South Korea's Defense Acquisition Program Administration (DAPA) said it would treat any move by Hanwha Group to secure managerial control of Korea Aerospace Industries (KAI) as subject to a full merger review under strict standards. The agency raised no separate objection when Hanwha's purchase of KAI shares was approved in late August, but it has now signaled that it will intervene actively in the review process if Hanwha attempts to enter the board.
The Fair Trade Commission (FTC) earlier conducted a simplified review, judging that Hanwha's acquisition of KAI shares did not give it a level of stake capable of exercising substantive influence over management. Within the defense industry, however, some observers expect that Hanwha figures could begin taking part in the board in earnest now that the group has become KAI's second-largest shareholder. Some analysts also see the share purchase as groundwork for eventually securing managerial control.
Asked on the 28th about the possibility of Hanwha securing managerial control of KAI, a DAPA official said, "Even if one company acquires shares in another, if that does not create a controlling relationship, it is deemed to pose no restriction on competition and is excluded from a full review." The official added, "But if Hanwha's move to secure managerial control becomes formalized, such as by entering the board through the appointment of directors, it will become subject to a full merger review."
"In that case, we can conduct a review of competition restrictions, including conflicts of interest," the official said. "Once the appointment of directors takes concrete shape and is formalized, that amounts to substantive involvement in management, and it could constitute vertical and horizontal restrictions on competition between Hanwha and KAI, and between Hanwha and its competitors." The official added that the agency "plans to apply strict standards and to present a formal opinion to the competition authorities and respond accordingly."
The FTC shares DAPA's position. When it approved Hanwha's purchase of KAI shares in August, the commission attached certain conditions: a merger review will be conducted if Hanwha Group becomes KAI's largest investor, or if it holds one-third or more of KAI's executive posts or concurrently holds the chief executive position. The intent is to examine closely whether there are concerns over restrictions on competition once Hanwha's participation in management becomes formal.
DAPA to Apply Article 35, Paragraph 3 of Defense Business Act Strictly
In response to a query from the office of Rep. Min Hong-chul of the Democratic Party of Korea, a member of the National Assembly's National Defense Committee, DAPA said, "If Hanwha's move to secure managerial control, such as entering the KAI board, becomes formalized, it will become subject to a full merger review." The agency added, "Once the appointment of directors takes concrete shape and is formalized, we will present a formal opinion on the matter as subject to review for vertical and horizontal restrictions on competition between competing firms."
Separately from the FTC's corporate review, DAPA says it will intervene rigorously by applying Article 35, Paragraph 3 of the Defense Business Act. Under that provision, when a substantive change in managerial control is expected, a party seeking to substantively acquire managerial control of a defense industry company must obtain prior approval from the Minister of Trade, Industry and Energy.
Paragraph 4 further stipulates that the minister must consult in advance with the DAPA commissioner before granting such approval. Because the defense sector is directly tied to national security, the provision is designed to have DAPA comprehensively examine matters such as the effect of a defense contractor's sale on the procurement of defense materiel and whether security requirements are met, meaning DAPA's consent is also required.
For this reason, officials inside DAPA are said to be focusing on the fact that consultation with the government — in the form of prior approval from the trade ministry and DAPA under the relevant law — is mandatory. This is read as meaning that if Hanwha overlooks this and seeks to exercise substantive influence over KAI's management, the agency can apply strict standards to check any move to secure managerial control.
The FTC approved the acquisition of KAI shares by Hanwha Aerospace and two other companies on Aug. 31. It granted approval immediately through a simplified review, on the presumption that Hanwha's purchase of the KAI stake posed no possibility of restricting competition. Hanwha Group's combined stake in KAI totals 15.89%, consisting of 9.90% held by Hanwha Aerospace, 4.98% by Hanwha Systems and 1.01% by Hanwha Aerospace USA.
