[Contract Lawyer] The key to fair corporate transactions, Legal review of parent-subsidiary supply entrustment contract by Law firm Veat.

Law firm Veat received a request from the parent company (hereinafter "Customer") responsible for software development and supply, and thoroughly reviewed the legal risks of a supply entrustment contract where a subsidiary entrusts the parent company with supply work.

In particular, we comprehensively reviewed issues such as △ the applicability of the “Act on Fair Trade in Subcontracting” (hereinafter “Subcontracting Act”), △ the possibility of violating the “Act on Fair Competition and Consumer Protection” (hereinafter “Fair Competition Act”) due to the addition of unnecessary transaction steps, and △ legal issues arising from payment date deferral, and provided the Customer with legal response measures.

1. Review of Applicability of the Subcontracting Act

Whether a supply entrustment contract falls under the Subcontracting Act requires an understanding of the transaction structure and the nature of the supplied goods.

(1) Whether the Supplied Goods are for a Specific Purpose

The Subcontracting Act applies legal regulations in cases of manufacturing entrustment. If the entrusted goods are designed for a specific purpose only and cannot be used universally, there is a high possibility that they constitute "manufacturing entrustment" under the Subcontracting Act. Accordingly, Law firm Veat thoroughly reviewed whether the goods are versatile or manufactured for a specific purpose.

(2) Review of Applicability of the Subcontracting Act

Even if it is deemed a manufacturing entrustment, separate review is necessary to determine whether the Subcontracting Act applies, given that the transaction parties are the parent company (ordering party) and the subsidiary (subcontractor). Generally, the Subcontracting Act regulates cases where a large enterprise entrusts manufacturing, services, etc., to a small enterprise, but it may also apply to transactions between group affiliates. Accordingly, we thoroughly informed the Customer about the possibility that the contract would be subject to the Subcontracting Act.

2. Review of the possibility of ‘Unreasonable Addition of Transaction Steps’ under the Fair Competition Act

The Fair Competition Act prohibits acts that add unnecessary transaction steps and cause economic disadvantages. In this case, there was a structural problem that the Customer would bear additional distribution costs by passing through the parent company rather than the subsidiary purchasing directly.

(1) Legal Analysis of the Parent Company’s Role

If the parent company merely acts as an intermediary for the delivery of goods and does not create additional value, there is a high possibility that it will be interpreted as “Unreasonable Addition of Transaction Steps.” That is, if the parent company purchases goods from the subsidiary and resells them without any role, it may be considered an act of passing through unnecessary distribution steps.

(2) Whether the Subsidiary Suffers Economic Disadvantages

In this case, if the subsidiary receives goods through the parent company and can procure them at a cheaper price than purchasing them directly, there is no practical economic disadvantage. However, if additional costs arise by passing through the parent company and the subsidiary bears a higher price, it may be deemed a transaction structure that violates the Fair Competition Act, and we provided the Customer with detailed legal advice.

3. Review of ‘Payment Date Deferral’ under the Fair Competition Act

The Fair Competition Act restricts acts that set payment dates unreasonably or delay payments, thereby increasing the economic burden on the transaction counterparty. Law firm Veat did not overlook this and analyzed the legal elements that could be problematic due to payment date deferral.

(1) Economic Effects of Payment Date Deferral

If the subsidiary can operate funds for a certain period of time by receiving a deferred payment date, it may be interpreted as the subsidiary receiving support from the parent company.

(2) Whether the Payment Date Exceeds the Normal Scope

If a long deferral period exceeding the legally normal payment date is granted, or even if the payment date is deemed reasonable, but payments are not actually collected within the date, or interest is not paid, it may be interpreted as an "act of supporting through payment date deferral."

Accordingly, we informed the Customer whether the payment date proposed by the Customer is at an appropriate level compared to general trade practices and whether there is a possibility of interpreting it as the parent company providing indirect financial support to the subsidiary.

In this way, we confirmed that the supply entrustment contract entails various legal risks under the Subcontracting Act and the Fair Competition Act. Effective management of these risks requires continuous legal review and prompt response.

Law firm Veat provides regular legal counsel services and membership services for companies seeking to prevent legal risks in advance and receive ongoing legal support. This is a service designed to go beyond simple one-off legal advice and allow customers to receive prompt and professional legal review whenever they need it.

In particular, for startups, there is a high probability of facing unexpected legal issues due to rapid growth and changes in business models. Therefore, Law firm Veat provides customized legal subscription services tailored to the characteristics and growth stage of startups, enabling companies to establish a stable legal foundation from the beginning and promote sustainable growth.

Through this service, customers can receive regular advice on major legal issues and can respond quickly and effectively in the event of complex legal problems.

Corporate lawyer Law firm Veat supports the establishment of a fair transaction structure by providing professional analysis of various legal issues that may arise in corporate transactions and minimizing the legal risks of the customer.

If you need legal advice related to supply entrustment and the Subcontracting Act, or regular legal advice, please feel free to contact Law firm Veat.

This case study can also be found on the Law firm Veat blog.

- Fair Corporate Transactions: Legal Review of Supply Entrustment Contracts between Parent and Subsidiary Companies

Thank you.

Law firm Veat