South Korea's Fair Trade Commission has completed examiner-level establishment of fair pricing standards for corporate trademark royalties. The development follows last July's Commercial Act amendment introducing directors' fiduciary duties to shareholders under Article 382-3. Excessive royalty payments from subsidiaries to holding companies can harm subsidiary shareholder value in Korea's dual-listing structure, where both entities trade publicly and create conflicts between controlling and minority investors.
FTC Establishes Fair Pricing Standards for Trademark Royalties
The Fair Trade Commission completed examiner-level development of fair pricing standards for corporate trademark royalties, according to industry sources on the 16th. Once finalized at the commission level, the standards will provide boards with benchmarks to assess whether royalty payments are appropriate. Experts have pointed to potential violations of fair trade laws, including improper support, private interest extraction, and business opportunity misappropriation in trademark transactions.
When subsidiaries pay excessive royalties to holding companies, profits transfer to entities where controlling families hold higher ownership stakes. This dynamic raises concerns under the amended Commercial Act.
Commercial Act Amendment Imposes Fiduciary Duties on Directors
Last July, the National Assembly passed Commercial Act amendments establishing directors' fiduciary duties to shareholders. Article 382-3 requires directors to faithfully perform duties for the company and shareholders in accordance with laws and articles of incorporation. Directors must protect the interests of all shareholders and treat all shareholders' interests equally when performing duties.
When subsidiaries pay inappropriately high trademark royalties, subsidiary minority shareholders suffer losses while holding company shareholders—often controlling families—gain benefits. This creates conflicts of interest between controlling and minority shareholders.
Kim Hyung-gyun, head of Cha Partners Asset Management, stated boards must scrutinize trademark transactions carefully given the fiduciary duty requirements. "If a parent company owns 100% of a subsidiary's shares, such trademark transactions would not be problematic," Kim said. "But in dual-listing structures, excessive royalty payments from subsidiaries to holding companies create subsidiary shareholder value destruction issues."
Kim explained the FTC's fair pricing standards will facilitate board decision-making. "Even before the fiduciary duty introduction, directors had to assess trademark royalty appropriateness to fulfill duties to the company," Kim said. "Now with added shareholder fiduciary duties, boards' legal responsibilities have become heavier."
Dual-Listing Structure Creates Shareholder Conflict Risks
Experts identified dual-listing structures as a primary cause of conflicts of interest in trademark transactions. In countries like South Korea where dual-listing is common, such transactions can undermine subsidiary shareholder value. Dual-listing refers to situations where both holding companies and subsidiaries are publicly listed.
Boards must examine whether trademark royalties are appropriate and whether they threaten subsidiary shareholder value to fulfill fiduciary duties. The FTC's establishment of fair pricing standards at the examiner level provides a foundation for boards to assess royalty appropriateness once finalized at the commission level.
FAQ
What did South Korea's Fair Trade Commission do regarding trademark royalties?
The Fair Trade Commission completed examiner-level establishment of fair pricing standards for corporate trademark royalties. The standards await finalization at the commission level to provide boards with benchmarks for assessing royalty payment appropriateness.
Why do excessive trademark royalties harm subsidiary shareholders in Korean stocks?
When subsidiaries pay excessive royalties to holding companies in dual-listing structures, profits transfer to entities where controlling families hold higher ownership stakes. This creates conflicts between controlling shareholders and minority investors, potentially destroying subsidiary shareholder value under Korea's prevalent dual-listing market structure.
