New cross-holdings are prohibited

From the second half of next year, new cross-shareholding investments by major conglomerates will be prohibited, the Fair Trade Commission (FTC) said yesterday.

The National Assembly approved legislation to prohibit new cross-shareholding investments by conglomerates at a plenary session yesterday, which will put restrictions on large companies and free up smaller companies from their dominance.

However, as the regulation is only imposed on new cross-shareholding investments, the impact is expected to be limited on many family-owned conglomerates that already control affiliates through such practices and control entire groups with only a small amount of shares.

Furthermore, new cross-shareholdings that are generated in the process of legal business activities - such as mergers - splits and corporate restructuring will also be accepted.

Cross-shareholding was considered a contentious issue under the Park Geun-hye government’s vow for more “economic democratization.”

The families are accused of taking advantage of the system, which has led to serious mismanagement practices in the past.

The collapse of subsidiaries of the Tongyang Group has been blamed on cross-shareholding investments among 17 affiliates.

One of President Park’s campaign pledges in 2012 was to ban new cross-shareholding investments to improve transparency in finance, avoid embezzlement, breach of trust and poor management at conglomerates.

The FTC completed eight out of 14 bills that are supposed to lead to more “economic democratization.”

The latest amendment to the Fair Trade Act specifically forbids conglomerates from creating new cross-shareholding investments or making additional investments that could reinforce the existing cross-ownership.

For the existing cross-shareholdings, the FTC plans to require the conglomerates to disclose their current cross-shareholding information and put them under pressure to untangle it.

However, the amendment will allow share-holding investments generated during companies’ mergers or splits, takeovers of businesses or comprehensive exchanges of shares during corporate restructuring, and it grants a grace period of a minimum of six months to a maximum of three years.

So even when the amendment enters into force, there won’t be a direct impact on the corporate governance of large conglomerates such as Samsung Group and Hyundai Group.

But the FTC expects changes going forward.

“The FTC expects that the prohibition of cross-shareholding investment will eradicate the financial support for insolvent affiliates and the expedient inheritance of management control within chaebol families,” said a spokesman for the FTC.

Large companies complained that the new legislation will make management more difficult and discourage investment.

“It will likely shrink new investments and also make it difficult for companies to defend themselves from hostile M&As and takeovers,” said one company spokesman. “It is fortunate that existing cross-shareholdings were excluded.”

By KIM JUNG-YOON AND JOO KYUNG-DON [kjy@joongang.co.kr]