Proposed Korean Merger Control Rules Target “Killer Acquisitions”

The Korean antitrust enforcer, the Korea Fair Trade Commission (KFTC), has released further revised draft merger control rules that are designed to capture the so-called “killer acquisitions,” i.e., acquisitions of small innovative start-ups by larger established companies. Under the proposed rules, a transaction that is not reportable to the KFTC under the existing standard rules will be reportable if it satisfies an alternative two- prong transaction value-based test: (1) a “transaction value” of KRW 600 billion or greater (Section II.A. below); and (2) “substantial Korean presence” of the target as determined by the scale of sales/services or R&D expenditure (Section II.B. below). The KFTC will accept comments on these draft rules until Sept. 28, 2021, after which it will promulgate the final rules with or without further modifications.

Background

In December 2020, the Korean antitrust statute, i.e., the Monopoly Regulation and Fair Trade Act (MRFTA), was significantly amended to cover various issues and a new provision was added to provide for an alternative, transaction value-based test for determining the reportability of a transaction in addition to the existing size-of-party (size of assets and turnover) test. The amendment to the merger control portion was aimed at addressing concern that the existing merger control rules fail to capture many acquisitions targeting a start-up that has yet to generate substantial sales but has a great growth potential and competitive significance. On June 4, 2021, the KFTC released for public comments its initial draft Enforcement Decree, including proposed guidance on how it will interpret and implement the new alternative transaction value-based test (with an alternative minimum Korean nexus threshold). Then, on September 8, 2021, the KFTC released for public comments revised draft Merger Notification Rules, further fine-tuning and clarifying some of the key concepts and ideas on the alternative transaction value- based notification test that was previously explained and proposed in the draft Enforcement Decree of June 4, 2021 and presumably reflecting some of the various public comments received on the draft Enforcement Decree. The amended MRFTA and various underlying rules and regulations (including the Enforcement Decree, Merger Notification Rules and any other guidance) will go into effect on Dec. 30, 2021.

Revised Proposed Rules

Under the KFTC’s existing standard merger notification rules, a transaction will be reportable to the KFTC if it is one of the five reportable types of transactions and meets the following size-of-party test: (i) one party has at least KRW 300 billion in worldwide assets or sales; and (ii) the other party has at least KRW 30 billion in worldwide assets or sales. For a foreign-to-foreign transaction or when the target is a foreign company, the additional local Korean nexus test also applies – that is, each relevant foreign party must have at least KRW 30 billion in sales in or into Korea. On the other hand, the alternative Korean nexus requirement of the alternative transaction value-base test applies to both Korean and non-Korean targets even when (or more correctly, especially when) they do not meet the standard rule’s minimum assets/ sales size thresholds.

Transaction Value

Under the proposed rules, whether a transaction has a total value of KRW 600 billion or greater will be determined in accordance with a formula that varies depending on the type of transaction at issue. Thus, a separate formula applies to each of the four reportable types of transactions for which “transaction value” can be attached: (1) share acquisition; (2) mergers; (3) “business transfer,” a category including asset acquisitions; and (4) participation in jointly establishing a new JV company.¹⁾

Share Acquisition

For a share acquisition, the transaction value will be the sum of (i) the acquisition price for all target shares being acquired, (ii) the total book value of any target shares already held by the acquirer, and (iii) liabilities of the target to be assumed by the acquirer prorated to the acquirer’s shareholding ratio.

Merger

For a merger, the transaction value will be the sum of (i) the total value of all shares to be issued by the acquirer in return for the acquisition (i.e., the per-share price multiplied by the number of shares), (ii) any payment to be made by the acquirer to the target’s shareholders, and (iii) liabilities of the target to be assumed by the acquirer.

Business Transfer

For a “business transfer” such as an asset acquisition, the transaction value will be the sum of (i) the transfer payment to be made by the acquirer and (ii) liabilities of the target to be assumed by the acquirer.

Participation in Joint Formation a New JV Company

For participation in jointly establishing a new company, the transaction value will be the total contribution to be made by the largest shareholder of the new JV company.

Substantial Korean Presence of the Target

Under the proposed amended rules, the target of a transaction has substantial Korean presence in case of the following: (i) within the three years preceding the transaction, the target sold products or provided services to at last one million people in Korea in a single month during the period, or (ii) within the three years preceding the transaction, the target (x) has leased Korean R&D facilities or has utilized Korean research personnel, and (y) had an annual “related budget” of at least KRW 30 billion as spent and recognized as such on its financial records in any of the three years.

The KFTC’s further revised proposed rules clarify that for a company providing content, SNS or other Internet-based services, the monthly customer count test does not double count the same customer/ user who visited a relevant site more than once during a given month. Rather, it will be counted as one customer/visitor.

Implications

The proposed rules provide for some concrete and useful guidance on the new alternative transaction value-based (with an alternative Korean nexus threshold) test for determining the reportability of a transaction. In the process, they appear to close in advance a few potential loopholes or resolve ambiguities, particularly with respect to the scale of sales or services as applied to an SNS or other Internet-based service provider, and as a result may help capture a number of “killer acquisitions” as indeed intended. As with any new regulation, however, some uncertainties and novel questions will inevitably emerge as to how the KFTC will apply the new rules, when they are finalized and promulgated, to particular transactions in practice. Therefore, it will be necessary and critical for the KFTC to stay engaged in constructive and timely dialogue with companies and their advisors to ensure that the new alternative transaction value-based rule is effectively yet sensibly implemented and enforced.

1) As noted above, in addition to these four, there is another type of reportable transaction under the “standard” Korean merger control regime, i.e., interlocking directorate. However, the proposed alternative transaction value-based test is not applicable to interlocking directorate transactions.

By Sung Bom PARK & Seuk Joon LEE, Yulchon, Korea, a Transatlantic Law International Affiliated Firm. 

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

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