of anti-competitive effects where the market share of the merging parties is less than 10% regardless of the market concentration, to deal with situations where the safe harbor was not applicable even though there were strong market leaders with significant market share with the parties’ position in the market being relatively weak, and would be facing strong competition from the market leaders.
II. New Establishment of the Global M&A Division
The KFTC had been aware that Korea’s existing merger review system was designed mainly for Korean merger reviews, which made it difficult for the KFTC to effectively respond to the recent increase in cross-border M&As. The KFTC has also noted that there were operational inefficiencies in cooperating with other competition agencies, and that it was necessary to introduce measures to (A) prevent confusions during international agency collaboration due to institutional differences and (B) to effectively regulate the market by utilizing corporate autonomy in the merger review process.
Accordingly, the KFTC recently submitted a plan to the Ministry of Public Administration and Security, a department in charge of the reorganization of the government organizations, to establish the Global M&A Division within the KFTC, which will be dedicated for the purpose of prompt and effective review and systematic international agency cooperation with regard to global M&As. Currently, the Ministry of Public Administration and Security is evaluating the feasibility of the KFTC’s reorganization plan along with other reorganization plans submitted by various ministries, and will be making its decision based on a comprehensive evaluation.
Apart from the establishment of the Global M&A Division, the KFTC is also considering ways to improve its review process, such as formally dividing the review phase into two phases depending on whether an in-depth examination is required, and allowing companies to voluntarily propose corrective measures to resolve any anti-competitive effects from the proposed merger. Given the number of recent and expected changes, we recommend companies to continuously monitor the progress of the changes in Korea’s M&A review system.
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