Imposing Passage Fees on Affiliate Support Likely to Be Considered Unfair Support
Fair Trade Commission Expected to Release Related Regulations... "Logistics Work Regulations to Be Established Within This Year"
[Asia Economy Reporter Moon Chae-seok]
#Paris Croissant, Espiel, BR Korea, and other SPC Group’s bakery affiliates have long purchased raw materials and finished products from SPC Samlip, an intermediate distributor within the same group. Over seven years, 41.4 billion KRW in profits were provided, and SPC Samlip’s sales increased from 269.3 billion KRW in 2010 to 1.01 trillion KRW in 2017. The Fair Trade Commission judged this transaction as an 'unfair support act' that boosted SPC Samlip’s stock price to maintain the control of SPC Group Chairman Heo Young-in’s family and facilitate succession of management rights. SPC Group was hit with the largest-ever fine of 64.7 billion KRW related to unfair support and the 'iron hammer' of criminal charges against Chairman Heo’s family and executives.
Going forward, if a corporate group supports its affiliates by imposing a 'pass-through fee' (support acts through additional transaction stages) at the group level like SPC Group, it may be considered an 'unfair support act.' The business community expressed dissatisfaction, saying that regulations on 'special treatment of orders' that only examine whether the group head appropriates private interests can regulate only large conglomerates, and now the government has begun to intervene in transactions involving small and medium-sized enterprises through unfair support act regulations.
The Fair Trade Commission announced that it has finalized and will implement from the 10th the revised 'Guidelines for Reviewing Unfair Support Acts.' For an unfair support act to be established under the Fair Trade Act, the requirements of 'support act nature' and 'unfairness' must be met, and the criteria for judging these two requirements have been strengthened.
The standards for unfair support acts related to pass-through fees will be strengthened. From now on, an act will be considered unfair support if it is ▲difficult to view as a result of normal business judgment, ▲an unusual transaction pattern, ▲the supported party’s role is minimal, ▲the support provider is subject to a disadvantageous transaction method, or ▲the support provider can trade directly with other businesses at a lower price.
The level of judgment for 'unfairness' has also been raised. The criterion for assessing competition restriction, 'the supported party’s relevant market,' has been specified as 'the market to which the supported party directly or indirectly belongs.' In other words, the group’s behavior of boosting affiliates through internal transactions to completely block external businesses’ market entry will be strictly scrutinized. Also, the exemption threshold for unfair support acts has been raised from 10 million KRW to 50 million KRW in support amount.
The criteria for establishing the 'support act nature' have also been revised. The method for calculating the 'normal price,' which is the premise of support acts, has been reorganized. Separate normal price calculation standards have been set for 'financial,' 'asset/product/service support acts.'
First, the method for calculating the normal price (individual normal interest rate) in 'financial' support acts applies the interest rates in order: ▲the rate applied between independent parties with no special relationship under the same conditions as the transaction between the support provider and recipient, ▲the rate applied between independent parties with no special relationship under similar conditions, ▲the rate applied between independent parties with no special relationship under identical or similar conditions.
The method for calculating the normal price in 'asset/product/service support acts' applies sequentially: ▲the price of transactions between independent parties with no special relationship in identical cases for the relevant assets (securities, real estate, intangible property rights, etc.), products, or services, ▲the price adjusted reasonably for differences in transaction conditions in similar cases. If there are no similar cases, a realistic price commonly chosen considering the economic and business situation at the time of the transaction must be identified.
The Fair Trade Commission announced it will continue to introduce strengthened regulations on unfair support acts by corporate groups, including small and medium-sized enterprises. It plans to establish 'voluntary compliance standards for opening logistics orders' within this year. Lee Sang-hyup, head of the Unfair Support Monitoring Division at the Fair Trade Commission, said, "With this revision of the review guidelines, the objectivity and consistency of law enforcement on unfair support acts will be elevated to a higher level."
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