Related party transactions (RPTs) exist in most countries, developed as well as developing. RPTs may take place on an ad hoc basis, or routinely in a corporate group structure. Routine RPTs pose tougher regulatory challenges than ad hoc RTPs do as they often bring benefits, in an emerging market economy in particular. The degree of prevalence of RPTs and the shape of their regulation vary country by country, reflecting differences in their corporate governance environment. Stated reversely, a glimpse into the actual regulation of RPTs may shed light on essential features of the corporate governance ecosystem of a particular jurisdiction.
This post is based on a chapter in Luca Enriques and Tobias Tröger (eds), The Law and Finance of Related Party Transactions (CUP, forthcoming). The purpose of this chapter is to examine, from a comparative perspective, the status of RPTs and their regulation in three East Asian countries, namely Japan, South Korea and China. This chapter will primarily focus on routine RPTs involving large listed firms – which will serve as a convenient window through which to view the complex world of corporate governance in the three countries.
This chapter proceeds as follows. Setting out the theoretical framework for the ensuing discussion, Part II starts with the relationship between routine RPTs and industrial organization. From the perspective of industrial organization, a primary function of RPTs is to replace market transactions. The existing regulation on RPTs may well shape the pattern of industrial organization in the future. Conversely, the current state of industrial organization might affect the form and the intensity of regulation, both in the books and in reality. All three countries under review started developing their economies based, at least partly, on the vertically integrated group structure. Japan started parting with this structure after World War II. Korean and Chinese firms, however, still rely heavily on intra-group RPTs, although both of them, China in particular, are now increasingly dependent on outsourcing to other market participants. The remainder of Part II provides an overview of regulatory framework including conventional strategies employed to deal with RPTs.
Part III conducts a brief survey of the current status of RPTs and the regulatory structure in each jurisdiction. It starts with presenting basic RPT-related data and go on to outline substantive constraints, procedural constraints and disclosure requirements applicable to RPTs.
Based on this survey, Part IV attempts to make some general observations from a comparative perspective. First, it focuses on the evolution of RPT regulations. The initiation of reforms to improve control of RPTs is presumed to depend on the balance between two conflicting forces: the pressure for reform and the powerful resistance from the business community. An attempt is made to evaluate the relative importance of various factors contributing to reform measures in each jurisdiction. Second, it also evaluates the three features of RPT regulation, namely substantive and procedural constraints and disclosure. Third, it briefly discusses the potential impact of further RPT reforms on business firms in each jurisdiction.
Part V is a conclusion. The incidence of RPTs may be affected by the existing share ownership structure and industrial organization. Indeed, it will be difficult to strengthen regulations on RPTs as long as this economic environment remains unchanged. Considerable differences exist in RPT regulation are attributable to differences in the salience of RPTs, in the economic and political environment, and in the institutional infrastructure of each jurisdiction. Another relevant factor may be the extent of each country’s need to develop capital markets. A country’s need to promote its capital market may vary depending, partly at least, on the type of its principal industries. The three countries all started their economic development with relatively low-tech, and thus low-risk, manufacturing industries. They could all safely depend heavily on bank loans for business capital. The three countries, and certainly their leading firms, have been moving into higher-tech and higher-risk industries, requiring risk capital in the capital market. It will still take more time, however, to clarify whether the financing behavior of leading firms can be changed and the impact such change would have on the extent to which each country relies on RPTs.
Kon Sik Kim is Professor of Law at Seoul National University (SNU), specializing in corporate and securities law.