Under construction
In a recent case involving indemnity action (2004Na64267) filed by Korea Credit Guarantee Fund (KCGF), the Seoul High Court made a ruling to the effect that directors?joint liability may only be applicable to those directors who have actually or likely to have controlled or participated in management of a company, thereby reversing the lower court’s decision.
KCGF had provided its guarantee for a company A which obtained loans from a bank, and, after the company A could not repay the loan principal to the bank, KCGF had to make the loan payment as a guarantor and subsequently sued the company A and its directors for indemnity, and the Seoul District Court rendered its judgment in favor of KCGF.
However, the Seoul High Court, in reviewing the above case that was later appealed, stated that a son of the representative director of the company A, though a director registered in the company’s commercial registry, could not be jointly held liable for the indemnity amount because he was not actually involved in the management of the company (perhaps lending his name to the company for a registered director position). So, although, at the time of providing its guarantee to the bank, KCGF had directors of the company A provide to it the joint guarantees for the loaned amount, KCGF could only enforce the indemnity claim against the directors who were actually involved in the decisions of the company A.
Arbitration is defined as a process in which private disputes are resolved swiftly and privately through arbitrator(s) to whom the parties agree to refer their disputes avoiding rather prolonged court procedures. An issue arises as to whether an elective or optional arbitration clause, i.e., a clause gives the parties choices to resolve the matter via either court proceedings or arbitration proceedings, will be regarded as valid and honored as such by Korean courts.
At first, Korea has seen a larger number of lower trial court precedents adopting the view that a ‘waiver of the right to trial’ was necessary. However, some lower court precedents have embraced the view that optional arbitration clauses may be also valid.
Eventually, the Korean Supreme Court (the “Court”) declared a somewhat peculiar ruling (August 22, 2003 declared, 2003Da318). According to the Court, optional arbitration clauses, in general, were possibly to be viewed as valid in light of totality of the relevant facts. The Court ruled further that if an elective clause, which allows the disputes to be resolved either through litigation or arbitration, allows one party to request the arbitration proceedings and the other party takes part in the proceedings without any objection, then the elective clause is considered valid as such, and that if a party objects to arbitration as the method of dispute resolution under the elective clause, such a clause will not be considered valid.
The above opinion, as well as subsequent lower trial court opinions following the ruling, has since created much debate due to the fact that, in spite of recognizing the possible validity of the selective arbitration clause, the opinion refrains from fully endorsing selective clauses by effectively stating that, depending on the specific language of the applicable provision, the elective clause may be invalidated.
In view of the above court rulings, unfortunately, uncertainty still remains in determining whether such an elective arbitration clause will be upheld as valid and binding on the parties. Therefore, where parties have agreed to resolve disputes via arbitration proceedings that are to be implemented or executed in Korea, the parties should bear in mind that the provision should be clear and unambiguous as to whether such resolution is to be via arbitration only, eliminating the alternatives of court proceedings.
If you are a director of a company and have neglected to perform your duty willfully or gross negligence, causing damages to a third party, the period of statute of limitations within which an aggrieved party could bring a claim is 10 years. This is what the Supreme Court of Korea ruled in a damage compensation case brought against 2 former directors of Daewoo Electronics (2004Da63354, ruled on Dec. 22, 2006), confirming the judgment of the lower courts that had awarded 2 billion Won in damages to Woori Bank.
Woori Bank made some 40 billion Won and 30 Million USD loans to Daewoo Electronics during a period from 1997 to 1998 based on the company’s financial statements that included falsified earnings amounting to some 1.7 trillion Won and, after suffering damages from the loans made, filed a lawsuit against the then executives of the company.
The lawsuit by Woori Bank was mainly based on Article 401 of the Commercial Act of Korea which provides for the joint and several liabilities of directors to third person if they have neglected to perform their duties willfully or by gross negligence.
The Supreme Court stated in the judgment that the liability of directors to third persons under Article 401 of the Commercial Act is considered a special responsibility intended to protect third persons, and so the 10-year period of statute of limitation applicable to monetary and other claims (Paragraph 1 of Article 162 of the Civil Act) should apply.
The defendants had argued that a 3-year period of the statute of limitations under Paragraph 1 of Article 766 of the Civil Act should apply. Paragraph 1 of Article 766 of the Civil Act states that the right to claim for damages resulting from an unlawful act shall lapse if not exercised within 3 years commencing from the dates on which the injured party becomes aware of such damages and of the identity of the person who caused it.
The Supreme Court rejected the argument of the defendants stating that considering the importance of stock corporations in today’s economy and the role of directors in operations of a stock company, third persons must be protected from any willful or gross negligent acts of directors. And, therefore, the usual period of 10-year statute of limitations under the Civil Act must be applied to such liabilities of directors, and that the short 3-year period of statute of limitation provided under the Civil Act as an exception to the usual 10-year rule cannot be relied upon in this case.
The Supreme Court of Korea recently ruled that an agreement between a director and a company providing for dismissal compensation in case of the director being dismissed is void in the absence of a shareholder resolution.
A former representative director of Bridge Securities Co. filed a lawsuit with the Seoul Central District Court against the former employer for payment of dismissal compensation amounting to some USD 700,000.00. The claim of the former representative director was based on the employment agreement between the former representative director and the company, which specified, among other things, that in the event of the employee being involuntarily dismissed, the company was required to pay him certain dismissal compensation.
The Seoul Central District Court ruled that the employee was not entitled to the compensation for the dismissal and the Seoul High Court affirmed the decision. The former representative director appealed the ruling of the lower courts, but the Supreme Court also concurred with the decision of the lower courts as it denied the appeal filed by the former representative director (Case 2004da49570).
In its ruling, the Supreme Court referred to Article 388 of the Commercial Act that provides that if the amount of remuneration to be received by directors has not been fixed by the articles of incorporation, it shall be determined by the resolution of a general meeting of shareholders. The Supreme Court stated that Article 388 of the Commercial Act is also applicable to the dismissal compensation matters, and, therefore, unless a specific amount is provided for in the relevant articles of incorporation or there exists a shareholder resolution approving the relevant dismissal compensation, the employer is not obligated to pay the dismissal compensation amount specified in the employment agreement.
The Supreme Court further stated that since a company is free to dismiss a director with or without a just cause pursuant to a special resolution of shareholders under the Commercial Act, recognition of director dismissal compensation in an employment agreement could interfere with, especially if the compensation amount is large, the free right to dismissal of directors by shareholders, leading to the restriction of stipulated functions of shareholder meetings under the Commercial Act.
Oftentimes, a foreign direct investment under the Foreign Investment Promotion Act of Korea via share acquisition is accompanied by the relevant foreign investor’s participation in the board of directors of the Korean company in which the foreign investment is made. And, as for the foreign individuals becoming directors of a Korean company, it becomes natural for them to wonder about the possibility of being exposed to any liability while serving as director of a Korean corporation. So we take a look briefly at duties and liabilities of directors under Korean law.
Under Korean law, the relationship between a company and a director(s) is that of a fiduciary relationship where the company has entrusted the director with the management of affairs and the director(s) has consented thereto. Based on such relationship, a director is required to manage the affairs entrusted to him with the care of a good manager (Paragraph 2 of Article 382 of the Commercial Act and Article 681 of the Civil Act). A director is also required to perform their duties faithfully for the good of the company in accordance with laws, subordinate statutes, and the articles of incorporation (Article 382-3 of the Commercial Act).
So if a director violates the above-noted duty of care as a good manager and duty to faithfully perform for the interests of company, the director may be held liable to the company or even to a third party under certain circumstances, and be required to pay damages.
More specifically, under Article 399 of the Commercial Act, a director would be held liable to the company for damages if (s)he acted in violation of any laws or of the articles of incorporation, or neglected to perform his (or her) duties as a director. If any act referred to in the foregoing sentence were done in accordance with the resolution of the board of directors, the directors who assented to such resolution would be held jointly and severally liable. As a related matter, even if a director voiced his dissenting opinion in the meeting, but any record of the dissenting opinion was not entered in the minutes thereof, then the director may be presumed to have assented to the said resolution.
In addition, under Article 401 of the Commercial Act, a director would be held liable to a third party if (s)he neglected to perform his duties willfully or by gross negligence causing damages to the third party. As with director’s liabilities to a company, if any act referred to in the foregoing sentence were done in accordance with the resolution of the board of directors, the directors who assented to such resolution would be held jointly and severally liable, as well as director(s) having voiced his dissenting opinion but not having any record of the said opinion in the relevant minutes.
It is noted, however, that as with the US common laws, a director faced with a damage compensation lawsuit (e.g., breach of duty of care as a good manager) could claim as a defense that the director exercised his or her business judgment, and if a court accepts such defense, then the director could be exculpated from liability unless the party bringing the lawsuit (e.g., shareholder) proves otherwise.
In addition, looking at the potential liabilities of a director as noted above, one could make a case that a director should be held liable only to a company when the director has not properly discharged any of the required duties, but not to a third party, since the director acts pursuant to the mandate issued by the relevant company. Korean courts also recognize this foregoing point, and so award damages to a third party in limited cases where a director acted irrationally to a significant extent and/or discharged any of the required duties unreasonably so as to cause damages to a third party.
Apart from civil liability towards the relevant company or a third party, it is noted that a director could also be criminally liable for breach of trust cases.
Under Article 355 of the Criminal Act, the offense of breach of trust is applicable to a person, who, administering another's business, obtains pecuniary advantage or causes a third person to do so from another in violation of one’s duty, thereby causing loss to such person, and the offense is punishable by imprisonment for not more than five years or by a fine not exceeding fifteen million won. Korean courts are especially known to recognize the breach of trust offense for cases where financial institutions have unreasonably made loan arrangements with other parties.
We lastly note that under current Korean law, there is no ceiling on directors’ liabilities, and, as such, the scope of directors’ liabilities is unlimited. Further, there are no laws in Korea that require companies to obtain insurance for directors’ potential liabilities, so a company has complete freedom as to whether it should obtain the said insurance.
Recently, because of a much more active movement by civic organizations in Korea for protection of minority shareholders’ rights, there have been some actual litigation with respect to directors’ liabilities, and the cases in which courts have acknowledged liabilities of directors are increasing. Also, with introduction of securities-class action system that is now applicable to all publicly listed companies in Korea, we will likely see more of lawsuits pertaining to directors’ liabilities.
In view of the above-noted recent developments, the number of companies obtaining directors and officers liability insurance (D&O Insurance) for the purpose of protecting directors and encouraging directors to make decisions without fear of liability has been increasing. But still the number of companies which have obtained the D&O insurance is still far below (under 40% for public corporations, though most public companies with assets of at least 2 trillion won have obtained the said insurance) when compared to the advanced nations.
We set forth a brief description of each form of a company that is available under the Commercial Code of Korea. While Korean companies today commonly utilize the form of a corporation (Chusik Hoesa, the most common type of a company in Korea) or a limited liability company (Yuhan Hoesa), taking advantage of limited liability associated with those forms, there are fundamental differences between those two forms, which we also note below.
(1) Partnership (Hapmyong Hoesa)
Members consist of only those with unlimited (direct, joint and several, unlimited) liabilities. Every member has the authority to represent the company unless the articles of incorporation of the company provides for a member who has such authority. Each member will be jointly liable to repay the debts of the company in case the company may not fully repay its debts by use of the company’s corporate assets. Transfer of ownership interest is limited (requires unanimous consent of all members).
(2) Limited Partnership (Hapja Hoesa)
Members consist of those with unlimited liabilities (unlimited members) and those with limited liabilities (limited members) (dual structure). Unlimited members have the authority to execute the corporate affairs of the company and also will be liable to the liabilities of the company, while limited members participate in the company only through capital investment and do not have the right to execute the company business or to represent the company. Their liability will be limited by the amount of their capital investment to the company.
(3) Corporation (Stock Company or Chusik Hoesa)
Shareholders of a corporation have limited liabilities, being liable only to the extent of their capital investment in the corporation made through the acquisition of its stock. The capital of a corporation is a normal sum of the total face value (par value) of stock issued by the corporation. The stock of a corporation may be freely transferable; however, the transfer of stock may be subject to the approval of the board of directors in accordance with its articles of incorporation. By its nature, a corporation cannot increase the liabilities on its stockholders, neither by a provision in the articles of incorporation nor by a decision of the general meeting of stockholders.
(4) Limited Liabilities Company (Yuhan Hoesa)
A limited liabilities company consists of members with limited liabilities (the number of employees must be not more than 50), who are responsible only to the extent of their capital investment. Since there are many restrictions on this type of company, including the ceiling on the maximum number of members at 50, it is rather a suitable form for a small and medium business to assume.
We provide the following explanations on the differences between a chusik hoesa and a yuhan hoesa:
a. Total number of shareholders (members) of yuhan hoesa may not exceed 50, while there is no such restriction for chusik hoesa.
b. Board of directors is not required for yuhan hoesa, while it is a requirement for chusik hoesa.
c. Each director of yuhan hoesa has the authority to represent the company unless the articles of incorporation of the company designates a specific director who has the authority to represent the company (equivalent to the representative director of chusik hoesa), while chusik hoesa must have at least one representative director elected from among the members of the Board of Directors.
d. Yuhan hoesa may be organized without the statutory auditor (unless the articles of incorporation of the company require a statutory auditor to be appointed), while appointment of a statutory auditor is a requirement for chusik hoesa.
e. Issue of additional shares must be approved at the shareholders (members) meeting of yuhan hoesa in the form of an amendment to the articles of incorporation, while such issue may be approved at the Board of Directors of chusik hoesa unless an increase in the authorized capital is required for issue of such additional shares (the concept of the authorized capital is not applicable to yuhan hoesa).
f. Yuhan hoesa may not issue corporate debenture or bond (borrowing of cash loans is allowed), while chusik hoesa may raise fund through issue of corporate debenture as well as through cash loans.
g. Transfer of shares of yuhan hoesa must always be approved by the shareholders (members) meeting by a 3/4 approval, while transfer of shares of chusik hoesa may be free unless the articles of incorporation of chusik hoesa requires an advance approval of the Board of Directors for transfer of shares.
In Korea, unfair trade practices and anti-competitive behavior of enterprises are regulated under Monopoly Regulation and Fair Trade Act (“MRFTA”), which was enacted on December 31, 1980 and which have underwent several revisions since its enactment. Article 1 of MRFTA sets forth the purpose of the Act as preventing the abuse of market dominance and excessive concentration of economic power in enterprises and regulating undue concerted acts and unfair trade practices, thereby promoting fair and free competition.
In principle, MRFTA applies to transactions between enterprises or those transactions where a party thereto is an enterprise. However, such sectors as electricity, gas, water, public health, and small-and-medium enterprises are regulated under separate laws and regulations since they are highly public in nature or require different policy considerations by government. In addition, exercise of rights pertaining to intellectual properties is regulated under such acts as Copyright Act, Patent Act, and Trademark Act, etc.; however, to the extent a certain intellectual property right holder abuses his or her rights to obtain unfair trade benefits in a transaction (e.g., designating the source of purchasing raw materials or parts when granting licenses to other enterprises), MRFTA shall be applicable to regulate such unfair practice.
The Korea Fair Trade Commission (“KFTC”) is Korea’s competition agency which is in charge of developing competition policy and enforcing MRFTA. For KFTC, cartel, M&As, and abuse of dominance in market are major targets of law enforcement. KFTC also does not seem to shy away from applying MRFTA to foreign companies operating outside of Korea when their actions cause, or have potential to cause, anti-competitive effects in Korea. More specifically, marking for the first time to apply Korea’s anti-trust laws extraterritorially, KFTC issued last March 20, 2002, an order imposing a surcharge of 11,242 Million Won on six graphite electrode manufacturers from the US, Germany and Japan that participated in the international cartel of graphite electrodes.
Below are some important provisions under MRFTA and KFTC’s role in enforcing them.
1. Prohibition Against the Abuse of Market-dominant Positions
Under MRFTA, any company with annual sales revenue of at least 1 Billion Won whose market share is more than fifty (50) percent is presumed as a market-dominant enterprise. Or, if and when combined market share of less than three (3) enterprises is above seventy-five (75) percent, those enterprises are also presumed to hold market-dominant positions, provided, however, that any enterprise with market share of less than ten (10) percent shall not be counted in.
If any market-dominant enterprise commits any of the acts listed below, KFTC may order corrective measures and/or impose upon the said enterprise a surcharge not exceeding three (3) percent of the turnover.
a) Unreasonably fix, maintain, or alter the price of a good or service fees;
b) Unreasonably control the sale of goods or the rendering of services;
c) Unreasonably interfere in the business activities of other enterprises;
d) Unreasonably interfere in the entry of new competitors; or
e) Engage in unreasonable transaction to eliminate competitors or harm interests of consumers.
It used to be that KFTC regularly issued a list of enterprises with market-dominant positions, but now the market-dominant enterprises are determined ex post facto, taking into account such factors as market share, existence of market barrier for new entrants, size of competitors, etc.
2. Restrictions on Business Combinations and Economic Concentration
MRFTA prohibits a business combination which would substantially restrict competition in a given sector, unless efficiency-enhancing effects are deemed difficult to achieve without the proposed combination, or the business combination involves a company whose revitalization would be impossible without the combination.
As a related matter, MRFTA requires companies of a certain scale (total asset or revenue amount, inclusive of all affiliates, exceeding 100 Billion Won) to make a report on the following business combination to KFTC.
a) Acquisition of shares of another company (20% or more, 15% for listed corporations);
b) Officers’ concurrent hold of positions (limited to a Large Enterprise – to be explained in the next section);
c) Mergers and acquisitions;
d) Taking over or leasing the whole or a substantial part of the business, and undertaking the management of another company; or
e) A company subscribing to 20% or more of the shares of a new company to be established.
3. Designation of Large Enterprises
Under MRFTA, as part of curtailing excessive economic concentration of power, any company belonging to a “large business enterprise” is allowed to acquire or own stocks of other companies, but such investment is limited by the rule that the total investment amount cannot exceed an amount representing forty percent (40%) of the investing company’s net assets. These companies are also banned from making mutual equity investments or providing mutual debt guarantees.
As a result of the recent amendment of the MRFTA, which took effect on April 13, 2007, the number of companies subject to the investment limit by KFTC has been reduced to 27 large affiliates in seven major business groups, including Samsung Electronics Co. in the Samsung Group and Hyundai Motor Co. in the Hyundai Motor Group. Last year, 343 affiliates in 14 business groups were subject to the investment restriction, adopted in 2001 to prevent top conglomerates from reckless business expansion.
Before the revision, every affiliate of a business group with assts of 6 trillion won ($6.4 billion) or more was banned from investing more than 25 percent of its assets in other companies.
Now, under the revised fair trade laws, the threshold has been raised to 10 trillion won, and the ceiling has been raised to 40 percent of net assets. In addition, the target of the restriction is narrowed to large affiliates with minimum assets of 2 trillion won. For example, LG International Corp. will not be subject to the investment limit because its assets are less than 2 trillion won, though LG business group to which the company belongs is subject to the investment limit because the assets of the business group as a whole exceed 10 trillion won.
Consequently, LG, Kumho Asiana, Hanwha and Doosan business groups will be excluded from the conglomerates subject to the investment restriction because they do not have affiliates with at least 2 trillion won in assets, except for holding companies that are exempt from the investment cap.
Other acts that are regulated under MRFTA include activities of holding companies, unfair concerted acts, unfair trade practices, and unfair practices in execution of international contracts, etc.
If you have any inquiries on Korean competition or anti-trust laws, please contact Hoon Lee (hoonlee@sigonglaw.com.), chief editor of this Korealaw.com and senior foreign attorney at Sigong Law P.C.
In principle, any gambling activities (or speculative activities) are prohibited in Korea. Article 246 of the Criminal Act punishes a person who gambles or bets for the purpose of gaining property by a fine of not more than five million won or a minor fine. Article 247 of Criminal Act prohibits opening of a gambling place for a profit and punishes a person who violates this provision by imprisonment of not more than three years or by a fine not exceeding twenty million won.
However, Korea has allowed certain gambling activities to be operated in the nation under restricted circumstances (e.g., promotion of public welfare, tourism) pursuant to special laws enacted.
For example:
a. Casinos
Casinos are being separately regulated between foreigners and Korean citizens.
Under the Special Act on the Assistance to the Development of Abandoned Mine Areas, Gangwon-land casino located in abandoned mining district in Gangwon province is presently the only casino that Korean citizens may enter. Obviously, this casino is located in a very remote countryside to restrict access by Korean individuals, and there is no casino located in an urban area.
In contrast, the Tourism Promotion Act permits qualified domestic hotels to operate casinos which only foreign nationals are allowed to enter. At present, casinos for foreigners are actively in operation in Seoul, Incheon and Jaeju Island and are supervised under the Ministry of Culture and Tourism.
b. Lotteries
There are two different types of lottery that customers may choose, which are (i) Lotto and (ii) ToTo, which is a type of sports lottery.
The operations of selling lottery tickets are regulated under the Lottery and Lottery Fund Act and are under the jurisdiction of Lottery Commission under the office of the Prime Minister.
Also, the National Sports Promotion Act (the “NSPA”) regulates sale of ToTo tickets that are presently issued by Seoul Olympic Sports Promotion Foundation, which is a public corporation founded pursuant to the NSPA.
c. Racing
Horse racing is permitted under the Korean Horse Affairs Association Act and is under the jurisdiction of the Ministry of Agriculture and Forestry.
Also, cycling and motor boat racing is regulated under the Cycling and Motor-Boat Racing Act, and is under the jurisdiction of the Ministry of Culture and Tourism.
d. Online Gambling
Korea does not yet have laws relevant to online gambling operations, and, as such, no one may legitimately operate online gambling in Korea. Nevertheless, there are unlawful operations of online gambling. The National Policy Agency has established Online Criminal Activity Investigation Team and intensified control of any unlawful activities online.
e. Slot machines
Any operation of slot machines outside permitted casinos is illegal.
f. Skill gaming
Any skill gaming that is too conducive to gambling is prohibited. Thus, any operation of any form of skill gaming (that tantamounts to gambling) outside permitted casinos is illegal.
Under the Act on Special Cases Concerning Regulation and Punishment of Speculative Acts, Etc., if one is to set up speculative business operations (i.e., slot machines, lottery ticket, wheel spinning, etc), he or she would need to obtain a permission from the Commissioner of the Local Police Agency in accordance with the foregoing Act. Generally, the permissions required for speculative operations are granted when they are deemed to promote public welfare, tourism or necessary to advertise goods for sale.
With the rising level of gambling operations, however, the public opinion against such activities has also risen, and, pressured by such public sentiment, Korean government has recently enacted the Act on General Supervisory Commission on Speculative Industries (the “Act on Commission on Speculative Industries”) in the first half of 2007. The Act on Commission on Speculative Industries, which became effective as of Jan. 26 of 2007, is intended to be the law comprehensively regulating the entire speculative industries.
But, as the primary objective of the Act on Commission on Speculative Industries is to rein in expansion of operations of gambling or speculative businesses and further restrict gambling businesses that have large revenue and a high level of speculative nature, many related parties, including owners of gambling and speculative businesses, are already raising objections to the Act, leading to public “speculation” that the Act will not much serve the purpose originally intended.
The office of statutory auditor is unique in Korea. It differs from outside auditor, who is an accountant and audits financial statements of a company. The most important function of the statutory auditor is to supervise and audit whether the directors properly discharge their duties. To this end, the statutory auditor may attend meetings of the board of directors, express opinion at such meetings and sign the meeting minutes. The statutory auditor may also require the directors to report to him on the business operation of the company. In any litigation between the company and any of its directors of the company, the statutory auditor represents the company. The powers of statutory auditor also include the power to investigate the financial condition of the company and audit whether the financial statements are prepared and maintained in an appropriate manner (this is independent from and in addition to audit by the outside auditor). The statutory auditor may also prepare an audit report and submit the same to the shareholders, request convocation of and attend the shareholders meeting.
By law, all joint stocks corporations must have at least one (non-standing) statutory auditor. (In case of a publicly traded company, depending upon the amount of total company assets, either at least one full-time statutory auditor or an audit committee is required.) The statutory auditor is elected at the shareholders meeting by an ordinary resolution and can only be removed by the shareholders by a special resolution (i.e., affirmative votes of at least two-thirds of the shares present or represented at a duly-convened shareholders meeting, but in no event less than one-third of the total issued and outstanding shares).
Under Korean commercial laws, the representative director of a corporation (a joint stock company that is normally called jushik hoesa in Korean) is responsible for implementation of resolutions of the board of directors and shareholders. The representative director is also responsible for making decisions in regard to the ordinary matters not stipulated under the Commercial Code of Korea and articles of incorporation as being subject to authorization by the shareholders or the company board. The representative director is normally elected by a board resolution among the directors of the company board. In the event that more than 1 director is appointed as representative director, the articles of incorporation must stipulate whether the directors are to act jointly or individually in representing the corporation.
If deemed necessary in implementation of the business affairs of the corporation in accordance with the resolutions of shareholders or the company board, the representative director has also power to legally represent the corporation. This is why control over the seal (of the representative director) and its use is of importance in Korea because, under Korean law, a document executed in the name of the representative director and by use of the registered seal may be assumed as a document that is validly and effectively executed by the corporation, thereby having a binding effect over the corporation. If the corporation wants to deny the legal effect of such document, it must prove that the seal was used without due authorization and the counter-party acted with bad faith with knowledge of such unauthorized use of the seal.
[Editors’ note: Since the Financial Supervisory Commission (FSC) and Financial Supervisory Service (FSS) of Korea relaxed stock market regulations in late 2005 to allow initial public offering by overseas companies, 3 NOD Digital Group Co., a Chinese company, became the first foreign company to list its shares on KOSDAQ (Korea Securities Dealers Automated Quotation) market in Korea.
In order to develop capital market in Korea, the FSC and FSS had previously revised stock regulations in order for overseas companies, which are not listed on overseas exchanges, to be able to hold initial public offerings in Korea. (Before the new measures, only previously listed overseas companies were allowed to seek a secondary listing in Korea, which had been obstacle to develop the country’s capital market.) The move by FSC and FSS to facilitate listing of overseas companies came as some overseas companies had been tapping the possibility of listing on the Korean stock market.
To list shares on Korean stock market, overseas companies shall be subject to the same listing requirements. Specifically, companies should have 20 billion won of annual average sales in the past 3 years and a minimum of 10 billion won of shareholders capital in terms of listing requirements for Korea’s regular stock market. As for listing on KODAQ market, the relevant company must have been established for 3 years and its shareholder capital must be 3 billion won or more, and return on equity (ROE) must be 10% or more in regard to the latest fiscal year (or, alternatively, at least 2 billion net profit must have been recorded). (There are different listing requirements for venture-type companies, but we do not discuss them here.)
After listing, overseas companies will be able to use accounting in the U.S. or under global standards when they submit financial statement to Korea Exchange, but they will be restricted from changing those accounting principals at their discretion after the listing.
In addition, overseas companies shall be required to make disclosures in Korean language and submit Korean-language extracts of their internal documents reported to headquarters so that local investors could assess the value of their stock more safely.
Please read the below newspaper article for further information on the listing by the first foreign company 3 NOD.]
Source: Joongang Daily; Aug. 18, 2007
Chinese audio components manufacturer 3NOD Digital Group Co. [which is the holding company, Cayman Island-based, of China’s Shenzhen 3NOD Electronics Co.] listed its shares on the Kosdaq market yesterday [August 17], becoming the first non-Korean company to list shares on Korea’s stock markets. 3Nod’s shares rose to a daily limit of 15 percent on yesterday’s closing, defying prevailing stock market gloom.
3Nod Digital Group started its first trading day with a price of 3,000 won ($3.16) per share, 20 percent higher than its initial public offering price. The share price initially tumbled to 2,550 won in the morning amid a downturn stemming from global credit fears but soon rebounded to 3,450 won per share, hitting the daily limit of 15 percent growth. It closed at 3,450 won.
The company had planned to sell 12 million shares at 2,500 won each, as opposed to the highest price of 2,200 won initially marketed to investors, [according to the company’s filing to Korean regulators]. Korean and overseas institutional investors applied for 236.8 million shares, almost 25 times the 9.6 million allocated, the company said.
Korea Exchange, operator of Asia’s fourth-biggest stock market by value, is seeking to attract companies from China, Vietnam and other Asian nations to list their shares. 3NOD’s shares are the first foreign listing after Huafeng Textile International Group Ltd., a Hong Kong-based fabrics maker, delayed a planned IPO.
In Korea, the requirement of filing a public report to the Financial Supervisory Commission (FSC) of Korea and the Korea Stock Exchange upon acquiring a large shareholding (5% or more) in a publicly held corporation plays a significant part in Korean (hostile) takeover market (more so than such mechanisms as public tender offer or proxy fights), as any violation of such reporting requirement by an aggressor may result in a loss of voting rights with respect to the ownership of the shares exceeding 5%, and the FSC may issue an order to dispose of such non-reported shares. Furthermore, the aggressor may be subject to criminal sanctions such as fines or imprisonment.
In October of 2004, the Financial Supervisory Service of Korea (FSS), which is delegated the authority to enforce the 5% reporting requirement, implemented certain measures to strengthen this 5% reporting rule.
It used to be that when writing down in the report the purpose of acquiring large shareholding, the person (or entity) reporting the large shareholding was allowed to freely describe the purpose of the shareholding without having to choose from any prescribed objectives. That is, there was more focus on the accuracy of reporting about the number of shares held and type of shareholding in relation to the large shareholding, as opposed to the accuracy of the purpose of the shareholding. The reason for the foregoing seemed to be that by ensuring the accuracy of the level and extent of large shareholding, the purpose of alerting to the management of the companies which may be target of a takeover could largely be achieved, and the purpose of the shareholding would not matter much.
However, there have recently been some incidents that have exposed the shortcomings of the 5% reporting rule in connection with reporting of the purpose of large shareholding. For instance, in 2003, a foreign asset management company, when reporting about the status of its large shareholding in a domestic corporation, wrote down creation of profits as the purpose of the shareholding, but later it became apparent that the purpose was related to takeover of the corporation as it later attempted to change the incumbent management of the corporation. In another instance, certain investors who acquired as a group large stakes in a corporation declared in the report participation in the management as the purpose of the shareholding (i.e., to make it appear as an M&A deal), but the group of investors proceeded with disposal of the shares after the share price increased as a result of the public report.
Apparently aimed at resolving the above issue concerning reporting of the purpose of large shareholding, the FSS has now changed, among other things, the method of reporting the purpose. Under the new system, the person reporting the large shareholding would first be required to choose between Simple Investment and Acquisition of Control or Performance of Influence on Management in relation to the purpose of the shareholding, and, in the case of choosing the latter, is required to elaborate on such matters as the change in management officers and corporate governance structure, plan on acquiring additional shares or disposal of any shares currently owned, etc.
Prior to changing the reporting method of the purpose of large shareholding as mentioned above, there was little guidance from the FSS as pertains to the same. In fact, it had been thought that the FSS did not consider the false reporting of the purpose as “false report or omission of statement concerning material facts" which may lead to the loss of voting rights with respect to the shares exceeding 5% under the Securities Exchange Act of Korea. However, the recent measures announced by FSS appear to represent a shift in its attitude in that regard, showing more resolve to prevent any unfair acts that would confuse good-faith investors and provide fairer rules with regard to acquiring management control, by touching upon the area (i.e., the reporting of the purpose) of the 5% reporting rule that had previously been left untouched.
The Seoul High Court (15th Civil Division) recently ruled in a case (2004 Na 69047) that a securities company is liable to a customer for the failed option investment amount since the company was negligent in supervision of its employee who induced the customer into making the option investment with the company, thus confirming the lower court’s decision which ruled in favor of the investing customer in part.
The facts of the case are as follows. A customer, Y, was induced by a branch head, G, of a securities company, D, into entering option trade and entrusted to G such option trade and remitted 130 Million Won to G’s bank account. G could have avoided large losses in the option trade, but could not do so because he was late for work due to the heavy drinking the night before. And the customer Y filed a lawsuit against G’s employer D for damage compensation, and the Seoul district court ruled in part in favor of the customer G.
In rendering its decision, the High Court stated that the act of the employee G agreeing to bear losses resulting from making trade in the course of recommending securities investment to a customer is a prohibited act under the Securities Exchange Act (Paragraph 1 of Article 52 of the Securities Exchange Act), and that the employee’s act of incurring large losses to the customer, which was attributable to the employee’s delinquency in preventing loss and creation of profits, is a tortuous act. Thus the High Court said that the securities company D must compensate the customer Y as employer of G.
However, the High Court also stated that the customer is also negligent for 30% of the investment loss since the customer remitted money to G even though he was aware that the option investment with an account in another person’s name was unusual and was also totally reliant on the employee G, never making any efforts to check on the option investment through other routes.
In case a foreign investor desires to acquire publicly-listed shares of a Korean corporation, under the relevant Korean law, it is normally required for the foreign investor to acquire such shares through the stock market and not outside of the market. However, there are certain exceptions to such requirement, and we briefly discuss those exceptions and related matters thereof below.
We first note that the Securities Exchange Act of Korea (SEA) provides that if and when a foreign investor desires to acquire certain shares of a Korean company listed on KSE or Korea Securities Dealers Automated Quotation (KOSDAQ), the foreign investor is required to acquire the shares only through KSE or KOSDAQ unless the foreign investor obtains permission from the Financial Supervisory Commission of Korea (FSC) for acquisition of the shares outside of KSE or KOSDAQ, as the case may be. FSC would grant such permission to a foreign investor only if the proposed acquisition fits into limited categories, which include a “direct foreign investment” under the Foreign Investment Promotion Act of Korea (FIPA) and a “public tender offer” to an unspecified number of existing shareholders of DHC under Article 21 of SEA.
A “direct foreign investment” under FIPA means a foreign investor’s acquisition of at least 10% of total issued shares of a domestic corporation, or a foreign investor’s acquisition of less than 10% of total issued shares of a domestic corporation accompanied by (i) a secondment of an executive to the domestic corporation or a contract granting such secondment right to the foreign investor, (ii) execution of a supply contract for raw materials or other products for a period of at least a year or more, or (iii) execution of a technology license contract or joint development agreement.
Under SEA, a public tender offer is required where the purchaser and the persons who have a special relationship with the purchaser will hold 5% or more of the total issued and outstanding shares concerned as a result of the purchase of the shares outside KSE or KOSDAQ from at least 10 persons.
So, barring those “foreign direct investment” or “public tender offer” exceptions, any foreign investor desiring to acquire publicly-listed shares in Korea should enter the relevant stock market for such acquisition.
For your information, we also briefly provide below the key regulations for the foreign investors desiring to enter the Korean stock market for acquisition of shares of publicly-listed companies.
(i) Under the Securities Industry Supervision Regulation, a foreign investor who acquires listed securities for the first time will be required to register the investor’s name and other personal data with Financial Supervisory Commission of Korea (FSC).
(ii) Under the Foreign Exchange Transaction Act of Korea (FETA), a foreign resident’s acquisition of a domestic corporation’s securities is regarded as a “capital transaction” and FETA requires the relevant foreign resident to file a report to the minister of the Ministry of Finance and Economy (MOFE) about such transaction.
(iii) SEA requires that when an investor acquires 5% or more of total issued shares of a listed corporation, the investor is required to file a report to FSC and KSE on the share acquisition status within 5 days of the acquisition. In addition, if, after the acquisition, the investor changes its shareholding and the changed shareholding is at least 1% or more of total issued shares of the listed corporation, the investor is required to file a report to FSC and KSE within 5 days of the occurrence of the changed shareholding.
As seen above, from a foreign investor’s standpoint, the regulations concerning acquisition of publicly-listed shares are not easy to understand, and so it would be prudent for such investor to seek advice of a qualified Korean law firm.
The Financial Supervisory Commission (FSC), the top financial watchdog in Korea, has new chairman named Mr. Kim, Yong Duk, effective from August 6 of 2007. Mr. Kim is replacing Mr. Yoon, Jeung Hyun, who managed to become the first chairman to finish the prescribed 3-year term since FSC was established in 1998 pursuant to the Act on the Establishment, etc. of Financial Supervisory Organizations. During his tenure as chairman of FSC, Mr. Yoon was widely credited with having laid the groundwork for life insurance companies to go public and also worked to lower barriers that keep non-financial companies from owning banks. Mr. Kim, Mr. Yoon’s replacement, was economic policy advisor to President Roh before being appointed as new FSC chief.
Sometimes there is confusion as to the functions of FSC and the Financial Supervisory Service (FSS). FSC is part of Korean government under the Office of Prime Minister and consists of top bureaucrats while FSS is under the directions of FSC but is an organization independent of Korean government.
FSS monitors and supervises various kinds of financial companies and institutions and report any findings or results to FSC. FSC formulates regulations relevant to the financial institutions and supervises duties of FSS.
More specifically:
FSC consists of 9 commission members, which are as follows:
(i) The Vice Minister of Finance and Economy
(ii) The Deputy Governor of the Bank of Korea
(iii) The President of the Korea Deposit Insurance Corporation
(iv) An expert on accounting recommended by the Minister of Finance and Economy
(v) An expert on banking and finance recommended by the Chairman of FSC
(vi) An expert on law recommended by the Minister of Justice; and
(vii) A representative of business community recommended by the President of the Korea Chamber of Commerce and Industry
The Chairman of the FSC is appointed by the President of the Republic of Korea after deliberation by the State Council, and the Vice Chairman of the FSC is also appointed by the President of the Republic of Korea upon recommendation by the Minister of Finance and Economy.
FSC deliberates and makes resolutions concerning the following matters.
(a) Formulation of and amendment to regulations relevant to the supervision of financial institutions;
(b) Authorization or permission of establishment, merger, conversion, or transfer or takeover of business of financial institutions;
(c) Authorization and permission relevant to the operations of financial institutions;
(d) Important matters relevant to the examination of and sanction against financial institutions
(e) Important matters relevant to the administration, supervision, and surveillance of securities and futures market; and
(f) Other matters relevant to the authority vested in the FSC.
The Securities and Futures Commission (SFC) is separately established under the FSC to regulate and monitor companies in securities and futures industry.
The FSS is established (as a special corporation having no capital) in order to examine and supervise financial institutions under the directions of the FSC and SFC. The Chairman of the FSC concurrently holds the post of the Governor of FSS.
The FSS performs the following duties in accordance with the Act on the Establishment, etc. of Financial Supervisory Organizations (the Act).
-Examination of the business and asset status of the financial institutions
-Imposition of sanctions under the Act and other acts and subordinate statutes according to the findings as a result of the examinations
-Assistance in the duties of the FSS and the SFC; and
-Other duties which are entrusted to the FSS under the Act and other acts and subordinate statutes
The institutions which are subject to examination by the FSS are those falling under one of the following categories.
-Financial institutions established with the authorization under the Banking Act or the Long-Term Credit Bank Act
-Securities companies, securities finance corporations, and transfer agents established under the Securities and Exchange Act
-Asset management companies and investment counsel companies established under the Act on Business of Operating Indirect Investment and Assets
-Insurers established under the Insurance Business Act
-Merchant banks established under the Merchant Banks Act
-Mutual savings banks and the Federation of Saving Banks established under the Mutual Savings Banks Act
-Credit unions and the National Credit Union Federation established under the Credit Unions Act
-Trust companies established under the Trust Business Act
-Specialized credit financial companies and persons who engage concurrently in loan business established under the Specialized Credit Financial Business Act
-Futures dealer under the Futures Trading Act
-The credit business sector of the National Agricultural Cooperative Federation under the Agricultural Cooperatives Act
-The credit business sector of the National Federation of Fisheries Cooperatives under the Fisheries Cooperatives Act
-The institutions to be examined by the Financial Supervisory Service pursuant to the provisions of other Acts and subordinate statutes
As you can see above, the range of financial institutions monitored by FSS and FSC are all-encompassing, and, as such, the FSC and FSS play influential roles in shaping up the financial industry of Korea.
With the advent of the new Lee, Myung Bak administration in Korea last February 2008, one of the key regulatory structure changes taken place relate to the financial authority structure in Korea. Specifically, the formerly known as the Financial Supervisory Commission has been now renamed to the Financial Services Commission (the “FSC”), and such name change has come with more regulatory authority than ever before.
Prior to the Lee Administration, the main functions of the FSC were formulation of and amendment to regulations relevant to the supervision of financial institutions and issuing authorization and permits related to establishment and operation of the financial institutions. Now, adding to these powers of the FSC is formulation of and amendment to regulations relevant to the financial policies, which function previously belonged to the former Ministry of Finance and Economy (now known as the Ministry of Strategy and Finance).
So, the FSC now effectively controls both aspects of the financial policy and the financial supervision, and such consolidation of power clearly worry some people about going back to the old days of the government sector controlling the financial private sector. That is, after the foreign exchange crisis in the late 1990s, the authority relevant to the financial policy was given to the then Ministry of Finance and Economy (the “MOFE”) with the authority relevant to the financial supervision going to the then Financial Supervisory Commission and the Financial Supervisory Service (the “FSS”), to avoid abuse of the government’s power in managing the financial sector. But, some 10 years later, now with the FSC absorbing the rule-making authority concerning the financial policy, there are voices expressing concerns about the FSC wielding too much power in the finance industry.
To be sure, there are also people welcoming the change, mainly on the ground that the efficiency in overseeing the financial sector will improve. Specifically, the FSC will take care of the matters pertaining to the financial system, and the FSS will take care of the matters pertaining to examination of the financial institutions. Before the change, the overall structure of the financial authority was said to be loose as the MOFE, the FSC and the FSS took separate functions of overseeing the financial industry.
It should be noted that the entity that cannot be happy with all this change in the financial regulatory structure is the FSS. With the FSC having become a much wider financial authority, the FSS is worried that it will merely be reduced to conducting examination of the financial institutions under the directions of the FSC. (The FSC is part of Korean government under the Office of Prime Minister and consists of top bureaucrats while the FSS is under the directions of the FSC but is an organization independent of Korean government.)
As the first Chairman of the FSC, the Lee Administration appointed Jun, Kwang Woo, who was formerly chairman of Deloitte Korea. Mr. Jun, an international finance expert who has served in various posts both in the government and private sectors the past 25 years, is expected to ease regulations in efforts to bolster the competitiveness of the Korean finance industry; but, in such process, he would be certainly challenged by the tough task of effectively running his powerful agency without creating perceptions of wielding its power to an unnecessary extent.
How do you effectively assign loans or your rights to certain receivables under Korean laws?
Under the Civil Act of Korea (the “Civil Act”), any right to payment held by a party (the “Creditor”) can be assigned to a third party unless there is an agreement between the Creditor and the party who is obligated to make the payment (the “Debtor”) that prohibits assignment of the Creditor’s right. In the event, however, that the Creditor assigns the right to payment to a third party in violation of the agreement for non-assignment, such assignment would still be valid if the assignee was not aware of the non-assignment agreement and also was not grossly negligent when receiving the assignment.
Similarly, if there is an agreement between the Creditor and the Debtor requiring the Creditor to obtain a prior consent of the Debtor for assignment, and the Creditor has made an assignment without obtaining the required consent, the relevant assignment would not be rendered void, provided that the assignee was not aware of the agreement for requiring the prior consent and also was not grossly negligent when receiving the assignment.
As for the method of making an assignment by the Creditor, Korean laws do not prescribe any specific method or means. However, in order for an assignment by the Creditor to be effective as to the Debtor and any third party, it would be required to follow certain method prescribed by the Civil Act.
(i) For assignment to have effect as to the Debtor: The Creditor is required to send a notice to the Debtor for assignment of the Creditor’s right to payment, or obtain from the Debtor a consent to the relevant assignment.
(ii) For assignment to have effect as to any third party: The above notice by the Creditor or the consent by the Debtor must have a fixed-date stamp affixed thereon. This could be done by sending the Creditor’s notice or obtaining the Debtor’s consent by way of a contents-certified mail (i.e., a Korean post office certifying as to contents of a mail and placing a certification date thereon) or receiving the Debtor’s consent that has been notarized.
For any assignment of loans or certain receivables occurred in Korea, it would be advisable to retain advice of a qualified Korean law firm or Korean attorney to ensure that the intended assignment has met the requirements under Korean law.
From: www.buyusa.gov/korea/en/protectingyouripr.html
Protecting Your Intellectual Property
intellectual property laws exist in Korea. However, protection of intellectual property and the laws governing enforcement of these protections are not necessarily extra-territorial. What is understood and practiced in the United States is not always practiced in Korea. U.S. companies wishing to sell their products or services in Korea should first and foremost find out if they have to register their intellectual property rights (copyright, trademark or patents) in Korea. The speediest means to enforce the right-holder’s claim is to have their intellectual property recognized by the Korean authorities and government.
One of the most frequent IPR problems facing U.S. businesses in Korea is trademark protection. Unlike the trademark registration system in the United States, which is based on "first commercial use" or "first intent to use," the trademark registration system in Korea is based on "first-to-file," or more accurately, first to successfully register with the Korea Intellectual Property Office (KIPO). If a U.S. company is considering entering the Korean market it is highly advisable that the U.S. company register their trademark first before an unauthorized party has the opportunity to register the trademark. The company will save much time, energy, resources and legal fees in the long run. Since registration of trademarks is in Korean, in order to successfully register a trademark, the U.S. company should hire a qualified local attorney who is familiar with registration procedures. To have maximum effect, a company should be prepared to register its trademark in every applicable product class category for the product(s). Should the trademark be challenged, protection is not generally provided under the Korean legal system if the company has not registered in the relevant product class category.
During the course of trademark registration, information on pending applications initially becomes available in publications of the Korea Invention and Patent Association two to three months after the initial application. Official announcements of pending applications are published for comment by KIPO in its Official Gazette. Generally, U.S. companies hire a local attorney and ask the firm to look into the status of the company’s trademark in Korea. Sometimes, the U.S. company discovers from the aforementioned publications that an unauthorized party has already filed the trademark and is awaiting registration. In this case the company is eligible to file an Opposition Action Petition within a 30-day period of official publication. In an opposition action petition, the company states their case as to why the unauthorized party's application should be rejected during the course of initial review. After reviewing the opposition action petition, KIPO can decide either to proceed with registering the unauthorized trademark application or to reject the trademark application, clearing the path for the U.S. company to register at a later date.
At a minimum, American companies that plan to enter the Korean market in the future should monitor KIPO public notices to ensure that their trademark has not been registered. Since the public notices are only in Korean, if the U.S. company cannot monitor the situation from America, the company should consider hiring someone in Korea, such as an attorney, who can.
The 1998 Trademark Act provides KIPO with grounds to reject third-party applications of the same or similar trademarks if KIPO is convinced that the registration is done in "bad faith." As capable as trademark examiners can be, some trademark registrations by unauthorized registrants have slipped through the cracks and have been successfully registered. Registration by an unauthorized party can include "predatory registration" (i.e., knowing that the mark belongs to another company, the unauthorized applicant registers the mark, with no intention of using it but rather to sell the trademark registration when the legitimate trademark owner tries to enter the Korean market).
In such cases, because the Korean legal system is based on "first to file", and because the unauthorized registrant successfully registered with KIPO, the unauthorized registrant is the legal owner of the trademark in Korea—even if it is the U.S. company’s mark and the American company has been using it in international business for several years. Provided that the mark was not used commercially by the successful but unauthorized registrant in Korea for the previous three years, the U.S. company can file a Cancellation Action petition to cancel the existing mark. If the cancellation action is successful and there is no appeal, the U.S. company can immediately file to register the trademark with KIPO, thereby reclaiming the trademark.
The most contentious scenario takes place when an unauthorized trademark application has been successfully registered with KIPO, and the party is actually using the U.S. company’s trademark commercially in Korea. In this case, the legal remedy available is an Invalidation Action. An invalidation action petition can be filed anytime during the course of the 10-year life of a trademark, provided the unauthorized registrant is actually using the trademark. The American company's petition should outline why the unauthorized trademark owner’s registration should be voided (invalidated), i.e. that the American company is the legitimate and original trademark owner, and that consumers know the trademark to be associated with the U.S. company.
If the company follows either the invalidation or cancellation action routes, the burden of proof lies with the petitioner. U.S. companies should be prepared to provide documentation showing commercial use (include samples of the product and illustrating the uniqueness of the trademark and product), to substantiate financial investment in advertisements (include all examples of actual advertisements or promotional materials that appeared in the media), even to provide results of any surveys that show that the brand name is publicly recognized in Korea and that the company is the source of the legitimate goods promoting the trademark.
Provided that the company and their attorneys put forth a convincing argument with meticulously documented details as to why the company is the legitimate trademark owner, the company has a good chance of winning the case before the KIPO Trial Board. However that may not be the final hurdle since there is an appeals process for cancellation and invalidation actions from the KIPO Tribunal Board to the Korean Patent Court and finally to the Supreme Court of Korea. The rule of thumb for a trial date is first come, first served --- petitions are filed by date with the trial dates occurring in order of the date of petition.
Unlike successful cancellation actions where the company may file for the trademark immediately with KIPO, successful invalidation actions have a one-year moratorium from the invalidation action date before a U.S. company can officially register a trademark. However, US companies can seek enforcement measures from the date of invalidation of the Korean registration.
An alternative approach is to settle out of court. Due to the length of time it takes to go from the KIPO Tribunal Board to the Korean Patent Court and all the way up to the Korean Supreme Court, some companies decide not to wait to reclaim their trademark. Four years or more is not unheard of for a final decision using the legal process and even then there is no guarantee that the U.S. company will be successful. Because the opportunity cost of not entering the Korean market can be considerable, some companies have opted to settle out of court, i.e., to buy their own trademark back from the unauthorized (but legal) registrant for use in the Korean market. Regardless of the approach taken, good legal counsel is essential.
How and Where to Register Your Intellectual Property in KoreaBoth the United States and Korea are members of the Madrid Protocol, which allows companies from the member nations to apply for trademark ownership in several member nation countries simultaneously. In Korea, a U.S. company can register their trademark and patents with the Korea Industrial Property Office (KIPO). Foreign applicants are required to retain a licensed local attorney in order to prepare applications in Korean and to conduct necessary follow-up correspondence locally. Under international law, copyrights do not have to be registered in order to be protected; however, similar to the U.S., registration is also possible in Korea with the Ministry of Culture and Tourism. Enforcement of legally registered copyrights, trademarks, and patents are under the jurisdiction of the Prosecutor's Office in Korea.
Type of Intellectual Property Where to Register
Trademark:
Patent Korea Industrial Property Office (KIPO)
http://www.kipo.go.kr1
Copyright:
Ministry of Culture and Tourism (MOCT)
http://www.moct.go.kr2
Copyright Registration Division: Copyright Deliberation and Conciliation Committee
http://www.copyright.or.kr3
When registering a copyright, trademark, or patent, US companies should maintain control of their intellectual property even if they request their Korean agent to do the processing. This control is particularly important should the relationship dissolve. In previous cases where the Korean agent maintained control of the intellectual property, long, costly legal battles ensued in order for the U.S. company to register their trademark.
Need for a Local AttorneyA large number of Korean law firms focus on international business. Most experts advise engaging a local attorney before making major business decisions in dealing with Korean companies. In addition to advice on structuring deals or arranging contracts, Korean law firms are usually well connected into the power structure and have extensive contacts in government ministries.
Although it is important to have legal representation when a business in Korea reaches even a modest level of complexity, it is important to remember two things. First, as a matter of legal culture, Korean lawyers do not see themselves as businessmen and try to avoid intruding on business judgments. It is rare for Korean lawyers to venture far from recitation of applicable statutes. This is one reason why it is a good idea to seek a Korean firm employing foreign legal consultants who tend to provide a proactive, commercial-oriented philosophy. Although major Korean legal firms have extensive and excellent contacts with the Korean bureaucracy, for anyone planning long-term business in Korea, it is useful to establish direct contacts with officials who oversee any given industry.
Under Article 307of the Criminal Law of Korea, publication of any facts that may bring another person into disrepute is a criminal act, but, under Article 310 of the Criminal Law, such publication may not be a punishable act, if the facts published are true and that the purpose of the publication is to promote public interest.
Relying on Article 310 of the Criminal Law, the Supreme Court of Korea recently ruled that publication of the facts on Internet concerning sexual harassment by a national university professor of a female student is not a punishable act, thereby reversing the district court’s guilty decision (2003 Do 2137; Decision rendered on 04/29/05). In rendering its decision, the Court stated that while Article 307 is intended to protect reputation of individuals, Article 310 is intended to balance such rights of individuals against the rights to freedom to express since the freedom to express is one of the essential basic rights in democratic society that guarantees free exchange of ideas ad opinions and the right to know possessed by the citizens. The Court also stated that although the injury to the reputation of the person concerned may be grave, the publication appeared to be intended for calling for a thorough investigation of the alleged sexual harassment act and elimination of sexual violence occurring within school campus, so the said publication may have been necessary for promotion of public interest.
Because of the Court’s decision, debate and criticism over social issues through Internet would likely be further expanded.
Paragraph 1 of Article 398 of the Civil Act provides that parties to a contract can agree to certain liquidated damages in case of a breach of contractual obligations by either party. The basis of any liquidated damages does not have to be provided at the time of execution of a contract, and the amount of liquidated damages is usually upheld if the reasonableness of such amount is objectively verifiable at a later time. However, Paragraph 2 of Article 398 of the Civil Act does provide that a court may reduce the amount of such damages if it is deemed unduly excessive.
It is noted that a court may reduce the amount of liquidated damages based on all circumstances surrounding a specific contract, such as the relative economic power of creditor and debtor, the purpose and terms of the contract, the reason for setting the liquidated damages, the ratio of the debt to the amount of the liquidated damages, the anticipated amount of damages, and the trade practices at the time of execution of the contract, etc. If and when the court, based on the foregoing factors, deems that the liquidated damages specified in the contract would impose undue pressure to the debtor who is in an economically disadvantageous position, thereby leading to an unfair result, then the court would reduce the amount of the liquidated damages.
In one court case involving a contract for delivery of certain electric vehicles, the court reduced the liquidated damages from 17 Billion KRW to 7 Billion KRW on the ground that the stipulated damages are unreasonably large when taking into account the amount of actual loss by the creditor, the category of the contract in question, and the relative economic powers of the parties concerned. The rate of liquidated damages provided in the contract was 1.5/1000 of the value of the contract and the liquidated damages amount accrued represented some 38% of the total contract value, whereas the reduced liquidated damages amount represented 15% of the total contract value.
However, we still note that the courts would not automatically reduce certain liquidated damages just because the rate of the liquidated damages is set a little higher than usual. The rate of the liquidated damages would be given a full legal effect, provided that there is a valid ground on which the rate was agreed by the parties concerned.
We first note that Korea became a signatory in 1973 to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (hereafter referred to as the Convention) with a reservation to the effect that the Convention will be applicable to arbitration cases involving commercial disputes under Korea Law and that arbitration awards rendered only in the Convention member states will be enforced in Korea.
In view of the foregoing, the foreign arbitral award coming from a member state and which would satisfy the reservation requirements of Korea would likely be recognized and enforced by Korean courts without further review. However, the foreign arbitral award still may not be enforced if the party against whom the arbitral award is being enforced makes proof that the award had not been rendered properly due to such factors as incapacity of the parties, lack of proper notice, compensation of the arbitral procedure not adhering to the agreement of the parties, or the award being contrary to the public policy of the country in which the award is being enforced, etc. (Article 5 of the Convention).
We note that in case where a foreign arbitral award is originated out of a non-contracting state to the Convention, Korean arbitration laws have no relevant provisions relating to the foregoing issue; so, in this case, we would need to rely on Korean law provisions pertaining to the enforcement of the foreign judgments seeking enforcement in Korea.
Specifically, under Article 217 of the Civil Action Laws of Korea, it is stipulated that the Korean courts should recognize and enforce a foreign judgment, provided that (a) such judgment was a final and conclusive judgment given by a court having valid jurisdiction, (b) the party against whom such judgment awarded received service of process in conformity with the laws of the jurisdiction of the court rendering judgment otherwise than by publication or responded to the action without being served with process, (c) such judgment has not been obtained by fraud, is not contrary to public policy of Korea and has not been obtained in proceedings which were contrary to natural justice and (d) judgments of the courts of Korea are accorded reciprocal treatment under the laws of jurisdiction of the court rendering such judgment.
So, as for both the arbitral award coming from a non-contracting state to the Convention and the foreign judgment seeking recognition and enforcement in Korea, Korean courts would apply the legal principles described immediately above to decide whether such foreign award or judgment should be enforced.
The Seoul High Court issued a combined ruling on January 26, 2006 on two cases (2002Na32662, 2002Na32686) that Dow Chemical Company and Monsanto Company, the US manufacturers of the defoliant known as Agent Orange, pay 63 billion won (about US$62 million) in medical compensation to Korean veterans of Vietnam War and their families. This ruling marks the first time that a Korean court has awarded reparations to the Korean veterans by recognizing a casual relationship between the defoliant and some of the illnesses of the plaintiffs which Agent Orange has been known to cause.
Some 20,000 Korean veterans had filed two separate lawsuits in 1999 against the US companies, seeking more than 5 trillion won in damages, but the district court in charge of the cases ruled in favor of the US companies. The ruling by the Seoul High Court, however, overturns the lower court’s decision, and it appears likely that the US companies would appeal the High Court’s decision, sending the cases to the Supreme Court of Korea.
In issuing the combined ruling, the Seoul High Court appears to have relied on the facts that (i) the Agent Orange contained dioxin, one of the strongest toxic substances known, at the higher levels than standard, (ii) a report of the US National Academy of Science points to a causal relationship between the toxic defoliant and 11 diseases including Non-Hodgkin’s lymphoma, skin disease, bone marrow disease, and lung, larynx and prostate cancers, and (iii) the Korean troops were stationed in areas where the defoliant were sprayed, so it was likely that they would have been exposed to the toxic chemical.
However, the High Court did not recognize a causal relationship between Agent Orange and peripheral neuropathy, the most widespread disease suffered by the Korean veterans and 2nd generation of the veterans, and so rejected a related suit (2002 Na 34679) against the US companies filed by 15 children of the veterans. The children had claimed that they suffer from peripheral neuropathy because their father had been exposed to the chemical.
It is notable that the Seoul High Court ruling comes at a time when there has been no court in the world which has rendered a judgment in favor of Vietnam veterans on an Agent Orange claim in the various court cases during some 20 years since the first Agent Orange claims were filed and settled in the US back in 1984. The Korean veterans were not parties to the out-of-court settlement in 1984 which involved Australian, Canadian and New Zealand veteran plaintiffs, and the US manufacturers have so far refused to settle with the Korean veterans on the grounds, among other things, that the 1984 settlement was reached without defendants admitting any liability, and that any settlement with Korean veterans would invite more Agent Orange claims in Korea as the current cases are not a class action suit.
Under Korean civil law, when a minor (under age 20) enter into legal acts, a parental consent or consent of a court-appointed representative is required for such acts to be given legal effect.
The Supreme Court recently ruled in a case involving confirmation of non-existence of credit card debt of minors (2003 Da 60297; Decision rendered April 15, 2005) that even if the credit card usage agreement between a minor and a credit card company may be deemed without any effect, the minor has an obligation to return the amount of unjust enrichment gained as a result of the credit card usage. Thus, the Court confirmed the lower courts?decisions that had required the minors who used their credit cards (that were obtained without the consents required under applicable law) to pay back the amounts of the credit card they used.
This case was started back in April of 2002 when several minors filed an action for confirmation of non-existence of credit card payment obligation, arguing that the credit cards that were issued to them as minors are invalid.
The Supreme Court stated in the above decision that the individual sale and purchase contracts between the credit card members and the stores that are affiliated with relevant credit card were independent of the cancelled credit card usage agreement and were thus still effective, and that the minors were thus required to return the unjust enrichment gained by the relevant credit card company having made the credit card payments to the stores at which the minors used their credit cards.
The following summarizes a gist of evidentiary and litigation rules operating in Korean trial court setting. At the outset, it should be noted that there is no jury system in court trials in Korea. (Provided, however, that in 2008, Korea will introduce jury system in limited criminal court cases, but the jury decision will not have any binding effect on judge and can be used only as reference by judges.)
Therefore, an attorney does not have chance to be theatrical in front of the jurors, and there is less drama than trials in the U.S. Also, in Korea, the judge in fact acts as the jury, investigator and judge, all in one. In Korean litigation case, the following evidentiary rules apply:
1. The judge, rather than the parties' lawyers, takes the main responsibility for gathering and sifting the evidence.
2. By law, the judge can freely request or take evidence that has not been requested, offered, or introduced by the parties.
3. By law, the judge has the legal obligation to actively investigate the facts until she deems that the information gathered is sufficient to justify a judgment (rather than being constrained by the evidence presented by the parties.)
4. By law, the judge can refuse to collect or admit evidence requested by the parties, if she deems it irrelevant to the case.
5. By law, the judge can refuse to collect or admit evidence requested by the parties, based on considerations of time and efficiency.
6. Statements of fact that were not directly known or perceived by the witness, but only heard from a third person, may be admitted as evidence.
7. Expert witnesses (specialist court advisors) are NOT appointed or presented by the parties. Instead, they are selected by the judge herself from an independent list of outsiders.
8. By law, the judge does not need to pre-qualify the questions before they are asked to the witnesses. However, questions are submitted in advance to the judge, and the judge may limit the questions.
9. By law, there must be a written or magnetic record of all evidence introduced at trial.
10. In relation to admissibility of documentary evidence at lower-level civil trial courts in Korea, simple or uncertified copies are admissible even if there is evidence against their authenticity, in which case their probative value may be reduced.
11. In relation to weight of documentary evidence at lower-level civil trials in Korea, the authenticity and probative value of all admissible documentary evidence is freely weighted by the judge.
In view of the above-noted rules, a foreign company bringing a lawsuit in Korea could become frustrated by the lack of discovery system where a party to the lawsuit could require the other party to produce evidence. So, prior to filing a formal action, it becomes more important for a party (contemplating to file a lawsuit) to review all evidence available for proving its claims because, without sufficient evidence that could be presented to a Korean court, any successful outcome of a lawsuit could be in doubt.
If you require any legal assistance in connection with filing a lawsuit, please contact Hoon Lee (hoonlee@sigonglaw.com), a foreign attorney working at Sigong Law P.C. (www.sigonglaw.com).
Let's assume you (a foreign-based individual or company) have a legal claim against a company or individual in Korea arising out of a commercial dispute. What are the proper steps?
I. Send a formal demand letter. This is the same as what you would normally do in the United States or in any Western country. However, for certain cultural reasons, keep in mind that such a demand letter may be more effective if sent by a Korean attorney.
II. Do an asset check on Defendant. This is also the same as what you would normally do in the United States.
III. If you discover that Defendant has sufficient assets to satisfy any probable judgment, you might consider applying for a preliminary attachment against Defendant's properties before filing a lawsuit or even while the case is pending. You have to, however, provide security or bond with a Korean court by depositing cash with the court. (If you have established a residence in Korea, security deposit may be made by a bank guarantee or insurance rather than cash.) The required amount of the security varies from court to court. If the property to be attached is a real property or vessel, the amount usually ranges from one-eighth to one-tenth of your claim amount. In case the property to be attached is a personal property, the security amount usually ranges from one-third to one-fifth of the claim amount.
IV. Let's assume you are forced to sue the Defendant in Korea. What do you need to do?
You first have to file a written complaint with a district court with the following documents attached: 1) power of attorney properly notarized and translated; 2) if you and/or Defendant are corporations, commercial registry extracts of Defendant corporation and a "certificate as to corporate nationality", properly notarized and translated. You also have to pay a court stamp fee to file a lawsuit. The amount is usually around 0.5% of the claim amount, and you can pay this amount by affixing revenue or payment stamps (this is a stamp showing the amount you paid to file a lawsuit) in the required amount to the Complaint document. If you have no address, office, or other place of business in Korea, the court will order that you provide security for litigation costs, if Defendant requests it. The purpose of this security amount is to secure the Defendant's claim for reimbursement of the litigation costs expended by Defendant should you lose the case. You should understand that because the Korean trial system does not use pre-trial discovery methods such as depositions and interrogatories, evidence is mostly gathered during trial. Therefore, a typical Korean trial consists of many hearings scheduled two to four weeks apart conducted over a lengthy period of time. Most of the evidence-gathering is conducted between hearings and the parties are permitted to present their evidence up to the close of the hearings.
V. Interest can be recovered from the judgment. Although there are laws specifying the permissible rate of interest, in practice, the court usually declares the 25 percent rate applicable from the date of judgment.
VI. What can you do if you lose the trial? You can appeal to an appropriate court. An appeal from a judgment of a three-judge court within the district court is made to a High Court. A judgment of a single-judge court of the district court must be appealed to a three-judge court of the same district. It depends on the amount of claim and type of claim whether or not your claim will be heard by a single judge or three judges. The court fees for filing an appeal are twice that of the amount you had to pay to originally file the claim at the district court. If you lose on appeal, you can appeal to the Supreme Court, although in civil cases, the grounds for appeal to Supreme Court are limited to constitutional and legal issues which are material to the case. You have to pay three times the court fees to appeal to the Supreme Court.
In conclusion, there are established legal avenues in Korea to seek your claims.
Hearsay is the legal term that describes statements made outside of court or other judicial proceedings. With few exceptions, hearsay is not allowed as evidence in the U.S.
However, in Korea, hearsay evidence would be admissible and have probative value in court at least in civil proceedings if accepted by courts as evidence, and, therefore, hearsay is indistinguishable from any other evidence in how Korean courts treat evidence:
Under Korean law, hearsay refers to any matter experienced by a person which forms a basis for establishing certain fact and which is offered in court as evidence by any means other than direct testimony of the person at a legal proceeding.
Article 202 of the Civil Procedure Act provides that “The court shall determine the truth of the matters asserted pursuant to its free convictions, consistent with social justice and equity and keeping in line with principles of logic and experience and taking the whole purport of pleadings and the results of the evidence investigation into consideration.” This is so called “the principle of free conviction.” That is, court judges are given total, free discretion to choose or throw out any evidence which come before them, or how much admissibility or value should be given to each evidence accepted.
So, under Korean legal system, it would be solely up to court judges who would exercise their free convictions on whether to accept certain hearsay in a case to the extent such exercise of free convictions does not violate the principle of logic and experience.
The Supreme Court of Korea stated in one case that the total denial of the admissibility of hearsay evidence in civil proceedings is in contravention of the principle of taking evidence (at the court’s sole discretion) (Supreme Court decision 67Da67; March 21, 1967) and also stated in another case that the date of purchasing real estate could be established by hearsay evidence even if such hearsay would contradict witness’ statements (Supreme Court decision 79Da395; December 26, 1979).
In sum, such hearsay evidence as government reports, any public statements by government or banking officials, government and bank website materials, scholarly reports, and bank reports would not be limited in terms of their admissibility or probative value in court.
According to views of the Supreme Court, once a court makes its decision to accept certain evidence having exercised its free convictions, it is only sufficient for the court to express the acceptance of the evidence, and the court is not required to give the basis of its decision for such acceptance (Supreme Court decision 96Da16247; June 28, 1996). In this connection, when a court makes its decision in a case and provides its opinion of the case, it would be difficult to identify from such opinion how much weight were given to any hearsay evidence submitted to the court (assuming that any such evidence was accepted by the court).
There are two kinds of mediation that could take place in the course of litigation before a Korean court, which we briefly note below.
Under Korean law and practice, courts sometimes suspend pending litigation to request that the parties in the litigation try to reach a settlement. The courts may take such measure even after the close of hearing. The courts often rely on such procedure, which is called court-sponsored meditation, when the legal issues are highly complex or are not clear-cut, or if they believe that the dispute is better suited to a settlement rather than a decision entirely in favor of one party. In such a procedure, the court will typically hold a mediation session in court. If the parties cannot reach a settlement, then the mediation is stopped, the suspension on litigation is lifted, and litigation resumes.
It is also noted that there exists a less voluntary variation on court-sponsored mediation (so-called court-ordered mediation). Under this approach, rather than request the parties to try to reach an agreement, the court may present a settlement proposal for consideration of the parties after listening to the parties during the mediation hearing(s). In such case, any party can reject the settlement order within 2 weeks of receiving the written notice of settlement order. However, if neither party files their objection within the 2-week period, the order of the court becomes final. It is then entered into court records as the final decision in the case. If any party rejects the settlement order, the mediation is dissolved and litigation resumes.
"Jo-hap" is a Korean word for a sort of "partnership" like entity under the Western legal concept. Often, a Korean construction company (or companies) and a foreign company may enter into a joint venture agreement, in which case, under the Korean law, such agreement may very well be considered a "Jo-hap" agreement. In other words, the content, rather than the wording of the agreement, takes precedent in determining the kind of agreement.
One thing that a foreign company should know before entering into a "Jo-hap" agreement with a Korean company under the governing law of Korea is that in case a "Jo-hap" needs to sue a third-party, the consent of all other parties to the "Jo-hap" needs to be obtained. If another party to the "Jo-hap" does not consent, then the foreign party may well be not able to sue the third-party.
For example, let's say a foreign subcontractor and a Korean contractor enter into an agreement named "Joint Venture Agreement" (the "JVA") to market and work together to build a construction project in Korea, and the Korean law governs the JVA. [As explained above, under the Korean law the JVA will be considered to be a "Jo-hap".] Let's further assume that down the road, the owner-client unlawfully terminates the construction agreement, and the foreign subcontractor is very upset and wishes to sue the owner-client for the wrongful termination of the construction agreement with "Jo-hap". However, the Korean contractor party is very close to this owner-client and does not wish to sue the owner-client and withholds its consent to sue the owner-client. The Korean contractor party's refusal to sue the owner-client places the foreign subcontractor in a quandary -- which could have avoided if the foreign subcontractor had retained a good Korean law firm to draft the JVA agreement to allow the foreign subcontractor (a member of Jo-hap or JVA) to pursue a claim against a third-party without the consent of the Korean contractor, the other Jo-hap member.
One way to avoid this potential problem is to include a provision in the JVA "Jo-hap" to make it clear that the foreign subcontractor has the decision-making ability to decide on any matters concerning disputes or litigation against third-parties, with or without consent of the other Jo-hap members.
This example illustrates subtle differences between Western law and Korean law regarding the respective rights and obligations under the partnership-like agreement. That is why you need to retain a law firm which understands this difference and can exploit this difference to your advantage.
[Editor’s note: The below article was originally written by Mr. Young H. Noh who is the founder of Korealaw.com and a US immigration law practitioner, and is re-produced here for the foreign individuals intending to stay in Korea for work purposes.]
Let’s assume you (a non-Korean) need to work for a company in Korea, what visa is appropriate for you? There are working visas in Korea that are similar to H-1B, L-1 and other temporary working visas that are available under the United States immigration law. You may consider retaining services of a Korean law firm experienced in handling this type of work. Basically, you can apply for visas abroad at the Korean Embassy or Consulate or if you are in Korea, apply to the Immigration Administrative Office within the Ministry of Justice, after the approval of which you must leave Korea and then obtain visas.
The following are a brief overview of the five (5) types of available visas in Korea that are issued to foreign employees of commercial businesses: C-2 D-7, D-8, E-4 and E-7. Other employment-type visas that are not covered in this memo are: E-1 (for professors and other academicians), E-2 (foreign language conversation teachers) and E-3 (for researchers).
In addition, if you are born in Korea and are either green card holder or citizens of another country should note that there is a resident visa called F-4 (passed into law in 1999) which allows one to reside in Korea indefinitely and work at almost any other jobs. This F-4 visa is very convenient, and in order to apply for one, you need the proof of your green card or citizen status in another country and your Family Census Register. Especially if you are a citizen of another country, then you should seriously consider applying for F-4 visa instead of any of the visas described below, because F-4 visa is much more convenient in that the Korean employer does not have any power over your visa status in Korea, you can work for almost any employer in Korea and it is a relatively simple process.
1. C-2 Short-Term Business Visa
If you do not qualify for any long-term temporary working visas, you can always apply for C-2 visa (equivalent to B-1 visa under the U.S. immigration law) that allows you to engage in business activities in Korea up to 90 days). You must, however, re-apply for another 90-day C-2 visa at a Korean Embassy or Consulate, after the expiration of the 90-day period, or be subject to a substantial fine. This is why you often see many U.S. citizens leave Korea and return within one or two days to renew their C-2 visas, so they can stay in Korea for another 90 days.
2. D-7 Commercial Residence Visa
If you are a foreign employee of a branch or liaison office of a foreign parent company who need to be dispatched to Korea by the foreign parent company, D-7 visa is for you. You as the foreign employee must have 1 year or more of working experience at the parent company’s headquarters, branch or other offices.
The common documents that must be submitted are:
a. applicant’s passport;
b. completed application form with passport-size photograph;
c. letter of invitation from the local company in Korea confirming the purpose of the applicant’s visit to Korea;
d. a dispatch order or certificate of employment from the local company in Korea;
e. copy of permission to establish the local office;
f. certified copy of company registration or copy of business entity certification of the local office;
g. copy of certificate of remittance of operating capital for the local office or business plan thereof;
h. affidavit of support from the local office duly notarized by a notary public in Korea; and
i. resume or personal work history of applicant.
3. D-8 Corporate Investment Visa
If you are a foreign employee of a foreign-invested corporation, whether a wholly-owned subsidiary or a joint-venture company, under the provisions of the Foreign Capital Inducement Act, then D-8 visa is for you. You as a foreign employee must have some expertise and should be employed in a position related to the management, administration, production and/or technological aspects of the local company.
The documents that must be submitted are:
a. passport of applicant;
b. completed application form with passport-sized photograph;
c. letter of invitation from the local company confirming the purpose of the applicant’s employment in Korea;
d. dispatch order or certificate of employment from the local company;
e. certified copy of company registration or copy of business entity certification of the local company;
f. copy of the approval letter for foreign investment or certificate of foreign-invested company;
g. affidavit of support from the local company duly notarized by a notary public in Korea; and
h. resume or personal work history.
4. E-4 Technical Training Visa
If you are a foreign technician who has been invited to Korea by a public or private Korean organization for the specific purpose of providing professional knowledge in the natural sciences or technology with respect to a specialized industrial field, then E-4 visa is for you. Such foreign technician is frequently invited to Korea for the purpose of providing technical assistance or training pursuant to a technical licensing agreement or other agreements of such type.
The documents that must be submitted are:
a. applicant’s passport;
b. completed application form with passport-sized photograph;
c. letter of invitation from the local company confirming the purpose of the applicant’s visit to Korea;
d. dispatch order or certificate of employment from the local company;
e. copy of diploma or certificate of qualification of applicant;
f. approval report for the technical license agreement or confirmation of service transaction or designation as a defense industry;
g. documents related to the establishment of the public or private organization of the local company, including a certified copy of company registration or business entity certificate, etc.
h. affidavit of support from the local company duly notarized by a notary public in Korea; and
i. resume or personal work history of applicant.
5. E-7 Special Activity Visa
This E-7 visa is similar to E-4 except this is reserved for all other special activities that are specially designated by the Ministry of Justice. Therefore, if you are going to be working for a domestic, Korean company and you possess certain skills or knowledge that are unavailable in the Korean domestic market, such as foreign attorneys and tax accountants, then this E-7 visa is probably for you. It should be noted that E-7 visa is generally granted for only those positions that are difficult to fill with domestic Korean employees due to the shortage of Korean workers.
The documents that must be submitted are:
a. applicant’s passport;
b. completed application form with passport-sized photograph;
c. letter of invitation from the local company confirming the purpose of the applicant’s employment in Korea;
d. copy of diploma or certificate of qualification of applicant;
e. employment reference by the Minister of the relevant Ministry;
f. employment contract;
g. documents relating to the establishment of public or private organizations, including a certified copy of the company registration or business entity certificate, etc. of the local company;
h. affidavit of support from the local company duly notarized by a Notary Public of Korea; and
i. resume or personal work history of applicant.
The matters pertaining to a foreign individual or entity wising to make a direct foreign investment in Korea are primarily prescribed by the Foreign Investment Promotion Act (“FIPA”) and the Commercial Code of Korea. This document attempts to give an overview of procedure for foreign investment.
Brief introduction of FIPA
Investing in Korea has been facilitated by FIPA, which was enacted in November of 1998. The foundation of this Act involves two main points: 1) foreign investors will have access to invest in virtually all types of business in Korea, and 2) potential foreign investors only have to 'notify' the relevant government authorities rather than to 'seek' consent. Currently, out of a total classified 1,148 industrial sectors, only 31 sectors remain closed (13 permanently and 18 partially) to foreign investment. In short, this law attempts to treat the foreign investors equally as it does Korean investors.
A “direct foreign investment” under FIPA means a foreign investor’s acquisition of at least 10% of total issued shares of a domestic corporation, or a foreign investor’s acquisition of less than 10% of total issued shares of a domestic corporation accompanied by (i) a secondment of an executive to the domestic corporation or a contract granting such secondment right to the foreign investor, (ii) execution of a supply contract for raw materials or other products for a period of at least a year or more, or (iii) execution of a technology license contract or joint development agreement.
A foreign invested enterprise established under FIPA is also eligible to receive certain tax incentives provided by the Special Tax Treatment Control Act of Korea (“STTCA”) in calculation of corporate income tax, if it meets the requirements prescribed by the STTCA.
Example: Establishment of a foreign invested enterprise under FIPA
The procedures for establishment of a foreign invested enterprise (in the form of a joint-stock company called “Chusik Hoesa” in Korean) under FIPA would consist of three procedures: (1) filing of a report on foreign investment with a foreign exchange bank; (2) incorporation and registration with the court registry office; and (3) registration with the competent tax office.
1. Report on Foreign Investment with Foreign Exchange Bank under FIPA
For this filing purpose, you may choose any Korean bank which handles foreign exchange business, such as Korea Exchange Bank, or a Korean Branch of foreign banks (such as Citibank, HSBC, Chase, etc.). .
In order to file a report with a foreign exchange bank, we need the following documents:
a. A notarized Power of Attorney, authorizing us to prepare and file the report and to take necessary steps for establishment of the foreign invested enterprise in Korea; and
b. A notarized certificate of board resolution to establish the foreign invested enterprise.
It is noted that the minimum amount of foreign investment required by FIPA is 50 Million Korean Won. If there is more than 1 foreign investor, then such minimum capital requirement would be applicable to each foreign investor.
To prepare a report on foreign investment, we also need to have the following information: exact corporate name, address and nationality of the foreign investors and the corporate name and the address of the head office of the foreign invested enterprise and the line of business in which the foreign invested enterprise would be engaged in. You may provide us with a copy of certificate of incorporation, or certificate of good standing to slow that the foreign investor is duly incorporated and existing under the laws of its incorporation.
2. Incorporation and Registration with the Court Registry Office.
After the report of the foreign investment is accepted by the foreign exchange bank, steps may be taken to establish the foreign invested enterprise. The following documents are required to incorporate and register the foreign invested enterprise with the court registry office which has jurisdiction over the location where the foreign invested enterprise is to be located:
a. Articles of incorporation of the foreign invested enterprise
b. Names, addresses, date of birth and nationality of the directors of the foreign invested enterprise and the copies of their passports.
c. Name, address, date of birth and nationality of the representative director of the foreign invested enterprise (from among the directors). The representative director is the person who is authorized by Korean law and the Articles of Incorporation to represent the company. If there will be more than one representative directors, please identify such directors and whether they will be acting only jointly or separately.
d. Name, addresses, date of birth and nationally of the statutory auditor of the foreign invested enterprise and the copy of the passport. There must be at least one statutory auditor for a chushik hoesa (who must be a natural person and an accounting firm may not serve as a statutory auditor). The statutory auditor performs certain statutory supervisory functions, separately from independent auditors (who are usually accountants). There is no restriction regarding nationality of the statutory auditor.
e. Notarized acceptance letters to be signed by each of the directors (and representative director) and the statutory auditor (if required) and the report on seal impression by the representative director(s) of the foreign invested enterprise.
With the above information and documents, an inaugural meeting of the foreign invested enterprise will be held, where the directors, representative director(s) and the statutory auditor (if required) will be appointed. Since a certificate of full payment of capital contribution issued by the foreign exchange bank is one of the documents necessary for court registration, the foreign investor must remit the investment funds after the report on the foreign investment is accepted by the bank and before the court registration is to be effected.
3. Registration with the Tax office
The foreign invested enterprise must be registered with the local tax office to obtain a business ID number. This can be completed within 1-2 weeks after court registration of the foreign invested enterprise. The tax office registration requires a copy of a lease agreement evidencing the foreign invested enterprise’ actual presence in Korea.
General
Prior to April 1, 1999, investments in Korean securities by non-residents and issuance of securities outside of Korea by Korean companies had been regulated by the Foreign Exchange Management Act and the Presidential Decree and regulations thereunder (collectively the Foreign Exchange Management Laws). As of April 1, 1999, the Foreign Exchange Management Laws were abolished and the Foreign Exchange Transaction Act and the presidential Decree and regulations thereunder (collectively, the Foreign Exchange Transaction Laws) were enacted. Under the Foreign Exchange Transaction Laws, many restrictions on foreign exchange transactions have been deregulated and many currency and capital transactions have been liberalized.
However, Korean government has instituted certain measures to curb capital flight and international money laundering which may result from liberalization of capital transfers.
Under the Foreign Exchange Transaction Laws, if the Korean government deems that certain emergency circumstances, including, but not limited to, sudden fluctuations in interest rates or exchange rates, extreme difficulty in stabilizing the balance of payments or a substantial disturbance in the Korean financial and capital markets, are likely to occur, it may impose any necessary restrictions such as requiring foreign investors to obtain prior approval from the Minister of Finance and Economy (MOFE) for the acquisition of Korean securities or for the repatriation of interest, dividends or sales proceeds arising from Korean securities or from disposition of such securities, provided, however, that certain foreign investments made under the Foreign Investment Promotion Act shall not be subject to the foregoing restrictions.
The Securities Exchange Act, which regulates issuance and exchange of securities publicly traded in Korea, was amended several times from April 1997 to internationalize the system for issuing and distributing securities and the systems for mergers and acquisitions of businesses, to enhance the autonomy of the securities industry through deregulations and to strengthen the independence of auditors and the protection of minority shareholders. For instance, the amendments made the tender offer requirements more specific by requiring a tender offer where the purchaser and the persons who have a special relationship with the purchaser will hold 5% or more of the total issued and outstanding shares concerned as a result of the purchase of the shares outside the Korea Stock Exchange or KOSDAQ from a certain number of persons, enhanced the rights of minority shareholders, required inclusion of outside directors in the board of directors for improvement of corporate governance, repealed the limitation for the acquisition of its own shares by a listed company, and permitted the payment of interim dividends by companies listed on the Korea Stock Exchange or registered with the KOSDAQ if provided for in their articles if incorporation.
Under the Securities Exchange Act, when an investor acquires 5% or more of total issued shares of a listed corporation, the investor is required to file a report to the Financial Supervisory Commission and Korea Stock Exchange on the share acquisition status within 5 days of the acquisition. In addition, if, after the acquisition, the investor changes its shareholding and the changed shareholding is at least 1% or more of total issued shares of the listed corporation, the investor is required to file a report to the Financial Supervisory Commission and Korea Stock Exchange within 5 days of the occurrence of the changed shareholding.
Acquisition of Shares by Foreigners
Under the Foreign Exchange Transaction Laws, the Securities Exchange Act, and regulations of the Financial Supervisory Commission (collectively the Securities-Related Laws), foreigners are permitted to invest, with certain exceptions and subject to certain procedural requirements, in all shares of Korean companies unless prohibited by specific laws. Foreign investors may trade shares listed on the Korea Stock Exchange or registered on the Korea Securities Dealers Association Automated Quotation system (KOSDAQ) only through the Korea Stock Exchange or through the KOSDAQ except in limited circumstances, including share acquisition under the Foreign Investment Promotion Act, acquisition of shares by exercise of warrants, conversion right under convertible bonds or withdrawal right under depositary receipts issued outside of Korea by a Korean company, acquisition of shares as a result of exercising applicable conversion rights attached to certain eligible domestic convertible bonds issued by listed companies, acquisition of shares as a result of inheritance, donation, bequest or exercise of shareholder rights (including preemptive rights or rights to participate in free distributions and receive dividends).
The Securities-Related Laws require a foreign investor who wishes to invest in shares on the Korea Stock Exchange or the KOSDAQ to register its identity with the Financial Supervisory Service prior to making any such investment. Upon registration, the Financial Supervisory Service will issue to the foreign investor an Investment Registration Card which must be presented each time the foreign investor opens a brokerage account with a securities company. Foreigners eligible to obtain an Investment Registration Card include foreign nationals who are individuals, foreign governments, foreign municipal authorities, foreign public institution, international financial institutions or similar international organizations, corporations incorporated under foreign laws and any person in any additional category designated by the decree of the MOFE.
Upon a foreign investor’s purchase of shares through the Korea Stock Exchange or the KOSDAQ, no separate report by the investor is required because the Investment Registration Card system is designed to control and oversee foreign investment through a computer system.
One question that is frequently asked by foreign companies intending to build business presence in Korea is the scope of activities that a liaison office could undertake and the legal requirements for setting up such an office.
Obviously, as the term “liaison office” denotes, a liaison office cannot be involved in any revenue generating activities (e.g., direct sales, or any sales or after-sales activities engaged on behalf of the headquarters) and can thus only undertake the preliminary and auxiliary activities such as propaganda, collection and supply of market information and market survey.
If a liaison office undertakes any sales activities, it could be deemed as being involved in the essential and important parts of the activities of the head office and could thus be regarded as permanent establishment in Korea of the foreign company. Then, such liaison office could be subject to Korean taxation (based on Korean sourced income/profit) under the Corporate Income Tax Act of Korea.
Setting up a liaison office is rather a simple process. It does not require any entity registration or initial equity. But the foreign company establishing a liaison office is required to file a report to a designated foreign exchange bank for such establishment, which is done primarily for the purpose of funds transfer between the head office and the liaison office. (It should also obtain an identification number from the relevant tax office that is equivalent to a business entity registration number.)
The documents required for submission to the bank (at the time of filing the above report) are as follows:
(i) Certificate of incorporation of the head office
(ii) Board resolution for setting up a liaison office
(iii) Personnel information concerning the head of liaison office
(iv) Power of attorney (if a law firm is acting on the foreign company’s behalf)
It should be lastly noted that should a foreign company desire to engage in any revenue-generating activities, it should set up a branch office (or a corporate subsidiary) instead of a liaison office, though establishing a branch office requires registration with a court registry office.
In the 19th free economic zone committee meeting held Aug. 17, presided over by the Minister of Finance and Economy (Mr. Kwon O-kyu), Korean government decided to extend a tax exemption period on some large-scale foreign-invested companies in the country's free economic zones, a move aimed at attracting more foreign investment. (The foregoing committee presently consists of 16 ministers from various ministries within the government and 8 members from private sector.)
Currently, foreign-invested enterprises within the free economic zones are exempted from corporate income tax and income tax for a period of 5 years (100% for 3 years followed by 50% for the last 2 years). And import tariff is exempted 100% for 3 years with regard to importing capital goods.
The above tax-exemption is presently applied to the foreign investment of at least USD 10 million in manufacturing and tourism business and also the foreign investment of at least USD 5 million in logistics and medical fields.
If the tax benefit increase is effected (expected in late this year), the tax exemption period will be increased from 5 years to 7 years (100% for 5 years and 50% for 2 years), provided that such benefit will be applied to the manufacturing business of USD 30 million or more, tourism business of USD 20 million or more and logistics business of USD 10 million or more.
In addition, value added taxes will be exempted in regard to import of capital goods for 3 years.
The government also plans to add research and development businesses as beneficiaries of the tax exemption and reduction to attract more research centers. The government also indicated that it could offer more tax incentives to world-class multinational corporations if such incentives would be deemed necessary to attract foreign companies in strategically important areas (e.g., bio- and IT-related).
In addition, the government plans to select two to three more regions as new free economic zones within this year. Currently, Incheon, Pusan, Jinhae, and Kwangyang-man areas are designated as the free economic zones.
The Labor Ministry of Korea publicly announced last August 1 that the minimum wage for 2008 shall be 3,770 Won, which is up 8.3% compared to the minimum wage of 3,480 Won for 2007. It is estimated that about 13.8% of the total workers in Korea, or some 2.12 million workers, will be benefiting from the newly-set minimum wage.
This new minimum wage was passed at the Minimum Wage Committee last June 27, and because there had not been any objections filed from labor organizations in Korea, the minimum wage was confirmed as originally passed.
As the public notice for the new minimum wage has been issued, every employer in Korea will be required to apply the minimum wage (as to their employees) from January 1, 2008, and shall be prevented from lowering any wage on the basis of the newly announced minimum wage. Any employer in violation of the minimum wage requirements and related regulations thereof may be subject to an imprisonment of up to 3 years or a fine of up to 20 million Won.
Finding out whether any wage being is paid is meeting the minimum wage requirement could be done by (i) first deducting any part of wage amounts not regarded as part of minimum wage (e.g., bonus pay, overtime work pay, transportation pay, food allowance, family allowance, etc.) from the total wage amounts, (ii) dividing such net amount by the hours worked, and (iii) comparing the hourly wage amount resulted with the stipulated minimum wage amount.
It should be noted that, if any company out-sources any part of its business to an outside company on an independent contract basis, and the contracting company (the contractor) pays to its employees (working under the contract) wages that are below the stipulated minimum wage, the company giving the contract (the employer company) could be he