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KFTC Issues Finalized Amendments to Merger Review Guideline

2024.07.01

On April 29, 2024, the Korea Fair Trade Commission (“KFTC”) announced that it has finalized the amendments to its merger enforcement manual (the “Merger Review Guideline”; “기업결합 심사기준” in Korean), taking effect from May 1, 2024, to modernize the process of merger review and to better reflect certain features of the digital sector. Above all, the amendments are designed to fine-tune and balance the anti-competitive and efficiency-enhancing effects of mergers unique to the digital sector, whereby market competition is effectively protected while fostering innovation. The amendments, inter alia, introduces several changes to the KFTC’s approach to market definition, expands the list of factors to consider for competitive assessment, adds a new set of criteria to evaluate efficiency gains in mergers involving online platforms, and updates the eligibility criteria vis-à-vis simplified merger review. 
 
 
1. Market Definition 
 
In the Merger Review Guideline, the KFTC adopts a revised market definition by introducing distinct features of digital service providers, such as online platform companies and IT startups. It is worthy of mention that such digital service providers render services for a nominally free value, unlike traditional business operators. For instance, they tend not to receive any monetary consideration for their services, but instead receive non-monetary consideration in the form of views on advertisements. 
 
In principle, in order to determine whether a certain entity has a market dominant position, the particular trade area where the competitive relationship may become an issue (i.e., the relevant market) must first be defined. The KFTC points out the deficiency of using “price” as the sole indicator of demand substitution in relation to digital service providers. In such cases, the KFTC acknowledges that the market can be defined by using “changes in service quality” as an alternative indicator of demand substitution rather than price (e.g., if demand can be substituted for Service B when the quality of Service A declines, Service A and Service B are now deemed to be in the same market as competitors). 
 
The KFTC further identifies a multi-sided market for businesses that intermediate certain transactions between distinct user groups, such that the number of users on one side of the service affects demand on the other side. For example, in the case of an online delivery platform that intermediates transactions between an individual consumer and a restaurant, a single “delivery platform” market could be delineated as encompassing both sides of the platform. 
 
The KFTC corroborates that the so-called “innovation” market can be defined in a merger involving entities that actively engage in digitally innovative endeavors, such as R&D, in light of the fact that the said entities are not competing on price, but the level of innovation. The precedents exemplify: (1) companies competing on the development of equipment for manufacturing semiconductors, and (2) those competing on the development of operating services for smart devices, as constituting entities competing in the innovation market. 
 
 
2. Competitive Assessment 
 
The KFTC notes that a merger involving digital service providers is likely to result in an increase in the number of service users or the amount of data held by the merged entity. This would in turn trigger an increased demand for the said service, thereby bringing about a network effect, and allow the merged entity to reinforce its dominance and raise barriers to entry in the relevant market. 
 
In light of the foregoing, the KFTC introduces a new set of criteria for competitive assessment in cases where nominally free services are rendered. Indeed, the market share is an important indicator in assessing if a merger will substantially reduce competition. The bigger the market share of the merging entity, the higher the risk that competition can be restricted in the relevant market due to the merger. The KFTC now allows for the use of alternative variables, such as the “number of service users” or “frequency of service usage” to calculate the market share, since it is difficult to calculate the market share on the basis of the digital service provider’s earnings or revenue, when nominally free services are provided to its users. In addition, the KFTC suggests that the competitive assessment may be performed by focusing on non-price variables, such as a “decline in the service quality”, rather than an increase in price. 
 
Moreover, the KFTC expresses concerns over tying1 and bundling2 of products in conglomerate mergers3. If the consumer loyalty for Product A is high, the market dominance of Product A is likely to be greater than that of Product B, such that tying Product A to Product B may have the effect of spilling the market dominance of Product A over the market of Product B and excluding competitors in the market for Product B. Moreover, if separate products are offered together as a bundle, it may also raise the barriers to entry for new entrants that offer only one product. Indeed, this is especially true in the digital platform sector, where multiple services tend to be bundled together and consumed as an ecosystem. To address this concern, the amendments to the Merger Review Guideline require the KFTC to consider the possibility of such tying or bundling arrangements in the merger review. 
 
 
3. Criteria for Assessing Efficiency Gains in Mergers Involving Online Platforms 
 
The KFTC adds the following criteria to take into consideration when assessing efficiency gains in mergers involving online platforms:

<ul>
	<li style="text-align: justify;">Whether an increase in the number of service users due to a merger may increase benefits of the existing users;</li>
	<li style="text-align: justify;">Whether additional data acquired as a result of the merger may be utilized to create innovative services or to reduce costs of production or distribution; and</li>
	<li style="text-align: justify;">Whether the merger may expand the range of services available to users and ultimately increase consumer benefits.</li>
</ul>

<div style="text-align: justify;"> 
Moreover, the amendments provide that when two (2) startups that develop innovative digital technologies are merged, the subsequent exit of existing capital contributions may lead to the creation of new startups and their entry into the market, thus revitalizing the startup ecosystem. 
 
 
4. Eligibility Criteria for Simplified Merger Review 
 
Under the existing Merger Review Guideline, a transaction may qualify for a simplified merger review in the case of (i) an intragroup transaction, (ii) a transaction that does not involve the acquisition of control, (iii) a conglomerate merger of companies with total assets or a total turnover of less than KRW 2 trillion, (iv) a conglomerate merger that does not involve any overlap or relevance among the respective products of the parties, or (v) participation in the establishment of an overseas joint-venture company that is not likely to cause a material effect on the Korean market. In principle, a merger qualified for a simplified review will be granted clearance from the KFTC within fifteen (15) calendar days from the date of the merger filing. The existing Merger Review Guideline also sets forth that a merger must be reported to the KFTC, (i) if a party to the transaction has total assets or total sales turnover equal to or greater than KRW 300 billion during the immediately preceding business year (including those of its affiliates), and (ii) the other party to the transaction has total assets or total turnover equal to or greater than KRW 30 billion during the immediately preceding business year (including those of its affiliates). 
 
In the case of an online platform merging with businesses or business units that provide services that are not complementary or substitutable for its own services, it will be subject to a standard merger review, to the extent that the merged business or business unit supplies goods and services to over five (5) million consumers per month on average in the immediately preceding calendar year. In other words, the acquired business or business unit must not only have an average monthly consumer base of at least five (5) million, but also be over KRW 30 billion in size for the transaction to qualify for a standard merger review. 
 
Moreover, the amendments expand the eligibility for simplified merger review to existing limited partners (“LPs”) of a private equity fund (“PEF”) participating in a capital increase in the PEF, or otherwise acquiring shares of other LPs. The rationale is that such LPs’ conduct of business constitutes internal actions of the PEF and do not cause a significant impact on market competition as a whole, thereby permitting simplified merger review. 
 
 
In conclusion, the KFTC makes clear that the amendments to the Merger Review Guideline do not establish a novel set of merger review process, but merely serve to reflect certain distinct features of online platforms that affect competitive analysis, including nominally free services, multi-sided markets, and network effects. It is noteworthy that the KFTC included a sunset provision by which the current Merger Review Guideline will be subject to revision every two (2) years. It will be essential to monitor closely to what extent the KFTC will refer to the Merger Review Guideline in enforcing and conducting merger review with respect to online platform operators.</div>

<hr align="left" background-color="#cc0000" size="1" width="33%" />
<div style="line-height: 110%;">1 Tying means selling Product A and Product B as a bundle. 
2 Bundling means selling Product A and Product B separately, but providing ancillary benefits such as price discounts when purchased as a bundle. 
3 Conglomerate merger is a type of mergers involving companies in businesses that are mutually exclusive (i.e., totally unrelated). 
 
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