The Fair Trade Commission (KFTC) is intensifying its economic penalties, including increased fines, which is heightening risks for companies. The immediate impact of large fines on accounting can adversely affect the stock prices of publicly traded companies.
Even after the KFTC completes its investigations, ongoing disputes and appeals contribute to prolonged litigation, further extending the legal risks for businesses.
Investors react to KFTC investigations and sanctions impacting stock prices
The KFTC processes cases through a structured approach, starting from reporting or initiating investigations, followed by inquiries, the submission of review reports, and deliberations leading to decisions and sanctions. This process essentially serves as the first instance of legal judgment under relevant laws.
However, the knowledge that KFTC investigations and sanctions are forthcoming can significantly influence stock prices and investor sentiment. A notable example is Naver, which saw its stock decline after the KFTC sent a review report regarding allegations of abuse of monopoly power in 2019. Although the final decision had not yet been made, investors perceived it as a regulatory risk.
Once sanctions are imposed, the situation becomes more complicated. Fines that are levied must be reflected in financial statements, leading to negative impacts on stock prices. Investors may perceive this as an immediate decline in performance, which can dampen investor sentiment.
For instance, in 2024, the KFTC imposed a fine of approximately 140 billion won on Coupang related to manipulation of its private brand product searches. This was the largest fine in the retail sector's history, and at that time, Coupang's stock fell from the low $20 range to the high $10 range. Such penalties can also depress investor sentiment across entire sectors; for example, after news of fines related to a paper collusion case, stocks in the paper industry also experienced declines.
Recently, the KFTC has begun to disclose the submission of review reports, which were previously kept confidential, further increasing the perceived risks for companies. From February to June, the KFTC publicly announced the submission of review reports six times. Following the first public disclosure related to flour price collusion, stocks of companies like CJ CheilJedang also fell.
Long-term litigation poses significant risks for companies
Businesses are expressing concerns that KFTC investigations extend beyond mere legal issues, evolving into broader management risks. The likelihood of prolonged investigations, sanctions, and administrative lawsuits increases significantly once news of a KFTC inquiry becomes public. There are numerous instances where a violation was found during the KFTC's review, only for the courts to later overturn that decision.
A prominent case involves Kakao Mobility's so-called "call allocation" incident. In 2023, the KFTC fined Kakao Mobility 27.1 billion won for allegedly violating franchise law by charging fees to drivers who did not use its app. However, the Seoul High Court later annulled this decision, and the KFTC has since appealed, with the case now under review by the Supreme Court.
A similar situation occurred with Naver's shopping search algorithm case. In 2020, the KFTC fined Naver 26.7 billion won for allegedly favoring its own products by adjusting its search algorithm. Naver contested this in an administrative lawsuit, but the Seoul High Court upheld the KFTC's ruling. The Supreme Court later overturned the original ruling, sending the case back to the Seoul High Court for further review.
As these cases drag on, the risks for companies continue to escalate. The litigation process can last two to three years, and if the Supreme Court orders a retrial, the case may extend even longer.
Even if companies ultimately win their cases, the damage from years of stock price declines and reputational harm is often irreversible. Cases such as the SPC unfair support incident, the Nongsim ramen price collusion case, and the Hyundai Mobis volume push incident have all seen KFTC decisions overturned by the courts.
Moreover, the recent practice of the KFTC disclosing review reports before final decisions adds to the burden on companies. While these reports reflect the findings and recommendations of investigators, they do not represent the KFTC's final judgment. However, once the submission and allegations are made public, the market may interpret it as an acknowledgment of wrongdoing.
An industry insider remarked, "While it is understandable for the KFTC to explain its decisions after confirming fines or administrative orders, publicly disclosing content still under review seems excessive. Even if a company wins a lawsuit three to five years later, it will be difficult to recover from the damage to its stock price and reputation."
* This article has been translated by AI.
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