Korea: Overview

Invigorating the market through active anti-trust enforcement

Throughout 2009 the Korea Fair Trade Commission (the KFTC or the Commission), Korea's competition authority, continued its active enforcement of competition law.1 At the same time, as the global recession continued to affect the country, the KFTC focused its efforts on protecting Korean consumers and also on relaxing certain regulations constricting corporate activities. The KFTC recognised that the harsh environment during an economic recovery may tend to aggravate anti-competitive behaviour in the market, and that consumers and smaller businesses may therefore become more vulnerable. In this context, as the guardian of the market, the KFTC has set as its 2010 policy objective the reinvigoration of the nation's economy by further boosting competition. To that end, it proposes to pursue the following policy goals.

Revamp those areas of the market that have structural restrictions on competition

• Overhaul anticompetitive entry barriers in key sectors affecting the public, such as healthcare, finance, logistics and energy; and

• prevent formation of monopolies and oligopolies by carefully reviewing large-scale M&A transactions, while facilitating corporate restructuring by expediting the review process for non-anticompetitive M&A transactions.

Eradicate cartels to ensure that markets are competitive

• Tighten monitoring of industries that produce consumer goods closely related to the everyday lives of consumers and of the business activities of enterprises that produce daily necessities, raw materials and business equipment, in order to prevent the formation of cartels; and

• devise measures to prevent bid-rigging in public procurement, such as the requirement to specify in all procurement agreements the amount of liquidated damages that would become payable upon detection of a cartel.

Promote competitive environment for small and medium-sized enterprises (SMEs)

Reflecting the focus of Korean competition law on protecting smaller companies from abuse by larger companies, the KFTC will monitor and redress unfair subcontracting practices of large companies, and monitor unfair business practices committed by large-scale retailers. In particular, the Commission will ensure that its enforcement efforts in this area target second- and third-tier suppliers as well as first-tier suppliers.

Encourage active consumer participation

In order to provide appropriate information to consumers, the KFTC plans to launch by 2011 a comprehensive online information network. The KFTC will also strengthen consumer rights, especially in the financial industry, and adopt measures to foster consumers' trust in the market.

Korean competition law

The KFTC is a ministerial-level administrative organisation with four main mandates: to promote competition, strengthen consumer rights, create a competitive environment for SMEs and restrain concentration of economic power. It is a quasi-judiciary body that formulates and administers competition policies, and hears and decides antitrust cases brought by its staff. The Commission enforces nine laws including the Monopoly Regulation and Fair Trade Act (the MRFTA), which is the primary source of competition law in Korea. When it was enacted in 1980, the MRFTA heralded a significant departure from a government-controlled economy towards a market economy based on private enterprise and free competition. Since then, the MRFTA has been gradually amended and the scope of enforcement has been broadened to conform to the global standards of antitrust practices.

The KFTC's case proceedings consist of two stages, namely investigation followed by deliberation. The staff at the Commission initiates an investigation when a possible violation of the law is reported or detected. To protect competition and uncover anticompetitive behavior, the staff is given comprehensive investigative powers, including summoning respondents and witnesses and inspection and seizure of relevant evidence. The examiner in charge of the case issues the examination report to the respondents and also submits to the Commission (consisting of nine Commissioners) for deliberation. The respondents are given an opportunity to present written opinions to the Commission and to appear at the hearing. After the hearing, the Commission gives its verdict as to whether any law has been violated. If a violation is found, the Commission will impose corrective measures and fines, which depend on the type of violation involved, eg, cartel, abuse of dominance, etc.

In the case of a serious violation, in addition to imposing corrective measures and fines, the KFTC may refer the matter to the public prosecutor's office for criminal prosecution of the company involved and its individual officers. In Korea, criminal proceedings for violation of the MRFTA can be commenced only if the KFTC refers the matter to the public prosecutor's office. If convicted, an officer of the offending company may be sentenced to up to three years' imprisonment, a criminal fine of up to 200 million Korean won. The offending company itself may also be subject to a criminal fine not exceeding 200 million won.

Before commencing an on-site investigation, the KFTC must present an official notice of investigation with a statement setting forth the rights of the respondent, and also orally explain such rights to the respondent. The company subject to investigation can confirm the contents of the official notice of investigation, and if it believes that the actual investigation differs from that set forth in the notice, it is entitled to refuse to submit to the investigation. During the ongoing investigation, the company is entitled to a fair and transparent investigation without undue delay and may report to the KFTC any misconduct of the examiners.

The KFTC has been an enthusiastic participant in the OECD and International Competition Network, and has not hesitated to cooperate with competition authorities in other countries, in particular to clamp down on cross-border cartels. For instance, in May 2009, the KFTC entered into the Agreement Concerning Cooperation on Anti-Competitive Activities with the European Commission, aimed at promoting cooperation on competition policies and enforcement of competition law between Korea and the European Community. This was the first government-level competition policy agreement the Korean government signed.

Mergers & acquisitions

Generally, a post-closing notification must be made within 30 days after the closing of a share acquisition, business transfer, merger or establishment of a joint venture company (M&A transaction). The MRFTA does not specify a review period for post-closing filings.

However, if an M&A transaction involves a large-scale company with total assets or sales revenue of 2 trillion won or more, the notification must be filed before the transaction closes. The statutory review period for a pre-closing notification is 30 days from the filing, but the KFTC has the discretion to extend the period for an additional 90 days. 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.

If the parties close an M&A transaction subject to pre-closing notification without clearance from the KFTC, the Commission may impose an administrative fine on the company of up to 100 million won, recommend the matter to the public prosecutor's office for criminal prosecution of individual officers, in which case any officer held to be responsible can be subject to imprisonment for up to two years or criminal fines of up to 150 million won, or both.

In order to decrease the administrative burden for companies involved in an M&A transaction that is not likely to cause any anticompetitive concern, the KFTC has introduced a simplified review procedure. If the M&A transaction falls into a 'safe harbour' based, among other things, on its Herfindahl-Hirschmann Index value, the KFTC is required to notify the applicant of the outcome of its review within 15 days after the filing.

After completing its review of the notification, the KFTC issues its decision, which can be either a clearance decision or a corrective order. The corrective order, whether seeking a structural remedy or behavioral remedy, is issued only after a hearing before the Commission. Failure to comply with the remedies in the corrective order may result in fines calculated based on the length of the period the company is in default and the size of the M&A transaction. 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, or both.

In May 2009, the KFTC reorganised its structure and created the Business Combination Division, dedicated to the review of merger notifications; previously, five different divisions had been responsible for merger review. In doing so, the KFTC hoped to enhance the level of diligence in the merger review process. As a practical consequence, the KFTC is now conducting a closer examination of the potential competitive impact of M&A transactions and applying particular scrutiny to potential vertical and conglomerate effects.

According to the KFTC's analysis of merger notifications filed in 2009, the following trends have been identified.

In 2009, 413 merger notifications were filed with the KFTC, down 25 per cent from 550 notifications filed in 2008, but the aggregate value of the transactions was 150.3 trillion won, up 5 per cent from the 142.8 trillion won notified in 2008. The decrease in the number of the transaction appears to have resulted from the global economic downturn. One notable trend in the 2009 merger notifications was a relative rise in the number of transactions between affiliates for enhanced efficiency in internal management. In particular, there was an increase in the number of intra-group mergers consolidating similar or related businesses. A total of 23 acquisitions of domestic companies by foreign entities were notified in 2009, down 51 per cent from 47 cases notified during 2008.

One noteworthy decision was rendered on 6 October 2009, in which the KFTC prohibited the acquisition of Paradise Group's duty free shops by Lotte. This was the fifth time that the KFTC has outright prohibited an M&A transaction. In this case, the Commission based its decision on, among other things, its finding that the relevant market is static and has high barriers to entry, so there was little possibility of regaining the level of competition enjoyed before the transaction occurred.

Cartels

The KFTC is an active contributor to the growing international cooperation in the fight against global cartels, conducting thorough industry investigations and increasingly imposing fines. In recent years, the KFTC has aggressively enforced Korean competition law on an extraterritorial basis, with high-profile actions against worldwide cartels involving air cargo (still pending), carbon paper (resulting in a fine of 3.8 billion won) and marine hose (resulting in a fine of 560 million won). The carbon paper cartel was a landmark case in that it was the first international cartel sanctioned by the KFTC before any other competition authority took action.

The MRFTA prohibits entities from engaging in certain concerted acts and collaborative behaviors that substantially restrain competition in a particular field of trade. The law further specifies that entities may not agree by contract or any other means to jointly engage in any acts that substantially restrain competition in a relevant area of trade, such as price fixing, territorial or customer allocation, or restriction of other companies' business activities. If as result of its investigation the KFTC concludes that a company has or is engaged in collaborative behavior 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 fine up to 10 per cent of the company's revenue during the relevant period; or

• in case of grave infringement, file a criminal complaint with the public prosecutor's office.

Korea is one of the first countries in Asia to introduce a leniency programme. The programme provides for full exemption from fines for the first applicant (immunity) and partial exemption for the second applicant (reduction of fine). There is also an 'amnesty-plus'_leniency programme whereby an entity under investigation for an alleged cartel that voluntarily provides the KFTC with valuable information on a different cartel will benefit not only from amnesty in respect of the second cartel (full exemption from fines), but also a reduction of fine in respect of the first cartel.

As with other MRFTA infringements, the KFTC exercises extraterritorial jurisdiction on the basis that cartel activity outside Korea may adversely impact the Korean market. For example, in late 2009 the KFTC examiners submitted to the Commission examination reports alleging participation in a cartel in the international air cargo business by two domestic and 24 foreign airline companies.

As discussed above, in 2009 the KFTC fined six producers of liquefied petroleum gas (LPG) a record 669 billion won for price fixing, which is the highest-ever fine imposed in a single cartel case in Korea. In its press release, the KFTC stated that the LPG suppliers had been fixing prices for six years. Many companies subject to the investigation denied the existence of such an agreement during the investigation and continue to do so after the KFTC's decision. It is reported that these companies will file an appeal against the decision before the Seoul High Court after they receive the written final decision of the KFTC. This case illustrates the KFTC's willingness to actively investigate and enforce the antitrust laws even when the existence of an illegal collusion is not admitted by the parties.

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.

The MRFTA provides a list of behavior that constitutes an abuse of market dominance: 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 issue a corrective order against the dominant firm to reduce prices, to discontinue the infringement or to take other measures necessary to correct the abuse. The KFTC may also impose an administrative fine of up to 2 per cent of the affected volume of commerce.

In July 2009, the KFTC found that Qualcomm Inc had abused its dominant position by charging discriminatory royalties and offering conditional rebates, issuing corrective orders and a fine of about US$208 million. Qualcomm has filed for an appeal and the case is pending.

Vertical restraints

The MRFTA regulates several categories of vertical restraints, including exclusive dealing, customer or territorial restraint, refusals to deal, discrimination, tying or transacting with conditions, abuse of superior bargaining position, interference with management, and resale price maintenance.

Minimum resale price maintenance is per se illegal, but other types of vertical restraint will generally be assessed under the rule of reason. 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 refusals to deal, discriminatory transaction terms (excluding price discrimination), exclusive dealing and territorial or customer restraint.

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 large companies 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'_ conditions, it may be deemed illegal. No finding of market power or dominance is required to establish of the requisite 'superior bargaining position'.

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 business presence in Korea, the Korean antitrust legislation may be applied on an extraterritorial basis.

Unfair subcontracting

One of the KFTC's ongoing objectives is to establish a fair subcontracting order and crack down on unfair transaction practices. The Fair Subcontract Transactions Act (the FCTA) protects small subcontractors against larger contractors with superior bargaining leverage. The typical targets of FCTA enforcement are undue price reduction, unreasonable return, retaliation by refusing to deal with a subcontractor, failure to provide a prior written agreement and forced purchase of goods. Violators may be subject to corrective measures (eg, a cease-and-desist order or an order to pay the subcontract price), an administrative fine of up to double the subcontract price and, in severe cases, a criminal fine of the same magnitude.

In 2008, the KFTC imposed a record 11.6 billion won fine on a domestic electronics company for violation of subcontracting regulations, as well as personal fines on the executive officers of the violating company for interference with the KFTC's investigation. It is expected that strict enforcement of these regulations will continue in the future, especially in relation to unilateral reduction of subcontracting prices by large companies.

Notes

1. For example, in 2009 the KFTC levied fines in excess of 1 trillion won, a record-breaking amount in the history of Korea's antitrust enforcement and a substantial increase over 2008 (371 billion won). This included an aggregate penalty of 668.9 billion won imposed on six major liquefied petroleum gas suppliers for price fixing, under appeal at the time of writing.

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