KLRI : KOREA LEGISLATION RESEARCH INSTITUTE

Ⅰ. Background and Purpose of this Study

○As of 2021, the number of reports on business combination reached a record high of 1,113 cases, which increased by 248 cases compared year-on-year. The total amount of business combination also soared to 349 trillion won from 138.8 trillion won. With the increase of global business combinations aimed at strengthening industrial competitiveness among domestic and foreign enterprises, the Fair Trade Commission is reviewing an increasing number of the same cases as foreign competition authorities are doing. 

  -Business combination under the Monopoly Regulation and Fair Trade Act (hereinafter “the Fair Trade Act”) means cases where the relevant enterprises meeting certain requirements report the business combination to the Fair Trade Commission and then the Commission may restrict the business combination that can result in substantial restriction of competition or impose corrective measures after conducting reviews thereon. The business combination should undergo two main procedures: business combination reporting and review.  

  -Business combination reporting has been maintained for more than 40 years since the Fair Trade Act was enacted in 1980. Due to the rapid increase of business combination reports, the review process is being delayed, causing inconvenience to the relevant enterprises. 

  -In addition, based on ex post reporting principle, the business combination is reported after the relevant situation is completed. Thus, there is growing concerns about legal uncertainty among companies as they may need to restore the situation to the original state if the Fair Trade Commission imposes corrective measures.

○ It is found that the Fair Trade Act fails to meet the consistency with foreign merger control regulations that apply to Korean companies due to the increase in global business combinations.

  - Particularly, the Fair Trade Act does not classify review stages in the process of business combination review, compared to foreign merger control regulations. This causes uncertainty in the process of business combination review. 

  - There is no incentives for companies to offer undertakings that are appropriate for the domestic situation, so they are tend to focus on reviews conducted by foreign competition authorities, which provide the procedures for offering undertakings.

○ Given such background, it is necessary to analyze the feasibility and effectiveness of legislative purposes of the Fair Trade Act and the suitability of its legal systems and to provide proper measures by conducting ex post legislative evaluation on whether the business combination report and review under the current Fair Trade Act contribute to encouraging creative business activities by promoting fair and free competition, which is one of the purposes of the Act. 

 

Ⅱ. Major Content 

▶ Subjects and main issues of legislative evaluation

○The following matters are the main issues of the legislative evaluation:

  - Standards for reporting business combination 

  - Timing of reporting business combination

  - Review stages of business combination

  -Imposition of corrective measures after business combination review

▶ Legislation cases of overseas countries regarding merger report and review

○ European Union

  - The European Commission must be notified of any merger with an EU dimension prior to its implementation. Companies may contact the Commission beforehand  to see how to best prepare their notification. 

  - EU classifies review into Phase I and Phase II. Phase I investigation should be conducted within 25 working days; and Phase II investigation should be completed within 90 working days.

  - More than 90% of all cases are resolved in Phase I, generally without remedies. In Phase II, the Commission analyzes claimed efficiencies which the companies could achieve when merged. 

  - Companies may offer remedies in Phase I or in Phase II. If remedies are accepted, they become binding upon the companies. 

○ Germany

  - Bundeskartellamt (Federal Cartel Office (BKartA)) must be notified of any merger prior to its implementation. The first phase investigation should be conducted within one month as a preliminary review while the second phase investigation should be conducted within four months as a main review.

  - If any substantive competition problem exists, BKartA may initiate the process of the main review for the relevant merger.

  -BKartA may issue a clearance decision on the conditions and obligations that enable the commitments offered by the relevant companies to be implemented. 

○ United Kingdom

  - There is no obligation under the EA 2002 to seek prior clearance of a qualifying merger from the Competition and Markets Authority (CMA)   either before or after the merger takes place, and there are no sanctions for proceeding without clearance. However, it is likely that the CMA will hear about the merger from another source and investigate on its own initiative. 

  - For Phase 1 investigation, a 40 working day period applies. Phase 2 investigation is conducted within 24 weeks from the date of reference.

  - An initial review considers whether the merger raises prima facie competition concerns (a Phase 1 investigation), with a second stage in-depth review for more contentious mergers (a Phase 2 investigation).

  -The parties may offer undertakings in lieu of a Phase 2 investigation. During the Phase 2 investigation, the CMA will negotiate and finalize remedies with the parties. The CMA will accept and manage such remedies. If any proper remedies are not agreed, the CMA may issue a separate Notice of Possible Remedies setting out proposed remedies.

○ United States

  - The proposed transaction cannot be consummated util the filing is completed. Buy-side and sell-side parties to the transaction musk make separate filings with the FTC and the DOJ.

  -A preliminary substantive review should be conducted within 30 days. The issuance of a second request extends the waiting period to the 30th day. 

  -After conducting preliminary review, the two antitrust agencies decide between themselves which one of them will review the transaction and the transaction will be investigated by the agency assigned. 

  -When the FTC and DOJ agree the prevention of a merger, the two antitrust agencies may seek an injunction in a District court prohibiting completion of the proposed transaction. If appropriate, the parties and the responsible agency may negotiate settlement conditions. If the FTC and the DOJ reach the agreement, they may bring a proceeding to a district court after collecting opinions. 

○ Japan

  -A notification must be made prior to the closing of the transaction. However, no filing requirement is imposed in respect of the creating of interlocking directorships.

  -The parties are subject to a 30-day waiting period starting from the date of filing (Phase 1) and Phase II review should be completed withing 120 days. If the FTC requires parties to “request report, etc.” Phase II review is triggered. 

  -Parties can submit additional information to supplement the notification or data necessary for the review (including request for measures to resolve problems) at any process of the phase 1 and phase 2. 

○ China

  - A notification must be made prior to the transaction.

  -The State Anti-Monopoly Bureau should conduct the first review within 30 days from the date of filling and if the Bureau decides to conduct an additional review, it should make a decision on whether the transaction is cleared or prohibited, within 90 days. 

▶ Legislative Evaluation on Business Combination and its Review under the Fair Trade Act

○ Standards for Business Combination

  - The current standards for business combination prescribed in the Fair Trade Act fails to reflect the scale of the national economy, which has rapidly developed since 2017. In addition, compared to overseas competition laws, the wider range of business combination subject to reporting causes burdens to the companies and the excessive number of reports hinders the Fair Trade Commission from promptly conducting review of business combination.

○ Timing of reporting business combination

  -The current Fair Trade Act provides for the principle of ex post reporting and grants exemption from ex ante reporting. However, most of the business combinations are subject to ex ante reporting, so this provision fails to reflect the current status of the market. If the relevant transaction is found to substantially restrict competition after the completion of the implementation of the transaction as a result of ex post reporting, legal uncertainty related to the business combination can occur as the Fair Trade Commission may imposes corrective measure like restoration to the original. 

○ Business Combination Review

  -The current Fair Trade Act prescribes the period of business combination review but does not provide for a clear review process. This causes the decrease of the efficiency and effectiveness of the review process of the business combination. Under the current review process, the period of review can be additionally extended by virtue of corrective order even though the case does not substantially restrict the competition. Thus, the relevant companies cannot expect when they can obtain the approval after they submit the application. 

○ Method of offering remedies after the review of business combination

  -During the current review process, the Fair Trade Commission may unofficially consult with the relevant companies, but the offering of companies’ undertakings is not clearly prescribed in the Fair Trade Act. The unofficial consultation has no bindings and market test is rarely conducted. Thus, the current way to offer undertakings is less efficient and effective.

▶ Measures for improving business combination reporting and review process under the Fair Trade Act

○ Upgrading the standards for reporting business combination

  -In order to maintain the proper number of cases filed, it is necessary to upgrade the standards for reporting business combination through simulation based on the statistics related to the previous cases and the proportion of the business combination cases that are determined as substantially restricting competition. 

  -It is necessary to adjust standards for reporting business combination, which is currently based on the total amount of the transaction, aimed at relieving the concerns over the market concentration caused by excessive expansion of subsidiaries by platform business operators.

○ Transition to pre-notification

  -It is necessary to make transition to pre-notification in line with the trend of overseas competition laws, but some cases where it is impractical to make pre-notification such as interlocking directorate, public tender offer, exercise of secured interest, etc. can be exempt from pre-notification. 

○ Introduction of two-stage review process

  -(Short-term measure) As the Fair Trade Commission is currently suffering from the shortage of human resources related to the receipt of business combination reporting and the conduct of business combination review. While the current review process is maintained in the short term, it is necessary to improve the system that enable the FTC to notify the reasons for extension in writing to the reporting company when the Fair Trade Commission extends an additional 90 day period after the lapse of a 30 day review period.

  -(Long-term measure) In the long term, it is necessary to increase the number of those responsible for examining the review of business combination and then to introduce a two-stage review process that are already implemented under overseas competition laws. For most of the cases that are less likely to substantially restrict competition, the review process can be completed at the first phase and the approval for business combination can be granted. Only for the cases that can result in substantial restriction of competition, the second phase can be triggered. When initiating the second review phase, it is necessary to give predictability by notifying the reporting companies of the reasons for the concerns on substantial restriction on competition and other main issues. 

○Introduction of systems to submit remedies by the companies involved in business combination

  -When the companies involved in business combination submit undertakings following the simplified procedures for corrective measures, it is necessary to improve the system that the examiner assesses the relevant undertakings and if the undertakings are suitable to resolve the substantial restriction of competition, grants the business combination on the condition that the proposed term will be implemented. Under the improvement measure, if the companies fail to comply with the terms, the FTC may issue corrective measures after re-examination.

  -When the undertakings submitted by an enterprise are insufficient to resolve the substantial restriction of competition, the Fair Trade Commission may impose corrective measures under Article 14(1) of the Fair Trade Act following the original official procedures.

 

Ⅲ. Expected Effects

○This study aims at identifying the problems on the reporting and review of business combination and amending to the Fair Trade Act by analyzing the achievement of the legislative purposes and their weakness through legislative evaluation on the business combination under the Fair Trade Act.