Korea: Overview

New administration, shift in policy

With the inauguration of the avowedly 'business-oriented' President Myung-Bak Lee, and the replacement of the chairman and vice chairman of the Korea Fair Trade Commission (KFTC), Korea's antitrust enforcement agency, some changes are expected in some aspects of Korean antitrust enforcement.

In his inauguration speech, Chairman Yong-Ho Baek expressed his view that the antitrust rules should reflect globalisation and an open economy perspective while taking due account of the interests of business operators. He said that he would create a market-friendly environment and facilitate the economy through abolishing the restriction on total investments by large companies and relaxing the regulations on holding companies. Nonetheless, enforcement against cartels and abuses of market dominance, which is consistent with global standards, is expected to continue. In addition, to maintain a level playing field for all companies while balancing the interests of large companies and small- and medium-sized companies, regulations on unfair subcontracting contracts are expected to be strengthened.

Korean competition law

The Monopoly Regulation and Fair Trade Act (MRFTA), enacted in 1980, is the primary source of competition law in Korea. At the time of its adoption, the MRFTA marked a considerable step forward from a rigid government-controlled economy, focusing on the stabilisation of prices, towards a market economy based on private initiative and competition. Taking account of the extensive concentration in most Korean industries, competition policy was essentially a tool used by the government to implement policies relating to the big conglomerates known as chaebol.

The KFTC is a ministerial-level central administrative organisation under the authority of the prime minister. The KFTC is committed to four main mandates: promoting competition, strengthening consumers' rights, creating a competitive environment for small and medium-sized enterprises (SMEs) and restraining concentration of economic power.

To protect competition and detect anti-competitive behaviour, the KFTC has been given comprehensive investigative powers, including summoning respondents and witnesses and inspection and seizure of relevant evidence.

To obtain evidence, the KFTC often proceeds with 'dawn raids'; technically, the KFTC has no right to enter the premises when refused entrance by the party under investigation, but the adverse consequences, formal and informal, of non-cooperation lead most parties to admit the investigative team when it comes.

The KFTC has been an enthusiastic participant in the OECD and International Competition Network (ICN), and has not been shy about using its investigative powers on international issues touching the Korean market. To further enhance cooperation with other jurisdictions, particularly the US, Japan and the EU, and to foster extraterritorial application of Korean competition law, the KFTC has recently created a new department whose only task is to investigate and prosecute international antitrust violations.

Mergers and acquisitions

In 2007, the Enforcement Decree and Merger Review Guidelines were extensively amended, raising the turnover thresholds for merger notification for domestic and foreign mergers, switching from a market concentration approach (CRk) to the Herfindahl-Hirschman Index (HHI), dropping the anti-competitiveness presumption solely based on market shares, and thereby conducting a more balanced, less static, assessment of investigated mergers and bringing the merger review process in line with that of other major jurisdictions.

Business combinations that meet certain financial thresholds are subject to merger notification requirements. The types of combinations that may require a merger notification include:

• the acquisition or lease of all or an important portion of the business of another company;


• acquisition of all or an important portion of fixed assets for business;


• acquisition of 20 per cent (15 per cent if a listed company) or more of the voting shares of an existing company (either existing shares or newly issued shares);


• acquisition of 20 per cent or more of the voting shares in a newly incorporated company, except for the incorporation of a wholly owned subsidiary;


• additional acquisition of such number of shares that results in the acquirer's becoming the largest shareholder of another company (except for cases where the acquirer is already the largest shareholder at the time of the additional acquisition); and


• interlocking directorate with another company (only if it involves a statutorily defined 'large-scale company' - a company with total assets or revenues on a consolidated basis exceeding 2 trillion Korean won1).


 

Turnover thresholds also apply: the above combinations require filing only when the total amount of assets or sales of either one of the parties is 100 billion won or more; and that of the other party is 20 billion won or more. For overseas mergers (foreign-to-foreign transactions), the threshold regarding total sales turnover of the acquirer and the acquired on the Korean market (as determined by total affiliated companies' sales in Korea, not limited to the company at issue) is 20 billion won or more for each of the parties.

Generally, a post-closing notification must be made within 30 days after the closing of the transaction. However, if the transaction involves a share acquisition, business transfer, merger or establishment of a joint venture company that constitutes a 'large-scale company' (as defined above), a merger notification report must be filed before the execution of the business combination. In such a case, the report must be filed within 30 days after the signing of the share acquisition agreement, business transfer agreement, merger agreement, or board of directors meeting that approves the establishment of a joint venture. If the parties proceed with closing of the transaction without having obtained KFTC clearance, the KFTC may impose an administrative fine of up to 100 million won, varying depending on the amount of total assets and the number of past violations, and/or imprisonment for up to two years or criminal fines up to 150 million won.

The statutory review period for a pre-closing business combination report is 30 days from the filing, but the KFTC has the discretion to extend the period for an additional 90 days. Also, if the KFTC makes a request for additional information or material, the review period is tolled until the requested information or material is submitted to the KFTC. The MRFTA does not specify a review period for post-closing filings.

In order to decrease the administrative burden for companies involved in business combinations not likely to cause any anti-competitive impact, the KFTC has introduced a simplified review procedure. If a business combination falls into a 'safe harbour' based on its HHI value, the KFTC is required to notify the applicant of the outcome of its review within 15 days after the filing.

After completing the review of a business combination report, the KFTC issues its decision, which can be either a clearance decision or can contain measures such as a corrective order, a public acknowledgment of the violation, administrative fines or, as is occasionally the case, filing a criminal complaint with the Prosecutor's Office. Failure to comply with the remedies may result in fines calculated based on the length of the default period and the size of the business combination in violation. Once the KFTC issues its decision, only the filer of the report (not any other affected party) may appeal to the KFTC or the court.

Following the continuing trend of more international cooperation and extraterritorial application of Korean competition law, last year, for the first time in its history and out of a total of 114 foreign-to-foreign filings in 2007, the KFTC ordered a divestiture in one such transaction. In July 2007, US-based Owens Corning acquired the glass fibre manufacturing business from France-based Saint-Gobain Vetrotex (SGV). Based on a potential combined market share of 53.5 per cent in the Korean market, the KFTC ordered SGV to sell its Korean subsidiary to a third party. It is expected that foreign transactions will continue to receive close scrutiny.

Another first for the KFTC in 2007 was its approval of the largest-ever acquisition of a foreign company by a Korean company when Doosan Infracore acquired Ingersoll-Rand, a US-based enterprise active in the compact construction equipment business. The KFTC found no adverse affect on competition in the relevant Korean markets.

Cartels

With intensifying international cooperation, the KFTC has become an active partner in the fight against global cartels, leading to increasing imposition of fines and several thorough industry investigations. In recent years, the KFTC has been aggressively enforcing the Korean competition law on an extraterritorial basis, with well-known actions against worldwide cartels involving graphite electrodes, vitamins, chemical transportation and D-RAM.

The MRFTA prohibits entities from engaging in certain concerted acts and collaborative behaviours that substantially restrain competition in a particular field of trade. The law further specifies that no entity shall agree with another entity by contract, agreement, resolution, or any other means, to jointly engage in any acts such as price-fixing, territorial or customer allocation or hindrance or restriction of other companies' business activities, thereby substantially restraining competition in a relevant area of trade.

Prior to amendments in 2007, the MRFTA contained a strong deterrent against the forming of cartels in the form of a legal 'presumption' of cartel agreement based on parallel behaviour. Specifically, even in the absence of 'smoking-gun' evidence, when two or more entities behave in a parallel way with the semblance of cartel and substantial anti-competitive effect, the entities were presumed to have committed an unfair collaborative act (cartel), despite the absence of an explicit agreement to engage in such an act. Although this presumption would seem to be triggered fairly easily, the KFTC in practice added a third criterion as a necessary 'plus factor': circumstantial evidence. This administrative practice of the KFTC was effectively codified by the 2007 amendments to the MRFTA.

If as result of its investigation the KFTC concludes that a company has or is engaged in collaborative behaviour in violation of the MRFTA, it may:

• issue a cease-and-desist order;


• order the company to issue a public announcement of the finding of violation;


• impose an administrative surcharge up to 10 per cent of the revenue generated during the relevant period; or


• in case of grave infringement, file a criminal complaint with the Prosecutor's Office.


 

To encourage cooperation with the competition authority, the KFTC was one of the first countries in Asia to establish a leniency programme. The programme was first adopted in 1997. The leniency programme provides for two types of leniency: full leniency for the first applicant (immunity) and partial exemption for a consecutive reporter (reduction of fine). There is also a third kind of 'amnesty-plus' leniency whereby an entity that is being investigated for one type of violation of the MRFTA provides the KFTC with valuable information on another type of violation.

The leniency programme as initially promulgated was not a success. One perceived problem was that the KFTC had extensive discretion as to whether to grant the benefits of the programme, which meant that potential applicants did not have any assurance that their reporting of a violation would result in real benefit. This issue was addressed by amendments in 2006, resulting in greater legal security for applicants and substantially less discretionary power for the KFTC, and these amendments have greatly enhanced the attractiveness of the programme. The programme was amended again in 2007, and the surcharge reduction rate for the second applicant to come forward and cooperate with the KFTC's investigation was increased from 30 to 50 per cent. Also, the KFTC revised its programme to align it with international standards by denying exemption from surcharges to applicants that were responsible for forcing other parties to either continue or participate in a cartel.

As with other MRFTA infringements, the KFTC exercises extraterritorial jurisdiction on the basis that cartel activity outside Korea (with no ties to Korea other than sales in the Korean market) may adversely affect competition in the Korean domestic market. In this regard, the international cartels that were targeted by the KFTC in the past specifically included the domestic market in the scope of their cartels and their agreement was implemented in the domestic market (ie, the carbon graphite electrode case and vitamin cases). In April 2007, the KFTC investigated domestic and overseas semiconductor (D-RAM) manufacturers for alleged price-fixing affecting the Korean market, but because of lack of evidence the investigation was suspended.

Distribution and vertical restraints

Since 2006, the KFTC has been eager to regulate abuse of dominance cases and vertical restraints. This was also emphasised by the new chairman at his inauguration in March 2008. He expressly stated that a fair relationship between the large conglomerates and SMEs will be an area of primary focus during his term in office. Although the concept of vertical restraints itself is not separately defined, the MRFTA and specific KFTC Guidelines do mention several categories of vertical restraints, for example, exclusive dealing, customer or territorial restraint, refusal to deal, discrimination, tying or transaction with condition, abuse of superior bargaining position, interference with management, and resale price maintenance.

Korean antitrust law is unique in regulating a type of vertical restraint known as 'abuse of superior bargaining position,' stemming from the Korean business context of traditional conglomerates dealing in an arbitrary manner with smaller business partners (most often SMEs). The scope of this type of vertical restraint is very comprehensive in that if a company deemed to have a superior bargaining position forces its transaction counterparty to accept any 'unfair' condition, it may be deemed illegal. No finding of market power or dominance is required to establish an abuse of superior position. In a 2007 case concerning abuse of superior bargaining position, the KFTC found that an automobile manufacturer had abused its superior bargaining position by forcing excessive sales targets on its dealers. As remedies for the infringement, the KFTC imposed a surcharge of 985 million won on the manufacturer and ordered it to notify all its dealers of the fact and the details of the KFTC's imposition of sanctions.

The KFTC's approach in assessing vertical restraints varies with the type of vertical restraint under investigation. Safe harbour exceptions for companies with market shares not exceeding 10 per cent are applied to refusal to deal, discriminative transaction terms (excluding price discrimination), exclusive dealing and territorial or customer restraint.

Minimum resale price maintenance is deemed illegal per se, but other types of vertical restraint will generally be assessed under the rule of reason.

In reviewing vertical restraints under the rule of reason, the KFTC first assesses whether the vertical agreement in practice restrains competition in the relevant market, and then it will investigate whether the vertical restraint can improve economic efficiency or consumer welfare and to what extent the pro-competitive effect outweighs the anti-competitive effect. To balance the latter, the KFTC will, among other things, consider the degree of market power of the undertakings concerned and, therefore, on the extent to which those undertakings face competition from other suppliers of goods or services regarded by the buyer as interchangeable or substitutable for one another, the availability of alternative distribution channels, possible indispensability of the restraint, the purpose of the restraint, etc.

If the KFTC deems a practice in violation of the regulations on vertical restraints, it may impose penalties. In almost every case, the KFTC will at least issue a cease-and-desist order, and it is increasingly imposing monetary sanctions depending on the seriousness of the violation and anticompetitive impact on the market.

As with cartels, if a vertical restraint has an impact on the Korean market, even though the restraint is imposed by a foreign company with no branch or business presence in Korea, the Korean antitrust regulations will apply on an extraterritorial basis. The main criterion for extraterritorial application will be for the company to have sales in Korea.

Abuse of dominant market position

The MRFTA prohibits the abuse of a dominant market position. A company is presumed to be market-dominant when it has a market share of 50 per cent or more in the relevant market, or when it is one of the top three companies with a combined market share of 75 per cent or more. Companies with annual turnover of less than 1 billion won or a market share of less than 10 per cent are conclusively presumed not to be market-dominant.

Six types of behaviours constituting an abuse of a market-dominant position are specified: price abuse, output control, obstruction of competitors' business activities, blocking market entry, exclusion of competitors and damaging consumer interest.

Once the KFTC decides that an abuse of market dominance has occurred, it may impose an administrative surcharge of up to 3 per cent of the annual sales turnover or, in a rather rare case, if is difficult to compute turnover, up to 1 billion won. The KFTC may also issue a corrective order against the dominating firm to reduce prices, to discontinue the infringement, to announce the fact of the corrective order to the public, and to take other measures necessary to correct the abuse.

A landmark case regarding abuse of dominance was decided on 11 November 2007, by the Korean Supreme Court. The case involved an appeal from a KFTC decision issuing corrective orders on POSCO, one of the largest steelmakers in the world. The court held that, in order for a refusal to supply to constitute an illegal abuse of market dominance, the petitioner must clearly demonstrate the degree of a pronounced anti-competitive effect on the relevant market, for example, the effective foreclosure or hindrance of a prospective competitor's entry into the market. Simple proof of business disadvantages or difficulties encountered by competitors will not be sufficient. The Supreme Court in effect upheld the principle that antitrust law is intended to protect competition, not competitors.

Unfair subcontracting

One of the KFTC's prime objectives for 2008 is to establish a fair subcontracting order and crack down on unfair transaction practices. The Fair Subcontract Transactions Act (FSTA) was revised with the general intent of protecting small subcontractors against larger contractors that have bargaining leverage. The typical targets of enforcement of the FSTA are practices such as undue price reduction, unreasonable return, retaliation by refusing to deal with a reporting subcontractor, failure to provide prior written agreement, and forced purchase of goods. Violators may be subject to corrective measures (eg, cease-and-desist order or order to pay the subcontract price), a surcharge of up to double the subcontract price, and in severe cases a criminal fine of the same magnitude.

In 2007, the KFTC imposed 1,526 such corrective measures, a notable example of which relates to practices of automobile sales companies and parts suppliers involved in unfair subcontracting.

Introduction of consumer class action system

Under the recently amended Consumer Basic Law which took effect on 1 January 2008, a consumer association satisfying certain qualifications may bring an action in court to enjoin a company from engaging in, or to require a company to discontinue, a behaviour that endangers consumers' lives or physical bodies or infringes upon consumers' property rights.

The new law creates a new element of legal exposure for companies doing business in Korea. Care is required, as being subject to a consumer class action, finding of guilt and possible awards of money damages could have a significant negative impact on a company's reputation and financial position.

While the Korean system is different from other jurisdictions' class actions, as it is closer to a consumer interest group action, this system may bring similar results, especially in antitrust matters, where anti-competitive acts in many cases may result in damages to consumers.

Notes

1. At the time of writing, 1,000 Korean won = approximately US$1.02 or €0.645.
2. Record Year for International Patent Filings with Significant Growth from Northeast Asia, Geneva , February 8, 2007, WIPO/PR/2007/476, www.wipo.int/pressroom/en/articles/2007/article_0008.html, visited 9 April 2007.