CONTENTS
- 1. Asset Transfer Agreement | Overview of the Case
- 2. Asset Transfer Agreement | The Supreme Court's Determination
- - A Transaction That Defers Payment of the Price for a Long Period May Amount to the Provision of Excessive Economic Benefit
- - A Structure in Which Assets Are Transferred First and the Price Is Received Later Is Unusual Under Ordinary Commercial Practice
- - Where an Intent to Support an Affiliate in a Liquidity Crisis Is Recognized, the Finding of Unfair Support Is Strengthened
- - The Risk of Undermining Fair Trade Should Be Assessed for Each Individual Act, While Looking to Its Substance
- 3. Asset Transfer Agreement | Standards for Assessing the Illegality of Intra-Group Transactions
- - Points for Assessing Liability
- 4. Asset Transfer Agreement | A Practical Checklist for Companies
1. Asset Transfer Agreement | Overview of the Case
In this case involving an asset transfer agreement, the central issue was whether the terms of several transactions among affiliated companies belonging to a large business group had been designed in a manner favorable to a particular affiliate.
The companies at issue were affiliates engaged, respectively, in the distribution business and in the manufacture and sale of clothing and accessories, and the Fair Trade Commission viewed the transactions between them as going beyond ordinary intra-group dealings and amounting to unfair support of specially related persons and affiliated companies.
The conduct challenged by the Fair Trade Commission fell into three main categories.
(ii) the conduct of deferring payment of the transfer price over a long period and not collecting interest on the delay in an asset transfer agreement relating to a clothing brand;
(iii) whether one company's bearing the entire salary of a person who concurrently served as the representative director of two companies constituted an act of personnel support
The Lower Court's Determination
With respect to the asset transfer agreement at issue, the lower court found that, given that the price had been paid over approximately three years following the asset transfer reference date and that no separate financial safeguard or interest on the delay had been imposed, the provision of excessive economic benefit through a transaction on considerably favorable terms was established.
2. Asset Transfer Agreement | The Supreme Court's Determination
With respect to the asset transfer agreement, the Supreme Court upheld the lower court's determination, finding that the transaction had been carried out on terms considerably favorable to the affiliate and that, in the course of it, a risk of undermining fair trade was recognized.
A Transaction That Defers Payment of the Price for a Long Period May Amount to the Provision of Excessive Economic Benefit
In this case, the reference date for the transfer of the assets was July 1, 2014, and the assets actually began to be transferred around that time.
However, although the transfer price that the transferee company was required to pay amounted to approximately 51.1 billion won, payment was not completed until June 2017, nearly three years later.
The problem was that, in the course of the contract, the transferor company set no financial safeguard to secure performance of the obligation, did not actively press for payment of the price, and did not collect any interest at all even in circumstances where interest on the delay could have accrued.
Taking these circumstances together, the court determined that the transferee company could be assessed as having enjoyed an economic benefit similar to receiving funds equivalent to the unpaid transfer price interest-free.
Ultimately, the import of this is that the transaction was conducted on terms excessively favorable compared with normal transaction terms and could constitute a support act subject to challenge under the Monopoly Regulation and Fair Trade Act.
A Structure in Which Assets Are Transferred First and the Price Is Received Later Is Unusual Under Ordinary Commercial Practice
What the appellate court and the Supreme Court particularly focused on was that the transfer of the assets had already taken place while payment of the transfer price was deferred for a long period.
The court found that the very fact of “transferring the assets before payment of the transfer price was completed” was, in light of ordinary commercial practice, extremely unusual.
In particular, considering that a substantial amount of brand-related assets had been transferred and that those assets had the potential to generate stable revenue going forward, the court determined that this transaction structure was difficult to regard as a mere delay in payment.
That is, even where a transaction is between affiliated companies, if the security arrangements, deadline management, and imposition of delay damages that independent economic actors would ordinarily have required were all absent, the court treats it not as a contract in form but as a support structure in substance.
Where an Intent to Support an Affiliate in a Liquidity Crisis Is Recognized, the Finding of Unfair Support Is Strengthened
The Supreme Court determined that the delayed collection of the asset transfer price and the failure to collect interest on the delay were not a mere provision of transactional convenience but were carried out with an intent to support an affiliate that was, at the time, in a liquidity crisis.
This carries significant weight in the assessment of unfair intra-group support under the Monopoly Regulation and Fair Trade Act.
Transactions among affiliated companies may in practice occur frequently, but if such a transaction is designed not according to normal prices and normal terms but in a direction that eases the financial situation of a particular company, the risk that it will harm a fair competitive order increases in and of itself.
The Risk of Undermining Fair Trade Should Be Assessed for Each Individual Act, While Looking to Its Substance
The Supreme Court also reaffirmed that the assessment of the unfairness of an unfair intra-group support and of an unfair provision of benefit to a specially related person should, in principle, be made for each individual act.
In this case, the court did not assess the conduct relating to the asset transfer agreement and the conduct of paying the representative director's salary on another's behalf as a single bundle.
Rather, after examining whether each act was part of a series of acts carried out under the same intent or purpose, the court held that, if not, the unfairness should be reviewed individually.
As a result, the portion relating to the asset transfer agreement was found to pose a risk of undermining fair trade, but the portion concerning payment of the representative director's salary on another's behalf was viewed separately, and the court determined that it was difficult to recognize, to that degree, a restriction of competition or a risk of concentration of economic power.
3. Asset Transfer Agreement | Standards for Assessing the Illegality of Intra-Group Transactions
Even where a transaction takes the form of an asset transfer agreement, if in reality it has the effect of allowing one affiliate to use funds interest-free for a long period or of easing its liquidity burden, this may lead to an issue of unfair intra-group support under the Monopoly Regulation and Fair Trade Act.
In particular, the legal risk may increase where the following factors are present together.
- where the assets are transferred first while payment of the price is deferred for a long period
- where no security is set even though the counterparty's potential insolvency or deteriorating liquidity is known
- where, even after the payment deadline has passed, there is no demand for payment, collection measure, or claim for delay damages whatsoever
- where the counterparty belongs to the same business group and a need for support in fact existed
- where the transaction has a scale and character capable of affecting market competition
In future disputes involving asset transfer agreements, how the price was collected, why there was no interest on the delay, and what economic benefit the counterparty consequently obtained are likely to become the central issues.
Points for Assessing Liability
Category | Key Practical Assessment Points | Materials the Company Should Prepare |
Representative and Management | · whether they were involved in designing the transaction structure · whether they were aware of the need to support the affiliate · whether they approved the abnormal terms | · board meeting minutes · internal reports · approval documents · funds management review materials |
Finance and Legal Officers | · whether a plan for collecting the price existed · the reason for not claiming interest on the delay · the reasonableness of not setting security | · contract review memoranda · claim management documents · security review materials · collection schedules |
Working-Level Staff | · whether payment of the price was demanded · whether internal approval procedures were observed · the actual state of payment-deadline management | · emails · official letters · approval documents · communications relating to claim collection |
The Corporation (Company) | · whether the transaction was designed according to normal prices and normal terms · whether it constituted a structure for supporting a particular affiliate | · intra-group transaction standards · review system for transactions with specially related persons · compliance policies · follow-up review materials |
4. Asset Transfer Agreement | A Practical Checklist for Companies
Asset transfer agreements are frequently used in corporate restructuring, brand transfers, business-division reorganization, and the adjustment of functions among affiliates.
However, as in this judgment, if the terms of a transaction are designed abnormally, the risk of a violation of the Monopoly Regulation and Fair Trade Act may materialize.
Companies therefore need to review the following matters proactively.
Because asset transfer agreements are contracts frequently used in the course of reorganization within a business group, fair trade risks should be reviewed from the stage of designing the transaction's purpose and terms.
Rather than explaining after the fact that it was merely a transaction among affiliates, it is far more important to design the price-collection structure, interest on delay, security, and approval procedures so that they closely resemble a normal transaction from the outset.
Daeryun Law Firm LLP, through its attorneys experienced in fair trade matters working with legal experts on the relevant issues, provides one-stop assistance in connection with asset transfer agreements, covering responses to Fair Trade Commission investigations, review of the legal principles on unfair intra-group support, analysis of the structure of transactions with specially related persons, review of contracts, and improvement of internal control systems.
If a transaction among affiliates is planned, or if issues have already been raised over the terms of a transaction, an accurate organization of the facts and a legal review are needed from the early stages.
If you need assistance with a related matter, you are welcome to arrange a 🔗Fair Trade Legal Consultation.
Daeryun provides tailored legal services.
See More
Watch related video content
for this case study.
Key issues of fair trade and subcontracting and corporate practical response strategies
