Korea Update: KFTC Proposes Amendments to the Merger Review Guidelines

Modernization of the Merger Review Process to Reflect Digital Economy Dynamics.

On November 14, 2023, the Korea Fair Trade Commission (“KFTC”) published its proposal to amend the Merger Review Guidelines, specifically tailored to address the complexities of the digital economy (“Proposed Amendments”). The Proposed Amendments include an updated methodology for defining the relevant markets in digital sectors, particularly in cases involving free service providers and multi-sided markets. Additionally, the Proposed Amendments seek to refine how the KFTC evaluates competitive effects, focusing on network effects and the unique challenges posed by mergers involving entities offering free services, and also conglomerate mergers involving online platforms. The Proposed Amendments are also aimed at modifying the scope of simplified merger reviews.

Key Provisions of the Proposed Amendments

(ⅰ) Updated Market Definition Methodology The Proposed Amendments introduce a new approach for determining the relevant markets, particularly in multi-sided markets where companies offer nominally free services. Specifically, for companies offering nominally free services monetized through advertisements or other indirect means, the new methodology provides for a market definition based on factors such as demand substitutability arising from changes in service quality. Additionally, for multi-sided markets, which facilitate transactions between multiple parties, the Proposed Amendments allow for defining a single, integrated “multi-sided market” rather than a separate market on each side.

(ⅱ) Refined Competitive Assessment Criteria The Proposed Amendments introduce refined criteria for assessing the competitive effects of mergers in the digital sector, emphasizing the significance of network effects resulting from an increase in the number of users or the scale of data held by digital service providers. Mergers by digital service providers can generate network effects: They can expand the user base or data volume, thereby creating additional demand for the service and reinforcing the market dominance of the merged entity. Should the network effects be significant, the merged entity might gain sufficient market power to raise price unilaterally. The Proposed Amendments incorporate these factors into the competitive assessment of mergers in the digital sector.

Furthermore, the Proposed Amendments introduce an alternative methodology for market share calculation in cases involving companies offering nominally free services, noting that the traditional revenue-based methodology could produce a misleading outcome in these cases. Under this methodology, the KFTC will employ alternative metrics such as the number of users and the frequency of use to determine market share. Additionally, when evaluating mergers between providers of nominally free services, the emphasis will shift toward non-price factors such as diminution in service quality.

In the case of conglomerate mergers, the Proposed Amendments consider the potential competitive harm and the likelihood of increased barriers to market entry if the merged company bundles high[1]demand products with less popular ones.

(ⅲ) Additional Examples of Efficiency Gains The Proposed Amendments acknowledge efficiency gains unique to digital sectors. Accordingly, they cite specific examples of such gains and provide for a thorough assessment that weighs the potential competitive harm against the potential benefits. For example, the KFTC will consider factors like enhanced user convenience, innovations in service, cost reductions, expanded access to service, and the potential for an invigorated startup ecosystem (in mergers involving innovative digital technology startups where the exit of capital could lead to the creation of new startups).

1. Updated Scope of Simplified Review In cases with minimal economic impact on the market, the current Merger Review Guidelines provide for a simplified review that only verifies the facts and is to be concluded within 15 days. Under the Proposed Amendments, activities such as an existing limited partner (LP) of a private equity fund (PEF) participating in capital increases or acquiring stakes from another LP will be deemed internal to the PEF with negligible market impact, thereby qualifying for a simplified review. Conversely, conglomerate mergers involving online platforms will necessitate a full KFTC review, particularly if the entity involved in the merger serves over five million users per month or incurs an annual R&D expenditure amounting to KRW 30 billion or more.

Implications

The Proposed Amendments represent a significant step in updating the Korean merger control regime to account for the intricacies of the digital economy. These changes signify a more nuanced approach to merger review, balancing the need to address potential competitive harm with the goal of fostering innovation and enhanced efficiencies in digital markets.

By Yulchon, Korea, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact korea@transatlanticlaw.com

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