Investment Restrictions and Mandatory Affiliate Shareholding... "Holding Company Regulations Should Shift to Ex-Post Regulation Like G5"

US allows investment up to 7 levels, Korea only 3 levels
Japanese holding company’s grandchild company investment allowed, Korea not allowed
Germany controls affiliates with less than 50% stake

There has been a business community claim that the pre-transaction regulations on Korean holding companies, such as restrictions on investment and mandatory equity ownership clauses for affiliates, are excessively rigid and need to be reconsidered to align with global standards. They argue that the system should be changed to focus on ex-post regulations, like the major five countries (G5) including the United States, Japan, Germany, the United Kingdom, and France.

[Image source=Yonhap News]

On the 13th, the Korea Economic Association asserted this through a report titled "A Case Study on Holding Company System Corporate Groups in G5 Countries," commissioned to Professor Jin-Yeop Ji of Dongguk University's Department of Economics. According to the report, pre-regulation of holding companies is only implemented in Korea. The G5 countries regulate only ex-post through competition law and company law. As a result, it is relatively difficult to find diverse holding company investment structures in Korea. Pre-regulation means proactively restricting regulated acts if they are likely to harm competition and consumer interests. It is stricter than ex-post regulation.

First, in the United States, there is an example of a vertically integrated energy company with a seven-tier investment structure. The largest U.S. energy conglomerate, Southern Company, is representative. The Southern Company Group holding company controls regional intermediate holding companies. These regional intermediate holding companies control intermediate holding companies by power generation sectors such as wind and solar. It has up to a seven-tier investment structure. This regional and sectoral vertical integration enables rapid decision-making and efficient management.

In Korea, investment is allowed up to a maximum of three tiers. Article 18 of the Fair Trade Act generally permits investment only up to "holding company-subsidiary-grandchild company." Only in cases where the equity ratio is 100% is it exceptionally allowed to hold great-grandchild companies. Even for the Southern Company Group, if Korean Fair Trade Act is applied, affiliates below the great-grandchild company level must be sold or merged to avoid illegality.

The types of holding company investment structures are also limited. Japan's NTT Group holding company (NTT Corporation) jointly invests in a grandchild company (NTT Data Inc) with its subsidiary (NTT Data). This is impossible in Korea. Under the Fair Trade Act, holding companies cannot directly invest in grandchild companies. Joint investment with subsidiaries is also prohibited.

The mandatory equity ownership ratio for controlling affiliates is also higher in Korea than in the G5. Germany has a diverse range of ownership ratios from 20% to 33.33%. For example, Deutsche Telekom holds 20% to 33.33% stakes in its four unlisted subsidiaries. In Korea, under the Fair Trade Act, subsidiaries must hold more than 50% of the total issued shares of unlisted grandchild companies. It is a more challenging environment to establish affiliate control than in Germany.

Holding financial subsidiaries within holding companies is also strictly regulated. The United Kingdom allows holding companies to own financial subsidiaries and great-grandchild companies in the form of joint ventures. The UK's largest oil company, BP (British Petroleum), controls the entire group by having multiple intermediate holding companies by business sector and region centered on the holding company BP PLC. For example, BP International Limited, a subsidiary (intermediate holding company) of BP PLC, controls a financial insurance company (grandchild company). The financial insurance company issues corporate bonds to raise funds independently. Holding a financial insurance company within a holding company is illegal in Korea.

Unlike Korea, France allows investment between subsidiaries. For example, the AXA Group holding company (AXA SA) facilitates investment between subsidiaries. AXA France IARD holds a 1.42% stake in AXA France Vie, and AXA France Vie holds a 29.71% stake in DHP SAS. All are subsidiaries of the group holding company (AXA SA). This structure is impossible in Korea.

Lee Sang-ho, head of the Economic and Industrial Headquarters at the Korea Economic Association, emphasized, "Korean holding company regulations are extraordinarily stringent on a global scale," adding, "It is necessary to relax pre-regulations related to holding companies to focus on ex-post regulations like the G5, so that companies can explore investment structures suitable for changing business environments."