New law to restrict inter-affiliate deals

By Kim Rahn

New laws against conglomerates and chaebol have prompted an outcry from within commerce circles. Business lobby groups claim that the latest move amounts to “excessive restriction.”

The Federation of Korean Industries (FKI) said Wednesday that fair and normal transactions between affiliates can be regarded as unfair, saying inter-subsidiary deals will be reduced greatly.

“Inter-affiliate transactions are made usually for effectiveness or for confidential reasons. But the revision basically regards such transactions as unfair, so for every inter-subsidiary deal, companies will have to consider whether it is in violation of the rule. It will be negative toward managerial efficiency,” an FKI official said.

He said the rule will infringe on the economic freedom of conglomerates in justification of preventing chaebol owners from seeking their own interests.

The move by the FKI came after lawmakers on Tuesday passed a revision bill to the law on anti-monopoly and fair trade, which was designed to prevent the families of chaebol owners accumulating wealth by unfairly favoring their subsidiaries when awarding contracts. The new rule will take effect in January.

The revision was part of the Park Geun-hye administration’s “economic democratization” policy that aims to curb conglomerates’ abuses of power and offer more business chances to small-sized firms.

Anti-monopoly

There was criticism that advertising, logistics or system integration subsidiaries of chaebol have exclusively obtained orders from other affiliates of conglomerates without having to compete with other companies in the industries.

In the case of Hyundai Motor Group’s advertisement affiliate Innocean, it has made ads for the group’s affiliates. Entirely owned by group Chairman Chung Mong-koo’s family members, the company has emerged as the ad market’s No. 2 in only eight years since it was established in 2005.

As chaebol owner family members are the largest shareholders of most of the “favored” subsidiaries, there was criticism that such transactions have helped owner families amass wealth too easily.

Now the revised law will ban such deals. It prohibits transactions which offer considerable advantages to chaebol family-owned subsidiaries compared to normal deals; which have not been made through usual subcontractor selection procedures; and which are expected to give considerable profits to such affiliates.

However, deals among affiliates made for the conglomerate’s confidential reasons will be allowed.

The revision also prevents “commission collection” practices, which means an affiliate accepting an order from another subsidiary and having a small-sized subcontractor do the work, with the affiliate taking 10-20 percent of the payment in commission.

However, some lawmakers, especially those from the opposition parties, pointed out the restrictions have been eased from the original plans, doubting whether the new law will be effective.

For example, the revision did not set the criteria on which affiliates are subject to the restriction. The initial plans were to target subsidiaries in which chaebol owner family members hold more than 30 percent of the stake. But under the revision, the ratio will be set later as a subordinate ordinance.

According to the Fair Trade Commission, the nation’s 62 conglomerates have some 1,800 affiliates. Of them, chaebol family members own more than 30 percent of stakes in about 200 subsidiaries. If the 30-percent ratio is confirmed, one of nine affiliates will be under the restriction.

Rights for franchise outlet owners

The Assembly passed another revision bill which was designed to protect the rights of franchise store owners.

Under the new rule, when making a contract for a store opening, franchise giants will have to state the store owner’s business area and must not allow another store of the same type to open in the area - an effort to guarantee minimum sales.

For 24-hour businesses such as convenience stores, franchise companies will also have to allow shorter operating hours for outlets which are located in remote regions and barely make sales during nighttime.

Franchise outlet owners will also be allowed to form an association among themselves to negotiate operational conditions with the companies.