1. Reasons for Proposal

  The Amendment streamlines the related parties’ system to account for changes in the policy environment and public perception of the scope of relatives. It relaxes requirements for postponing affiliations with large business groups to promote investment in small and medium venture businesses, and otherwise addresses weaknesses that have emerged from the operation of the current system in order to make sensible improvements to the large business group system.

2. Major Provisions

 A. Streamline the scope of relatives (Article 4, subparagraph 1 (a))

  1) The current Decree stipulates that the scope of relatives included in the scope of related parties shall be “a lineal relative within the sixth degree of consanguinity, or a relative within the fourth degree of affinity.” However, critics point out that this is broader than the public perception of the scope of relatives, and the prevalence of nuclear families and the abolishment of the patriarchal family system (2008) make it difficult to identify all relevant individuals, which imposes excessive obligations on business groups.

  2) The Amendment reduces the basic scope of persons related to the same person who are relatives from “a lineal relative within the sixth degree of consanguinity, or a relative within the fourth degree of affinity” to “a lineal relative within the fourth degree of consanguinity, or a relative within the third degree of affinity,” while also making an exception to include in the scope of relatives any person who is a lineal relative of the fifth or sixth degree of consanguinity or a relative of the fourth degree of affinity and who owns 1/100 or more of the total number of stocks issued by a company controlled by the same person, or who has a debt guarantee or monetary loan with the same person or a person related to the same person.

  3) Moreover, cases where a de facto spouse is a major shareholder of an affiliate and supports the same person’s control are excluded from the scope of related parties under the Fair Trade Act, which may create a regulatory blind spot, while the Commercial Act, Framework Act on National Taxes, and other major regulations specify de facto spouses as related parties. Accordingly, the Amendment includes in the scope of relatives any person who is the biological father or biological mother of a natural child under the Civil Act and who is in a de facto relationship with the same person.

 B. Exclude companies controlled by outside directors from the scope of affiliates (Article 4, subparagraph 1 (d))

  1) The current Decree prescribes that any company that is independently controlled by an outside director shall be included as an affiliate of the business group as a basic rule, and then excluded from being an affiliate by applying for independent management by an executive officer once it has met certain requirements. However, critics point out that this imposes excessive obligations on business groups, and the burden of being subject to large business group policies makes it difficult to recruit outside directors with expertise.

  2) The Amendment prescribes that any company that is controlled by an outside director and that meets the requirements for independent management by an executive officer shall not be included as an affiliate as a basic rule.

 C. Expand the postponement of affiliations with large business groups by small and medium venture businesses (Article 5 (2))

  1) To increase the utilization of affiliation postponement for small and medium venture businesses, the Amendment relaxes the sales to research and development expenses ratio requirement for small and medium businesses eligible for affiliation postponement from “5/100” to “3/100.”

  2) To enable businesses to apply for postponement after becoming a large business group affiliate, the Amendment allows affiliation postponement applications to be submitted for up to one year after the inclusion, and prescribes that any company that is controlled by a small or medium venture business that is eligible for affiliation postponement to also be eligible for affiliation postponement.

 D. Change the time period of trading amount determination required for independent management by an executive officer (Article 5 (1))

  1) Under the current Decree, the “trade dependence requirement” for independent operation by an executive officer specifies that sales and purchases shall be determined for the “one year immediately preceding” the date of application for independent management by an executive officer. This incurs unnecessary expenses as the amounts differ from the closing amounts on financial statements.

  2) The Amendment changes the “trade dependence requirement” to prescribe that trading amounts shall be determined for the “business year immediately preceding the business year of the request date.”