Fair Trade Commission Investigates Whether Kakao and NongHyup Exercised Voting Rights Improperly

Corporate Group Debt Guarantees Soar 1242%↑... Impact of Four Newly Designated Groups Including Celltrion

[Sejong=Asia Economy Reporter Kwon Haeyoung] The Fair Trade Commission (FTC) announced on the 26th that it is conducting an investigation, finding that the 16 instances of voting rights exercised by Kakao and NongHyup are not permitted under the Fair Trade Act.

The FTC made this announcement while releasing the '2021 Status of Debt Guarantees by Mutual Investment Restricted Business Groups and Voting Rights Exercise Status of Financial and Insurance Companies.'

The FTC reviewed the voting rights exercise status from May 1 of last year to April 30 of this year for 11 mutual investment restricted business groups (groups with assets exceeding 10 trillion KRW) that have investments by financial and insurance companies in non-financial affiliates. As a result, 11 financial and insurance companies belonging to 7 groups exercised voting rights a total of 107 times at shareholders' meetings of 18 non-financial affiliates. Among these, the 16 instances exercised by Kakao and NongHyup are suspected of violating the Fair Trade Act, and the FTC is currently conducting a related investigation.

Article 11 of the Fair Trade Act stipulates, according to the principle of separation between finance and industry, that financial and insurance companies belonging to mutual investment restricted business groups cannot exercise voting rights in non-financial or insurance companies in which they hold shares. However, exceptions are allowed ▲ when conducting financial or insurance business ▲ when approval is obtained under the Insurance Business Act, etc., for efficient operation and management of insurance assets ▲ or when resolutions on appointment/dismissal of executives, amendments to articles of incorporation, mergers, and business transfers are made at shareholders' meetings of listed non-financial companies, provided that the combined voting rights with special related parties do not exceed 15%. Regarding Kakao, the FTC is examining whether K Cube Holdings, which is effectively a holding company engaged in financial business, exercised voting rights over Kakao, a non-financial company.

Sung Kyungje, Director of the Corporate Group Policy Division at the FTC, said, "The number of suspected illegal voting rights exercises increased from 13 times in last year's investigation to 16 times this year," adding, "Continuous monitoring is necessary to check for indirect affiliate investments and illicit expansion of control using financial and insurance companies."

As of May this year, among 34 financial-industrial complex groups (groups owning financial and insurance companies) with controlling shareholders, 110 financial and insurance companies belonging to 20 groups invested a total of 12.3 trillion KRW in 265 affiliates. Notably, the number of non-financial affiliates invested in by financial and insurance companies increased by 7 to 60 compared to the previous year, continuing a rising trend since 2017. The investment amount was 440 billion KRW, down 180 billion KRW from the previous year.

As of May this year, among 40 mutual investment restricted business groups, 8 groups were providing inter-affiliate debt guarantees totaling 1.1588 trillion KRW. This is an increase of 1.0724 trillion KRW (1,242%) compared to last year's debt guarantee amount of 86.4 billion KRW. This increase is due to the newly designated groups Celltrion, Netmarble, Hoban Construction, and SM, whose debt guarantees amounted to 1.0901 trillion KRW. Excluding these four newly designated groups, the debt guarantee amount was 68.7 billion KRW, a decrease of 17.7 billion KRW (-20.5%) from the previous year.

The government introduced a system in April 1998 that generally prohibits debt guarantees to eliminate unreasonable debt guarantee practices by large business groups. However, if a company is newly designated as a mutual investment restricted business group or newly incorporated as an affiliate with debt guarantees, the debt guarantee elimination is deferred for two years from the designation or incorporation date. All four newly designated groups are understood to have either resolved their debts as of this date or are able to do so within two years.

The government exceptionally allows debt guarantees related to overseas construction, social overhead capital (SOC), and export-import production financing to strengthen international competitiveness. The related debt guarantees amount to 68.7 billion KRW, including SK (3.6 billion KRW), GS (36 billion KRW), KCC (27.9 billion KRW), and Doosan (1.2 billion KRW).