CONTENTS
- 1. A Case in Which Unfair Intra-Group Support Was at Issue
- - What Is Unfair Intra-Group Support
- 2. The Lower Court's Determination on Unfair Intra-Group Support
- 3. The Supreme Court's Determination on Whether Unfair Intra-Group Support Existed
- - The Significance of This Judgment
- 4. Daeryun's Strategy Regarding Unfair Intra-Group Support
1. A Case in Which Unfair Intra-Group Support Was at Issue
This case, which addressed unfair intra-group support, concerned whether a business group with large-scale construction and development affiliates, in the course of pursuing a public housing-site development project, provided its affiliates with the resale of land, interest-free financing, gratuitous guarantees of PF loans, the transfer of construction work, and similar arrangements, and whether such conduct constituted unfair intra-group support under the Monopoly Regulation and Fair Trade Act.
Plaintiff Company 1 secured public housing sites either directly or through partner companies and then resold them to affiliates at the supply price, repeatedly lent several hundred billion won in bid-application funds on an interest-free basis, and fully guaranteed the PF loans of the affiliated developers at no charge.
It also emerged that the company had transferred part of the construction work it was handling to a company controlled by a specially related person.
The Fair Trade Commission regarded this as unfair intra-group support and as the provision of unjust benefits to a specially related person, imposed a corrective order and a penalty surcharge, and the plaintiffs challenged the disposition.
What Is Unfair Intra-Group Support
The Monopoly Regulation and Fair Trade Act provides for two types of regulation in order to prevent unjust benefits from being transferred to a particular affiliate or to the controlling family through abnormal transactions within a business group.
1) Unfair intra-group support
Unfair intra-group support refers to conduct that may impair market competition by supporting an affiliate through transactions on markedly favorable terms, gratuitous or below-market provision, the transfer of excessive economic benefits, or similar means.
In other words, the key factors are whether support was provided on terms markedly more favorable than ordinary economic consideration and conditions, and whether such support may impair market competition.
2) Provision of unjust benefits to a specially related person
Article 23-2 of the Monopoly Regulation and Fair Trade Act separately regulates conduct that causes economic benefits to accrue to specially related persons, such as the controlling family.
This may include the provision of construction opportunities, the transfer of business opportunities, the formation of unnatural profit structures, and similar arrangements, and the principal criterion is whether an irregular transfer of wealth occurred, independently of whether market competition is impaired.
This Supreme Court judgment is significant in that it distinguished unfair intra-group support from the provision of benefits to a specially related person and applied the respective requirements to each, thereby reestablishing the standards governing intra-group transactions within business groups.
2. The Lower Court's Determination on Unfair Intra-Group Support
The court of first instance concluded that the first act (resale of the public housing sites) and the second act (interest-free lending of bid-application funds) did not constitute unfair intra-group support, while the third act (gratuitous guarantee of PF loans) and the fourth act (transfer of construction work) constituted both unfair intra-group support and the provision of unjust benefits to a specially related person.
The appellate court likewise upheld the conclusion of the first instance, and held in particular that the gratuitous guarantee of the PF loans was a transaction on terms markedly more favorable than the normal price and normal conditions, and that, because it was linked to enhancing the affiliate's financing capacity and strengthening its market position, it constituted unfair intra-group support.
3. The Supreme Court's Determination on Whether Unfair Intra-Group Support Existed
The Supreme Court considered each of the four acts separately.
(1) First act: resale of the public housing sites → not unfair intra-group support
- The price of public housing sites is regulated so that they cannot be traded above the supply price.
- Subsequent sales profits are merely an after-the-fact benefit, and it is difficult to find that a transfer of economic benefits arose from the resale itself.
Accordingly, the Court held that the resale of the public housing sites was not unfair intra-group support.
(2) Second act: short-term interest-free lending of bid-application funds → not unfair intra-group support
- The average lending period was about four days.
- The amount of uncollected interest was also small.
- It is difficult to find a transfer of economic benefits sufficient to distort market competition.
Accordingly, the Court found that the short-term interest-free lending of bid-application funds likewise could not constitute unfair intra-group support.
(3) Third act: full gratuitous payment guarantee of the PF loans → recognized as unfair intra-group support
The Supreme Court regarded this gratuitous guarantee of the PF loans as the core of the case.
- A guarantee of the entire loan amount, exceeding the share attributable to the construction cost, runs contrary to normal transaction practices.
- The uncollected guarantee fees amounted to tens of millions to hundreds of millions of won.
- It substantially helped an affiliate with insufficient financing capacity to secure competitiveness in the market.
Accordingly, the Court held that unfair intra-group support was established and that its unfairness was recognized.
(4) Fourth act: transfer of construction work → recognized as the provision of unjust benefits to a specially related person
The Supreme Court reasoned that, in the course of transferring the construction work, a company owned by the controlling shareholder's child directly obtained economic benefits, that the transfer of the construction opportunity itself constituted a structure of irregular transfer of wealth, and that a transfer without consideration is difficult to regard as a normal transaction, and on these grounds it recognized this as the provision of benefits to a specially related person.
The Significance of This Judgment
This judgment set out the criteria for determining unfair intra-group support as follows.
- Support provided to an affiliate requires a comprehensive assessment of the purpose, scale, consideration, and competitive effects of the transaction.
- It set out the standard that PF guarantees, the transfer of construction opportunities, and similar arrangements will be subject to particularly strict regulation, even within intra-group transactions.
- It confirmed that the provision of benefits to a specially related person is subject to regulation by reason of the transfer of wealth itself, regardless of any impairment of competition.
- It set out a practical standard under which short-term, small-amount financing transactions are not regarded as unfair intra-group support.
4. Daeryun's Strategy Regarding Unfair Intra-Group Support
Daeryun Law Firm LLP applies the norms of this judgment in practice and proposes the following strategies.
(1) Responding at the Fair Trade Commission investigation stage
- Objectively organizing the purpose of the conduct, the business necessity, and the group structure.
- Submitting economic analysis materials, such as the calculation of the normal price and an analysis of guarantee fees.
- Presenting technical and accounting grounds regarding the PF structure and the necessity of the intra-group transactions.
(2) Strategy for responding to administrative litigation
- Because the requirements for establishing illegality differ for each act, responding to each separately.
- Emphasizing errors in the method of calculating economic benefits, the absence of any anticompetitive effect, and similar points.
- Maximizing the possibility of partial revocation and a reduction of the penalty surcharge.
(3) Comprehensive support extending to criminal and civil proceedings
- Defending the criminal liability of executives.
- Responding to civil claims for damages.
- Improving the structure of corporate intra-group transactions and refining compliance.
Unfair intra-group support may proceed from a Fair Trade Commission investigation to a criminal investigation, and criminal punishment may be imposed, so that a coordinated, one-stop response by attorneys handling fair trade matters and related legal practitioners can be of considerable value.
If you need legal assistance regarding unfair intra-group support, you are welcome to arrange a 🔗legal consultation with an attorney handling fair trade matters.
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