As the ownership dispute between Korea Zinc and Young Poong brought to light a circular shareholding structure using overseas affiliates, critics said it exposed a blind spot in the current Monopoly Regulation and Fair Trade Act. Because circular shareholding routed through overseas entities is not directly regulated under current law, some said the system needs to be improved.
The Korean Antitrust Law Association held a policy forum titled "A review of circular shareholding regulations under the Monopoly Regulation and Fair Trade Act" on the 17th. Association President Lim Young-jae, who delivered the keynote, said, "The two sides' ownership dispute is revealing legal complexities unprecedented in the history of Korea's capital market and fair trade legislation," and added, "If the Korea Fair Trade Commission recognizes circular shareholding via overseas entities as an act of evasion, it will become an important precedent for future regulations on large business groups."
The dispute over the two sides' circular shareholding loop erupted on Jan. last year, a day before an extraordinary shareholders meeting at Korea Zinc. At the time, Korea Zinc Chairman Choi Yun-beom's side transferred 10.33% of Young Poong shares held by Young Poong Precision Corporation (now KZ Precision) and the Choi family to the overseas entity Sun Metals Corporation (SMC), forming a circular shareholding loop of "Korea Zinc-SMC-Young Poong-Korea Zinc." As SMC came to hold 10% or more of Young Poong equity, a cross-shareholding structure was created under Article 369(3) of the Commercial Act, which limits the voting rights of Korea Zinc equity held by Young Poong.
In response, Young Poong and private equity fund (PEF) manager MBK Partners' alliance contributed in kind all Young Poong's Korea Zinc equity to a newly established limited liability company, YPC. It was a move to sever the cross-shareholding link and avoid voting right restrictions. The action took advantage of the fact that the Commercial Act's voting right restrictions on cross-shareholdings do not apply to limited liability companies.
Korea Zinc then moved again. By transferring the Young Poong shares held by SMC to its parent, Sun Metals Holdings (SMH), via an in-kind dividend, it changed the holder of the equity. This formed a circular shareholding structure that runs "Young Poong-YPC-Korea Zinc-SMH-Young Poong."
Afterward, when Young Poong resolved at its regular shareholders meeting to pay a stock dividend of 0.04 shares per share, SMH's Young Poong equity ratio fell below 10%. However, the Korea Zinc side acquired an additional 1,350 shares of Young Poong that had been held by KZ Precision, pushing the equity ratio back up to 10.03%.
While the current Monopoly Regulation and Fair Trade Act bans circular shareholding, it limits the scope of regulation to "affiliate investment in domestic affiliated companies." As a result, investment structures routed through overseas affiliates can be unclear in terms of regulatory application. In this case, too, the inclusion of Australian entities SMH and SMC in the middle exposed a gap in the law's application.
At the forum, participants raised the possibility that such structures could constitute an "act of evasion" that circumvents the purpose of the legal provisions. Although formally an overseas entity's investment, if in substance it follows the decision-making of a domestic company, there is room to view it as regulatory avoidance.
However, some assessed that this fundamentally shows the limits of the legal framework. With large business groups' overseas investment structures becoming more complex, existing regulations premised only on investments among domestic entities are not sufficiently reflecting reality.
As an improvement, one proposal is to delete the limiting phrase "domestic affiliated companies" from the circular shareholding provision and include overseas affiliates within the scope of regulation. However, this raises concerns that normal overseas business structures could also be regulated. Another suggestion is to apply regulation only when an overseas affiliate holds domestic company shares and becomes a link in a circular shareholding loop. In addition, introducing a "substantive control standard" that deems shares in a domestic affiliate acquired by an overseas entity controlled by a domestic corporation to be directly held by the domestic company was discussed as a complementary measure.
A plan was also proposed to specify, in the enforcement decree of the Monopoly Regulation and Fair Trade Act, types of cross-shareholding and circular shareholding circumvention that use overseas entities as an act of evasion. Lim said, "The current enforcement decree presupposes transactions among domestic entities, so it lacks direct regulation on new circumvention types routed through overseas entities," and added, "Amending the enforcement decree alone could resolve a significant part of the regulatory blind spots."