Under Korean law, a third party (a shareholder, parent or affiliated company) that is closely related to a company that is found have violated the MRFTA may be considered directly or indirectly liable for such company’s violation.

Keum Seok Oh, Seong Un Yun and Rosa B. Kim

Since its establishment in 1980, the Korean Fair Trade Commission (KFTC) has regulated anti-competitive activities under the Monopoly Regulation and Fair Trade Act (MRFTA), Korea’s general competition law. Various situations have raised the issue of the liability of third parties (e.g., a shareholder, parent or affiliated company) closely related to a company that has violated the MRFTA. The KFTC has found direct liability in the event a third party directly instructed the company involved to violate the MRFTA, as well as imputed liability in light of circumstantial factors such as instrumentality and control.

The MRFTA prohibits any person or entity from engaging in activities that would impinge fair trade, as well as from directing or causing another person or entity to engage in such activities. A shareholder, parent company or the affiliate of a company that has violated the MRFTA by engaging in unfair trade practices, for example, may be held directly liable if the shareholder, parent company or affiliated company is found to have directly instructed the concerned company to do so. In other words, if a company is found to have acted, essentially, as an instrument or agent of a closely related third party in such instruction, such third party will bear direct liability under the MRFTA.

Even if there is no finding that a third party directly instructed the company to violate the MRFTA, the liability of a third party may also be imputed in certain cases.

Piercing the Corporate Veil

The "piercing the corporate veil doctrine" may be used to impute liability to a shareholder or parent of a company that has been found to contravene the MRFTA (i) where the concerned company is undercapitalized and fails to follow proper corporate formalities (e.g., it intermingles funds and/or assets, or the corporate officers and directors of the company are appointed as mere figureheads), and (ii) the concerned company is found to be a sham company established to defraud the company’s creditors.

This doctrine has not yet been applied under the MRFTA in KFTC rulings. Under the Commercial Code, the application of this doctrine has, by and large, been limited to sole proprietorships and wholly owned subsidiaries, and to cases in which extraordinary circumstances have been present.

Single Economic Unit Theory

Another way a company’s liability may be imputed to a closely related third party is through the single economic unit theory, applied in cases where a group of companies (parent and subsidiary, for example) is found to have engaged in a single undertaking in violation of anti-trust law.

This theory has been applied by the European Commission to find a parent company liable for the anti-trust violations of its subsidiary company (or, a company liable for the actions of its affiliated company) to the extent that the parent company exerted control over the subsidiary’s activities and the subsidiary could not be viewed as being independently operated from its parent company.

In short, in the event of an anti-trust violation by a company, the single economic unit theory may impute liability to the company’s shareholder, parent company or affiliated company where: (i) the shareholder/parent/affiliate is closely related to, or exercises general control over, the activities of the concerned company, and (ii) the concerned company has no liberty to make its own decisions but is substantially compelled to carry out the directions of its shareholder/parent/affiliate (even if no direct instruction is, in fact, given). The concerned company and its shareholder/parent/affiliate are, in this case, viewed essentially as having acted as a single economic unit and the shareholder/parent/affiliate is deemed to have coordinated the actions of the unit.

The single economic unit theory has remained largely untested in Korea, although in certain recent cases it has been presented in similar form before the KFTC and the courts.

KFTC and Court Precedents

Although not expressly stated as such, the single economic theory was reflected, to an extent, in the following three rulings of the KFTC.

In November of 1998, the KFTC issued Ruling No. 98-252 (Case 1) in which it found a parent company liable for its subsidiary’s violation of Article 3-2 of the MRFTA (which prohibits abuses of market dominance, such as abuse of price, output control, obstruction of competitor’s business activities, impeding market entry, exclusion of competitors and harm to consumer interests), based on the fact that the subsidiary was wholly owned by the parent company and its only role was to function as a sales division of the parent company by distributing the parent company’s products.

In KFTC’s recent Case No. 2006kajung2146 (Case 2), Company A (i.e., the consignee), which was entrusted by Company B (i.e., the consignor) with the sales of products manufactured by Company B, was found to have colluded with the competitors of Company B. The KFTC found Company B liable for Company A’s collusive activities as it considered Company A and Company B to be substantially the same company from an economic perspective, in light of the fact that (i) Company A and Company B had jointly organized a steering committee to make important business decisions, (ii) the representative director and largest individual shareholder of Company B, and his specially related persons, jointly owned 100% equity in Company A, (iii) Company A had 13% equity in Company B and was the largest shareholder in Company B, and (iv) some of the officers of Company A concurrently held certain positions in Company B.

The KFTC thus regarded Company B as the respondent in Case 2 and found that the penalty surcharge to be rendered should be based on the total sales revenue of Company B, rather than the commissions paid by Company B to Company A for the distribution and sale of products. If Company A and Company B had not been deemed the same company, penalty surcharges would have been imposed on Company A based on the commissions received by Company A from Company B.

In another recent case, Case No. 2006kajung2147 (Case 3), Company X (i.e., the consignee), which was the parent company holding 50% equity in Company Y (i.e., the consignor) and entrusted with the sales of products manufactured by Company Y, was found to have colluded with the competitors of Company Y. The KFTC also viewed Company Y and Company X as substantially the same company from an economic perspective. However, unlike in Case 2, Company X was regarded as the respondent in this case. Even so, the KFTC found that the penalty surcharge to be rendered should be based on the total sales revenue of Company Y, given that Company X and Company Y could be viewed as essentially the same unit from an economic perspective. If Company X and Company Y had not been viewed as the same economic unit, penalty surcharges would have been imposed on Company X based on commissions received by Company X from Company Y.

Case Law

The KFTC’s ruling in Case 1 was subsequently appealed to the Seoul High Court of Appeal (Case No. 99nu3524). The Court affirmed the KFTC’s ruling and based its decision on the finding that the parent company had direct influence over its subsidiary, given that the subsidiary was wholly owned by the parent and its sole role was to distribute the parent company’s products, and thus, the subsidiary served as an instrument of the parent company. The decision of the Seoul High Court of Appeal was then appealed at the Supreme Court (Case No. 99du10964). Although the Supreme Court affirmed the appellate court’s ruling and held that the parent company was liable for the activities of the subsidiary, its decision was based exclusively on the finding that the parent company actually instructed the subsidiary company to engage in such activities (in the KFTC and appellate court rulings, the actual instruction by the parent company was not the substantial basis for the decision, rather, the circumstantial factors of control and instrumentality were emphasized). In contrast to the rulings of the KFTC and the Seoul High Court of Appeal, the Supreme Court did not expand on the merits of the theory of imputed liability.

The KFTC’s rulings in Cases 2 and 3 have not yet been appealed at court, and we expect that the merits of the imputed liability theories may be further disputed if these cases are appealed. There has yet to be any court precedent in Korea that has directly acknowledged the applicability of the single economic unit theory or that has set out specific requirements for its application. The evolution of this theory in Korea will continue to be of interest to foreign parent companies with subsidiary companies conducting business domestically that are concerned with the potential risk of anti-trust violations.

In Korean jurisprudence, a third party closely related to a company that has violated the MRFTA has been held directly liable for such violation if it is found that the third party directed the company to do so. As discussed above, some precedents touch briefly on the merits of imputed liability theories based on control or instrumentality (similar in substance to the single economic unit theory). However, the comments by the KFTC and Seoul High Court of Appeal were brief and did not expressly recognize the merits of the single economic unit theory. Furthermore, the Korean Supreme Court has not yet commented on the merits of such imputed liability theories, even in brief. In this light, the single economic unit theory has not yet been integrated sufficiently into the Korean legal discourse to constitute a binding authority. However, if the single economic unit theory is accepted in the future, based on current precedents, it will likely attach liability to a parent company for the anti-trust violations of a subsidiary based on the degree of control exercised by the parent company in consideration of all the circumstances, including the equity stake held by the parent company, the number of directors appointed by the parent company, the business relationship between parent company and subsidiary, and other relevant circumstances.

This article is intended as a summary report only and not as advice.

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