This article was published on March 19, 2025, at 9:58 a.m. on the ChosunBiz RM Report site.
The Democratic Party of Korea will introduce regulatory legislation to prevent "circular investments in overseas affiliates" that emerged in the management rights dispute between Korea Zinc and Young Poong·MBK Partners. The current Fair Trade Act limits the prohibition of circular investments to domestic affiliates, aiming to prevent the increase of circumvention activities that involve circular investments in overseas affiliates like in the case of Korea Zinc.
According to the political circles on the 19th, Kim Nam-keun, a Democratic Party member of the National Assembly’s Political Affairs Committee, proposed an amendment to the "Monopoly Regulation and Fair Trade Act" to expand the prohibition of circular investments to overseas affiliates on the 14th, and the bill has been announced for legislation. The process was pushed forward after current issue inquiries related to the management rights dispute of Korea Zinc had taken place, and a consensus was formed within the Political Affairs Committee.
A circular investment refers to a scenario where three or more corporations within a corporate group invest capital in each other to form a governance structure. Currently, Article 21 and Article 22 of the Fair Trade Act prohibit circular investments and mutual investments only for domestic affiliates of corporations belonging to mutual investment-restricted groups.
Corporations can use circular investments to own and control multiple companies with less capital, and South Korean conglomerates have heavily utilized this method. However, if a specific company within the circular chain becomes financially unstable, there is an increased risk of a domino effect of bankruptcies, and the potential for distorted corporate governance arises. Therefore, the Commercial Act and Fair Trade Act prohibit mutual investments and circular investments.
The issue of circular investments in overseas affiliates was ignited during the management rights dispute between Korea Zinc and Young Poong·MBK. On the 12th, Korea Zinc provided a 10.3% stake in Young Poong to its subsidiary SunMetal Holdings (SMH) in Australia as an in-kind dividend. This was an attempt made again after a circular investment related to SunMetal Corporation (SMC) was blocked by a court ruling in January.
Article 369 of the Commercial Act limits voting rights when two corporations hold more than 10% of each other's shares. Korea Zinc aims to create a ring of 'Korea Zinc→SMH→Young Poong→Korea Zinc' through circular investment in overseas affiliates to restrict the voting rights of Young Poong and MBK.
The Fair Trade Commission is also conducting an investigation into the case of circular investments in overseas affiliates by Korea Zinc. Young Poong and MBK reported that Kwon Yong-beom, the chairman of Korea Zinc, violated the Fair Trade Act, and the commission began its investigation on the 11th. However, since this is the first investigation related to circular investments in overseas affiliates, the commission is expected to face challenges in its judgment.
The concern is that there is a high likelihood of an increase in cases utilizing circular investments in overseas affiliates arising from the management rights dispute of Korea Zinc. According to Kim, there were 7,558 overseas affiliates of 49 mutual investment-restricted corporate groups as of last year. This implies a strong incentive and possibility to form mutual and circular investment structures through overseas affiliates. In fact, although it doesn’t belong to mutual investment-restricted corporate groups, HiteJinro has formed a circular investment structure through its Japanese affiliate.
The Fair Trade Act prohibits circular investments solely for domestic affiliates because, in the past, it was difficult to understand the existence and investment structure of overseas affiliates. Now, with the expanded introduction of disclosure systems, it has become possible to sufficiently understand the investment structures of overseas affiliates, according to Kim. He argues that there are nearly no substantial difficulties that necessitate limiting the prohibition of circular investments to domestic affiliates.
Kim stated, "While it may be true that Korea Zinc attempted to use circular investment structures as a means of defending its management rights dispute, the Fair Trade Commission has failed to determine aspects that could classify circular investments in overseas affiliates as unlawful," adding, "It is an issue that cannot be neglected since there is a possibility that conglomerate groups will use overseas affiliates for circular investments."
He further noted, "Companies that have already transitioned to a holding company system can increase their affiliates. However, for those like Hyundai Motor and Samsung, there is a possibility of expanding circular investment structures," explaining that a consensus was formed within the National Assembly’s Political Affairs Committee to propose the legislation.