South Korea: Recent Statutory Changes and Cases

In summary

This chapter provides an overview of recent modifications to South Korea’s main antitrust legislation, the Monopoly Regulation and Fair Trade Act (MRFTA), and introduces a major merger and acquisition decision made by the Korean Fair Trade Commission (KFTC). In previous editions of this book, we introduced, in extensive detail, the Act and legislators’ efforts to promote competition and safeguard consumers from unlawful business practices that may hinder healthy competition in the market. This year, we update our previous submissions to bring companies and foreign practitioners up to date on the current Korean competition law.

Discussion points

• The Korean government’s stance on anticompetitive practices;
• noteworthy amendments to the Monopoly Regulation and Fair Trade Act;
• procedural due process protections for KFTC investigations; and
• conditional approval of Delivery Hero’s acquisition of Woowa Brothers.

Referenced in this article

• MRFTA;
• KFTC;
• the US Federal Trade Commission;
• the EU Commission; and
• Delivery Hero/Woowa Brothers acquisition.

Notable changes in Korean competition law in 2020

In 2020, there have been developments and changes to competition law. Legislators have passed revisions to the MRFTA, which is the counterpart of the Sherman Act in the United States and the Treaty on the Functioning of European Union in the EU. Below are the key changes to the MRFTA that may draw attention of multinational companies doing business in Korea. Most of the amendments will come into force at the end of 2021.

Information exchange as a stand-alone offence

Information exchange or sharing among competitors is set as a violation the MRFTA. Before the amendment, information exchange among competitors did not constitute a stand-alone offence under the MRFTA, although it may be admitted as evidence of a per se illegal conspiracy. Korean courts have ruled repeatedly that mere information exchange or sharing is not an agreement under the meaning of the MRFTA. However, legislators have amended the MRFTA so that information exchange among competitors has become a new offence itself under the MRFTA.

The amendments provide that any exchange or sharing of information among competitors that facilitates unlawful conspiracy will presume to be an anticompetitive agreement, and an agreement to exchange information will constitute a stand-alone violation even in the absence of a naked cartel agreement (eg, agreement to fix prices or output). Particularly, the former amendment will dramatically lower the enforcement agency’s burden of proof to prove the existence of an agreement. In turn, if the agency uncovers any evidence of information sharing among competitors, a prima facie case will be made where facts alleged, if not rebutted, will result in those facts being conclusive to establish an unlawful cartel case. Unfortunately, there are currently no guidelines on court decisions for interpreting the nature of the information that is prohibited from sharing or exchanging among competitors, but they are expected to be released sooner or later.

Enhanced procedural due process protections

Some significant changes have been made to the MRFTA to strengthen the procedural due process protections for those who are under investigation. Until now, the MRFTA has been criticised for the lack of due process protections when it comes to investigations and hearings. Most of the due process amendments are legislative efforts to address statutory ambiguity and discrepancies between the statute and the KFTC’s internal rules. The following are brief introductions of notable provisions.

Right to information

Currently, as the amendments are not yet in force, the MRFTA requires the KFTC to simply present a proof of investigative authority at the beginning of its dawn raids or on-site investigation. The amended MRFTA requires the KFTC to reveal substantial information prior to the commencement of its dawn raids, including the objectives, anticipated duration and method of their investigation. Some practitioners may be familiar with these requirements as they have been already incorporated into the KFTC’s Rules on Investigative Procedures, the nature of which is an internal office procedure. The rules were fully adopted and elevated to the MRFTA to prevent abuse of power from potential fishing expeditions. In accordance with the amendments, the KFTC’s investigation is limited to the ordinary business hours of the business premises under investigation except if the investigation objective would not be achieved otherwise due to potential evidence tampering or spoliation. The amendment also requires minimal business disruption.

Right to collected materials

The amendments also protect the respondent’s rights by requiring the KFTC to issue a letter of collected materials from the investigated person’s voluntary release upon the Commission’s request. The KFTC is also required to return all collected materials as soon as they are determined to be irrelevant to its investigation or no longer needed for the KFTC’s custody.

Right to present testimonies

The amendments also permit respondents and interested parties to present their opinions or provide testimonies to the KFTC even after the issuance of its examiner’s report (ER), which is the counterpart of the US Federal Trade Commission’s complaint or the EU Commission’s statement of objections. Prior to the amendments, the respondents and interested parties had to wait for the issuance of the KFTC’s ER for their defence. The amendments enable defence at both the investigation stage and the KFTC’s deliberation stage.

Right to Access Evidence

The amendments enable respondents or interested parties’ access to evidence present in the ER. Respondents are finally granted with access to evidence used against them, which would not be available otherwise before the amendments unless such disclosure was explicitly permitted by law.

Right to a written notice of result

The amendments further require the KFTC to give a written notice to respondents of its decision even when the KFTC decides to drop or dismiss the investigation, which would not have been required otherwise.

Limited investigation

Prior to the amendment, it was ambiguous whether the KFTC is empowered to conduct further investigations even after the release of its ER. To address this issue, the amendment specifies that any further investigation following its ER is prohibited unless approved by the KFTC.

Uniform statute of limitations

The legislators have adopted an amendment that sets a seven-year limitation for the KFTC to bring a case, except for unlawful cartels. The clock begins running on the end date of alleged violations. Before the amendment, the statute of limitations was five years, running from the date of opening investigation or seven years running from the end date of the alleged violations. The new limitations period applies only to cases where an investigation is launched before the amendment comes into force and does not apply to unlawful concerted action.

KFTC’s monitoring consent order compliance

The legislators also adopted an amendment to empower the KFTC and allow the Commission to monitor respondents’ compliance with their obligations set forth in the consent orders. The KFTC may appoint other agencies (eg, the Korean Consumer Agency and the Korea Fair Trade Mediation Agency) to monitor on its behalf. The monitoring agencies are required to submit periodic reports to the KFTC concerning performance by respondents of their obligations under the consent orders and provide any additional information as may be requested by the KFTC. The monitoring agencies are obligated to maintain the confidentiality of all non-public information provided to them.

Twofold increase in monetary penalties and repeal of criminal sanctions

Legislators heightened the maximum administrative fines to discourage or deter MRFTA violations. The base fine is calculated as the percentage of sales turnover of relevant products during the period of violations. If the turnover is not calculable, a fixed amount of administrative fine is used as the base fine. Aggravating or mitigating factors, or both, are also considered when determining the final number of administrative fines imposed on the violators. As tabulated below, the maximum percentages and the fixed penalties are doubled in the amendment:

The legislators also passed modifications to repeal criminal sanctions against a few unlawful acts under the MRFTA. No risk of criminal sanctions lies with unlawful mergers, resale price maintenance and unfair trade practices.

Introduction of injunctive relief against unfair trade practices

The amendments to the MRFTA also adopt proactive measures to enhance the protection of victims of unfair trade practices. Under the amendment, a person injured or likely to be injured by unfair trade practices may directly seek injunctive relief from the court to limit or prevent potential harm caused by such offence. This interim remedy was not allowed previously as all remedies for the MRFTA offences were available only after reporting the violation of the MRFTA to the KFTC. Hence, it was common to bring a follow-on action for the incurred damages.

Introduction of transaction value thresholds in merger control

The amendments have widened the net to catch mergers that were not reportable under the current jurisdictional threshold. Before the amendment, the MRFTA considered only the size of the assets or revenues of the acquirer and the target. In particular, the jurisdictional threshold to report is met if the acquirer’s total worldwide turnover or assets was 300 billion won or more and that of the target was 30 billion won or more in the immediately preceding year. Certainly, the domestic nexus requirement (at least 30 billion won revenue or assets in Korea) is additionally required in a foreign-to-foreign or Korean-to-foreign merger.

Under the newly added threshold, the KFTC must be notified even if the target does not meet the above-mentioned 30 billion won threshold (assuming the acquiring party meets the 300 billion won threshold) if the value of consideration for the proposed transaction is substantial and the seller has substantial domestic activity. This is the same move taken by the German and Austrian competition authorities in 2017 aiming to cover the acquisition of highly rated start-up companies (unicorns) but to generate revenues exceeding the domestic thresholds at the time of the merger. Relevant rules and guidelines on how to assess the value of consideration or determining domestic activity have yet to be enacted or released.

Request for information in the case of cartels and unfair trade practices

With the new amendments, legislators seek to promote remedies through civil suits against cartels and unfair trade practices by alleviating the burden of proof of the plaintiff. Under the amendment, the injured person or plaintiff in a damage suit may motion the court to render an order to produce information necessary to prove the damages caused by cartel and unfair trade practices. However, the defendant has the right to refuse if and only if the refusal is accompanied by justifiable reasons.

Furthermore, it does not constitute a justifiable reason that the requested information contains the defendant’s trade secrets in so far as such information is necessary for the plaintiff to prove the damages. If the defendant refuses to obey the court order without a justifiable reason, the court may deem true the plaintiff’s alleged contents of the requested information withheld by the defendant. The legislators anticipate that such harsh consequences resulting from non-compliance would press the defendant to produce the requested documents so that it would be less challenging to award damages suffered by the plaintiff to be awarded.

Takeaways

We believe South Korea is one of many attractive markets for foreign companies doing international business. South Korea’s unique geographical location, its developed economy and hardworking population have made it stand out from others. Foreign companies’ contribution to Korea’s domestic economy has kept growing over the years.

Without accurate knowledge of local laws and regulations, including Korean competition law, foreign companies contemplating investment in Korea could run into unanticipated legal hurdles. We have often seen our foreign clients find out that their long-lasting legitimate business practices turned out be prohibited or constrained especially by the Korean competition law, which would have raised no red flags in other jurisdictions. Certain conduct falling into the unfair trade practices under the MRFTA (eg, setting sales target for dealers) is strictly restrained depending on the market.

In this chapter, we briefly explore the latest competition law changes. These recent legislative modifications imply that the legislative move to tighten regulation for small business protection would likely further constrain business activities of foreign and domestic market players – we expect, accordingly, heightened enforcement activities. Further, it is obvious that the increased penalties will lead companies to be confronted with more severe legal consequences than before. These changes are sending signals to companies to spend more time on compliance activities. Therefore, we advise foreign companies to build their competition law risk management to effectively respond to the Korean competition law environment – distinguished in many respects from other jurisdictions.

Case highlights: Delivery Hero’s acquisition of Woowa Brothers

Deal structure

Delivery Hero SE (DH), a Berlin-based online food delivery service company, announced an acquisition of about 88 per cent of stake in Woowa Brothers (WB), Korea’s top food delivery mobile app (Baedal Minjok, BM) operator, on 13 December 2019. The leftover stake in WB was planned to be swapped by DH’s shares.

The proposed transaction falls into a merger under the meaning of the MRFTA – acquisition of 20 per cent or more (15 per cent or more if the acquired party is being listed) of the total outstanding voting shares of another company.

As the proposed deal met the jurisdictional thresholds (the 300 billion or 30 billon won standard under the MRFTA), it was pre-notified to the KFTC on 30 December 2019. Moreover, the proposed deal was required for pre-merger notification because the aggregate worldwide turnover of one of the parties to the deal in the preceding year exceeded 2 trillion won (obviously, the other party met the 30 billion won threshold). DH, the acquiring party, notified the deal to the KFTC on 30 December 2019 according to the KFTC’s press release on the same day.

Timeline

The KFTC’s comprehensive review of the DH/WB merger took almost a full year. Under the MRFTA, the KFTC is required to review the reported deal within 30 days of the reported date but may extend the initial 30-day review period by 90 days. However, the actual review period is often longer than the statutory review period of 120 days because of the stop-the-clock rule. According to the stop-the-clock rule, the clock stops ticking once the KFTC has issued the request for information to the parties and will not begin running until the requested information has been provided to the KFTC. For this reason, much longer review time could be taken particularly for the high-profile cases. The review period in Hanaro Web (n) TV merger in 2004 lasted two and a half years.

The proposed deal faced harsh criticism from the public. Restaurants with the support of some politicians expressed their deep concern that people will face higher prices due to higher delivery fees – as there will be no meaningful competition after the merger. A civil activist group filed a petition against the proposed merger as well.

While the KFTC was reviewing the merger, WB engaged in unhelpful business action that could make an adverse impact on the Commission’s review. WB announced the increase of its prices in March 2020, which had provoked public outcry against the merger. Although WB withdrew its new pricing policy shortly after in April 2020, it was considered enough to make a bad impression on the merger and made the KFTC view the deal with a more suspicious eye. Further, WB was fined for having engaged in unfair trade practices in June 2020.

After about a year-long review where the KFTC issued its ER, it proposed, among other things, a structural remedy, which had not been anticipated. The KFTC proposed that DH sell Yogiyo (YGY), the second-largest online food delivery mobile app company to a third party to restore competition. The ER is not usually disclosed to the public by the parties even though there is no statutory restriction on such public disclosure. However, DH posted the unanticipated remedy on its website as soon as it received the ER.

Regulatory approval

Many lawyers did not anticipate the deal to be cleared without any conditions but instead they were anticipating a conditional approval with only behavioural remedies attached. It turned out otherwise. The KFTC imposed a divestiture of YGY as a structural remedy along with behavioural remedies to secure the structure remedy. The remedies attached to the regulatory approval are as follows:

According to its press release, the KFTC narrowly defined the relevant markets for its assessment of the proposed merger – the online food delivery mobile app market. The KFTC found that food delivery orders through the online food delivery mobile app should be distinctive from those made through other routes such as by directly calling restaurants or clicking on the direct link to restaurants. Such narrow delineation of the relevant market resulted in the merging parties’ claiming 99 per cent market share in the online food delivery market. The KFTC also addressed the general nature of the online food delivery market as having a high entry barrier (mainly due to the need for a great volume of ‘information asset’ for a successful entry) and massive competitive advantages for the incumbent competitors (due to the possibility of more efficient marketing by using its already owned information asset).

The KFTC did not deem meaningful a few competitors’ dramatic expansion of their footing in the market. The KFTC found that the market shares of the market participants over the past five years were not enough to serve as competitive pressure, adding that Coupang Eats, the competitor that had grown the most since the merger was notified, had been remaining below 5 per cent in terms of the market share.

At the KFTC hearing held in December 2020, the merging parties reportedly attempted to persuade the KFTC to lift the structural remedy, but this was not successful. The merging parties agreed to accept the KFTC’s remedial proposals and consummated the deal.

The KFTC’s conditional approval requires the merging parties to make continuous efforts to sell YGY even after closing the deal. Under the MRFTA, YGY must be sold within the period set by the KFTC (ranging from three to six months). In the case of failure to sell within this period, the KFTC may extend the period just once more by up to six months. Thus, the merging parties have to sell YGY at least within a year to comply with the remedial orders.

What if YGY still remains in the market for sale after the expiry of the given period? The MRFTA and other related guidelines do not seem to have given much thought to this scenario. In a few cases, the KFTC has withdrawn its structural remedies and imposed behavioural remedies instead because of substantial changes to the market environment.

Implications

Considering the forward-looking nature of merger review, as the review predicts how the merger will affect the future market, the agency must be more cautious when assessing competitive impact in a fast-changing industry. We are afraid that the KFTC seems to put too much emphasis on past records, although the competitive landscape in the online food delivery industry has significantly changed over the past year and will most likely keep changing. Market shares sometimes do not reveal much, especially in a fast-changing industry.

The KFTC’s assessment of the online food delivery market was quite different from common notions – actually, it is on the other end of the spectrum. The Online food delivery market is often described as the market having low barriers to entry, no competitive advantages and little attraction for customer loyalty. If the KFTC’s assessment is true, acquiring of YGY would be a great chance to successfully enter the online food delivery market so that it would not likely take much time for the merging parties to sell YGY. However, if the KFTC’s assessment is off the mark, we cannot exclude the possibility that YGY would remain unsold until the end of 2021. We will have to wait and see how this divestiture will conclude.