Proposal for a Council Regulation repealing the countervailing duty imposed on imports of certain electronic microcircuits known as DRAMs (Dynamic Random Access Memories) originating in the Republic of Korea and terminating the proceeding
Date: 2008-03-07
Institutions: European Commission
Subjects: South Korea, countervailing charge, electronic component, import, originating product, repeal

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 7.3.2008 
COM(2008) 121 final 

Proposal for a 

COUNCIL REGULATION 

repealing the countervailing duty imposed on imports of certain electronic microcircuits 
known as DRAMs (Dynamic Random Access Memories) originating in the Republic of 
Korea and terminating the proceeding 

(presented by the Commission) 

EN 

   EN 

 
 
 
  
EXPLANATORY MEMORANDUM 

1)  CONTEXT OF THE PROPOSAL 

•  Grounds for and objectives of the proposal 

This  proposal  concerns  the  application  of  Council  Regulation  (EC)  No  2026/97  of 
6 October 1997 on protection against subsidised imports from countries not members 
of  the  European  Community,  as  last  amended  by  Council  Regulation  (EC) 
No 461/2004  of  8  March  2004  (‘basic  Regulation’)  in  the  proceeding  concerning 
imports  of  certain  electronic  integrated  circuits  known  as  Dynamic  Random  Access 
Memories (‘DRAMs’) originating in the Republic of Korea.  

•  General context 

This proposal is made in the context of the implementation of the basic Regulation as is 
the  result  of  an  investigation  which  was  carried  out  in  line  with  the  substantive  and 
procedural requirements laid out in the basic Regulation. 

•  Existing provisions in the area of the proposal 

The Council, by Regulation (EC) No 1480/2003 (OJ L 212, 22.8.2003, p.1), imposed a 
definitive  countervailing  duty  of  34,8%  on  imports  of  DRAMs  originating  in  the 
Republic of Korea and manufactured by all companies other than Samsung Electronics 
Co., Ltd.  

Following  a  report  adopted  by  the  Dispute  Settlement  Body  of  the  World  Trade 
Organisation  (WT/DS299/R  European  Communities  –  Countervailing  Measures  on 
Dynamic  Random  Access  Memory  Chips  from  Korea  adopted  on  3.8.2005),  the 
Council  adopted  Regulation  (EC)  no  584/2006  (OJ  L  103,  12.4.2006,  p.  1), 
implementing  the  recommendations  made  by  the  report  and  lowering  the  definitive 
countervailing duty to 32,9%. 

•  Consistency with other policies and objectives of the Union 

Not applicable. 

2)  CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

•  Consultation of interested parties 

Interested  parties  concerned  by  the  proceeding  have  already  had  the  possibility  to 
defend their interests, in line with the provisions of the basic Regulation. 

•  Collection and use of expertise 

There was no need for external expertise. 

•  Impact assessment 

This proposal is the result of the implementation of the basic Regulation. 

The  basic  Regulation  does  not  foresee  a  general  impact  assessment,  but  contains  an 
exhaustive list of conditions that have to be assessed. 

EN 

2 

   EN 

 
 
 
 
 
 
 
 
 
 
3)  LEGAL ELEMENTS OF THE PROPOSAL 

•  Summary of the proposed action 

Following the receipt of prima facie evidence of the existence of further subsidisation 
from the Community industry and of a request for a review from Hynix Semiconductor 
Inc., claiming that the countervailable subsidies had expired, on 18th March 2006, the 
Commission initiated an ex officio partial interim review of the countervailing duty in 
force  in  respect  of  imports  of  DRAMs  originating  in  the  Republic  of  Korea.  The 
purpose  of  this  review,  which  was  limited  in  scope  to  the  examination  of  the 
subsidisation  of  one  Korean  exporting  producer,  namely  Hynix  Semiconductor  Inc. 
('Hynix'),  was  to  assess  the  need  for  continuation,  removal  or  amendment  of  the 
existing measures. 

The  review  investigation  confirmed  that  Hynix  did  receive  further  subsidisation. 
However,  it  also  confirmed  that  both  the  subsidies  countervailed  in  the  original 
investigation and those received following the end of the original investigation period 
had ceased to confer a benefit. 

It is therefore proposed to terminate the proceeding and repeal the measures imposed 
by Council Regulation (EC) No 1480/2003 as of 31st December 2007.  

•  Legal basis 

Council  Regulation  (EC)  No  2026/97  of  6  October  1997  on  protection  against 
subsidised  imports  from  countries  not  members  of  the  European  Community,  as  last 
amended by Council Regulation (EC) No 461/2004 of 8 March 2004. 

•  Subsidiarity principle 

The proposal falls under the exclusive competence of the Community. The subsidiarity 
principle therefore does not apply. 

•  Proportionality principle 

The proposal complies with the proportionality principle for the following reasons. 

The  form  of  action  is  described  in  the  above-mentioned  Regulations  and  leaves  no 
scope for national decision. 

Indication  of  how  financial  and  administrative  burden  falling  upon  the  Community, 
national governments, regional and local authorities, economic operators and citizens is 
minimized and proportionate to the objective of the proposal is not applicable. 

•  Choice of instruments 

Proposed instruments: regulation. 

Other  means  would  not  be  adequate  because  the  basic  Regulation  do  not  foresee 
alternative options. 

EN 

3 

   EN 

 
 
 
 
 
 
 
 
 
 
4)  BUDGETARY IMPLICATION 

The proposal has no implication for the Community budget. 

EN 

4 

   EN 

 
 
 
Proposal for a 

COUNCIL REGULATION 

repealing the countervailing duty imposed on imports of certain electronic microcircuits 
known as DRAMs (Dynamic Random Access Memories) originating in the Republic of 
Korea and terminating the proceeding 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, 

Having  regard  to  Council  Regulation  (EC)  No  2026/97  of  6  October  1997  on  protection 
against  subsidised  imports  from  countries  not  members  of  the  European  Community1  (the 
‘basic Regulation’) and in particular Article 19 thereof, 

Having  regard  to  the  proposal  submitted  by  the  Commission  after  consulting  the  Advisory 
Committee, 

Whereas: 

A. 

PROCEDURE 

Existing measures 
By  Regulation  (EC)  No  1480/20032  (the  ‘definitive  duty  Regulation’),  the  Council 
imposed  a  definitive  countervailing  duty  of  34,8%  on  imports  of  certain  electronic 
microcircuits  known  as  Dynamic  Random  Access  Memories  (‘DRAMs’)  originating 
in  the  Republic  of  Korea  and  manufactured  by  all  companies  other  than  Samsung 
Electronics  Co.,  Ltd  (‘Samsung’),  for  which  a  0%  duty  rate  was  established.  The 
definitive  duty  Regulation  was  preceded  by  Commission  Regulation  (EC)  No 
708/2003  imposing  a  provisional  countervailing  duty  on  imports  of  DRAMs 
originating in the Republic of Korea3 (the ‘provisional duty Regulation’). 

Following  a  report  adopted  by  the  Dispute  Settlement  Body  of  the  World  Trade 
Organisation4 (the 'EC-Korea DRAMs Panel Report'), the Council adopted Regulation 
(EC) no 584/20065, implementing the recommendations made by the Panel Report and 
lowering the definitive countervailing duty to 32,9% (the 'implementing Regulation'). 

Ex Officio initiation of a partial interim review 

The Community producers Micron Europe Ltd and Qimonda AG (formerly, Infineon 
Technologies  AG)  provided  prima  facie  evidence  to  the  Commission  indicating  that 
Hynix Semiconductor Inc. ('Hynix') was in receipt of additional subsidies in the period 
following  the  investigation  period  of  the  original  investigation.  Additionally,  Hynix 

OJ  L  288,  21.10.1997,  p.  1.  Regulation  as  last  amended  by  Regulation  (EC)  No  461/2004  (OJ  L  77, 
13.3.2004, p. 12). 
OJ  L  212,  22.8.2003,  p.  1.  Regulation  as  amended  by  Regulation  (EC)  No  2116/2005,  OJ  L  340, 
23.12.2005, p.7. 
OJ L 102, 24.4.2003, p. 7. 
WT/DS299/R European Communities – Countervailing Measures on Dynamic Random Access Memory 
Chips from Korea, adopted on 3rd August 2005. 
OJ L 103, 12.4.2006, p. 1. 

I. 

(1) 

(2) 

II. 

(3) 

1 

2 

3 
4 

5 

EN 

5 

   EN 

 
                                                 
submitted a request for a partial interim review alleging that the subsidies found to be 
countervailable in the original investigation had ceased to exist. 

(4) 

In view of the submissions above, the Commission decided to proceed ex officio. 

III. 

Investigation 

(5) 

(6) 

(7) 

(8) 

(9) 

Having determined that sufficient evidence existed to justify the initiation of a partial 
interim  review  and  having  consulted  the  Advisory  Committee,  the  Commission 
announced  on  18th  March  2006,  by  a  Notice  of  Initiation  published  in  the  Official 
Journal of the European Union6, the ex officio initiation of a partial interim review, in 
accordance with Article 19 of the basic Regulation. 

The review was limited in scope to the examination of subsidisation of one exporting 
producer,  Hynix,  in  order  to  assess  the  need  for  the  continuation,  removal  or 
amendment  of  the  existing  measures.  The  investigation  period  ran  from  1st  January 
2005 to 31st December 2005 ('IP'). 

The  Commission  officially  advised  the  exporting  producer  concerned  (Hynix),  the 
Government  of  the  Republic  of  Korea  (the  'GOK')  and  the  Community  producers  of 
the  initiation  of  the  partial  interim  review.  Interested  parties  were  given  the 
opportunity to make their views known in writing and to request a hearing within the 
time limits set out in the Notice of Initiation. 

In order to obtain the information necessary for its investigation, the Commission sent 
questionnaires  to  all  parties  known  to  be  concerned  and  received  replies  from  the 
company, the GOK and a number of Korean banks, as well as Deutsche Bank AG. 

The Commission sought to verify the information received and carried out verification 
visits at the premises of the GOK (Ministry of Finance and Economy – 'MOFE' and 
the  Financial  Supervisory  Commission  –  'FSC')  and  the  following  companies  and 
institutions in Seoul:- 

Hynix Semiconductor Inc. 

Korea Exchange Bank ('KEB') 

Korea Development Bank ('KDB') 

Woori Bank 

Shinhan Bank 

Deutsche Bank AG 

National Agricultural Cooperative Federation ('NACF') 

Hyundai Marine & Fire Insurance 

B. PRODUCT UNDER CONSIDERATION AND LIKE PRODUCT 

(10)  The product under consideration and the like product are the same as that covered in 
the  original  investigation,  i.e.,  certain  electronic  microcircuits  known  as  Dynamic 
Random  Access  Memories  ('DRAMs')  of  all  types,  densities  and  variations,  whether 
assembled, in processed wafer or chips (dies), manufactured using variations of Metal 
Oxide-Semiconductors  ('MOS')  process  technology,  including  complementary  MOS 
types  ('CMOS'),  of  all  densities  (including  future  densities),  irrespective  of  access 

6 

OJ C 67, 18.3.2006, p. 16. 

EN 

6 

   EN 

 
                                                 
speed, configuration, package or frame etc., originating in the Republic of Korea. The 
product  concerned  also  includes  DRAMs  presented  in  (non-customised)  memory 
modules or (non-customised) memory boards or in some other kind of aggregate form 
provided the main purpose of which is to provide memory. 

(11)  The  product  concerned  is  currently  classifiable  within  CN  codes  ex  8473  30  20,  ex 
8473 50 20, ex 8542 32 10, ex 8542 32 31, ex 8542 32 39 and ex 8548 90 20. 

I. 

Introduction 

C. SUBSIDIES 

(12)  On  the  basis  of  the  information  available  to  the  Commission  at  initiation  and  the 
replies  given  to  the  Commission's  questionnaires,  the  following  measures  were 
investigated:- 

(a) 

(b) 

(c) 

(d) 

(e) 

(f) 

A rescue package approved by the Hynix Creditors' and Financial Institutions 
Council ('CFIC') on 30th December 2002 (the 'new restructuring'), comprising a 
debt-to-equity  swap,  a  debt  rollover  and  changes  in  the  interest  payment 
conditions; 

Alleged  preferential  financing  provided  by  Korean  banks  to  Beijing  Orient 
Electronics ('BOE') to facilitate the purchase of Hydis, a Hynix operation; 

Alleged preferential financing provided by Korean banks to CVC to facilitate 
the purchase of System IC, a Hynix operation, including the transfer of Hynix 
debt to another entity at a discount; 

A discounted cash buyout of the Hynix debt; 

Preferential tax treatment allegedly given to Hynix by GOK; 

The July 2005 refinancing of Hynix debt. 

(13)  All the measures listed above were ad hoc measures. With the exception of (e) above, 
all  investigated  measures  were  taken  by  the  creditor  banks/institutions  of  Hynix, 
allegedly  under  direction  by  the  GOK.  The  issue  of  "financial  contribution  by  a 
government",  within  the  meaning  of  Article  2  of  the  basic  Regulation,  is,  as  in  the 
original  investigation,  central  to  this  proceeding  and  recitals  (9)  to  (15)  of  the 
definitive duty Regulation are hereby recalled.  

II. 

The financial situation of Hynix after the original investigation 

(14)  Despite the large bail-out packages received by Hynix in 2001, its financial situation 
did not improve and in 2002 it was still rated Selective Default by Standard & Poor. It 
reported a loss of KRW 1,03 trillion for the first nine months of 2002; it was obvious 
that  it  was  in  no  position  to  pay  any  maturing  debt.  Its  ratios,  based  on  its  2002 
financial  statement,  show  that  it  could  not  cover  its  current  liabilities  with  current 
assets,  could  not  cover  its  interest  expense  with  its  earning,  was  financed  with 
significantly  more  debt  than  equity  and  had  large  net  losses.  Although  the  October 
2001 bailout had helped matters to some degree, the company was still in considerable 
distress.  Morgan  Stanley  Dean  Witter,  one  of  Hynix's  external  advisors,  in  a  report 
produced in September 2002, stated that Hynix would be very unlikely to "accumulate 
enough  cash  in  the  next  two  years  to  meet  maturing  debt  obligations"  or  "expand 
capacity  and  fund  the  technological  upgrades  and  R&D  necessary  for  it  to  remain  a 
competitive  DRAM  producer."  Morgan  Stanley  Dean  Witter  went  on  to  say  that 
"Hynix is technically bankrupt, kept alive only though debt restructuring programmes" 
and  that  "The  financial  commitment  required  to  bring  the  company  back  to  a 

EN 

7 

   EN 

 
competitive level looks too great. Creditors cannot afford to nurse the company back 
to  health.  Whatever  the  outcome,  the  message  is  clear  to  investors:  Hynix  is  not  an 
investment grade company." 

(15)  Merrill Lynch, again in September 2002, stated that: "We are increasingly concerned 
about  Hynix's  dismal  earnings  prospects.  We  are  cutting  02-03  estimates  into  deficit 
territory as cost improvements and supply growth is constrained by lack of investment 
in the process technology upgrade." Another one of Hynix's advisors, Deutsche Bank 
Korea, admitted that their equities department, although it followed the semiconductor 
industry,  did  not  follow  Hynix,  as  "there  was  a  lack  of  investor  appetite".  The 
company itself does not dispute the severity of its financial difficulties at the relevant 
time. 

III.  The New Restructuring 

(16) 

In October 2001, a business normalisation plan was adopted by the CFIC to pursue the 
reconstruction of the company. The CFIC was made up of banks and other institutions 
which  were  Hynix's  creditors.  The  decisions  of  the  CFIC  were  taken  by  a  75% 
majority. The voting rights of each institution were determined in accordance with its 
exposure to Hynix. 

(17)  Hynix  was  under  the  Corporate  Restructuring  Promotion  Act  (the  'CRPA')  and,  as 
such, was effectively under the control of its creditors. The CFIC decided to sell the 
business or part of the business to a third party. In December 2002, the Restructuring 
Committee, which is a sub-committee of the CFIC, initiated negotiations with Micron 
Technology  Inc.  These  lasted  for  5  months;  a  Memorandum  of  Understanding  was 
signed  between  the  parties,  but  the  terms  of  the  sale  were  eventually  rejected  by  the 
Hynix Board of Directors. 

(18) 

In  May  2002,  as  a  follow-up  measure  given  the  continuing  deterioration  of  Hynix's 
finances,  the  CFIC  hired  a  number  of  external  advisors,  including  Deutsche  Bank 
('DB'), Morgan Stanley Dean Witter, Deloitte & Touche and A. D. Little, to analyse 
Hynix and come up with a plan to rescue the company. Together with these external 
advisors,  KEB,  which  was  the  head  of  the  CFIC  as  lead  creditor,  performed  due 
diligence on Hynix until November 2002. The resulting report, prepared by Deutsche 
Bank and KEB (the 'DB Report'), was submitted to the CFIC. 

(19)  On 30th December 2002, the CFIC decided to implement a corporate turnaround and 
sell-off  of  the  business,  as  outlined  in  the  DB  Report.  The  corporate  turnaround 
involved a restructuring, comprising:- 

–  a debt-to-equity swap of KRW 1.861,5bn 

–  a capital write-down on a ratio of 21:1; 

–  a rollover of debt amounting to KRW 3.293bn and 

–  changes to the interest payment conditions of the rolled-over debt. 

IV.  Description of the Measures 

i. 

Debt-to-Equity Swap 

(20)  The CFIC decided to swap debt amounting to KRW 1.861,5bn for Hynix shares; this 
amounted  to  approximately  50%  of  Hynix's  unsecured  loans.  The  swap  share  price 
was  fixed  to  KRW  435  at  the  time  the  decision  was  taken  in  December  2002,  by 
taking the one-month average market price. Although there is an obligation under the 

EN 

8 

   EN 

 
CRPA  on  the  CFIC  to  use  a  reasonable  method  in  calculating  the  swap  price,  no 
specific method is provided. 

(21)  The  restructuring  plan  involved  a  capital  write-down  prior  to  the  swap  taking  place, 
which  required  shareholder  approval;  hence  the  swap  could  not  take  place 
immediately.  Once  the  capital  write-down  was  implemented,  at  a  ratio  of  21:1,  the 
share swap price became KRW 9.135 (21 x KRW 435) and the swap went ahead. As 
the shares pursuant to the swap were not to be issued until April 2003, this price was 
to  serve  as  a  floor,  but  no  ceiling  was  set.  The  actual  share  price  at  the  time  of  the 
decision was in fact KRW 280; it fell to KRW 167 in April 2003. 

ii. 

Debt Rollover 

(22)  The  maturity  of  the  Hynix  debt  which  was  not  converted  to  equity  was  extended  to 

December 2006. This rolled-over debt amounted, in total, to KRW 3.293bn. 

iii. 

Changes in the terms of interest payments 

(23)  The  interest  rate  on  the  rolled-over  debt  was  reduced  to  3,5%  from  6,5%.  The  3% 
difference  was  treated  as  additional  principal  and  was  added  on  to  the  outstanding 
debt,  with  a  maturity  date  of  December  2006,  as  well.  Interest  on  this  additional 
principal was set at 6%, to be paid quarterly. 

V. 

The Policy of the GOK as regards Hynix 

(24)  As  described  in  the  provisional  and  the  definitive  duty  Regulations,  the  GOK  had  a 
keen  interest  in  the  fact  of  Hynix.  The  GOK  admitted  that,  due  to  Hynix's  situation, 
foreign  investors  were  not  willing  to  invest  in  Korea,  because  the  Korean  banks' 
exposure  to  Hynix  was  so  high.  It  need  the  Hynix  problem  to  be  solved,  in  order  to 
remove  the  uncertainty;  in  fact,  Hynix's  "structural  adjustment"  was  cited  as  a  main 
policy  issue  for  the  second  half  of  2002  in  a  report  by  the  Ministry  of  Finance  and 
Economy.  A  report  submitted  to  the  National  Assembly  by  Korea's  Grand  National 
Party ('GNP'), in opposition, criticised the GOK's insistence on rescuing the Hyundai 
Group, in which Hynix was a subsidiary, stating that the GOK, by saving Hynix, was 
"injecting money into bottomless pits." Hynix claims that, as the report was submitted 
in November 2002, it should not be considered as evidence of the GOK's involvement 
in  the  new  restructuring.  However,  the  new  restructuring  was  approved  by  the 
creditors only a month following the submission of the GNP report and deliberations 
on the best way to rescue Hynix had been ongoing for months before that. The GNP 
report, therefore, is not irrelevant to the question of whether the GOK had a policy to 
save Hynix.  

(25)  During  the  first  half  of  the  year,  the  Vice  Minister  for  Finance  stated  that  "creditors 
will  have  to  find  a  solution  to  Hynix  as  soon  as  possible  to  minimise  the  adverse 
impact  on  the  economy."  To  that  end,  a  meeting  between  the  GOK  and  Hynix's 
creditors had taken place to express the GOK's views with regard to the then ongoing 
negotiations  with  Micron.  The  MOFE  could  neither  confirm  nor  deny  whether  other 
meetings had taken place and claimed that records of meetings were not always kept. 
The FSC, on the other hand, said that no other meetings had taken place, although it 
was  kept  abreast  of  what  was  happening  by  informal  telephone  calls.  However, 
evidence on the record suggests that the GOK, mindful of the previous investigations 
in  its  involvement  in  Hynix  by  the  European  Communities  and  the  United  States, 
directed  that  any  communication  relating  to  Hynix  should  be  made  orally  to  avoid 

EN 

9 

   EN 

 
being traceable7. The FSC stated that it had no power to intervene in the restructuring 
efforts of each company, but that it did conduct partial monitoring of the process, for 
example, where they thought there could be a potential shock to the markets. The FSC 
conducts such monitoring by contacts with "work-level" persons, but not records are 
kept of such contacts. Although the FSC admitted that Hynix was restructured because 
it  was  so  big,  it  insisted  that  the  manner  and  mode  of  such  restructuring  was 
determined solely by the creditors. The Hynix creditor banks confirmed that the FSC 
kept a close eye on the restructuring by telephone calls and requests for information.  

(26)  The GOK, in the meetings of April 2002, communicated its official position to Hynix's 
creditors, which was either to sell Hynix or to rescue it to buffer the shock. Although 
the GOK insisted that the decision of whether liquidation was on the table or not was 
left to the creditors, its statements regarding the importance of rescuing Hynix (by a 
restructuring or a sale) in order to restore confidence in the Korean markets belies such 
insistence.  The  GOK's  belief  that  Hynix  was  too  big  to  fail  is  corroborated  by  a 
statement by one of the creditor banks that Hynix was such a big company, employing 
such a large number of people and and contracts "you can imagine what would happen 
if  it  went  bankrupt  or  insolvent."  Further,  one  of  Hynix's  external  advisors,  in  its 
engagement  letter  wrote  that  it  would  assist  "…in  [the]  effort  to  find  a  realistic  and 
viable  restructuring  solution  for  Hynix  that  would  minimise  social  damage…" 
(emphasis added). It was plain that the liquidation of Hynix was not an option. 

VI.  GOK involvement in Hynix creditor banks 

(27)  The  GOK  is  a  major  shareholder  in  a  large  number  of  Hynix  creditor  banks.  The 
information on the record provided by the banks, Hynix and the GOK shows that the 
GOK  has  at  least  a  significant  shareholding  (>20%)  in  creditor  banks/financial 
institutions holding at least 75% of the voting rights in the CFIC. It is recalled that the 
required  majority  in  the  CFIC  was  75%;  therefore,  the  GOK's  involvement  in  the 
decisions taken by the Creditors' Council cannot be doubted. 

(28)  As  in  the  original  investigation,  KDB  and  NACF  are  wholly-owned  government 
entities and are thus considered public bodies within the meaning of Article 1(3) of the 
basic Regulation. 

(29)  There is no evidence on the record to suggest that the situation as regards Woori Bank 
changed  from  the  one  described  in  recitals  (80)  to  (82)  of  the  provisional  duty 
Regulation. Further, as stated in the provisional duty Regulation, Chohung Bank, now 
called  Shinhan  Bank  since  its  merged  with  Shinhan  Bank  on  1st  April  2006,  entered 
into a Memorandum of Understanding with the Korean Deposit Insurance Corporation 
('KDIC')  in  January  2002,  giving  KDIC,  a  public  body,  a  decisive  influence  over 
Chohung Bank's decision-making. 

(30)  Prime  Minister's  Decree  408  is  further  evidence  that  there  is  legal  scope  for  GOK 
intervention  in  the  financial  sector  for  policy  reasons.  The  GOK  cites  the  Decree  as 
evidence  that  the  Korean  government  officially  stated  that  it  would  not  intervene  in 
banks and financial institutions. However, Article 5(1) of Prime Minister's Decree 408 
stipulates  that  "In  case  a  financial  supervisory  organisation  makes  a  request  for  a 
financial  institution's  cooperation  or  support  in  necessity  for  the  stabilisation  of  the 
financial market…it shall be done in a document or by meeting." Therefore, not only 

7 

Kangwon Lee, CEO of KEB "I will not tell", Maeil Business Newspaper, 23rd August 2002. 

EN 

10 

   EN 

 
                                                 
does  the  Decree  not  preclude  government  intervention  in  financial  institutions,  it 
expressly sets out the ways in which such intervention may be carried out. 

(31)  Hynix  claimed 

that  KEB  was  not  controlled  by 

including  risk  management.  However,  KEB  could  not  confirm 

the  GOK  and  presented 
Commerzbank's shareholding as evidence of its independence from GOK intervention. 
It  also  submitted  documents  which  refer  to  Commerzbank's  veto  right  over  some 
issues, 
that 
Commerzbank, although it had sent a person to become a member of the credit team, 
actually exercised any control over credit decisions and, in fact, stated that they were 
unaware of the existence of such veto rights. Further, the recent investigation into the 
GOK's  involvement  in  Lone  Star's  purchase  of  shares  in  KEB  in  2003  demonstrates 
further that KEB is controlled by the GOK. Therefore, it is considered that there is no 
reason  to  depart  from  the  conclusions  of  the  original  investigation  regarding  the 
GOK's influence on the decisions of KEB. 

(32)  Another  example  of  GOK  involvement  in  the  Hynix  creditor  banks  was  the 
appointment  of  a  former  Minister  of  Industry  and  Commerce  as  Chairman  of  the 
Restructuring  Committee  of  Hynix's  CFIC,  by  the  Steering  Committee  of  that  body, 
only for him to be re-appointed Minister a few months later. 

(33)  Kookmin and Woori Bank have also indicated that GOK interference might lead them 
to  make  policy-based  decisions  in  their  prospectuses  to  the  Securities  Exchange 
Commission in 2002. Hynix has submitted evidence that the wording in question did 
not refer specifically to Hynix and should not be taken as intending to imply that the 
GOK  exercised  control  over  the  Korean  banking  sector.  However,  the  evidence 
submitted  by  Hynix  does  not  dispute  other  parts  of  the  prospectus  warning,  for 
example,  that  GOK  shareholding  "could  cause  us  to  take  actions  or  pursue  policy 
objectives that may be against [creditors'] interests." 

(34)  The  Commission  asked  to  see  the  internal  documentation  relating  to  creditors 
institutions' decision to approve the restructuring plan. These confidential documents 
show that, although the creditors each went through their standard internal procedures 
in deciding to participate in the restructuring, they did not act in accordance with the 
credit rating they had each ascribed to Hynix for the period in question. Although all 
creditors had given Hynix a rating equivalent to Standard & Poor's Selective Default, 
they nevertheless proceeded to approve the restructuring plan. For example, at the time 
the  restructuring  was  approved,  one  bank's  credit  rating  for  Hynix  indicated  that  the 
company was highly vulnerable and that the possibility of the business being restored 
was  very  unlikely.  The  rating  given  to  Hynix  by  another  of  the  banks  involved 
indicated that the possibility of default was very high and that there was no possibility 
of  future  recovery.  Instead,  these  banks  went  ahead  and  approved  the  restructuring 
proposal,  even  though  the  evidence  suggests  that  this  was  not  consistent  with  a 
market-oriented approach and the DB report does not indicate otherwise. 

(35)  This was demonstrated by the creditors' treatment of both the debt they rolled over and 
the equity they received under the debt-to-equity swap: around 80-90% of the Hynix 
debt  had  been  written  off  as  a  loss  –  in  one  case,  even  100%  -  and  the  equity  was 
booked at around 20% of the price the creditors paid. 

(36)  The  company  claims  that  subsequent  events  demonstrate  that  the  creditors'  decision 
was the correct one; Hynix has been profitable since 2005 and the creditors sold their 
shares in the company for a considerable profit. However, first of all this is an ex post 
facto analysis, which does not at all justify the conclusion that at the time the creditors 
approved the restructuring plan, this was consistent with a market oriented approach. 

EN 

11 

   EN 

 
Moreover, the fact that Hynix survived was due to the enormous subsidies it received. 
One  cannot  argue  that,  because  Hynix  survived,  subsidies  were  not  subsidies,  if  that 
survival  was  only  possible  because  of  those  subsidies.  Finally,  the  creditors  were  in 
the position they were in at the end of 2002 because they had participated in the 2001 
restructuring,  which  constituted  a  subsidy.  Therefore,  they  cannot  argue  that  they 
should be compared to private creditors who have taken all the steps leading to their 
position  at  a  certain  point  in  time  entirely  of  their  own  volition.  Thus,  Hynix's 
argument does not affect the conclusion that the creditors were not acting conformity 
with a market-oriented approach. 

VII.  Conclusion on Financial Contribution 

(37) 

In  view  of  the  evidence  on  the  record  regarding  the  GOK's  policy  as  regards  Hynix 
and its involvement in the decision-making process of Hynix's creditors, as well as the 
evidence relating to the dire state of Hynix and the market's unwillingness to advance 
capital, as well as the lack of evidence that the existing creditors acted in accordance 
with a market benchmark, itself undistorted by subsidies, it is concluded that the GOK 
entrusted  and  directed  Hynix's  creditors  to  rescue  Hynix  by  approving  the 
restructuring described in recital (19) above. This constituted a financial contribution 
within the meaning of Article 2(1) of the basic Regulation. 

(38)  Hynix claimed that the GOK had nothing to do with the new restructuring, which was 
devised by the creditors with the help of the external advisors. Further, it claimed that 
the  evidence  on  record  only  showed  that  the  GOK  was  concerned  about  Hynix's 
future,  but  that  it  fell  short  of  the  requirement  for  a  demonstrable  link  between  the 
GOK and the banks' actions. Although GOK shareholding is not conclusive proof of 
direction  or  entrustment,  it  is  strong  evidence  of  the  extent  to  which  the  GOK  can 
influence  the  banks'  decision-making  process.  As  was  the  case  in  the  original 
investigation, evidence on the record shows that, as major shareholder, the GOK can 
appoint  directors  and  is  thus  able  to  influence  the  outcome  of  voting  at  board 
meetings. Further, the various press articles and reports on record demonstrate clearly 
that the GOK would not allow Hynix to fail; this is also demonstrated by the fact that 
one of the wholly-owned GOK banks purchased Hynix debt from the other creditors to 
ease the financial burden on the banks that had been entrusted to save Hynix. It is not 
disputed  that  the  new  restructuring  plan  was  devised  by  Hynix's  external  advisors  in 
conjunction  with  its  creditors;  however,  the  evidence  on  the  record  suggests  that  the 
GOK had entrusted and directed Hynix's creditors to restructure Hynix and not let it 
fail. 

(39)  The  behaviour  of  the  banks  also  clearly  demonstrates  that  they  were  not  acting  in 
accordance with normal commercial considerations. None of the banks rated Hynix as 
an investment grade company; in fact, all the rating ascribed to Hynix by its creditors 
show  that  they  considered  it  a  substantial  risk  and  doubted  that  it  would  be  able  to 
survive. The company claimed that the creditors' behaviour should be examined from 
the point of view of an "existing creditor". However, as is discussed in more detail in 
recital (36) above and recitals (41)-(44) below, certainly in this case, which is affected 
by very large and similar subsidies having been granted only around a year earlier, the 
correct test to be applied with regard to the commercial reasonableness of the creditors 
is  the  private  investor  test.  Therefore,  the  question  of  whether  an  existing  creditor 
would  have  behaved  in  a  manner  similar  to  that  of  the  Hynix  creditors  need  not  be 
addressed. 

VIII.  Benefit 

EN 

12 

   EN 

 
(40)  With  regard  to  any  benefit  conferred  to  Hynix,  KEB,  Woori  Bank,  Shinhan  Bank, 
KDB and NACF all argued that they had participated in the new restructuring because 
they  wanted  to  maximise  the  recovery  rate  for  the  loans  already  granted  to  Hynix. 
They  considered  that  the  value  of  Hynix  as  a  going  concern  was  higher  than  its 
immediate liquidation value. Nevertheless, this comparison, whatever its merits are as 
a  standard  for  analysis  of  the  existence  of  a  benefit,  would  in  any  case  not  be 
applicable in the present case for the reasons explained in recital (36) above and (41)-
(44)  below.  Furthermore,  the  existence  of  a  potential  benefit  to  the  heavily  exposed 
creditors does not demonstrate that there was no benefit to Hynix. 

(41)  Hynix  claims  that  the  new  restructuring  was  market-based,  as  it  was  devised  by 
external  advisors,  such  as  DB  and  Deloittes,  after  months  of  due  diligence  and  was 
based  on  the  DB  report  which  recommended  the  course  of  action  which  was 
eventually  followed. However, the  DB report was addressed to Hynix's creditors. Its 
aim  was  to  maximise  debt  recovery  for  such  creditors  while  keeping  the  company 
from failing. Hynix argued that the test to be applied to ascertain the benefit received 
by the company from the new restructuring should be the 'private creditor' test and not 
the  'private  investor'  test.  The  position  of  the  creditors  is  a  factor  which  could  be 
considered  in  an  analysis;  however,  as  explained  in  recital  (36)  and  below,  it  cannot 
play a role in this case. 

(42) 

(43) 

In  general  terms,  the  relevant  standard  is  whether  or  not  a  market-oriented  investor 
with  or  without  an  existing  exposure  to  Hynix,  would  have  assessed  the  proposed 
investment in Hynix as one worth making. The DB report does not provide a reliable 
response  to  that  question,  because,  being  addressed  to  the  existing  creditors,  it  is 
premised  on  using  what  are  in  general  terms  the  existing  Hynix  debt  and  equity 
structures as a vehicle for the proposed investment, thus reducing to vanishing point 
any possibility for hypothetical outside investment on the same terms. The DB report 
contains  no  evidence  that  outside  private  investors  would  have  had  any  interest  in 
putting money into Hynix. Indeed, DB's advice to private investors was, in fact, not to 
invest in Hynix, as shown by the fact that its research department did not follow Hynix 
equity. 

In any event, the financial situation of Hynix at the time of the new restructuring, as 
described  in  recital  (14)  above,  was  dire  and  it  was  evident  that  Hynix  was  not  in  a 
position to service its liabilities; hence, no funding was forthcoming from the market, 
as  is  evident  from  the  statements  of  financial  advisors  cited  in  recitals  (14)  and  (15) 
above.  While  the  DB  report  points  the  way  for  Hynix's  creditors  to  minimise  their 
losses,  it  gives  no  indication  as  to  why  the  market  would  have  continued  to  lend  or 
invest money in Hynix, a company in selective default. Therefore, such other data as 
are  available  concerning  the  position  of  Hynix  and  the  market  situation  confirm  that 
the DB report does not provide any reliable response to the question of whether or not 
a market-oriented investor would have assessed the proposed investment in Hynix as 
one worth making. 

(44) 

In  addition,  leaving  aside  the  question  of  what  course  of  action  might  or  might  not 
have  been  open  to  the  parties  in  2002  given  the  situation  as  it  then  existed,  the  fact 
remains  that  Hynix  had  been  put  in  this  situation  by  economically  irrational 
investment  and  lending  decisions  taken  by  or  on  behalf  of  the  GOK  in  2001,  the 
effects  of  which  continued  into  2002  and  beyond.  The  express  purpose  of  the  new 
restructuring was to re-finance Hynix and it cannot be divorced from the initial 2001 
bailout.  The  two  are  inextricably  linked.  In  other  words,  it  is  only  because  of  the 

EN 

13 

   EN 

 
irrational nature and the subsequent failure of the earlier restructuring that it became 
necessary  to  rollover  the  exposure  of  the  existing  creditors  in  the  2002  measure. 
Therefore, the solution proposed in the DB report was only possible on the back of the 
2001  measures.  It  is  not  possible  to  treat  a  certain  proposed  course  of  action  as  a 
market  benchmark  if  that  course  of  action  is  itself  a  continuation  of  a  previous 
unreasonable  government  investment  decision.  For  this  reason  also,  the  DB  report 
does not provide a reliable answer to the question of whether or not a market-oriented 
investor would have assessed the proposed investment in Hynix as one worth making. 

(45) 

It  is  therefore  considered  that  the  new  restructuring  conferred  a  benefit  to  the 
company, within the meaning of Article 2(2) of the basic Regulation. 

IX. 

Specificity 

(46)  As the measures comprising the new restructuring were taken exclusively for Hynix, 
the  debt  rollover,  the  principalisation  of  interest  and  the  debt-to-equity  swap  are 
considered to be specific within the meaning of Article 3 of the basic Regulation. 

X. 

i. 

Calculation of the amount of benefit 

Timing of the benefit 

(47)  According  to  Article  5  of  the  basic  Regulation,  the  amount  of  countervailable 
subsidies shall be calculated in terms of the benefit to the recipient which is found to 
exist during the investigation period of subsidisation. The amount of debt equivalent to 
the amount to be swapped into equity was moved away from loans and booked as a 
capital adjustment when the decision for the restructuring was taken on 30th December 
2002 (Note 14 to Hynix's Financial Statements 2002). Similarly, Hynix was released 
from its interest payment obligations with regard to this debt on the same date. 

(48)  The  Community  industry  argued  that  the  benefit  from  the  new  restructuring  did  not 
accrue to Hynix until 13th April 2003, when shares were in fact issued to the creditors. 
On the other hand, the company argued that the effective date of the benefit is, in fact, 
December  2002,  as  that  was  the  date  when  the  decision  to  approve  the  restructuring 
was  taken  by  the  creditors  and  the  date  on  which  Hynix  was  released  from  its 
obligations as regards its debt. 

(49)  As the DSB Panel on DRAMs stated that the benefit of a subsidy must be viewed form 
the point of view of the recipient and the company was no longer under any obligation 
vis-à-vis its debt exposure to its creditors from the date the decision to proceed with 
the new restructuring was taken, it is considered that the effective date for the accrual 
of the benefit to Hynix was 30th December 2002. 

ii. 

Basis for calculation 

Debt Rollover and Changes to the Interest Rate and Payment Conditions 

(50) 

In  accordance  with  the  methodology  adopted  in  the  original  investigation,  a  debt 
rollover  is  taken  to  be  a  loan  for  the  purposes  of  the  benefit  calculation.  The 
principalised interest will also be treated as a loan for these purposes. In the original 
investigation, the subsidy was considered to be the face amount of the principal of the 
loan,  allocated  over  the  normal  five-year  depreciation  period  of  assets.  Each  annual 
amount so allocated was increased by adding the standard commercial interest rate in 
Korea  (7%).  The  EC-Korea  DRAMs  Panel  criticised  this  as  being  a  "grant 
methodology" which did not reflect the fact that loans, unlike grants, are repayable and 
that "It is thus obviously less beneficial for a company to be given a loan than it is to 

EN 

14 

   EN 

 
be  given  a  grant"8.  The  Panel  considered  that  the  EC  should  base  its  calculation  on 
benchmarks reflecting normal investment practices. 

(51)  Following  the  WTO  Panel's  comments  with  regard  to  the  grant  methodology 
employed in the original investigation, it was considered appropriate in this review to 
find a loan-based benchmark against which the benefit could be calculated. 

(52)  The financial situation of Hynix at the time of the new restructuring, as described in 
recitals  (14)  and  (15)  above,  was  dire  and  it  was  evident  that  Hynix  was  not  in  a 
position to service its liabilities; hence, no funding was forthcoming from the market. 
No commercially  comparable lending had  been provided to Hynix  at the time of the 
new  restructuring,  nor  was  there  any  verified  evidence  on  record  regarding  the  cost 
and terms of a comparable commercial loan that Hynix or another firm in a situation 
comparable  to  Hynix  had  been  provided  at  the  relevant  time.  The  fact  that  private 
entities  had  also  participated  in  the  new  restructuring  does  not  provide  a  reliable 
benchmark; the entities involved were small and held insignificant amounts of debt in 
Hynix,  compared  to  the  GOK-directed  entities.  Further,  in  accordance  with  the 
findings  of  the  WTO  Panel  in  the  Japan  DRAMs  case,  which  considered  the  same 
facts  as  the  current  investigation,  the  presence  of  contemporaneous  government 
involvement  in  the  decision-making  process  regarding  the  new  restructuring  acts  to 
distort the market and thus private, non-directed entities cannot be taken as a reliable 
benchmark9. 

(53)  The Commission has therefore constructed a proxy benchmark, based on a commercial 
interest  rate,  with  the  addition  of  a  risk  premium  reflecting  the  default  rates  of 
companies exhibiting comparable risk. Such a benchmark takes into account the term 
of the loan, a benchmark interest rate that would be paid by a creditworthy company, 
the probability of default by an uncreditworthy company within a specified period of 
time and the probability of default by a creditworthy company within the same period 
of time. 

(54)  The  Commission  has  used  the  following  formula  to  calculate  an  appropriate 

uncreditworthy benchmark interest rate:- 

ib = [(1-qn)(1+if)^n/(1-pn)]^(1/n) -1 

Where:  

n = the term of the loan 

ib = the benchmark interest rate for an uncreditworthy borrower 

if = the long-term interest rate that would be paid by a creditworthy company 

pn = the probability of default by an uncreditworthy company within n years 

qn = the probability of default by a creditworthy company within n years. 

(55)  For the purposes of this calculation, the Commission has used as the creditworthy rate 
for KRW loans the average Bank of Korea interest rate on investment grade corporate 
bonds  in  2003,  which  was  10,43%.  The  default  rates  for  both  creditworthy  and 
uncreditworthy  companies  for  the  term  of  the  measures  in  question  were  taken  from 
Moody's Investor Services. The rate of default of an uncreditworthy company in 2003 

8 
9 

EC-Korea DRAMs Panel Report, Para 7.212. 
Japan – Korea DRAMs WT/DS336/R Panel Report Para 7.283 – 7.298. 

EN 

15 

   EN 

 
                                                 
within 3 years (the term of the rollover) was 54,86%, whereas the rate of default of a 
creditworthy company within 3 years in 2003 was 0,33%. This led to a total interest 
rate of 43,8%. In contrast, the interest rate payable by Hynix on the rolled-over debt 
was 3,5%, i.e., an interest rate differential of 40,3%, which leads to a countervailing 
duty rate of 23,7%. 

Debt-to-Equity Swap 

(56)  As described in recital (21) above, the CFIC calculated a swap price for the debt-to-
equity  swap  of  KRW  435  on  30th  December  2002,  based  on  the  one-month  average 
market  price.  The  company  claims  that  this  was  a  commercially  valid  method  to 
determine  the  share  price  and  that  it  reflected  market  reality.  In  fact,  this  price 
reflected a ceiling; if the share price went up between 30th December 2002 and the day 
the shares were actually issued, the price would have changed accordingly. The actual 
price  on  the  day  the  decision  to  proceed  with  the  new  restructuring  was  taken  was 
KRW 280. When the debt was eventually converted into equity, following the capital 
reduction,  at  a  price  of  KRW  9.513  (KRW  435  x  21),  the  share  price  was,  in  fact, 
KRW 3.500. If the effect of the capital writedown is ignored, the shares issued were 
trading well below par, at KRW 167. It is not disputed that the CFIC had a discretion 
as  to  the  method  by  which  it  could  set  the  swap  price.  Notwithstanding  such  a 
discretion, however, as the swap price was not a fixed price, but a guarantee that the 
company would receive a minimum amount for its shares, it cannot be considered to 
be a price which corresponds to commercial reality, especially given the actual price at 
the time the swap price was set and the unsurprising downward trend between the time 
of the CFIC meetings until the swap date in April 2003. 

(57) 

In order to calculate the benefit received by Hynix from the debt-to-equity swap, the 
cost  of  issuing  equity  to  Hynix  must  be  considered.  The  Commission  noted  that,  in 
order the examine the cost, if any, of the swap from the point of view of the recipient, 
the  obligations  imposed  on  a  company  when  issuing  new  equity  would  have  to  be 
considered.  The  Commission  noted  in  this  respect,  that  injections  of  ordinary  share 
capital do not generally impose particular obligations on a company, as there is nether 
a  fixed  rate  of  return  which  the  company  must  achieve  nor,  in  fat,  do  any  payments 
need  to  be  made.  However,  the  company  has  at  least  a  theoretical  obligation  to 
distribute  its  profits,  or  part  thereof,  to  its  shareholders;  the  return  on  equity  ratio 
('ROE') could provide some indication of the level of return the company is expected 
to provide to its shareholders and could be used in the calculation of the amount of the 
benefit to Hynix. However, the ROE of Hynix in 2003 was a negative percentage, as 
calculated by reference to its financial statements for the year. Therefore, on the basis 
of  an  objective  evaluation  of  Hynix's  financial  standing  at  the  time  of  the  debt-to-
equity  swap,  it  is  unreasonable  to  expect  that  Hynix  would  be  in  a  position  to 
distributed any sort of return to its shareholders for the relevant year. Hence, using the 
ROE as a benchmark, it would still be concluded that the entire amount of the debt-to-
equity swap is a countervailable subsidy. 

(58)  The Commission has also examined whether there are costs to Hynix associated with 
having to surrender ownership shares as a result of the swap or the cost to Hynix from 
a potential dilution of the share price resulting from the issuance of new shares. Based 
on  its  review  of  the  record  evidence,  the  Commission  does  not  believe  that  the  net 
benefit  to  Hynix  of  the  full  debt-to-equity  swap  is  diminished  as  a  result  of  the 
issuance  of  new  shares.  In  this  regard,  the  Commission  believes  it  is  essential  to 
recognise the impact that the debt-to-equity swap had on Hynix's financial situation. 

EN 

16 

   EN 

 
(59)  As a threshold matter, it is key to recognise that this was not a straight equity infusion. 
The fundamental benefit to Hynix resulted from the massive amount of debt that was 
extinguished  as  a  result  of  the  swap,  namely  KRW  1.861,5  billion.  This  absolved 
Hynix  from  having  to  repay  any  of  this  principal  amount  and  from  having  to  pay 
interest. Instead,  this massive  amount  of debt was replaced with shares issued to the 
creditor  banks.  However,  there  was  no  real  quantifiable  cost  to  Hynix  of  issuing  the 
new shares. While the existing share value was diluted as a result of the issuance, this 
had absolutely no balance sheet impact for Hynix. It did not result in any cash outlays 
(apart  from  the  expense  associated  with  the  issuance  of  the  new  shares)  and  did  not 
obligate Hynix to make any kind of cash payments in the future, as would have been 
the case with debt instruments. 

(60)  The company claimed that the market value of the shares has to be deducted from any 
finding  of  benefit  and  cited  the  Commission's  Guidelines  for  the  Calculation  of 
Subsidy in Countervailing Duty Investigations, which provide, in paragraph E(f)(iii), 
that "if the government buys shares in a company and pays above the market price for 
these  shares  (taking  into  account  of  any  other  factors  which  may  have  influenced  a 
private  investor),  the  amount  of  subsidy  is  the  difference  between  the  two  prices 
(emphasis  added)."  However,  a  private  investor  would  not  have  purchased  Hynix 
shares in the relevant period at all. In fact, evidence on the record shows that Hynix's 
shares were trading at such a low level that they should have been suspended, but for 
an exception to the Korean Listing Regulations  which appeared  to have been  carved 
out  for  Hynix  alone.  Further,  the  fact  that  there  was  a  market  value  attached  to  the 
shares  does  not  impact  on  the  company,  which  does  not  have  to  pay  it.  This  would 
only  be  a  relevant  consideration  if  there  was  an  element  in  the  debt-to-equity  swap 
which obliged Hynix to enter into a share buyback. 

(61)  Consequently, in light of the above considerations and since Hynix did not report any 
costs  associated  with  the  issuance  of  equity,  it  is  considered  that  the  appropriate 
approach  to  measuring  the  benefit  from  the  debt-to-equity  swap  is  to  take  the  full 
amount of the swap. 

iii. 

Final calculation of benefit 

(62)  As explained in recital (61) above, the full amount of the debt-to-equity swap has been 
taken as the benefit accruing to Hynix from that measure. This subsidy confers a large, 
non-recurring benefit as, as described above, the allocation method over a period of 5 
years was considered appropriate. The amount of subsidy so allocated was expressed 
as  a  percentage  of  the  total  sales  of  Hynix  in  2005.  With  interest,  using  the  average 
commercial interest rates applicable in Korea for the review investigation period, the 
countervailable  subsidy  is  6,8%.  However,  as  the  debt-to-equity  swap  is  a  one-off, 
non-recurring subsidy, allocated over a set period of time and as such allocation period 
is  deemed  to  begin  at  the  time  the  benefit  was  actually  received,  it  is  considered  it 
expired on 31st December 2007. 

(63)  As  mentioned  in  recital  (50)  above,  the  debt-rollover  and  the  principalised  interest 
were  treated  as  loans  and  are  considered  to  be  a  recurring  subsidy.  The  company 
argued  that  it  has  repaid  the  subsidy  received  in  the  December  2002  restructuring 
when  it  refinanced  its  debt  in  July  2005  to  a  consortium  of  Korean  and  non-Korean 
banks (see recitals (75) and (76) below). Hynix claims that the refinancing, by which it 
assumed new debt in order to pay the debt under the new restructuring and graduate 
from the CRPA, extinguished the subsidy. When the refinancing took place in 2005, 
Hynix had returned to profit and had a credit rating of BBB+ according to the Korea 

EN 

17 

   EN 

 
Investors  Service  Inc.  The  refinancing  of  its  debt  on  commercial  terms  by  Hynix 
effectively stopped the subsidy from recurring, thus the  benefit ceased to exist. As a 
result, it is considered that from 13th July 2005 the debt-rollover and the principalised 
interest ceased to confer a benefit to Hynix.  

XI.  Other alleged subsidy schemes 

The BOE-Hydis Sale 

(64) 

In  January  2003,  Hynix  sold  its  liquid  crystal  display  business  ('Hydis')  to  Beijing 
Orient  Electronics  Technology  Group  Co.  Limited  ('BOE'),  a  Chinese  company,  for 
approximately USD 380 million. The purchase price was funded to a large degree by 
loans  provided  by  Hynix  creditor  banks,  namely,  KEB,  KDB,  Woori  Bank  and 
Hyundai Marine and Fire Insurance ('HMFI'), which collectively lent USD 188 million 
to the new company formed to buy the assets, BOE-Hydis. 

(65)  The  Community  industry  alleged  that  the  GOK  entrusted  and  directed  the  Korean 
banks to provide funding on preferential terms in order to enable BOE to purchase the 
assets, thus providing a much-needed cash injection to Hynix. 

(66)  Although there was some evidence that pressure was exerted on to some of the other 
lenders  by  KEB  and  Hynix  and  that  BOE  was  not  able  to  attract  financing  from 
independent creditors, there was no evidence that the funding provided was, in fact, a 
countervailable  subsidy.  A  finding  of  entrustment  and/ore  direction  of  the  Korean 
banks  by  the  GOK  is  not  enough;  in  order  to  find  a  countervailable  subsidy  in  the 
circumstances described by the Community industry, it must be shown that BOE was 
itself entrusted and directed by the GOK to purchase Hydis. Even though the terms of 
the funding provided by the Korean banks were generous, BOE still assumed a debt of 
USD  188  million  and  paid  the  remainder  of  the  purchase  price  in  cash;  there  is  no 
evidence of entrustment/ direction by the GOK of BOE. In any event, the funding was 
given to BOE-Hydis, and no evidence has been presented that a benefit passed though 
to  Hynix.  Therefore,  the  loans  of  USD  188  million  given  to  BOE-Hydis  by  Korean 
banks are not considered to constitute a subsidy within the meaning of Article 2 of the 
basic Regulation. 

The System IC Sale 

(67)  As  envisaged  by  the  terms  of  the  new  restructuring,  in  October  2004  Hynix  sold  its 
System IC assets to a consortium led by CVC Partners, a private equity fund managed 
by Citigroup Venture Capital for KRW 954,3 billion. Acquisition financing made up 
KRW 481,3 billion of the purchase price and it mostly took the form of a debt transfer 
from Hynix to MagnaChip, the company formed to buy the System IC assets. Hynix 
creditors  transferred  their  unsecured  Hynix  debts  to  MagnaChip  at  a  21%  discount 
rate, but secured debts were assumed by the new company without any concession. 

(68)  The  Community  industry  alleged  that  the  discounted  debt  transfer  amounted  to  a 
countervailable  subsidy.  However,  given  that  MagnaChip  assumed  debt  of  KRW 
481,3 billion and paid KRW 481,3 billion in cash, in order to find that the transaction 
involved  a  financial  contribution  there  should  first  be  evidence  of  entrustment  or 
direction of MagnaChip/ CVC Partners and none was provided or found. Participation 
in the discounted debt transfer by the creditors was voluntary. Similarly to the BOE-
Hydis  sale,  the  funding  was  given  to  a  third  party  and  not  Hynix,  thus  there  is  no 
evidence of a benefit having passed through to Hynix. Therefore, the discounted debt 
transfer to MagnaChip is not considered to constitute a subsidy within the meaning of 
Article 2 of the basic Regulation. 

EN 

18 

   EN 

 
Cash BuyOut 

(69) 

In  October  2004,  Hynix  used  the  proceeds  from  the  sale  of  the  System  IC  assets  to 
implement  a  Cash  Buyout  plan,  approved  by  the  CFIC,  according  to  which  Hynix 
"bought back" the debt it owed to its creditors at a discount. In effect, Hynix offered to 
repay its debt early, albeit at a reduced rate. A second cash buyout ('CBO') took place 
in December 2004. The Community industry alleged that these discounted cash CBOs 
were a countervailable subsidy.  

(70)  The creditors who wished to participate in the October CBO agreed that Hynix would 
repay  70%  of  the  unsecured  debt  owed  to  them  and  96%  of  any  secured  debt.  The 
discount rate for unsecured debt was reduced to 21,84% in for the December CBO.  

(71)  Evidence  on  the  record  show  that  participation  in  the  CBOs  was  voluntary.  Further, 
there  is  no  evidence  suggesting  that  the  participating  creditors'  behaviour  was 
commercially unreasonable as the discount on the unsecured debt was compensated by 
the fact of early repayment and, hence, the time value of money. Therefore, the CBOs 
are not considered to constitute a subsidy within the meaning of Article 2 of the basic 
Regulation. 

Preferential Tax Treatment 

(72)  The  Community  industry  alleged  that  the  GOK  gave  preferential  tax  treatment  to 
Hynix  by  not  requiring  it  to  recognise  the  gains  from  the  debt-to-equity  swap  in  the 
new restructuring as income. Although Hynix's losses were such in 2003 that it would 
not have been required to pay corporation tax even if it had recognised the gain from 
the  swap  as  income,  the  Community  industry  claimed  that  Hynix  received  a  benefit 
because, by not recognising the gain, it did not reduce its loss carryforwards, which it 
was then able to set off against taxable gains in 2005, when it became profitable. 

(73)  The alleged preferential tax treatment stems from a postponement of a change in the 
law which would require companies under voluntary restructurings, such as Hynix, to 
recognise  gains  from  debt-to-equity  swaps  as  taxable  income.  The  Community 
industry  has  alleged  that  the  GOK  originally  intended  the  change  in  legislation  to 
come  into  force  in  March  2003,  thus  making  the  gains  from  Hynix's  debt-to-equity 
swap pursuant to the new restructuring taxable. The Community industry claimed that 
following  complaints  from  at  least  one  of  three  companies  directly  affected  by  this 
change in the law, of which Hynix was one, the GOK postponed the coming into force 
of this new provision to 1st January 2004. Hynix claimed that the postponement of the 
effective date of the new provision was made when the GOK realised that the ruling's 
immediate effect would have been contrary to the principles of non-retroactivity and to 
the established practice of tax provisions coming into force at the beginning of the tax 
year. 

(74)  The Community industry reiterated its claims in its comments submitted following the 
disclosure  of  the  essential  facts  and  findings  of  the  investigation.  However,  there  is 
insufficient evidence on the record of the GOK's intention to ensure that Hynix's gain 
from  its  debt-to-equity  swap  was  not  taxed  or  that  the  alleged  preferential  treatment 
was, in fact, specific, within the meaning of Article 3 of the basic Regulation. Further, 
it  is  doubtful  whether  Hynix  received  any  benefit  from  this  tax  exemption  given  the 
size of its net operating losses and the fact that these could be carried forward only for 
five years. Hynix eventually made a profit in 2005, but its losses were such that, even 
if  the  gain  from  the  debt-to-equity  swap  was  recognised  as  taxable  income,  its 
remaining loss carryforward was still more than enough to absorb the profit made in 

EN 

19 

   EN 

 
2005,  thus,  no  benefit  would  have  accrued  to  Hynix  during  (or  before)  the  IP. 
Moreover, as the benefit from the debt-to-equity swap was countervailed 'gross', i.e., 
without  taking  any  potential  taxation  impact  into  account,  any  benefit  from  such 
preferential  tax  treatment,  has  already  been  taken  into  account  and  to  countervail  it 
again would be double counting. Therefore, the tax treatment of Hynix's debt-to-equity 
by the GOK is not considered to be a subsidy within the meaning of Article 2 of the 
basic Regulation. 

July 2005 Refinancing 

(75) 

In July 2005, Hynix refinanced KRW 1,2 trillion of its debt and graduated early from 
the CRPA. The refinancing involved a term loan of USD 500 million, raised by a bond 
issue on the New York Stock Exchange, and KRW 250 billion and a USD 550 million 
revolving  credit  agreement  with  the  participation  of  both  Korean  and  foreign  banks 
(the  'July  2005  refinancing').  The  Community  industry  claimed  that  the  July  2005 
refinancing involves a further subsidy, as Hynix was still a heavily indebted company 
to which no funding was available on the market. 

(76)  By July 2005, Hynix was a much healthier company, although a highly indebted one. 
It had returned to profitability and its credit rating was BBB+. Evidence on the record 
show  that  the  terms  of  the  financing  provided  by  the  Korean  banks  were  not 
inconsistent with its credit rating. Further, the degree of participation of foreign banks 
supports  Hynix's  claim  that  the  refinancing  was  made  on  commercial  terms.  In 
addition,  there  was  no  evidence  of  entrustment  or  direction  of  the  Korean  banks  in 
relation  to  the  loans  extended  to  Hynix  pursuant  to  this  refinancing.  Therefore,  the 
July 2005 refinancing is not considered to be a subsidy within Article 2 of the basic 
Regulation. 

XII.  Conclusion on measures 

(77)  The benefit from the subsidies countervailed in the original investigation was deemed 
to  have  been  received  on  1st  January  2001  and  was  allocated  over  a  period  of  five 
years,  which  corresponded  to  the  normal  depreciation  period  of  the  assets  in  the 
semiconductor industry. 

(78)  The  measures  imposed  in  the  original  investigation  related  to  one-off,  non-recurring 
subsidies, allocated over a set period of time and as such allocation period is deemed 
to begin at the time the benefit was actually received, it is considered that the measures 
imposed  by  the  definitive  duty  Regulation  expired  on  1st  January  2006.  As  the  debt 
rollover and the principalised interest of December 2002 ceased to confer a benefit on 
Hynix on 13th July 2005 and as the debt-to-equity swap of December 2002 expired on 
31st December 2007, the measures should be repealed with effect from 31st December 
2007 and the proceeding terminated. 

(79)  Consequently,  the  definitive  countervailing  duties  paid  or  entered  in  the  accounts 
pursuant  to  Council  Regulation  (EC)  No  1480/2003  on  imports  of  certain  electronic 
integrated  circuits  known  as  Dynamic  Random  Access  Memories  (DRAMs) 
manufactured  using  variations  of  metal  oxide-semiconductors  (MOS)  process 
technology,  including  complementary  MOS  types  (CMOS),  of  all  types,  densities, 
variations,  access  speed,  configuration,  package  or  frame  etc.,  originating  in  the 
Republic  of  Korea  and  released  for  free  circulation  as  from  31st  December  2007 
should be repaid or remitted. 

(80)  Hynix,  the  GOK,  the  Community  industry  and  all  other  interested  parties  were 
informed of the essential facts and considerations on the basis of which it is intended 

EN 

20 

   EN 

 
to  recommend  the  repeal  of  the  measures  in  force  and  the  termination  of  the 
proceeding and had the opportunity to comment. Where appropriate, such comments 
were addressed in the sections of this Regulation specifically dealing with the issues 
raised. 

(81)  Repayment  or  remission  must  be  requested  from  national  customs  authorities  in 

accordance with applicable customs legislation. 

(82) 

In its comments, the Community industry also claimed that measures should remain in 
force until they expire in August 2008, five years after the imposition of the definitive 
measures  in  order  to  offset  countervailable  subsidization  and  cite  Article  19  of  the 
basic Regulation in support of such claim. However, Article 19 provides inter alia the 
possibility  to  repeal  measures  if  they  are  no  longer  necessary  to  countervail 
subsidization.  Furthermore,  Article  15  of  the  basic  Regulation,  which  provides  the 
basis  for  the  imposition  of  measures,  states  that  measures  can  be  imposed  –  and  by 
analogy,  maintained  –  "unless  the  subsidy  or  subsidies  are  withdrawn  or  it  has  been 
demonstrated  that  the  subsidies  no  longer  confer  any  benefit  on  the  exporters 
involved." As the result of the investigation indicates that the subsidies given to Hynix 
have ceased to confer a benefit, the measures cannot be kept in force and the claim of 
the Community industry has to be rejected, 

HAS ADOPTED THIS REGULATION: 

Article 1 

The countervailing duty imposed on imports of certain electronic integrated circuits known as 
Dynamic Random Access Memories (DRAMs) manufactured using variations of metal oxide-
semiconductors  (MOS)  process  technology,  including  complementary  MOS  types  (CMOS), 
of  all  types,  densities,  variations,  access  speed,  configuration,  package  or  frame  etc., 
originating in the Republic of Korea imposed by Regulation (EC) No 1480/2003 is repealed 
as of 31st December 2007 and the proceeding is terminated. 

Article 2 

The  definitive  countervailing  duties  paid  or  entered  into  account  pursuant  to  Article  1  of 
Regulation  (EC)  No  1480/2003  as  from  31st  December  2007  shall  be  repaid  or  remitted, 
pursuant  to  Article  236  of  Council  Regulation  (EEC)  No  2913/92  of  12  October  1992 
establishing  the  Community  Customs  Code10.  Repayment  or  remission  shall  be  requested 
from national customs authorities in accordance with applicable customs legislation. 

This  Regulation  shall  enter  into  force  on  the  day  following  that  of  its  publication  in  the 
Official Journal of the European Union. 

Article 3 

10 

OJ L 302, 19.10.1992, p. 1. Regulation as last amended by Regulation (EC) No 1791/2006 (OJ L 363, 
20.12.2006, p. 1). 

EN 

21 

   EN 

 
                                                 
This Regulation shall be binding in its entirety and directly applicable in all Member States. 

Done at Brussels,  

For the Council 
The President  

EN 

22 

   EN