South Korea's Fair Trade Commission (FTC) on Tuesday changed Coupang's designated controlling person from the corporate entity "Coupang" to founder Kim Bum-suk (김범석), the board chairman. Coupang immediately pushed back and signalled an administrative lawsuit.

A controlling person refers to an individual or company that effectively controls a business group. Whether the controlling person is an individual or a company significantly changes disclosure obligations and the scope of rules on unfair internal transactions. Until now, Coupang had a company designated as the controlling person, meaning relatives of Kim and his personally related companies had been excluded from regulation.

◆FTC judgment: "His brother effectively took part in management"

The enforcement decree of the Fair Trade Act sets out, as one of the exceptional requirements for designating a company as the controlling person, that "relatives of the individual who controls the business group will not participate in the management of domestic affiliates."

The FTC said it determined during an on-site inspection of Coupang headquarters earlier this year that Kim's younger brother, Kim Yoo-seok (김유석), did not meet that requirement. The FTC said he is at the vice president level and in the top tier in Coupang's internal ranking, which it viewed as similar to the grade of chief executive of major affiliates. It said his annual pay reaches the average level for registered executives of the same rank, and that his treatment, including being assigned a secretary, is also equivalent to that of a registered executive.

It also said it confirmed that he hosted more than hundreds of regular and ad hoc meetings related to logistics and delivery policy, and invited executives including the chief executive of Coupang Logistics Services (CLS) to discuss measures such as reviewing weekly performance, expanding volume and changing delivery policy. The FTC concluded on that basis that he had effectively exercised influence over the direction of business execution in key operations.

With the controlling person changed to an individual, Coupang must include in mandatory disclosures affiliates in which Kim, his spouse, blood relatives within the fourth degree of kinship, and relatives by marriage within the third degree hold stakes. Rules on unfair internal transactions that ban providing unjust benefits to related parties will also apply. The FTC is also reviewing whether Coupang's omission of Kim Yoo-seok's management participation from disclosures amounts to a false disclosure, and it has left open the possibility of filing a complaint against the company or Kim.

◆Coupang pushback and outlook

Coupang issued a statement after the FTC announcement and said, "We will faithfully explain through an administrative lawsuit in the future."

Coupang said, "Coupang Inc owns 100 percent of the Korean Coupang company, and Korean Coupang also owns 100 percent of its subsidiaries and sub-subsidiaries, making a transparent governance structure." It said, "Kim and his relatives do not hold stakes in Korean affiliates, so there is absolutely no concern about unfair internal transactions." It added, "Coupang Inc, as a U.S.-listed company, is under strict oversight, including complying with related-party disclosure obligations required by the Securities and Exchange Commission (SEC), and the Korean Coupang company has consistently met the exception conditions for designation of a controlling person."

Coupang also said of Kim Yoo-seok, "He is not an officer under the Fair Trade Act (chief executive, director, auditor, manager, etc.) and does not hold stakes in Korean affiliates." Coupang said he "has only been seconded from Coupang Inc and is in charge of work to improve global logistics efficiency," and "only holds some of Coupang Inc listed shares in the same way as members of a similar rank." Coupang plans to raise an objection with the FTC within 7 days and, if it is not accepted, to proceed with an administrative lawsuit.

There is also a possibility it could expand into South Korea-U.S. trade friction. After the U.S. House of Representatives held a separate hearing and took issue with the South Korean government's measures, 54 lawmakers affiliated with the Republican Study Committee have sent a letter to Ambassador to the United States Kang Kyung-wha (강경화) demanding that "discriminatory regulation against U.S. companies including Coupang be stopped." Coupang argues the designation of the controlling person could constitute a violation of the Korea-U.S. free trade agreement obligations on most-favoured-nation treatment (Article 11.4) and investor protection (Article 11.5), so the possibility of it developing into a trade dispute cannot be ruled out.

Meanwhile, Dunamu, a case in which a company remains the controlling person, was confirmed to have met all exception requirements in the enforcement decree again this year and kept the corporate entity as the controlling person. The same standard was applied but the outcomes diverged.

The FTC on Tuesday designated 102 business groups, including Coupang, with 3,538 affiliated companies, as groups subject to disclosure. Legal judgments over the criteria for designating a controlling person are expected to emerge as a full-fledged point of contention.