Korea Times
October 23, 2009
by Sean C. Hayes (Host of this blog)
Two roads diverged in Korean yellow woods. Will Korea remain on the road less traveled and maintain its cumbersome regulatory framework governed by an inefficient, illogically burdensome and self-interested bureaucracy or will Korea free itself from its autocratic regulatory regime and bureaucracy and choose the other road?
In a country with a notorious Sybil-type personality, only the most arrogant of pontificators will take a stab at predicting the future of Korea.
What is definitely known about it, however, is that most economists and business professionals nearly unanimously opine that we must free ourselves from autocratic, authoritarian and government-focused regulatory regimes in order for the people of nations to prosper.
In short, we must respect and foster economic freedom. The leading indicator of economic freedom is the Index of Economic Freedom.
The index was developed by the Wall Street Journal and the Heritage Foundation and has empirically established, over its 15-year history that those nations that have increased scores year-on-year have nearly universally increased their economic prosperity and those nations with high scores are the most prosperous of nations.
Korea ranks in the ``moderately free'' category behind regional rivals Hong Kong, Singapore, Australia, New Zealand, Japan, Macau and Taiwan.
The seven economies ranked free are Hong Kong, Singapore, Australia, Ireland, New Zealand, the U.S. and Canada. Twenty-three nations are ranked ``mostly free" and include the United Kingdom, Iceland, Japan, Austria, the Netherlands, Germany, Sweden, Norway and Spain.
Nations ranked ``free'' had per capita GDP average of $40,253; ``mostly free,'' $33,428; ``moderately free,'' $15, 541; ``mostly unfree,'' $4,359; and ``repressed,'' $3,926.
Also, higher ranked nations receive higher scores in the Human Development Index, Pollution Control Index, Democracy Index and other prosperity related rankings.
The Index of Economic Freedom has also shown that nations that decrease their score year-on-year decrease their overall prosperity, while nations that increase their score year-on-year increase their overall prosperity.
Korea in many areas ranks as a ``mostly free'' nation. It has respectable rankings in business and monetary freedom and less than ``mostly free'' scores in financial, trade and investment freedom, government size and property rights, and of course dismal scores in freedom from corruption and labor freedom.
The good news is that the Lee Myung-bak government has made significant regulatory reforms during its administration.
The most significant reforms have been in the area of tax, zoning and industrial complex procurement and development, environment and capital markets, but many of the reforms have been thwarted by the efforts of a vocal radical liberal super minority that is highly capable of manipulating the population into believing in their anti-American, anti-free trade, anti-foreign capital and pro-militant labor policies.
Another great development under the Lee administration has been the Regulatory Reform Committee. The committee is headed by one of Korea's great scholars, Choi Byung-sun.
Choi has been a lifetime advocate of economic freedom and has taken a prominent role in the administration and his committee has taken a prominent role in fighting what he has noted on the committee's Web site as ``nonsense'' regulations.
The future of Korea may be in hands of the mainstream if the mainstream can be motivated to act. If the mainstream is willing to stand up against the minority it is likely that Korea will head down the path to joining the ranks of the most developed nations.
The question remains whether the Lee administration or other political leaders can motivate this mainstream to stand up against the minority or will major reforms be stymied again by this politically powerful, yet, small minority.
New York attorney Sean Hayes leads the International Corporate Practice Group at Joowon Attorneys at Law, one of Korea's largest firms. He formerly worked for the Constitutional Court of Korea and as a professor of constitutional and contract law. He may be contacted at www.thekoreanlawblog.com or at
SeanHayes@jwonlaw.com
The column by Sean Hayes appears in the Korea Times and can be found HERE.
October 28, 2009
Learn from Lee Administration
Korea Times
October 2, 2009
by Sean C. Hayes (Host of this blog)
The Lee Myung-bak administration and local governments have been pumping money into the economy through infrastructure spending. The administration has also lessened the regulatory burden on builders and provided funds for infrastructure and other building improvements.
U.S. President Barack Obama, on the other hand, created a stimulus package that overwhelmingly has been used by states to pay for social program promises by politicians and feed the folks that put the Obama administration into office.
For example, a group backed by Al Gore received a $600-million grant to develop an electric car; numerous charities that promoted liberal democratic causes received a stimulus fund; $30 million went to a train station that was abandoned for over 30 years; and $1 billion is going to a ``FutureGen" power plant that seems likely to be never put into operation.
Of course, if the Republicans were in office this same type of cronyism would have occurred, but in a time of such need the political powers should have left politics at the back door.
Many Republicans and Blue Dog Democrats are beginning to question and realize that this stimulus package did little-to-nothing to improve the ailing American economy and will simply lead to a larger deficit, higher taxes and potentially a longer recession.
The stimulus, thus, seems to be failing us.
Obama's promise that the unemployment rate would stabilize at around 7.9 percent if the stimulus bill was passed is off by 2 percentage points, and the argument that the rate of increase in unemployment has decreased is backed by no evidence.
Furthermore, economies such as Brazil, China and Germany, that implemented smaller stimulus packages and maintain low debt as a percentage of GDP have fared much better in this economy than countries such as the U.K. and the U.S., which implemented massive packages and maintain high debt as a percentage of GDP.
This may indicate, but no comprehensive studies with large data sets have yet been completed, that the stimulus programs may not accomplish the pump-priming Keynesian effects envisioned, and that lower taxes and a natural decrease in the asset bubbles would have done the trick.
If this is the case or not, the Lee administration approach to the stimulus should have been the path taken by America. These programs will have a lasting effect on the economy, since infrastructure spending has been shown, in numerous studies, to increase a nation's efficiency and growth rates.
The Lee administration, realizing the value in infrastructure improvements, has implemented a plan to expand Incheon International Airport, update transportation to the airport, build and/or remodel new local and national government buildings, while lessening the regulatory burden on builders.
The Lee administration has additionally created a Green Initiative Fund and vowed to spend 50 trillion won for these green projects.
America's economy may not have been benefited by the stimulus package, but would have been benefited and is in need of a drastic overhaul of its infrastructure.
According to the president of the American Society of Civil Engineers, the U.S. has ``been operating on a patch-and-pray system." The ASCE has published a report giving America a "D" in infrastructure and claimed that America would need to spend $2.2 trillion in order to get to a "B."
There is some good news on the horizon. Obama seems to realize the problems with America's infrastructure and has vowed in campaign and non-campaign speeches to improve the ailing American infrastructure. Hopefully, this infrastructure package will not be linked with wasteful cronyism like the first stimulus bill.
New York attorney Sean Hayes leads the International Corporate Practice Group at Joowon Attorneys at Law, one of Korea's largest firms. He formerly worked for the Constitutional Court of Korea and as a professor of constitutional and contract law. He may be contacted at www.thekoreanlawblog.com or at SeanHayes@jwonlaw.com.
The column by Sean Hayes appears in the Korea Times and can be found HERE.
October 2, 2009
by Sean C. Hayes (Host of this blog)
The Lee Myung-bak administration and local governments have been pumping money into the economy through infrastructure spending. The administration has also lessened the regulatory burden on builders and provided funds for infrastructure and other building improvements.
U.S. President Barack Obama, on the other hand, created a stimulus package that overwhelmingly has been used by states to pay for social program promises by politicians and feed the folks that put the Obama administration into office.
For example, a group backed by Al Gore received a $600-million grant to develop an electric car; numerous charities that promoted liberal democratic causes received a stimulus fund; $30 million went to a train station that was abandoned for over 30 years; and $1 billion is going to a ``FutureGen" power plant that seems likely to be never put into operation.
Of course, if the Republicans were in office this same type of cronyism would have occurred, but in a time of such need the political powers should have left politics at the back door.
Many Republicans and Blue Dog Democrats are beginning to question and realize that this stimulus package did little-to-nothing to improve the ailing American economy and will simply lead to a larger deficit, higher taxes and potentially a longer recession.
The stimulus, thus, seems to be failing us.
Obama's promise that the unemployment rate would stabilize at around 7.9 percent if the stimulus bill was passed is off by 2 percentage points, and the argument that the rate of increase in unemployment has decreased is backed by no evidence.
Furthermore, economies such as Brazil, China and Germany, that implemented smaller stimulus packages and maintain low debt as a percentage of GDP have fared much better in this economy than countries such as the U.K. and the U.S., which implemented massive packages and maintain high debt as a percentage of GDP.
This may indicate, but no comprehensive studies with large data sets have yet been completed, that the stimulus programs may not accomplish the pump-priming Keynesian effects envisioned, and that lower taxes and a natural decrease in the asset bubbles would have done the trick.
If this is the case or not, the Lee administration approach to the stimulus should have been the path taken by America. These programs will have a lasting effect on the economy, since infrastructure spending has been shown, in numerous studies, to increase a nation's efficiency and growth rates.
The Lee administration, realizing the value in infrastructure improvements, has implemented a plan to expand Incheon International Airport, update transportation to the airport, build and/or remodel new local and national government buildings, while lessening the regulatory burden on builders.
The Lee administration has additionally created a Green Initiative Fund and vowed to spend 50 trillion won for these green projects.
America's economy may not have been benefited by the stimulus package, but would have been benefited and is in need of a drastic overhaul of its infrastructure.
According to the president of the American Society of Civil Engineers, the U.S. has ``been operating on a patch-and-pray system." The ASCE has published a report giving America a "D" in infrastructure and claimed that America would need to spend $2.2 trillion in order to get to a "B."
There is some good news on the horizon. Obama seems to realize the problems with America's infrastructure and has vowed in campaign and non-campaign speeches to improve the ailing American infrastructure. Hopefully, this infrastructure package will not be linked with wasteful cronyism like the first stimulus bill.
New York attorney Sean Hayes leads the International Corporate Practice Group at Joowon Attorneys at Law, one of Korea's largest firms. He formerly worked for the Constitutional Court of Korea and as a professor of constitutional and contract law. He may be contacted at www.thekoreanlawblog.com or at SeanHayes@jwonlaw.com.
The column by Sean Hayes appears in the Korea Times and can be found HERE.
October 1, 2009
Protecting your Intellectual Property in Korea
Korea Times
October 2, 2009
by Sean C. Hayes (Host of this blog)
A popular song regularly played on the radio proclaims that in the summer of 1989 the songwriter was ``trying different things and smoking funny things.''
If you have any exposure to the Korean market, do your business a favor and don't be like the songwriter.
All business with any exposure to the Korean market must have a plan in place to protect their intellectual property.
Thus, for the sake of your company, at a bare minimum, you should follow these simple recommendations prior to entering Korea.
Every public company and most private companies have valuable intellectual property. In Korea, and most of the world, this basic plan will assist in protecting and also fostering your company's intellectual property.
We should not forget that often intellectual property is the most valuable asset that your company possesses and thus if you have refused to have a protection plan in place, you should question whether in the fall of 2009 you to have been ``trying different things and smoking funny things.''
Therefore, first have your business do a complete inventory of your intellectual property.
Form a team to audit all your intellectual property including your patents, trademarks, service marks, books, manuals, videos, software, know-how, and trade secrets.
The team should include, at a minimum, a senior manager experienced in the internal workings of the company and an outside consultant (attorney or intellectual property consultant) who is experienced in creating inventories.
The team should send a tailored questionnaire to the heads of all your company's departments.
From the questionnaire and other ascertained information, the team should produce a complete intellectual property inventory that details what intellectual property the company possesses and evidences how much the intellectual property is worth to the company.
Second, as in the words of the U.S. Commercial Services in Korea, ``protection of intellectual property and the laws governing enforcement of these protections exist but 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 register their intellectual property rights (copyrights, trademarks or patents) in Korea.''
Call a lawyer and get your intellectual property registered. The cost of registration is minimal.
Thirdly, have a plan in place to deal with intellectual property violations.
The plan should include an internal monitoring and worldwide registration and licensing scheme; an action plan to deal with intellectual property violators and patent trolls; formating of a team that is responsible for maintaining and fostering intellectual property rights and making sure that intellectual property is properly reflected in the company's financials.
Fourthly, have a law firm, in Korea, on retainer. A monthly retainer, in Korea, with prepaid hours is inexpensive.
Direct the firm to investigate, contact violators, draft license and distribution agreements, regularly review your intellectual property invoice and take an active role in further developing an appropriate scheme.
Additionally, keep the firm in the loop on all new intellectual property developments.
Lastly, integrate the home office with the Korean entity. All too often the Korean branch is totally out of the loop and hence unaware of developments at the home office. The Korean branch, in not only intellectual property, but in other company areas should at least be near the loop.
This basic plan will not only help to protect your intellectual property in Korea, but also assist U.S. public companies in avoiding the long arm of Sarbanes-Oxley.
For the sake of your company and the sake of not being labeled by your board as potentially ``trying different things and smoking funny things,'' implement this basic plan.
New York attorney Sean Hayes leads the International Corporate Practice Group at Joowon Law Firm, one of Korea's largest firms. He formerly worked for the Constitutional Court of Korea and as a professor of constitutional and contract law. He may be contacted at http://www.thekoreanlawblog.com/
or at SeanHayes@jwonlaw.com.
The column by Sean Hayes appears in the Korea Times and can be found HERE.
October 2, 2009
by Sean C. Hayes (Host of this blog)
A popular song regularly played on the radio proclaims that in the summer of 1989 the songwriter was ``trying different things and smoking funny things.''
If you have any exposure to the Korean market, do your business a favor and don't be like the songwriter.
All business with any exposure to the Korean market must have a plan in place to protect their intellectual property.
Thus, for the sake of your company, at a bare minimum, you should follow these simple recommendations prior to entering Korea.
Every public company and most private companies have valuable intellectual property. In Korea, and most of the world, this basic plan will assist in protecting and also fostering your company's intellectual property.
We should not forget that often intellectual property is the most valuable asset that your company possesses and thus if you have refused to have a protection plan in place, you should question whether in the fall of 2009 you to have been ``trying different things and smoking funny things.''
Therefore, first have your business do a complete inventory of your intellectual property.
Form a team to audit all your intellectual property including your patents, trademarks, service marks, books, manuals, videos, software, know-how, and trade secrets.
The team should include, at a minimum, a senior manager experienced in the internal workings of the company and an outside consultant (attorney or intellectual property consultant) who is experienced in creating inventories.
The team should send a tailored questionnaire to the heads of all your company's departments.
From the questionnaire and other ascertained information, the team should produce a complete intellectual property inventory that details what intellectual property the company possesses and evidences how much the intellectual property is worth to the company.
Second, as in the words of the U.S. Commercial Services in Korea, ``protection of intellectual property and the laws governing enforcement of these protections exist but 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 register their intellectual property rights (copyrights, trademarks or patents) in Korea.''
Call a lawyer and get your intellectual property registered. The cost of registration is minimal.
Thirdly, have a plan in place to deal with intellectual property violations.
The plan should include an internal monitoring and worldwide registration and licensing scheme; an action plan to deal with intellectual property violators and patent trolls; formating of a team that is responsible for maintaining and fostering intellectual property rights and making sure that intellectual property is properly reflected in the company's financials.
Fourthly, have a law firm, in Korea, on retainer. A monthly retainer, in Korea, with prepaid hours is inexpensive.
Direct the firm to investigate, contact violators, draft license and distribution agreements, regularly review your intellectual property invoice and take an active role in further developing an appropriate scheme.
Additionally, keep the firm in the loop on all new intellectual property developments.
Lastly, integrate the home office with the Korean entity. All too often the Korean branch is totally out of the loop and hence unaware of developments at the home office. The Korean branch, in not only intellectual property, but in other company areas should at least be near the loop.
This basic plan will not only help to protect your intellectual property in Korea, but also assist U.S. public companies in avoiding the long arm of Sarbanes-Oxley.
For the sake of your company and the sake of not being labeled by your board as potentially ``trying different things and smoking funny things,'' implement this basic plan.
New York attorney Sean Hayes leads the International Corporate Practice Group at Joowon Law Firm, one of Korea's largest firms. He formerly worked for the Constitutional Court of Korea and as a professor of constitutional and contract law. He may be contacted at http://www.thekoreanlawblog.com/
or at SeanHayes@jwonlaw.com.
The column by Sean Hayes appears in the Korea Times and can be found HERE.
September 25, 2009
Back to Park Chun-Hee
Korea Times
September 18, 2009
by Sean C. Hayes (Host of this blog)
This past week, Korea and my practice group lost a large multinational company to Hong Kong.
The client, who first hired a business consultant to conduct research on where to establish a regional headquarters, chose Hong Kong primarily based on the Index of Economic Freedom and its mention of Korea's: ``burdensome labor regulations'' and ``non-transparent rule making and law formulation; exclusionary social, political and business structures; and insufficient institutional checks and balances.''
Other negative implications included ``piracy of copyrighted works''; ``contracts … considered a matter of consensus''; and a ``justice system [that] can be inefficient and slow.''
These were contrasted, by the consultant, with Hong Kong's: ``flexible labor regulations''; ``foreign firms not seeing corruption as an obstacle to investment''; ``strongly protected'' contracts; a ``legal system [that] is transparent''; and the emphatic mention that ``foreign capital receives domestic treatment, and foreign investment is strongly encouraged.''
The consultant, based in the United Kingdom, advised the company to establish the regional headquarters in Hong Kong and forgo Korea and Japan. I don't agree with the consultant's conclusion, but most of his and the indexes comments are sound.
The company, surprised by the ``labor inflexibility'' and ``anti-foreign capital sentiment,'' requested an overview of Korean labor law and basic investment climate. The conference call led to a mention of the Ssangyong Motors fiasco ― an embarrassment that will have a lasting impact on investment sentiment for years to come.
Koreans and long-time foreign residents are tired of being held hostage by a radical liberal minority that is dedicated to returning Korea to its pre-industrialized past.
The present administration has proposed a bold step forward for Korea, but it is shackled by an effective, yet very small, radical liberal minority that seems more dedicated to moving Korea back to the ages where it was a sleepy backwater agricultural-based society envious of the wealth of the Philippines.
Back to the time when Korean construction companies were not world leaders, but were so lacking in skills that most major construction projects domestically were performed by foreign laborers and contractors. Back to the time when the largest Korean exports were not electrical equipment and autos, but humans and wigs.
Back to the time when the nation's traditional liquor soju was bought not by the bottle, but by the shot. Back to the time when sleeping on the street was not a Friday pastime, but a necessity.
Many of us that are at the forefront of this fight for foreign direct investment (FDI) are dismayed when we see this radical liberal minority's ability to manipulate the population into believing their anti-American, anti-free trade, anti-foreign capital, and pro-militant labor policies and often wish for a return to the time when the Park Chung-hee administration was not so willing to consider this as a mere sign of a vibrant democracy, but a sign, as it may be, of infiltration by North Korea into these radical liberal parties.
Sean Hayes leads the International Corporate Practice Group at Joowon Law Firm, one of Korea's largest. He formerly worked for the Constitutional Court of Korea and as a professor of constitutional and contract law. He may be contacted at www.thekoreanlawblog.com or at SeanHayes@jwonlaw.com. The views expressed in the above article are the author's own and do not reflect the editorial policy of The Korea Times.
The column by Sean Hayes appears in the Korea Times and can be found HERE.
September 18, 2009
by Sean C. Hayes (Host of this blog)
This past week, Korea and my practice group lost a large multinational company to Hong Kong.
The client, who first hired a business consultant to conduct research on where to establish a regional headquarters, chose Hong Kong primarily based on the Index of Economic Freedom and its mention of Korea's: ``burdensome labor regulations'' and ``non-transparent rule making and law formulation; exclusionary social, political and business structures; and insufficient institutional checks and balances.''
Other negative implications included ``piracy of copyrighted works''; ``contracts … considered a matter of consensus''; and a ``justice system [that] can be inefficient and slow.''
These were contrasted, by the consultant, with Hong Kong's: ``flexible labor regulations''; ``foreign firms not seeing corruption as an obstacle to investment''; ``strongly protected'' contracts; a ``legal system [that] is transparent''; and the emphatic mention that ``foreign capital receives domestic treatment, and foreign investment is strongly encouraged.''
The consultant, based in the United Kingdom, advised the company to establish the regional headquarters in Hong Kong and forgo Korea and Japan. I don't agree with the consultant's conclusion, but most of his and the indexes comments are sound.
The company, surprised by the ``labor inflexibility'' and ``anti-foreign capital sentiment,'' requested an overview of Korean labor law and basic investment climate. The conference call led to a mention of the Ssangyong Motors fiasco ― an embarrassment that will have a lasting impact on investment sentiment for years to come.
Koreans and long-time foreign residents are tired of being held hostage by a radical liberal minority that is dedicated to returning Korea to its pre-industrialized past.
The present administration has proposed a bold step forward for Korea, but it is shackled by an effective, yet very small, radical liberal minority that seems more dedicated to moving Korea back to the ages where it was a sleepy backwater agricultural-based society envious of the wealth of the Philippines.
Back to the time when Korean construction companies were not world leaders, but were so lacking in skills that most major construction projects domestically were performed by foreign laborers and contractors. Back to the time when the largest Korean exports were not electrical equipment and autos, but humans and wigs.
Back to the time when the nation's traditional liquor soju was bought not by the bottle, but by the shot. Back to the time when sleeping on the street was not a Friday pastime, but a necessity.
Many of us that are at the forefront of this fight for foreign direct investment (FDI) are dismayed when we see this radical liberal minority's ability to manipulate the population into believing their anti-American, anti-free trade, anti-foreign capital, and pro-militant labor policies and often wish for a return to the time when the Park Chung-hee administration was not so willing to consider this as a mere sign of a vibrant democracy, but a sign, as it may be, of infiltration by North Korea into these radical liberal parties.
Sean Hayes leads the International Corporate Practice Group at Joowon Law Firm, one of Korea's largest. He formerly worked for the Constitutional Court of Korea and as a professor of constitutional and contract law. He may be contacted at www.thekoreanlawblog.com or at SeanHayes@jwonlaw.com. The views expressed in the above article are the author's own and do not reflect the editorial policy of The Korea Times.
The column by Sean Hayes appears in the Korea Times and can be found HERE.
September 19, 2009
Koreans Saved Wall Street
Korea Times
September 18, 2009
by Sean C. Hayes (Host of this blog)
Ok, maybe not, but foreign direct investment (FDI) and other investments by domestic and foreign businesses have contributed to saving the American economy.
Woori Finance Private Equity Fund and Kumho Investment Bank led a consortium that bought the AIG Building, the largest building in lower Manhattan and the fifth largest in New York City.
The building, which at the height of the real estate boom was valued at $1 billion, is presently valued, according to industry sources, at around $400 million. The 66-floor-tall Gothic behemoth completed in 1932 is destined to be a profitable lower Manhattan landmark for years to come.
Korean companies have also invested heavily in the U.S. auto and electronics markets through manufacturing and distribution outlets. These and other investments by foreign businesses are stimulated by the business friendly American micro- and macro-economic environment.
This environment is well reflected in most noted economic freedom indexes and the fact that year-after-year America is the number one destination for FDI.
America's economy will be saved by this business friendly environment that motivates the international and domestic community of investors to consider America as a healthy destination for their capital.
Korean companies big and small have changed their mindset with regard to outbound FDI. Korean companies, since WWII have looked abroad for destinations for their products.
In recent years, however, many Korean conglomerates and even small and medium enterprises (SMEs) have shunned Korea investment opportunities in favor of foreign investment, thus, diverting their focus from export destinations to FDI destinations. Many of these Korean businesses have chosen the U.S. and other business-friendly destinations.
Foreign investors have also decreased their exposure to the Korean economy in favor of more business-friendly, lower-cost, and higher-growth economies.
The present astute Korean administration has realized this phenomenon and, thus, has vowed to increase FDI and stimulate growth through business and foreign capital friendly initiatives, but because of a vocal and powerful radical-liberal minority most of the reform efforts have either stalled or been amended to the point of uselessness.
All that is left is an administration hell-bent on stimulating growth through infrastructure spending and exports.
The administration must return to its bold roots and cut taxes, streamline government, decrease the regulatory burden on businesses, and implement its other noted progressive initiates that will allow this nation to grow through local and foreign investment.
However, the only way for this administration to get its initiatives off the ground is to motivate the mainstream to fight this radical liberal minority.
It's a minority, we all realize, that is mobilized by Marxist radicalism and is determined not to work within the political system, but to destroy the very system that created our present prosperity.
America is being saved by the world and American investors; I fear that if Korea doesn't change to become friendlier to foreign and domestic capital no one will be left to save this once proud and vibrant Asian Tiger.
Sean Hayes leads the International Corporate Practice Group at one of Korea's leading law firms. He formerly worked for the Constitutional Court of Korea and as a professor of constitutional and contract law. He may be contacted at http://www.thekoreanlawblog.com/ at SeanHayes@jwonlaw.com.
The column by Sean Hayes appears in the Korea Times and can be found HERE.
September 18, 2009
by Sean C. Hayes (Host of this blog)
Ok, maybe not, but foreign direct investment (FDI) and other investments by domestic and foreign businesses have contributed to saving the American economy.
Woori Finance Private Equity Fund and Kumho Investment Bank led a consortium that bought the AIG Building, the largest building in lower Manhattan and the fifth largest in New York City.
The building, which at the height of the real estate boom was valued at $1 billion, is presently valued, according to industry sources, at around $400 million. The 66-floor-tall Gothic behemoth completed in 1932 is destined to be a profitable lower Manhattan landmark for years to come.
Korean companies have also invested heavily in the U.S. auto and electronics markets through manufacturing and distribution outlets. These and other investments by foreign businesses are stimulated by the business friendly American micro- and macro-economic environment.
This environment is well reflected in most noted economic freedom indexes and the fact that year-after-year America is the number one destination for FDI.
America's economy will be saved by this business friendly environment that motivates the international and domestic community of investors to consider America as a healthy destination for their capital.
Korean companies big and small have changed their mindset with regard to outbound FDI. Korean companies, since WWII have looked abroad for destinations for their products.
In recent years, however, many Korean conglomerates and even small and medium enterprises (SMEs) have shunned Korea investment opportunities in favor of foreign investment, thus, diverting their focus from export destinations to FDI destinations. Many of these Korean businesses have chosen the U.S. and other business-friendly destinations.
Foreign investors have also decreased their exposure to the Korean economy in favor of more business-friendly, lower-cost, and higher-growth economies.
The present astute Korean administration has realized this phenomenon and, thus, has vowed to increase FDI and stimulate growth through business and foreign capital friendly initiatives, but because of a vocal and powerful radical-liberal minority most of the reform efforts have either stalled or been amended to the point of uselessness.
All that is left is an administration hell-bent on stimulating growth through infrastructure spending and exports.
The administration must return to its bold roots and cut taxes, streamline government, decrease the regulatory burden on businesses, and implement its other noted progressive initiates that will allow this nation to grow through local and foreign investment.
However, the only way for this administration to get its initiatives off the ground is to motivate the mainstream to fight this radical liberal minority.
It's a minority, we all realize, that is mobilized by Marxist radicalism and is determined not to work within the political system, but to destroy the very system that created our present prosperity.
America is being saved by the world and American investors; I fear that if Korea doesn't change to become friendlier to foreign and domestic capital no one will be left to save this once proud and vibrant Asian Tiger.
Sean Hayes leads the International Corporate Practice Group at one of Korea's leading law firms. He formerly worked for the Constitutional Court of Korea and as a professor of constitutional and contract law. He may be contacted at http://www.thekoreanlawblog.com/ at SeanHayes@jwonlaw.com.
The column by Sean Hayes appears in the Korea Times and can be found HERE.
September 2, 2009
IPR Protection in Korea
I recently was directed to an excellent source for information on intellectual property rights under Korean law. The U.S. Commercial Service Korea, a part of the U.S. Department of Commerce, has created and "IPR Toolkit" for Korea.
The Toolkit contains the best basic explanation, in English, available on Korean IPR. The pages can be found HERE.
The U.S. Commercial Services, correctly empathically states that "registering your IPR is your best strategy" and notes that "[f]oreign applicants are required to retain a licensed local attorney in order to prepare applications in Korean and to conduct necessary follow-up correspondence locally."
Word to the wise, checkout the site and contact an attorney (preferably my firm) to register your IPR and if you are engaged in a Joint Venture make sure your attorney also contractually protects your IPR within the JVC.
SeanHayes@jwonlaw.com
The Toolkit contains the best basic explanation, in English, available on Korean IPR. The pages can be found HERE.
The U.S. Commercial Services, correctly empathically states that "registering your IPR is your best strategy" and notes that "[f]oreign applicants are required to retain a licensed local attorney in order to prepare applications in Korean and to conduct necessary follow-up correspondence locally."
Word to the wise, checkout the site and contact an attorney (preferably my firm) to register your IPR and if you are engaged in a Joint Venture make sure your attorney also contractually protects your IPR within the JVC.
SeanHayes@jwonlaw.com
August 27, 2009
Joowon Law
Sean Hayes, a New York Attorney, has joined Joowon Law and will head the International Corporate Practice Group.
JOOWON
2nd and 6th Floor Construction Guarantee Center
71-2 Nonhyun-Dong, Gangnam-Gu
Seoul, Republic of Korea 135-701
Tel: +82-2-6710-0300
Fax: +82-2-6710-0310
Cell: +82 -10-8981-9518 (Sean C. Hayes esq.)
E-Mail: SeanHayes@jwonlaw.com
Joowon’s attorneys have been at the forefront of the Korean legal system for the past four decades. We are proud to be one of Korea’s most sophisticated full-service law firms with a dedication to employing only the brightest, most experienced, and most connected Korean and international attorneys.
Our attorney rosters includes National Assembly members, ministers, attorney generals, judges, prosecutors, in-house counsel, law professors, attorneys from international law firms, senior government officials, senior military attorneys, government attorneys, accountants, and custom, immigration and patent professionals.
Fortune 500 companies, Korean conglomerates, SMEs, and international and domestic entrepreneurs have placed their trust in Joowon because of our reputation for providing first-rate cost-effective representation in the most sophisticated Korean legal matters.
Practice Areas:
Full-Service Law Firm. Administrative, Ant-trust, Arbitration and Litigation, Aviation, Banking, Bankruptcy and Reorganization, Capital Markets, Chinese Law (Hong Kong Office), Civil Litigation, Constitutional Law, Construction, Corporate, Foreign Investment, Franchise, Health Care, Immigration, Intellectual Property, International Trade, Labor and Employment, Market Entry, Maritime Law and Marine Industry, Mergers and Acquisition, Product Liability, Joint Venture, Real Estate and Property Development, Taxation, Telecommunications, White-Collar Crime.
JOOWON
2nd and 6th Floor Construction Guarantee Center
71-2 Nonhyun-Dong, Gangnam-Gu
Seoul, Republic of Korea 135-701
Tel: +82-2-6710-0300
Fax: +82-2-6710-0310
Cell: +82 -10-8981-9518 (Sean C. Hayes esq.)
E-Mail: SeanHayes@jwonlaw.com
Joowon’s attorneys have been at the forefront of the Korean legal system for the past four decades. We are proud to be one of Korea’s most sophisticated full-service law firms with a dedication to employing only the brightest, most experienced, and most connected Korean and international attorneys.
Our attorney rosters includes National Assembly members, ministers, attorney generals, judges, prosecutors, in-house counsel, law professors, attorneys from international law firms, senior government officials, senior military attorneys, government attorneys, accountants, and custom, immigration and patent professionals.
Fortune 500 companies, Korean conglomerates, SMEs, and international and domestic entrepreneurs have placed their trust in Joowon because of our reputation for providing first-rate cost-effective representation in the most sophisticated Korean legal matters.
Practice Areas:
Full-Service Law Firm. Administrative, Ant-trust, Arbitration and Litigation, Aviation, Banking, Bankruptcy and Reorganization, Capital Markets, Chinese Law (Hong Kong Office), Civil Litigation, Constitutional Law, Construction, Corporate, Foreign Investment, Franchise, Health Care, Immigration, Intellectual Property, International Trade, Labor and Employment, Market Entry, Maritime Law and Marine Industry, Mergers and Acquisition, Product Liability, Joint Venture, Real Estate and Property Development, Taxation, Telecommunications, White-Collar Crime.
July 7, 2009
Asia Risk: KIKO in Korea
Quote from the Cover Story of the May 2009 issue of Asia Risk Magazine KO-ed in Korea
Sean Hayes, foreign legal consultant with Seoul-based Ahnse Law - which is representing around 50 plaintiffs - says that the firm's key arguments will all be around mis-selling. Hayes makes a point of saying that Ahnse is not a typical plaintiffs' lawyer - the firm's clients are often foreign companies or large banks that need to defend themselves in Korea - and he himself had misgivings about the cases when Ahnse accepted them. "When I first looked at this, my general attitude was that these are private contracts and I felt it was not the kind of case that a business law firm should be taking. But then when you start to look into it and find out what was happening here, you start to get a feeling that the banks were taking advantage of people," he says.
In some cases, Hayes adds, clients were asked to sign English-language contracts, despite being unable to speak English. He recalls sitting down with one plaintiff: "He pointed at a word and asked what it meant. The word was 'buyer'. He didn't even know what 'buyer' meant."
In other cases, no contract was sent - the only documentation the client received was the trade confirmation. Some companies apparently felt that getting loans in the future was conditional on buying the kiko. Others were rushed into the decision on the basis of a quick, five-minute sales pitch. Most of the companies were too small to have a derivatives governance structure - typically, the authority to go ahead with the trade rested with one person, who was the business owner or the person looking after the company's finances, he says.
Generally speaking, Hayes says banks failed to understand their clients' needs or to fully explain the downside risk the company was taking: "A lot of people are presenting this as an arm's-length contract between a buyer and a seller. But a bank is not just a seller - more than that, they are supposed to be selling you products you need. In these cases, clients were told that the product was going to make their company safer. That's what they were sold. But it's not what they bought. What they bought was a very, very risky product.
July 1, 2009
The Act on the Treatment of Foreigners in Korea
The Act on the Treatment of Foreigners in Korea may be found HERE.
May 14, 2009
Sean Hayes in New York Times and Hankyung Daily (Business Newspaper)
Sean Hayes appeared in numerous news sources this week discussing former President Roh. The most interesting appear below.
March 28, 2009
Testing the Con. Court Tests
By Sean Hayes (Korea Times 3/26/09
In my column, last week, I discussed a case at the Constitutional Court of Korea considering the ban on night protests. The article detailed the test used for time, place, and manner regulation of speech and assembly in the United States.
As I mentioned in the column, in the United States, a law concerning assembly will be upheld if it is a reasonable time, place and manner regulation.A reasonable time, place, and manner regulation is content-neutral, has an important government interest, is narrowly tailored to achieve the interest, and provides viable alternative channels for communication.
The test was developed in the United States and has been adopted, in part, by many non-American courts.The regulation, in Korea, would likely meet the American test.
However, in Korea, the law may be analyzed in a different manner because of notable differences in the text of the Korean Constitution.All too often, Korean scholars fail to give credence to the text of the Constitution and blindly hammer American, German, Japanese, and French legal tests into a uniquely Korean document with a uniquely Korean history behind the text.
This not only leads to a lack of understanding of the historically developed freedoms and rights evident through interpretation of the text of the Korean Constitution, but also creates a situation that leads to the destruction of the institutional integrity of courts. Courts receive power to interpret and declare laws unconstitutional through the Constitution.
If we allow courts to adopt foreign constitutional law, with no foundation within the text of the Korean Constitution, we are then simply allowing courts to have powers not granted through the Constitution, and thus usurp powers from other branches or the people. To begin our analyses we should look to the text of the Korean Constitution.
The Constitution guarantees the freedom of assembly by noting in Article 21 (1) that: ``All citizens shall enjoy freedom of speech and the press, and freedom of assembly and association.'' The clause creates the freedom of speech, press, assembly and association in terms that resemble the U.S. Constitution.
The Korean Constitution provides additional protection of these freedoms by noting in Article 21 (2) that: ``Licensing or censorship of speech and the press, and licensing of assembly and association shall not be recognized.'' The Korean word that was translated into the English word ``licensing'' refers to the act of allowing one to do an act only after the act is authorized by a controlling authority.If literally interpreted, the clause may be considered unique when considering the freedom of assembly in other nations.
Does the clause mean that the government can't require the application for a permit prior to an assembly? If so, Korea would be the only country that I know of, that doesn't have a permit system for at least some assemblies.Thus, I think it is reasonable to conclude that the term assembly, must not mean simply assembly, but must mean a particular type of assembly. The word in Korean that is used for the English word ``assembly'' refers more exactly to a gathering or meeting.
The word, in of itself, may refer to a ``peaceful gathering,'' since the word naturally is used only for gatherings that are peaceful. Thus, a possible interpretation of the Article 21 (2) is that all peaceful gatherings are absolutely protected and thus no prior authorization can be required for peaceful gatherings.
Article 21 (4) also limits the scope of protected assemblies. The article notes that: ``Neither speech nor the press shall violate the honor or rights of other persons nor undermine public morals or social ethics.'' An assembly, naturally has elements of speech as part of the assembly, therefore a logical reading would be that assemblies can not ``violate the honor or rights of other persons nor undermine public morals or social ethics.''
Therefore, a reasonable reading is that all ``peaceful gathering'' that don't ``violate the honor or rights of other persons nor undermine public morals or social ethics'' are absolutely protected.The key problem that the Constitution still doesn't seem to answer is whether the government has the power, prior to the action of holding an assembly to require a permit and whether certain blanket prohibitions of assemblies at certain times and places is permitted under the Constitution.
It seems in all likelihood from the history of the Korean Constitution and Constitutional Court case law that ``prior restraint'' of speech and assembly that may damage the rights and freedoms may be allowed when appropriate alternative channels are available.
It will be interesting to see if the Constitutional Court will apply to this case the American ``clear and present danger test,'' other tests, or choose to rely, as is often the case, on the overly used and under-analyzed Article 37 (2) catchall balance to either declare the law banning night protests constitutional or unconstitutional.
Sean Hayes is a New York attorney working in Seoul with one of Korea's leading law firms. He formerly worked for the Constitutional Court of Korea for over six years and as a law faculty member for over four years. He can be reached at www.thekoreanlawblog.com.
In my column, last week, I discussed a case at the Constitutional Court of Korea considering the ban on night protests. The article detailed the test used for time, place, and manner regulation of speech and assembly in the United States.
As I mentioned in the column, in the United States, a law concerning assembly will be upheld if it is a reasonable time, place and manner regulation.A reasonable time, place, and manner regulation is content-neutral, has an important government interest, is narrowly tailored to achieve the interest, and provides viable alternative channels for communication.
The test was developed in the United States and has been adopted, in part, by many non-American courts.The regulation, in Korea, would likely meet the American test.
However, in Korea, the law may be analyzed in a different manner because of notable differences in the text of the Korean Constitution.All too often, Korean scholars fail to give credence to the text of the Constitution and blindly hammer American, German, Japanese, and French legal tests into a uniquely Korean document with a uniquely Korean history behind the text.
This not only leads to a lack of understanding of the historically developed freedoms and rights evident through interpretation of the text of the Korean Constitution, but also creates a situation that leads to the destruction of the institutional integrity of courts. Courts receive power to interpret and declare laws unconstitutional through the Constitution.
If we allow courts to adopt foreign constitutional law, with no foundation within the text of the Korean Constitution, we are then simply allowing courts to have powers not granted through the Constitution, and thus usurp powers from other branches or the people. To begin our analyses we should look to the text of the Korean Constitution.
The Constitution guarantees the freedom of assembly by noting in Article 21 (1) that: ``All citizens shall enjoy freedom of speech and the press, and freedom of assembly and association.'' The clause creates the freedom of speech, press, assembly and association in terms that resemble the U.S. Constitution.
The Korean Constitution provides additional protection of these freedoms by noting in Article 21 (2) that: ``Licensing or censorship of speech and the press, and licensing of assembly and association shall not be recognized.'' The Korean word that was translated into the English word ``licensing'' refers to the act of allowing one to do an act only after the act is authorized by a controlling authority.If literally interpreted, the clause may be considered unique when considering the freedom of assembly in other nations.
Does the clause mean that the government can't require the application for a permit prior to an assembly? If so, Korea would be the only country that I know of, that doesn't have a permit system for at least some assemblies.Thus, I think it is reasonable to conclude that the term assembly, must not mean simply assembly, but must mean a particular type of assembly. The word in Korean that is used for the English word ``assembly'' refers more exactly to a gathering or meeting.
The word, in of itself, may refer to a ``peaceful gathering,'' since the word naturally is used only for gatherings that are peaceful. Thus, a possible interpretation of the Article 21 (2) is that all peaceful gatherings are absolutely protected and thus no prior authorization can be required for peaceful gatherings.
Article 21 (4) also limits the scope of protected assemblies. The article notes that: ``Neither speech nor the press shall violate the honor or rights of other persons nor undermine public morals or social ethics.'' An assembly, naturally has elements of speech as part of the assembly, therefore a logical reading would be that assemblies can not ``violate the honor or rights of other persons nor undermine public morals or social ethics.''
Therefore, a reasonable reading is that all ``peaceful gathering'' that don't ``violate the honor or rights of other persons nor undermine public morals or social ethics'' are absolutely protected.The key problem that the Constitution still doesn't seem to answer is whether the government has the power, prior to the action of holding an assembly to require a permit and whether certain blanket prohibitions of assemblies at certain times and places is permitted under the Constitution.
It seems in all likelihood from the history of the Korean Constitution and Constitutional Court case law that ``prior restraint'' of speech and assembly that may damage the rights and freedoms may be allowed when appropriate alternative channels are available.
It will be interesting to see if the Constitutional Court will apply to this case the American ``clear and present danger test,'' other tests, or choose to rely, as is often the case, on the overly used and under-analyzed Article 37 (2) catchall balance to either declare the law banning night protests constitutional or unconstitutional.
Sean Hayes is a New York attorney working in Seoul with one of Korea's leading law firms. He formerly worked for the Constitutional Court of Korea for over six years and as a law faculty member for over four years. He can be reached at www.thekoreanlawblog.com.
March 23, 2009
Ban on Night Protests
By Sean Hayes (Korea Times 03/20/09)
The Constitutional Court heard oral arguments, last week, in a landmark case concerning the right to assembly. The case will have a lasting impact on the government's ability to handle serious difficulties ― violence, disturbance of the peace and the destruction of property by an oft-violent liberal radical minority.
The case concerns a Korean law prohibiting protests at night. Some protesters during last summer's rallies against the importation of U.S. beef and other demonstrations were prosecuted under the law.
The law allows violators to receive a sentence of up to one year in jail or a 1-million-won fine. The facial purpose of the law is to prevent protests from causing injuries and damage to property. As most of us know, many peaceful protests in Korea have turned violent at night.
In the not so distant past, protests over the importation of U.S. beef led to, amongst other things, numerous injuries to police officers, the destruction of public property, Seoul-wide traffic congestion and lost revenues for businesses.
Based on the request of a liberal political activist, the Seoul Central District Court referred a case concerning a prosecution, under the law, to the Constitutional Court for adjudication. The district court, in its petition to the Constitutional Court, stated that: ``The Constitution basically guarantees outdoor protests without time restrictions.
Therefore, the law banning nighttime rallies should have been applied to cases that can apparently destabilize society. But it is now being too generally applied.'' The Korean Constitution declares in Article 21 (1) that: ``All citizens shall enjoy freedom of speech and the press, and freedom of assembly and association.'' Article 21 (2) follows by noting that: ``Licensing or censorship of speech and the press and licensing of assembly and association shall not be recognized.''
The language of the Constitution seems to absolutely guarantee that ``licensing of assembly and association'' is banned. However, as with the First Amendment to the U.S. Constitution, absolute language doesn't necessarily guarantee that courts would not impose limits on rights and freedoms.
For example, in the United States, ``reasonable time, place, and manner'' regulations on speech, assembly, and association are upheld by the courts.
For a law to be considered a reasonable time, place and manner, regulation of speech and assembly, first the law must be ``content-neutral.'' A content-neutral law is one that doesn't regulate a specific message. The night protest ban, in the United States, would be considered content-neutral. It prohibits facially and in practice all protests at night.
Secondly, the law must serve an ``important government interest.'' In this case, the government would contend and would likely prevail, in the United States, with the contention that the important government interest is maintaining peace and security. Laws that prohibited loud noise at night, focused residential picketing, protesting with close proximity to abortion clinics, and completely blocking roads or sidewalks were upheld.
Thirdly, the law must be ``narrowly tailored'' to serve the important government interest. This may pose a difficulty for the government in the United States. The law may be successfully labeled overbroad, since many night protests are peaceful and it may be possible to determine which protests will be violent. Thus, it may be successfully contended that only those protests that may damage the peace and security that will be held at night may be prohibited, thus an absolute ban on night protests is an overbroad burden on the freedom of assembly and hence not narrowly tailored.
The government, however, may successfully argue the reality that it is necessary to absolutely ban night protests because of the scale of the protests at night, the high likelihood of violence and the ready availability of numerous viable alternative channels.
Lastly, there must be viable alternative channels of communication. Daytime protests, weekend protests and the numerous other forms of protest in the United States would be likely held to provide ample alternative channels for communication.
This law in Korea hopefully is analyzed through a similar-type test and not the overused and under-analyzed Article 37 (2). The article states that: ``The freedoms and rights of citizens may be restricted by act only when necessary for national security, the maintenance of law and order, or for public welfare. Even when such restriction is imposed, no essential aspect of the freedom or right shall be violated.''
The article is too often used as a tool to balance away rights and freedoms with no more than a cursory explanation for the reason, with little basis in the application of logically applied and developed legal tests and principles based on the text of the Korean Constitution.
Sean Hayes is a New York attorney working in Seoul with one of Korea's leading law firms. He formerly worked for the Constitutional Court of Korea and as a law faculty member. He can be reached at www.thekoreanlawblog.com.
The Constitutional Court heard oral arguments, last week, in a landmark case concerning the right to assembly. The case will have a lasting impact on the government's ability to handle serious difficulties ― violence, disturbance of the peace and the destruction of property by an oft-violent liberal radical minority.
The case concerns a Korean law prohibiting protests at night. Some protesters during last summer's rallies against the importation of U.S. beef and other demonstrations were prosecuted under the law.
The law allows violators to receive a sentence of up to one year in jail or a 1-million-won fine. The facial purpose of the law is to prevent protests from causing injuries and damage to property. As most of us know, many peaceful protests in Korea have turned violent at night.
In the not so distant past, protests over the importation of U.S. beef led to, amongst other things, numerous injuries to police officers, the destruction of public property, Seoul-wide traffic congestion and lost revenues for businesses.
Based on the request of a liberal political activist, the Seoul Central District Court referred a case concerning a prosecution, under the law, to the Constitutional Court for adjudication. The district court, in its petition to the Constitutional Court, stated that: ``The Constitution basically guarantees outdoor protests without time restrictions.
Therefore, the law banning nighttime rallies should have been applied to cases that can apparently destabilize society. But it is now being too generally applied.'' The Korean Constitution declares in Article 21 (1) that: ``All citizens shall enjoy freedom of speech and the press, and freedom of assembly and association.'' Article 21 (2) follows by noting that: ``Licensing or censorship of speech and the press and licensing of assembly and association shall not be recognized.''
The language of the Constitution seems to absolutely guarantee that ``licensing of assembly and association'' is banned. However, as with the First Amendment to the U.S. Constitution, absolute language doesn't necessarily guarantee that courts would not impose limits on rights and freedoms.
For example, in the United States, ``reasonable time, place, and manner'' regulations on speech, assembly, and association are upheld by the courts.
For a law to be considered a reasonable time, place and manner, regulation of speech and assembly, first the law must be ``content-neutral.'' A content-neutral law is one that doesn't regulate a specific message. The night protest ban, in the United States, would be considered content-neutral. It prohibits facially and in practice all protests at night.
Secondly, the law must serve an ``important government interest.'' In this case, the government would contend and would likely prevail, in the United States, with the contention that the important government interest is maintaining peace and security. Laws that prohibited loud noise at night, focused residential picketing, protesting with close proximity to abortion clinics, and completely blocking roads or sidewalks were upheld.
Thirdly, the law must be ``narrowly tailored'' to serve the important government interest. This may pose a difficulty for the government in the United States. The law may be successfully labeled overbroad, since many night protests are peaceful and it may be possible to determine which protests will be violent. Thus, it may be successfully contended that only those protests that may damage the peace and security that will be held at night may be prohibited, thus an absolute ban on night protests is an overbroad burden on the freedom of assembly and hence not narrowly tailored.
The government, however, may successfully argue the reality that it is necessary to absolutely ban night protests because of the scale of the protests at night, the high likelihood of violence and the ready availability of numerous viable alternative channels.
Lastly, there must be viable alternative channels of communication. Daytime protests, weekend protests and the numerous other forms of protest in the United States would be likely held to provide ample alternative channels for communication.
This law in Korea hopefully is analyzed through a similar-type test and not the overused and under-analyzed Article 37 (2). The article states that: ``The freedoms and rights of citizens may be restricted by act only when necessary for national security, the maintenance of law and order, or for public welfare. Even when such restriction is imposed, no essential aspect of the freedom or right shall be violated.''
The article is too often used as a tool to balance away rights and freedoms with no more than a cursory explanation for the reason, with little basis in the application of logically applied and developed legal tests and principles based on the text of the Korean Constitution.
Sean Hayes is a New York attorney working in Seoul with one of Korea's leading law firms. He formerly worked for the Constitutional Court of Korea and as a law faculty member. He can be reached at www.thekoreanlawblog.com.
March 5, 2009
Opening Door to Legal Change
By Sean Hayes (Korea Times 03/05/2009)
On Monday, the National Assembly passed a bill that permits law firms from countries with free trade agreements with Korea to operate ``foreign law consultancy businesses'' and individuals from these countries to be registered as ``foreign legal consultants.''
At present, the best estimate is that over 400 foreign attorneys work and reside in Korea. The vast majority are Koreans. These attorneys work for law firms, accounting firms, and corporations. Many of these attorneys play lead and/or vital roles in representing Korean and non-Korean clients in a vast array of matters concerning Korean and international legal matters.
These attorneys are not technically ``attorneys,'' can't be paid directly by clients, normally don't sign work product, and can't appear in court.But they do play vital functions for clients and Korean firms by bridging the gap between the high expectations of clients and the often low client service skills of Korean attorneys, adding needed specialization to firms, and improving, overall, the quality of work products.
Korea, prior to this bill, had no formal regulation governing these attorneys with the exception of the Attorney-at-Law Act that prohibits the unauthorized practice of law. To my knowledge, no foreign attorney has been prosecuted for the unauthorized practice of law.This bill, passed on Monday, is part of the three-stage process for the opening of the Korean legal services market. The three-stages were formulated and incorporated into the Korea-U.S. Free Trade Agreement (KORUS FTA).
In the first-stage foreign firms are permitted to operate foreign legal consultancy businesses, but are not permitted to hire or partner with Korean attorneys, CPAs, patent attorneys or other like professionals. These ``consultancy businesses'' may only advise clients on issues concerning international law and the laws of the nation the business is from. The bill also permits and potentially mandates foreign attorneys to be registered as ``foreign legal consultants.''
These attorneys must have worked in a foreign jurisdiction for three years. If the attorney has already been employed in Korea for over two years the attorney is only required to have worked in a foreign jurisdiction for one year. A large percentage of foreign attorneys, presently working in Korea, don't meet this requirement.
The first-stage will lead to no noticeable change in the legal market in Korea. The stage is only intended to give Korean firms and attorneys the needed push toward improved competitiveness and few foreign attorneys and firms will choose to register, since there is no noticeable benefit to registration.In the second-stage, which is scheduled for 2011, foreign law firms are permitted to enter into agreements with Korean law firms and in the third-stage, which is scheduled for 2016, foreign law firms could establish joint-ventures with Korean law firms and hire Korean attorneys.
Korea is a dynamic nation with a future that is hard to predict. The third-stage of this plan will likely meet fierce resistance from the Korean bar. If Korea wishes to truly become a part of the global community it must shed the blanket of protectionism and open its service sectors and all other sectors to competition from abroad.
Sean Hayes is a New York attorney working in Seoul with one of Korea's leading law firms. He formerly worked for the Constitutional Court of Korea and as a law faculty member. He can be reached at www.thekoreanlawblog.com.
On Monday, the National Assembly passed a bill that permits law firms from countries with free trade agreements with Korea to operate ``foreign law consultancy businesses'' and individuals from these countries to be registered as ``foreign legal consultants.''
At present, the best estimate is that over 400 foreign attorneys work and reside in Korea. The vast majority are Koreans. These attorneys work for law firms, accounting firms, and corporations. Many of these attorneys play lead and/or vital roles in representing Korean and non-Korean clients in a vast array of matters concerning Korean and international legal matters.
These attorneys are not technically ``attorneys,'' can't be paid directly by clients, normally don't sign work product, and can't appear in court.But they do play vital functions for clients and Korean firms by bridging the gap between the high expectations of clients and the often low client service skills of Korean attorneys, adding needed specialization to firms, and improving, overall, the quality of work products.
Korea, prior to this bill, had no formal regulation governing these attorneys with the exception of the Attorney-at-Law Act that prohibits the unauthorized practice of law. To my knowledge, no foreign attorney has been prosecuted for the unauthorized practice of law.This bill, passed on Monday, is part of the three-stage process for the opening of the Korean legal services market. The three-stages were formulated and incorporated into the Korea-U.S. Free Trade Agreement (KORUS FTA).
In the first-stage foreign firms are permitted to operate foreign legal consultancy businesses, but are not permitted to hire or partner with Korean attorneys, CPAs, patent attorneys or other like professionals. These ``consultancy businesses'' may only advise clients on issues concerning international law and the laws of the nation the business is from. The bill also permits and potentially mandates foreign attorneys to be registered as ``foreign legal consultants.''
These attorneys must have worked in a foreign jurisdiction for three years. If the attorney has already been employed in Korea for over two years the attorney is only required to have worked in a foreign jurisdiction for one year. A large percentage of foreign attorneys, presently working in Korea, don't meet this requirement.
The first-stage will lead to no noticeable change in the legal market in Korea. The stage is only intended to give Korean firms and attorneys the needed push toward improved competitiveness and few foreign attorneys and firms will choose to register, since there is no noticeable benefit to registration.In the second-stage, which is scheduled for 2011, foreign law firms are permitted to enter into agreements with Korean law firms and in the third-stage, which is scheduled for 2016, foreign law firms could establish joint-ventures with Korean law firms and hire Korean attorneys.
Korea is a dynamic nation with a future that is hard to predict. The third-stage of this plan will likely meet fierce resistance from the Korean bar. If Korea wishes to truly become a part of the global community it must shed the blanket of protectionism and open its service sectors and all other sectors to competition from abroad.
Sean Hayes is a New York attorney working in Seoul with one of Korea's leading law firms. He formerly worked for the Constitutional Court of Korea and as a law faculty member. He can be reached at www.thekoreanlawblog.com.
KIKO on the Radio
Sean Hayes will be a guest on Korean Radio Station TBS EFM (101.3) at 7:33PM KST on March 3, 2009.
Sean will discuss KIKO (currency hedge) contracts. His firm is involved in the KIKO litigation in Korea. Sean Hayes prior to becoming an attorney worked as a stockbroker in New York.
Sean will discuss KIKO (currency hedge) contracts. His firm is involved in the KIKO litigation in Korea. Sean Hayes prior to becoming an attorney worked as a stockbroker in New York.
March 1, 2009
Protect Yourself from Bad Lawyers
By Sean Hayes (Korea Times 2/27/09)
Too many Korean and foreign attorneys working in Korea are performing legal work that is often to a level so low in quality that it must be considered the work of incompetent attorneys.Many of the biggest and most respected Korean law firms even have attorney competency issues.
Throughout much of the world, clients believe the reputation of the firm is the deciding factor in the quality of representation, since the top graduates choose to work for firms with the best reputation.
In Korea, many of the best attorneys have little interest in working for the largest and most respected law firms and many of the top firms hire attorneys that are far from the top of their trade.
Therefore, when hiring attorneys, choose attorneys, not firms. Many of the most “respected” firms amongst non-Korean clients, don’t have the best attorneys and even hire and retain incompetent attorneys, partners, management and staff, and many of the best don’t work for large firms.
I have seen my share of competency and professionalism issues while working within the legal community in Korea. In the past seven years, I have had the pleasure to work with some of the world’s best attorneys, and also many attorneys that should not been practicing law.
For example, one Korean managing partner at one of the largest law firms advised that a client who was facing significant time in jail to pray to God for assistance.
A foreign attorney working for one of the most respected law firms was caught plagiarizing nearly an entire opinion letter from a fellow attorney’s Web site.
One of the major Korean law firm’s corporate team staff member was appointed as a team leader, while he only had experience with litigation issues.
And one noted partner at a respected medium-size firm was caught frequently sleeping during $550-per-hour billed conference calls.
These and numerous other examples should lead clients to be very careful when retaining attorneys.
In Korea, attorney competency comes from high-level experience - not education. Nearly universally, the best attorneys in Korea are attorneys with this quality, and those with the most have usually worked for the government.
The majority of the top graduates from the Judicial Research and Training Institute are selected and choose to become judges, prosecutors or public servants. These experiences in government allow them to garner top-level work experience at a young age, obtain significant personal contacts in government and earn high respect among their peers.
Normally, these attorneys, when they leave government, will not choose to work for Korea’s largest law firms, and those who do are often not given prominent roles at the firm, or roles that include assisting non- Korean clients.
The same experience issues may be found among many foreign attorneys. Many working in Korea have only a rudimentary understanding of many of the unique aspects of the Korean legal system and the manner in which Koreans do business because of the experience of only working within law firms.
Few foreign attorneys have garnered the experience necessary to do anything more than proofread opinion letters, draft English contracts and advise on the most basic aspects of Korean legal issues.
Any legal team that you retain, therefore, should include an attorney who has significant experience working for government and a foreign attorney with a profound understanding of the uniqueness of the Korean legal system garnered from more than just law firm experience.
Sean Hayes is a New York attorney working in Seoul with one of Korea’s leading law firms. He formerly worked for the Constitutional Court of Korea and as a law faculty member. He can be reached at www.thekoreanlawblog.com.
Too many Korean and foreign attorneys working in Korea are performing legal work that is often to a level so low in quality that it must be considered the work of incompetent attorneys.Many of the biggest and most respected Korean law firms even have attorney competency issues.
Throughout much of the world, clients believe the reputation of the firm is the deciding factor in the quality of representation, since the top graduates choose to work for firms with the best reputation.
In Korea, many of the best attorneys have little interest in working for the largest and most respected law firms and many of the top firms hire attorneys that are far from the top of their trade.
Therefore, when hiring attorneys, choose attorneys, not firms. Many of the most “respected” firms amongst non-Korean clients, don’t have the best attorneys and even hire and retain incompetent attorneys, partners, management and staff, and many of the best don’t work for large firms.
I have seen my share of competency and professionalism issues while working within the legal community in Korea. In the past seven years, I have had the pleasure to work with some of the world’s best attorneys, and also many attorneys that should not been practicing law.
For example, one Korean managing partner at one of the largest law firms advised that a client who was facing significant time in jail to pray to God for assistance.
A foreign attorney working for one of the most respected law firms was caught plagiarizing nearly an entire opinion letter from a fellow attorney’s Web site.
One of the major Korean law firm’s corporate team staff member was appointed as a team leader, while he only had experience with litigation issues.
And one noted partner at a respected medium-size firm was caught frequently sleeping during $550-per-hour billed conference calls.
These and numerous other examples should lead clients to be very careful when retaining attorneys.
In Korea, attorney competency comes from high-level experience - not education. Nearly universally, the best attorneys in Korea are attorneys with this quality, and those with the most have usually worked for the government.
The majority of the top graduates from the Judicial Research and Training Institute are selected and choose to become judges, prosecutors or public servants. These experiences in government allow them to garner top-level work experience at a young age, obtain significant personal contacts in government and earn high respect among their peers.
Normally, these attorneys, when they leave government, will not choose to work for Korea’s largest law firms, and those who do are often not given prominent roles at the firm, or roles that include assisting non- Korean clients.
The same experience issues may be found among many foreign attorneys. Many working in Korea have only a rudimentary understanding of many of the unique aspects of the Korean legal system and the manner in which Koreans do business because of the experience of only working within law firms.
Few foreign attorneys have garnered the experience necessary to do anything more than proofread opinion letters, draft English contracts and advise on the most basic aspects of Korean legal issues.
Any legal team that you retain, therefore, should include an attorney who has significant experience working for government and a foreign attorney with a profound understanding of the uniqueness of the Korean legal system garnered from more than just law firm experience.
Sean Hayes is a New York attorney working in Seoul with one of Korea’s leading law firms. He formerly worked for the Constitutional Court of Korea and as a law faculty member. He can be reached at www.thekoreanlawblog.com.
February 25, 2009
Buy American Dance Goes On
by Sean Hayes (Korea Times 2/21/09)
The American stimulus bill is to be signed into law with a ``buy-American'' provision mandating that stimulus-funded programs only fund those that utilize U.S. manufactured goods.
Additionally, it makes it more difficult for banks, which received funds under the Troubled Assets Relief Program (TARP), to hire immigrants.
In order to appease free-trade Republicans, President Barack Obama pushed for language noting that the United States will honor its international agreements. The language doesn't change the effect this bill will have on the superpower and the world.
The United States is a country built on the notion of political and economic freedom. With vibrant and robust free market capitalism and a political system able to react quickly to changing dynamics, it has maintained one of the most prosperous societies the world has ever known.
Because of our financial crisis, opponents of free trade were able to successfully fight to include in the stimulus bill the buy-American principle and other similar provisions in order to ensure the protection of jobs in industries that are unable to compete with external competitors. The opponents may ``save'' a few jobs, but the costs far outweigh the benefits.First, Brazil, China, India and the rest of the developing world have numerous public works and other projects that often are awarded to U.S. firms.
American companies like Caterpillar and GE strongly opposed the buy-American language, since they realize that these provisions put America at a competitive disadvantage. Will these countries, and the rest of the world, use this as an opportunity to not purchase U.S. aircraft, tractors, financial services, reactors and high-tech electronics?
If history is a prediction of the future, the Great Depression is a useful lesson. The Smoot-Hawley Tariff, according to the vast majority of mainstream economists, set off a trade war with Europe that led to a deepening of the Great Depression, the deterioration of U.S. industries, and a deepening resentment in Europe to the United States' reactionary response to a worldwide depression.Secondly, free trade benefits all buyers and sellers, while trade barriers benefit certain sellers at the expense of other sellers and all buyers.
The elimination of ``outside'' competition, as history has shown, leads to an increase in cost. An increase in cost leads to the inability to buy other services from other buyers.For example, in Korea, the same Hyundai car bought in the United States will cost a considerable amount less.
The U.S. consumer, thus, buys the Hyundai and has a gain over the Korean purchaser of the car. This causes the Korean consumer to have less disposable income and thus less power to purchase additional products.Who loses? Of course consumers lose, but let's not forget that other sellers lose. The other sellers, because of the reduction in purchasing power of the Korean consumer, lose the opportunity to sell.
Lastly, the world needs a champion for economic freedom. The United States has taken the lead in most of the last century, but it seems no other nation is capable or willing to champion the benefits of political and economic freedom. If the United States doesn't take the lead, who will?Korean President Lee Myung-bak has an opportunity to show Asia the benefits of economic freedom. He has vowed to reform the way Korea operates, but a great deal of his measures adopt the same top-down regulatory approach advocated by his predecessors.
The world has seen the benefits of free trade and economic liberties. Hopefully, it will not regress and lose sight of the benefits trade and economic liberties has garnered for customers and sellers.
Sean Hayes is a New York attorney working in Seoul with one of Korea's leading law firms. He formerly worked as a law faculty member and for the Constitutional Court of Korea. He can be reached at www.thekoreanlawblog.com.
The American stimulus bill is to be signed into law with a ``buy-American'' provision mandating that stimulus-funded programs only fund those that utilize U.S. manufactured goods.
Additionally, it makes it more difficult for banks, which received funds under the Troubled Assets Relief Program (TARP), to hire immigrants.
In order to appease free-trade Republicans, President Barack Obama pushed for language noting that the United States will honor its international agreements. The language doesn't change the effect this bill will have on the superpower and the world.
The United States is a country built on the notion of political and economic freedom. With vibrant and robust free market capitalism and a political system able to react quickly to changing dynamics, it has maintained one of the most prosperous societies the world has ever known.
Because of our financial crisis, opponents of free trade were able to successfully fight to include in the stimulus bill the buy-American principle and other similar provisions in order to ensure the protection of jobs in industries that are unable to compete with external competitors. The opponents may ``save'' a few jobs, but the costs far outweigh the benefits.First, Brazil, China, India and the rest of the developing world have numerous public works and other projects that often are awarded to U.S. firms.
American companies like Caterpillar and GE strongly opposed the buy-American language, since they realize that these provisions put America at a competitive disadvantage. Will these countries, and the rest of the world, use this as an opportunity to not purchase U.S. aircraft, tractors, financial services, reactors and high-tech electronics?
If history is a prediction of the future, the Great Depression is a useful lesson. The Smoot-Hawley Tariff, according to the vast majority of mainstream economists, set off a trade war with Europe that led to a deepening of the Great Depression, the deterioration of U.S. industries, and a deepening resentment in Europe to the United States' reactionary response to a worldwide depression.Secondly, free trade benefits all buyers and sellers, while trade barriers benefit certain sellers at the expense of other sellers and all buyers.
The elimination of ``outside'' competition, as history has shown, leads to an increase in cost. An increase in cost leads to the inability to buy other services from other buyers.For example, in Korea, the same Hyundai car bought in the United States will cost a considerable amount less.
The U.S. consumer, thus, buys the Hyundai and has a gain over the Korean purchaser of the car. This causes the Korean consumer to have less disposable income and thus less power to purchase additional products.Who loses? Of course consumers lose, but let's not forget that other sellers lose. The other sellers, because of the reduction in purchasing power of the Korean consumer, lose the opportunity to sell.
Lastly, the world needs a champion for economic freedom. The United States has taken the lead in most of the last century, but it seems no other nation is capable or willing to champion the benefits of political and economic freedom. If the United States doesn't take the lead, who will?Korean President Lee Myung-bak has an opportunity to show Asia the benefits of economic freedom. He has vowed to reform the way Korea operates, but a great deal of his measures adopt the same top-down regulatory approach advocated by his predecessors.
The world has seen the benefits of free trade and economic liberties. Hopefully, it will not regress and lose sight of the benefits trade and economic liberties has garnered for customers and sellers.
Sean Hayes is a New York attorney working in Seoul with one of Korea's leading law firms. He formerly worked as a law faculty member and for the Constitutional Court of Korea. He can be reached at www.thekoreanlawblog.com.
February 4, 2009
KIKO Injunction Translated into English
English Translation of the Korean KIKO (currency option) injunction.
*NOTE: Not an official translation. The translation contains grammar errors and some errors in content. The translation was completed by my paralegal and not edited.
Seoul Central District Court
50 Civil Matters Department
DECISION
Case 2008Kahap3816
Provisional Disposition on Suspension of Option Contract Effect
TEXT
1. On conditions for (DELETED) Co.,Ltd to deposit \500 million and for (DELETED) Co.,Ltd to deposit \2 billion or to submit the trust contract document of Guarantee for payment set the respective amount as security deposit, as security for Respondent, Ga. For each currency option contract in Annex. List 1 between the Applicant (DELETED) Co.,Ltd and the Respondent and each currency option contract in the Annex. List 2 between the Applicant (DELETED) Co, .Ltd and the Respondent, the effect for the tranche expiring after November 3 2008 will be suspended until the ruling of the 2008Gahap108007 case of restitution and claim of unjust enrichment between the Applicants and the Respondent.
Na. The Respondent, on the tranches for which the effects are suspended, must not carry out disadvantageous disposition presupposing the tranches should remain effective, such as exercising call-options on the basis of each above currency option contract.
2. Other applications shall be dismissed.
3. The Applicants shall pay 1/2 of the lawsuit costs and the Respondent shall pay for the rest.
PURPOSE OF APPLICATION
1. Until the ruling of the 2008GaHap108007 case of restitution and claim of unjust enrichment between the Applicants and the Respondent, the effects of each currency option contract in Annex. List 1 between the Applicant (DELETED) Co.,Ltd and the Respondent, and each currency option contract in the Annex. List 2 between the Applicant (DELETED) Co.,Ltd and the Respondent shall be suspended.
2. The Respondent must not carry out disadvantageous disposition presupposing the tranches should remain effective such as exercising call-options based on each above currency option contract.
REASONING
1. Basic Facts
All the records and examination explain the following facts.
Ga. Status of the Parties
Applicant (DELETED) Co.,Ltd (“(DELETED)”, hereby) is a listed corporation which manufactures, sells and exports stationery and office equipments, having a total asset amount of \132.8 billion as of Dec. 31 2007 and a total annual sales of \191.9 billion. Another Applicant (DELETED) Co,.Ltd (“(DELETED)”, hereby) is a KOSDAQ-listed corporation which manufactures, sells and exports electronic devices, having a total asset amount of \188.6 billion as of Dec. 31 2007 and a total annual sales of \610.9 billion. In addition, the Respondent is a bank established in accordance of the Banking Act, having a total asset amount of \52.9722 trillion as of Dec. 31 2007 and total annual sales of \12.0485 trillion.
Na. Currency Option Contract between the Applicants and the Respondent
⑴ The Applicants have been utilizing the method of selling currency forwards in order to avoid (hedge) the potential hazard in Trade Receivables in Foreign Currency due to exchange fluctuation (decrease). Amidst the trend, since the KRW-USD exchange gradually decreased in 2006 and 2007, most profit from exports were lost due to selling trade receivables in foreign currency as future prices of the dollar became lower than spot prices. When this happened, Applicant (DELETED), around May 2006 and Applicant (DELETED) around June 2007 subscribed to the product “KIKO Currency Option’ with the advice from the Respondent.
⑵ Applicant (DELETED) concluded 14 KIKO currency option contracts with the Respondent from May 8 2006 to Jan 11 2008 (two of them are included in the Annex. List 1). Applicant (DELETED) concluded nine KIKO currency option contracts in the period between Jun 13 2007 and Jan 22 2008 (eight of them are included in the Annex. List 2. Each KIKO currency option contract in the Annex. List 1,2 will be “Contract of the Case”, hereby).
Da. Structure of KIKO Currency Option Contract
⑴ Basic Form of Currency Option Contract
(Ga) Literally, KIKO currency option refers to ‘A currency option which combines Knock-Out Put-Option for the bank from companies and Knock-In Call-Option for companies from bank in the ratio of 1:2 to avoid hazard from the exchange rate fluctuation in export prices’. In other words, it is a currency option that eventually realizes Zero-Cost in that companies buys put-option from the bank to avoid exchange risk, and sells call-option instead of providing premiums to the bank.
(Na) However, since the Knock-Out condition is attached to company’s put-option and knock-in to bank’s call-option, the contract will be ineffective once the market exchange rate decreases below the bottom exchange rate. The reason knock-out or knock-in is attached to options is that their premium is cheaper than the standard options without such conditions. One can hedge currency risk spending less money by attaching such conditions to options when the exchange rate changes within a certain range.
(Da) Also, in most cases, the contract amount of the call-option for bank is as twice as high as put-option for company (called ‘leverage condition’). This is because one can change knock-out and knock-in exchange rate as advantageously as possible for companies as the leverage gets higher.
(Ra) The contract period is as long as one to three years, and mainly consists of groups of options that expire every month. Payment is made based on the market exchange rate on the expiration date for each tranche.
(Ma) Rights and Duties of Companies and Banks for Each Scenario
• When the market exchange rate moves within the top and the bottom range:
- Only the company put-option is created.
- When the market exchange rate at the time of expiration is lower than the event exchange rate: Companies sell the contract amount to the bank based on the exchange rate by exercising put-option ☞ Company achieves the goal of avoiding currency risk
- When the market exchange rate at the time of expiration is the same as or higher than the event exchange rate: Companies can sell the contract amount based on the market exchange rate without exercising put-option ☞ Companies can enjoy exchange gains
• When the market exchange rate falls below the bottom exchange rate at least once
during observation period (satisfies ‘knock-out’ condition)
- The Contract regarding the tranche becomes ineffective. ☞ Companies are exposed to currency risk
• When the market exchange rate rose above the top exchange rate at lease once without ever dropping below the bottom exchange rate during observation period (satisfies ‘knock-in’ condition) Both company put-option and bank call-option are created.
- When the market exchange rate is lower than the event exchange rate at the time of expiration: Companies sells the contract amount based on the event exchange rate by exercising put-option. ☞ Company achieves the goal of avoiding currency risk
- When the market exchange rate at the time of expiration is the same as or higher than the event exchange rate: Bank purchases twice as much of the contract amount based on the event exchange rate by exercising call-option ☞ Company is exposed to risk of limitless losses.
⑵ Modified KIKO Currency Option
(Ga) Divides the contract period into two parts, making part A more advantageous than the basic form, but making part B more advantageous for banks instead.
(Na) Type 1 (Each contract in Annex. List 1. 1,2 & List 2. 3,4,5)
l Part A: Same as the basic form. But, It is more advantageous for companies compared to the basic form in terms of contract conditions, in that event price of company’ put-option is increased (‘turbo’ condition) or even if the company’s put-option is terminated as knock-out conditions are met, money is compensated to a certain extent. (‘enhanced’ condition)
Part B: Only banks have call-option of low event exchange rate. But, when the market exchange rate falls below the bottom exchange rate even once during the observation rate, all contracts on the related tranche and those after become ineffective. (‘Anytime’ knock-out condition)
(Da) Type 2 (Contract in Annex. List 2 1,2)
l Part A: Same as the basic form. But, it is more advantageous for companies compared to the basic form in terms of contract conditions, in that event price of companies’ put-option is increased or even if the company’s put-option is terminated as knock-out conditions are met, money is compensated to a certain extent.
Part B: A simple structure of selling currency forwards. But, part B becomes effective only when the market exchange rate at the time of expiration of part A is the same as or below the event exchange rate. (Knock-in condition)
(Ra) Type 3 (Contract in Annex. List 2 6,7,8)
l Part A: Only companies get put-option. And, it is more advantageous for companies compared to the basic form in terms of contract conditions, in that event price of company’ put-option is increased or even if the company’s put-option is terminated as knock-out conditions are met, money is compensated to a certain extent.
Part B: Only banks have call-option of low event exchange rate. But, when the market exchange rate falls below the bottom exchange rate even once during the observation rate, all contracts on the related tranche and those after become ineffective.
Ra. Surge of KRW-USD exchange rate after the Contract of the Case is Concluded (See Annex. ‘KRW-USD exchange rate fluctuation during the last 3 years’)
The KRW-USD exchange rate which moved upwards or downwards between the range of \900~940 from June 2007 to the beginning of March 2008, began to increase from the mid-March 2008, reached \1,021 on Mar 18 2008 and continued to go up to \1,050 in the mid-May 2008. Changing somewhat steadily for some time, the exchange rate sharply increased to \1,100 in Sep 2008, \1,200, \1,300 and \1,400 in October. Since the rate reached a record high of \1,509 on Nov 24 2008, it is currently moving up and down within the range of \1,200 and \1,400.
Ma. Applicants’ Losses Due to the Surging KRW-USD Exchange Rate
As the Respondent Bank exercised call-option for the Contract of the Case, Applicants had an obligation to sell the dollar which is as twice as the contract amount based on the event exchange rate that is significantly lower than the market exchange rate. As a result, the Applicants are facing great losses up to the present. (Applicants will face negative losses for which they cannot enjoy exchange gains if they have dollars as spots twice as much as the contract amount. Otherwise, since they have to buy the dollars based on the market exchange rate and sell them to the Respondent Bank based on the event price that is much lower, the applicants will face losses equivalent to the margin.
⑴ Applicant (DELETED): Total net losses of \2.8208 billion
⑵ Applicant (DELETED): Total net losses of \27.33940 billion
2. Judgment
Ga. Preservation Rights
⑴ Invalidity of the Contract of the Case
(Ga) Violation of Regulation of Standardized Contracts Act
1) Whether it falls under Standardized Contracts
‘Standardized Contracts’ refers to the contents of a contract prepared in advance by one of the contract parties to conclude a contract with one or more other parties regardless of its name, form or scope. (Regulation of Standardized Contracts Act)
According to the purpose of all the records and examination, the specific contents of the Contract conditions such as knock-in exchange rate, knock-out exchange rate and leverage signify the fact that came to a decision from individual negotiations between the Applicants and the Respondent. Therefore, it is difficult to say that the Contract of the Case is categorized as standardized contracts. However, all the basic form and the modified form of the Contract can be considered as having been prepared in a specific type for finalizing contracts. So, in this sense, it can be seen as a standardized contract.
2) Whether the Contract is Invalid because of its Unfairness
Ga) If there are provisions in the Contract that are disadvantageous towards companies, difficult for companies to anticipate considering the circumstances like the transaction type of the contract and that limit the basic rights so much that the contract purpose cannot be achieved, the related provisions are considered to be unfair (Regulation of Standardized Contracts Act Article 6, Clause 2) and, such unfair provisions violating the principle of good faith are ineffective. (Regulation of Standardized Contracts Act Article 6 Clause 1)
Na) Whether the Contract is unjust towards Applicants
Losses due to plummeting exchange rate are limited for the Respondent Bank, (since ‘Knock-out’ condition is attached) whereas losses for the Applicants can expand to an infinite level, the contract amount when the Respondent Bank exercises call-option is as twice as much as that when the Applicants exercise put-option. And, for some modified KIKO currency option contracts, part B in the latter part of the contract period requires the Respondent Bank to have low-priced call-option while the Applicants are not at all acknowledged with any rights. So, considering these elements, the structure itself can be considered to be disadvantageous on the Applicants.
However, as shown before, that options’ values are the same does not refer to the amount of the profit but that the expected profit of companies and banks that takes into account the probable range of the exchange rate fluctuation. In the Contract of the Case, the exchange rate section from which the Applicants can earn profit is already limited but its realization probability is fairly high. In contrast, the exchange rate section from which the Respondent can get benefit is theoretically infinite but its realization probability is quite low, which leads to an assumption that the expected profit of both the Applicants and the Respondent are the same. Therefore, it is difficult to conclude that the structure itself is disadvantageous towards the Applicants by just looking at the elements above.
Da) Whether the Contract is Difficult to Anticipate or Limits the Basic Rights of the Applicants
By the structure of the Contract, when the market exchange rate falls below the bottom exchange rate as knock-out condition is attached to the put-option, the Applicants are directly exposed to currency risk. In some modified KIKO currency option contracts, since the Applicants are not acknowledged with selling exchange forwards or put-option, they cannot at all achieve the goal of avoiding currency risk. Such a contract condition can be deemed as difficult to anticipate or limiting Applicants’ rights basically in the perspective of the goal of avoiding currency risk.
But, according to the records, the contract conditions as above seems to have been understood or known by the Applicants, and furthermore, for accepting such conditions stated above, the Applicants have changed other contract conditions favorable to them. So, it is hard to say that the Contract conditions above are unfair and violating the principle of good faith.
3) Contract Period & Knock-In - Whether the Event Provision is Ineffective Since it is Against the Regulation of Standardized Contracts Act Article 9 Item 5
Ga) In a contract with the purpose of creating continual claims, provisions may give disadvantage by making the period unjustifiably short or long, or by making it possible to implicitly prolong or renew the period are ineffective. (Regulation of Standardized Contracts Act Article 9 Item 5)
Na) Whether the Contract Period is Unjustifiably Long-term
The fluctuation of the exchange rate normally expands as the option’s expiration date prolongs, so as the contract period prolongs, the market exchange rate touches the bottom and the top exchange rate, leading to extinction of company’s put-option (Knock-out) and the possibility that the bank’s call-option will come into effect increases. Therefore, under the contract structure that company’s knock-out put-option and the bank’s knock-in call-option are combined in the ratio of 1:2, it may seem disadvantageous to make the contract period as 1~3 years. But, as shown before, since the contract seems to have been formed as the total value of company’s put-option and that of bank’s call-option are the same for the whole contract period, it is hard to conclude the Applicants might be unreasonably disadvantaged just from the fact the period itself is set to 1~3 years.
Da) Whether the Knock-In Event Provision is an Unreasonable Automatic Renewal Provision
Knock-in event provision, that is, one making part B effective as the contract is automatically renewed only when the market exchange rate at the time of expiration is higher or the same as the exercise exchange rate in part A of modified KIKO currency option contract. This is a situation where the contract is automatically been renewed even when companies would want the contract to be terminated as the exchange rate increases, so it may seem renewed forcefully against the company’s will. But, according to the purpose of the records and examinations, this issue seems to have been understood or recognized by the Applicant (DELETED) when finalizing the contract, and furthermore, (DELETED) seems to have changed Contract conditions as advantageous like event exchange rate for accepting the above provision. Therefore, it is difficult to conclude the Applicant (DELETED) was disadvantaged from the fact above.
4) Conclusion
Therefore, it is hard to say that the structure of the Contract is invalid due to violation of Regulation of Standardized Contracts Act.
(Na) Whether it violates the Civil Act Article 104
As shown before, since the Contract of the Case seems to have been formed as the total value of company’s put-option and that of bank’s call-option are the same, it is difficult to conclude the Contract of the Case is invalid due to violation of the Civil Act Article 104.
(2) Whether the Contract should be Revoked
(Ga) Summary of Assertion by the Applicants to Revoke the Contract due to Fraud or Mistake
The Contract of the Case is, in fact, not suitable for avoiding currency risk (Applicants are exposed to currency risk when the market exchange rate falls below the bottom exchange rate as a knock-out condition is attached to their put-option. And, in the case of some modified KIKO currency option contract, selling exchange forwards or put-option is not acknowledged for the Applicants in part B of the latter part of the contract period, so such goal cannot be achieved.) and, in contrary, it has a risk of unlimited losses when the foreign exchange rate increases. The fact is, the contract is for the speculative benefit of the bank not for avoiding Applicants’ currency risk. Nevertheless, the Respondent Bank explained about the product as if it were beneficial for avoiding currency risk but neglectfully explained on the unsuitability of hedging currency risk and high risk, making the Applicants to sign the Contract. Therefore, it is true that the Applicants signed the contract due to bank’s fraud or their mistake, so the Contract of the Case shall be revoked upon delivery of this application.
(Na) Judgment
According to all the records and examination, the Applicants knew, at the moment of concluding the Contract, that the knock-out condition is attached to their put-option, that they do not have any rights on the part B of some modified KIKO currency option contracts. More, it is found that they adjusted other contract conditions including the event exchange rate. Therefore, even if the Contract of the Case seems not suitable for avoiding currency risk which is the main purpose of the Contract, it is difficult to say that the Applicants’ signing the contract is due to the bank’s fraud or their mistake.
Also, as shown before, instead of paying premium to the Bank when purchasing put-option from the Respondent Bank in order to hedge currency risk, the Applicants sold knock-in call-option that is as twice as much as the premium. This makes it clear that the Applicants knew that they could see damages as they are obligated to sell twice as many dollars as the Contract amount to the bank based on the event exchange rate, (Applicant (DELETED) already has an experience of such damages from other KIKO currency option contracts before this) and it is difficult to say that the Applicants signed the Contract due to the Bank’s fraud or their mistake.
Meanwhile, according to the purposes of all the records and examination, the Applicants seem to have anticipated that the KRW-USD exchange rate would show a stable fluctuation in a certain range during the contract period, but did not foresee there would be great damages if the exchange rate sharply increases. However, by looking at just the records submitted by the Applicants, the Respondent bank does not seem to have purposely caused such result or made the Applicants sign the Contract by hiding what the Respondent may have anticipated. According to the purposes shown from all the records and examination, the Applicants seem to have anticipated the KRW-USD exchange rate would show a stable fluctuation within a certain range. Therefore, conclusion of the Contract is not from fraud of the Bank as above. Mistake of the Applicants and the Respondent Bank on anticipation of exchange rate fluctuation will be dealt later with termination upon the principle of good faith.
(3) Termination of the Contract of the Case – Principle of Good Faith
(Ga) Termination of Continuous Contract due to Change of Circumstances
The other party can terminate the Contract on the basis of the principle of good faith if, the parties could not anticipate the change of situation when circumstance that has been the basis of the Contract changed after the Contract was concluded and for which the Party was not responsible for the change; and if, in this case, binding power is acknowledged resulting in violation of the principle of good faith, and furthermore, if it is impossible to change the content of the Contract based on the change in situation or that cannot be expected from the other party. (See Supreme Court Decision 2007.3.29 2004Da31302) This theory even applies to the case where common and fundamental thought of the parties that was the basis of the Contract was found wrong ex post facto.
(Na) About this Case
From all the records and examination, making the Applicants to fulfill the obligations related to the Contract is substantially against the principle of good faith. Therefore, the Contract of the Case is lawfully terminated upon delivery of a copy of this application, which manifests intention of termination. (Delivered to the Respondent Bank on Nov. 3)
① The Contract of the Case has a structure categorized as a continuous contract for which payment is made based on the market exchange rate at the time of expiration for every tranche expiring every month during the contract period of 1~3 years. (but, since the total values of the Applicants’ put-option and the Respondent Bank’s call-option are the same considering the whole contract period, not every tranche, option premiums may need to be calculated on termination of contract)
② That ‘Implied volatility for KRW-USD’ was the key variant in deciding the values of each option the Applicants and the Respondent have upon concluding the Contract is an objective circumstance being the basis of the Contract. Also, as shown before, both the Applicants and the Respondent Bank signed the Contract with an anticipation that the exchange rate will go up and down within a certain range, so it is the common and fundamental perception of the Parties, which was the basic element of the Contract.
③ However, the KRW-USD exchange rate surged and its implied volatility also has sharply increased after the Contract of the Case was concluded (KRW-USD exchange rate: 3.6~5.4 at the time of contract conclusion, 10.025 on Mar 18 2008, 10295 on Sep 1, 15.8325 on Sep 16 2008, 20.7475 on Oct 6 2008, 25.7575 on Oct 7 2008, 31.3725 on Oct 16 2008, 37.86 on Oct 28 2008), such a significant change of circumstances would not have been anticipated by the Applicants or the Respondent considering the trend of the KRW-USD exchange rate for the previous 3~4 years before the contract was concluded, and prediction reports from renowned financial or research institutions.
④ As above, with the increasing KRW-USD exchange rate, the Applicants have faced great damages and more losses are expected unless the exchange rate does not sharply fall in the future during the remaining period of the Contract, the amount is estimated to exceed the figure predicted or could be predicted by the Applicants. Also, there is an imbalance between profit and losses of the Applicants and the Respondent Bank from the Contract of the Case.
⑤ According to the Contract of the Case, Contract conditions including the event price specified upon concluding the Contract is settled to remain for the contract period of 1~3 years, and there is no measure to help adjust to the situation where the Applicants’ losses increase more than expected with the increasing KRW-USD exchange rate or where the contract condition based on the implied volatility is no longer reasonable as the implied volatility of the KRW-USD exchange rate surged.
⑥ Generally, banks should not recommend OTC derivatives to those not capable enough to take such risks when they are considered inadequate based on the type of occupation, financial status, level of financial transactions, purpose of transaction, level of understanding the product, risk management ability and product type. Furthermore, the banks have a duty to fully explain important facts to clients like the transaction structure, risk entailing the transaction, major influential element on losses. Considering the Applicants’ experience in transaction of OTC derivatives and qualifications of bank officials, the Applicants did not have the capability in managing risks on OTC derivatives. Since the Contract not only has a complex and eccentric structure, but also implies limitless losses, the Respondent Bank should have complied with the suitability and duty to explain. But, the Respondent Bank seems to have not met the obligation and as a result, the Applicants face a great deal of damages regarding the fulfillment of the Contract.
i) Violation of the Suitability Principle
The Respondent Bank should check in advance whether the content of the Contract is suitable for the Applicants’ purpose of avoiding currency risk and whether the Applicants would not be exposed to excessive risk compared to their financial structure, operation structure or risk management ability, and if not, the Bank should not have recommended the product or have changed the content to make it suitable for the Applicants.
However, since the Applicants are exposed to unlimited losses, the Contract conditions are not suitable for them considering the transaction purposes, financial structure, operation status and risk management ability. The Respondent Bank had a duty to recommend other conditions (for example, limiting the Applicants’ total amount of losses, compensating a reasonable amount when the exchange rate rises above a certain level and allow the Applicants to terminate the Contract, or that limit the Applicant’s losses upon conclusion of the Contact) but did not fulfill it.
On this notion, the Respondent Bank asserts that the Applicants would not have accepted such conditions as above even if they will be disadvantaged anyhow including that the put-option event exchange rate will go down . However, if the Respondent Bank had fulfilled the duty of explanation which will be dealt later, it cannot be considered that there was no possibility at all that the Applicants would not have accepted the conditions taking risks of plummeting event exchange prices. Therefore, the Respondent Bank’s claim is not acknowledged.
ii) Violation of Duty to Explain
As shown above, since the Contract of the Case has a structure for which the Applicants would have damages when the exchange rate surges, it seems that the Respondent Bank has a duty to explain clearly and sufficiently about the risks implied in the Contract when the Respondent recommended it. (Simply notifying the risks in general and abstract is not enough considering the scope of the potential risks, and further, the Bank must have checked if the Applicants would still go on with signing the Contract after telling them what will happen in the worst case in detail clearly to make them fully understand.) Also, the Respondent Bank has a duty not to disturb the Applicants’ decision-making or risk cognition act by providing conclusive judgment on the future KRW-USD exchange rate that is directly related to the risk.
However, on recommending to sign the Contract, the Respondent Bank notified the Applicants the risks only in general and abstract (even though it was written that the Applicants had the duty to sell twice the price of the contract amount when the knock-in condition was satisfied in red in the contract proposal, product description, this also is deemed as general notification), the Respondent did not clearly and sufficiently explained what kind of situation the Applicants would face when KRW-USD exchange rate rises as present (According to Exhibit So-eul 23. 12, the Respondent notified the Applicants on the profits and losses with the estimation of fluctuation about ±6~70 KRW). Also, the Respondent emphasized only that the exchange rate will gradually go down and did not sufficiently explain on the possibility of its increase.
(4) Conclusion
Therefore, the Contract of the Case is lawfully terminated upon delivery of the Application copy manifesting the Applicants’ will to terminate the Contract, the tranche which expires after termination is considered to be ineffective. So, the Respondent Bank has a duty not to implement call-option based on the Contract regarding the ineffective tranche or carry out any disadvantageous disposition presuming the Contract of the part remains effective.
Na. The Need of Preservation
Considering the circumstances indicated in all the records and examination, in particular, up-to-date transaction losses of the Applicants or the amount of future appraisal losses and aggravation in the financial structure operation status (as of 1st to 3rd quarter of 2008, Applicant (DELETED) had an amount of derivative transaction losses of KRW 5.8 billion, losses of derivative appraisal of KRW14.7 billion that resulted in KRW -7.1 billion net profit of current period. For (DELETED)’s case derivative transaction losses amounted to KRW 9.8 billion, losses of derivative appraisal KRW 101.7 billion leading to KRW -64.1 billion), falling creditability in the market and illiquidity, necessity of temporarily put a halt in the part that became ineffective by the Applicants’ manifesting opinions to terminate the Contract is persuasively shown. ((DELETED) is a case of ‘over-hedge’ since the total amount of contract amount for various KIKO currency option contracts exceeds the amount of available dollars, but since the Respondent bank had a duty to check its status of ‘over-hedge’ of the other party in accordance with the suitability principle, only (DELETED) cannot be denied the need for preservation.)
On this issue, the Respondent Bank asserts that it would face great damages since it carried out a counter transaction like Back To Bank regarding the dollar it gets to achieve due to the Contract between the third party like other financial institutions in order not to exceed the foreign currency limit a bank can reserve, but it still fulfill obligations in regard to the counter transaction without being able to exercise the rights when the Contract of the Case becomes ineffective as above. However, full explanation on the above counter transaction is not sufficient, and the damages the Respondent will face are not as serious as that of the Applicants when the Contract is continuously be in effect. (Net profit related to derivatives for the Respondent is \448.7 billion as of 1st to 3rd quarter, risen fivefold from \95 billion in the same period last year). Therefore, the Respondent Bank’s claim is not acknowledged.
Also, the Respondent Bank asserts that the Fast Track Program of the government will be futile when the provisional disposition is accepted. But, the effectiveness of the program is questionable according to all the records and examination, and since the above program is created on the premise that the KIKO currency option contract is carried out as stated. Therefore, the necessity for preservation cannot be denied considering the circumstances above.
3. CONCLUSION
This Application is accepted in that it has a reasonable ground and other applications are dismissed with no reasonable grounds.
*NOTE: Not an official translation. The translation contains grammar errors and some errors in content. The translation was completed by my paralegal and not edited.
Seoul Central District Court
50 Civil Matters Department
DECISION
Case 2008Kahap3816
Provisional Disposition on Suspension of Option Contract Effect
TEXT
1. On conditions for (DELETED) Co.,Ltd to deposit \500 million and for (DELETED) Co.,Ltd to deposit \2 billion or to submit the trust contract document of Guarantee for payment set the respective amount as security deposit, as security for Respondent, Ga. For each currency option contract in Annex. List 1 between the Applicant (DELETED) Co.,Ltd and the Respondent and each currency option contract in the Annex. List 2 between the Applicant (DELETED) Co, .Ltd and the Respondent, the effect for the tranche expiring after November 3 2008 will be suspended until the ruling of the 2008Gahap108007 case of restitution and claim of unjust enrichment between the Applicants and the Respondent.
Na. The Respondent, on the tranches for which the effects are suspended, must not carry out disadvantageous disposition presupposing the tranches should remain effective, such as exercising call-options on the basis of each above currency option contract.
2. Other applications shall be dismissed.
3. The Applicants shall pay 1/2 of the lawsuit costs and the Respondent shall pay for the rest.
PURPOSE OF APPLICATION
1. Until the ruling of the 2008GaHap108007 case of restitution and claim of unjust enrichment between the Applicants and the Respondent, the effects of each currency option contract in Annex. List 1 between the Applicant (DELETED) Co.,Ltd and the Respondent, and each currency option contract in the Annex. List 2 between the Applicant (DELETED) Co.,Ltd and the Respondent shall be suspended.
2. The Respondent must not carry out disadvantageous disposition presupposing the tranches should remain effective such as exercising call-options based on each above currency option contract.
REASONING
1. Basic Facts
All the records and examination explain the following facts.
Ga. Status of the Parties
Applicant (DELETED) Co.,Ltd (“(DELETED)”, hereby) is a listed corporation which manufactures, sells and exports stationery and office equipments, having a total asset amount of \132.8 billion as of Dec. 31 2007 and a total annual sales of \191.9 billion. Another Applicant (DELETED) Co,.Ltd (“(DELETED)”, hereby) is a KOSDAQ-listed corporation which manufactures, sells and exports electronic devices, having a total asset amount of \188.6 billion as of Dec. 31 2007 and a total annual sales of \610.9 billion. In addition, the Respondent is a bank established in accordance of the Banking Act, having a total asset amount of \52.9722 trillion as of Dec. 31 2007 and total annual sales of \12.0485 trillion.
Na. Currency Option Contract between the Applicants and the Respondent
⑴ The Applicants have been utilizing the method of selling currency forwards in order to avoid (hedge) the potential hazard in Trade Receivables in Foreign Currency due to exchange fluctuation (decrease). Amidst the trend, since the KRW-USD exchange gradually decreased in 2006 and 2007, most profit from exports were lost due to selling trade receivables in foreign currency as future prices of the dollar became lower than spot prices. When this happened, Applicant (DELETED), around May 2006 and Applicant (DELETED) around June 2007 subscribed to the product “KIKO Currency Option’ with the advice from the Respondent.
⑵ Applicant (DELETED) concluded 14 KIKO currency option contracts with the Respondent from May 8 2006 to Jan 11 2008 (two of them are included in the Annex. List 1). Applicant (DELETED) concluded nine KIKO currency option contracts in the period between Jun 13 2007 and Jan 22 2008 (eight of them are included in the Annex. List 2. Each KIKO currency option contract in the Annex. List 1,2 will be “Contract of the Case”, hereby).
Da. Structure of KIKO Currency Option Contract
⑴ Basic Form of Currency Option Contract
(Ga) Literally, KIKO currency option refers to ‘A currency option which combines Knock-Out Put-Option for the bank from companies and Knock-In Call-Option for companies from bank in the ratio of 1:2 to avoid hazard from the exchange rate fluctuation in export prices’. In other words, it is a currency option that eventually realizes Zero-Cost in that companies buys put-option from the bank to avoid exchange risk, and sells call-option instead of providing premiums to the bank.
(Na) However, since the Knock-Out condition is attached to company’s put-option and knock-in to bank’s call-option, the contract will be ineffective once the market exchange rate decreases below the bottom exchange rate. The reason knock-out or knock-in is attached to options is that their premium is cheaper than the standard options without such conditions. One can hedge currency risk spending less money by attaching such conditions to options when the exchange rate changes within a certain range.
(Da) Also, in most cases, the contract amount of the call-option for bank is as twice as high as put-option for company (called ‘leverage condition’). This is because one can change knock-out and knock-in exchange rate as advantageously as possible for companies as the leverage gets higher.
(Ra) The contract period is as long as one to three years, and mainly consists of groups of options that expire every month. Payment is made based on the market exchange rate on the expiration date for each tranche.
(Ma) Rights and Duties of Companies and Banks for Each Scenario
• When the market exchange rate moves within the top and the bottom range:
- Only the company put-option is created.
- When the market exchange rate at the time of expiration is lower than the event exchange rate: Companies sell the contract amount to the bank based on the exchange rate by exercising put-option ☞ Company achieves the goal of avoiding currency risk
- When the market exchange rate at the time of expiration is the same as or higher than the event exchange rate: Companies can sell the contract amount based on the market exchange rate without exercising put-option ☞ Companies can enjoy exchange gains
• When the market exchange rate falls below the bottom exchange rate at least once
during observation period (satisfies ‘knock-out’ condition)
- The Contract regarding the tranche becomes ineffective. ☞ Companies are exposed to currency risk
• When the market exchange rate rose above the top exchange rate at lease once without ever dropping below the bottom exchange rate during observation period (satisfies ‘knock-in’ condition) Both company put-option and bank call-option are created.
- When the market exchange rate is lower than the event exchange rate at the time of expiration: Companies sells the contract amount based on the event exchange rate by exercising put-option. ☞ Company achieves the goal of avoiding currency risk
- When the market exchange rate at the time of expiration is the same as or higher than the event exchange rate: Bank purchases twice as much of the contract amount based on the event exchange rate by exercising call-option ☞ Company is exposed to risk of limitless losses.
⑵ Modified KIKO Currency Option
(Ga) Divides the contract period into two parts, making part A more advantageous than the basic form, but making part B more advantageous for banks instead.
(Na) Type 1 (Each contract in Annex. List 1. 1,2 & List 2. 3,4,5)
l Part A: Same as the basic form. But, It is more advantageous for companies compared to the basic form in terms of contract conditions, in that event price of company’ put-option is increased (‘turbo’ condition) or even if the company’s put-option is terminated as knock-out conditions are met, money is compensated to a certain extent. (‘enhanced’ condition)
Part B: Only banks have call-option of low event exchange rate. But, when the market exchange rate falls below the bottom exchange rate even once during the observation rate, all contracts on the related tranche and those after become ineffective. (‘Anytime’ knock-out condition)
(Da) Type 2 (Contract in Annex. List 2 1,2)
l Part A: Same as the basic form. But, it is more advantageous for companies compared to the basic form in terms of contract conditions, in that event price of companies’ put-option is increased or even if the company’s put-option is terminated as knock-out conditions are met, money is compensated to a certain extent.
Part B: A simple structure of selling currency forwards. But, part B becomes effective only when the market exchange rate at the time of expiration of part A is the same as or below the event exchange rate. (Knock-in condition)
(Ra) Type 3 (Contract in Annex. List 2 6,7,8)
l Part A: Only companies get put-option. And, it is more advantageous for companies compared to the basic form in terms of contract conditions, in that event price of company’ put-option is increased or even if the company’s put-option is terminated as knock-out conditions are met, money is compensated to a certain extent.
Part B: Only banks have call-option of low event exchange rate. But, when the market exchange rate falls below the bottom exchange rate even once during the observation rate, all contracts on the related tranche and those after become ineffective.
Ra. Surge of KRW-USD exchange rate after the Contract of the Case is Concluded (See Annex. ‘KRW-USD exchange rate fluctuation during the last 3 years’)
The KRW-USD exchange rate which moved upwards or downwards between the range of \900~940 from June 2007 to the beginning of March 2008, began to increase from the mid-March 2008, reached \1,021 on Mar 18 2008 and continued to go up to \1,050 in the mid-May 2008. Changing somewhat steadily for some time, the exchange rate sharply increased to \1,100 in Sep 2008, \1,200, \1,300 and \1,400 in October. Since the rate reached a record high of \1,509 on Nov 24 2008, it is currently moving up and down within the range of \1,200 and \1,400.
Ma. Applicants’ Losses Due to the Surging KRW-USD Exchange Rate
As the Respondent Bank exercised call-option for the Contract of the Case, Applicants had an obligation to sell the dollar which is as twice as the contract amount based on the event exchange rate that is significantly lower than the market exchange rate. As a result, the Applicants are facing great losses up to the present. (Applicants will face negative losses for which they cannot enjoy exchange gains if they have dollars as spots twice as much as the contract amount. Otherwise, since they have to buy the dollars based on the market exchange rate and sell them to the Respondent Bank based on the event price that is much lower, the applicants will face losses equivalent to the margin.
⑴ Applicant (DELETED): Total net losses of \2.8208 billion
⑵ Applicant (DELETED): Total net losses of \27.33940 billion
2. Judgment
Ga. Preservation Rights
⑴ Invalidity of the Contract of the Case
(Ga) Violation of Regulation of Standardized Contracts Act
1) Whether it falls under Standardized Contracts
‘Standardized Contracts’ refers to the contents of a contract prepared in advance by one of the contract parties to conclude a contract with one or more other parties regardless of its name, form or scope. (Regulation of Standardized Contracts Act)
According to the purpose of all the records and examination, the specific contents of the Contract conditions such as knock-in exchange rate, knock-out exchange rate and leverage signify the fact that came to a decision from individual negotiations between the Applicants and the Respondent. Therefore, it is difficult to say that the Contract of the Case is categorized as standardized contracts. However, all the basic form and the modified form of the Contract can be considered as having been prepared in a specific type for finalizing contracts. So, in this sense, it can be seen as a standardized contract.
2) Whether the Contract is Invalid because of its Unfairness
Ga) If there are provisions in the Contract that are disadvantageous towards companies, difficult for companies to anticipate considering the circumstances like the transaction type of the contract and that limit the basic rights so much that the contract purpose cannot be achieved, the related provisions are considered to be unfair (Regulation of Standardized Contracts Act Article 6, Clause 2) and, such unfair provisions violating the principle of good faith are ineffective. (Regulation of Standardized Contracts Act Article 6 Clause 1)
Na) Whether the Contract is unjust towards Applicants
Losses due to plummeting exchange rate are limited for the Respondent Bank, (since ‘Knock-out’ condition is attached) whereas losses for the Applicants can expand to an infinite level, the contract amount when the Respondent Bank exercises call-option is as twice as much as that when the Applicants exercise put-option. And, for some modified KIKO currency option contracts, part B in the latter part of the contract period requires the Respondent Bank to have low-priced call-option while the Applicants are not at all acknowledged with any rights. So, considering these elements, the structure itself can be considered to be disadvantageous on the Applicants.
However, as shown before, that options’ values are the same does not refer to the amount of the profit but that the expected profit of companies and banks that takes into account the probable range of the exchange rate fluctuation. In the Contract of the Case, the exchange rate section from which the Applicants can earn profit is already limited but its realization probability is fairly high. In contrast, the exchange rate section from which the Respondent can get benefit is theoretically infinite but its realization probability is quite low, which leads to an assumption that the expected profit of both the Applicants and the Respondent are the same. Therefore, it is difficult to conclude that the structure itself is disadvantageous towards the Applicants by just looking at the elements above.
Da) Whether the Contract is Difficult to Anticipate or Limits the Basic Rights of the Applicants
By the structure of the Contract, when the market exchange rate falls below the bottom exchange rate as knock-out condition is attached to the put-option, the Applicants are directly exposed to currency risk. In some modified KIKO currency option contracts, since the Applicants are not acknowledged with selling exchange forwards or put-option, they cannot at all achieve the goal of avoiding currency risk. Such a contract condition can be deemed as difficult to anticipate or limiting Applicants’ rights basically in the perspective of the goal of avoiding currency risk.
But, according to the records, the contract conditions as above seems to have been understood or known by the Applicants, and furthermore, for accepting such conditions stated above, the Applicants have changed other contract conditions favorable to them. So, it is hard to say that the Contract conditions above are unfair and violating the principle of good faith.
3) Contract Period & Knock-In - Whether the Event Provision is Ineffective Since it is Against the Regulation of Standardized Contracts Act Article 9 Item 5
Ga) In a contract with the purpose of creating continual claims, provisions may give disadvantage by making the period unjustifiably short or long, or by making it possible to implicitly prolong or renew the period are ineffective. (Regulation of Standardized Contracts Act Article 9 Item 5)
Na) Whether the Contract Period is Unjustifiably Long-term
The fluctuation of the exchange rate normally expands as the option’s expiration date prolongs, so as the contract period prolongs, the market exchange rate touches the bottom and the top exchange rate, leading to extinction of company’s put-option (Knock-out) and the possibility that the bank’s call-option will come into effect increases. Therefore, under the contract structure that company’s knock-out put-option and the bank’s knock-in call-option are combined in the ratio of 1:2, it may seem disadvantageous to make the contract period as 1~3 years. But, as shown before, since the contract seems to have been formed as the total value of company’s put-option and that of bank’s call-option are the same for the whole contract period, it is hard to conclude the Applicants might be unreasonably disadvantaged just from the fact the period itself is set to 1~3 years.
Da) Whether the Knock-In Event Provision is an Unreasonable Automatic Renewal Provision
Knock-in event provision, that is, one making part B effective as the contract is automatically renewed only when the market exchange rate at the time of expiration is higher or the same as the exercise exchange rate in part A of modified KIKO currency option contract. This is a situation where the contract is automatically been renewed even when companies would want the contract to be terminated as the exchange rate increases, so it may seem renewed forcefully against the company’s will. But, according to the purpose of the records and examinations, this issue seems to have been understood or recognized by the Applicant (DELETED) when finalizing the contract, and furthermore, (DELETED) seems to have changed Contract conditions as advantageous like event exchange rate for accepting the above provision. Therefore, it is difficult to conclude the Applicant (DELETED) was disadvantaged from the fact above.
4) Conclusion
Therefore, it is hard to say that the structure of the Contract is invalid due to violation of Regulation of Standardized Contracts Act.
(Na) Whether it violates the Civil Act Article 104
As shown before, since the Contract of the Case seems to have been formed as the total value of company’s put-option and that of bank’s call-option are the same, it is difficult to conclude the Contract of the Case is invalid due to violation of the Civil Act Article 104.
(2) Whether the Contract should be Revoked
(Ga) Summary of Assertion by the Applicants to Revoke the Contract due to Fraud or Mistake
The Contract of the Case is, in fact, not suitable for avoiding currency risk (Applicants are exposed to currency risk when the market exchange rate falls below the bottom exchange rate as a knock-out condition is attached to their put-option. And, in the case of some modified KIKO currency option contract, selling exchange forwards or put-option is not acknowledged for the Applicants in part B of the latter part of the contract period, so such goal cannot be achieved.) and, in contrary, it has a risk of unlimited losses when the foreign exchange rate increases. The fact is, the contract is for the speculative benefit of the bank not for avoiding Applicants’ currency risk. Nevertheless, the Respondent Bank explained about the product as if it were beneficial for avoiding currency risk but neglectfully explained on the unsuitability of hedging currency risk and high risk, making the Applicants to sign the Contract. Therefore, it is true that the Applicants signed the contract due to bank’s fraud or their mistake, so the Contract of the Case shall be revoked upon delivery of this application.
(Na) Judgment
According to all the records and examination, the Applicants knew, at the moment of concluding the Contract, that the knock-out condition is attached to their put-option, that they do not have any rights on the part B of some modified KIKO currency option contracts. More, it is found that they adjusted other contract conditions including the event exchange rate. Therefore, even if the Contract of the Case seems not suitable for avoiding currency risk which is the main purpose of the Contract, it is difficult to say that the Applicants’ signing the contract is due to the bank’s fraud or their mistake.
Also, as shown before, instead of paying premium to the Bank when purchasing put-option from the Respondent Bank in order to hedge currency risk, the Applicants sold knock-in call-option that is as twice as much as the premium. This makes it clear that the Applicants knew that they could see damages as they are obligated to sell twice as many dollars as the Contract amount to the bank based on the event exchange rate, (Applicant (DELETED) already has an experience of such damages from other KIKO currency option contracts before this) and it is difficult to say that the Applicants signed the Contract due to the Bank’s fraud or their mistake.
Meanwhile, according to the purposes of all the records and examination, the Applicants seem to have anticipated that the KRW-USD exchange rate would show a stable fluctuation in a certain range during the contract period, but did not foresee there would be great damages if the exchange rate sharply increases. However, by looking at just the records submitted by the Applicants, the Respondent bank does not seem to have purposely caused such result or made the Applicants sign the Contract by hiding what the Respondent may have anticipated. According to the purposes shown from all the records and examination, the Applicants seem to have anticipated the KRW-USD exchange rate would show a stable fluctuation within a certain range. Therefore, conclusion of the Contract is not from fraud of the Bank as above. Mistake of the Applicants and the Respondent Bank on anticipation of exchange rate fluctuation will be dealt later with termination upon the principle of good faith.
(3) Termination of the Contract of the Case – Principle of Good Faith
(Ga) Termination of Continuous Contract due to Change of Circumstances
The other party can terminate the Contract on the basis of the principle of good faith if, the parties could not anticipate the change of situation when circumstance that has been the basis of the Contract changed after the Contract was concluded and for which the Party was not responsible for the change; and if, in this case, binding power is acknowledged resulting in violation of the principle of good faith, and furthermore, if it is impossible to change the content of the Contract based on the change in situation or that cannot be expected from the other party. (See Supreme Court Decision 2007.3.29 2004Da31302) This theory even applies to the case where common and fundamental thought of the parties that was the basis of the Contract was found wrong ex post facto.
(Na) About this Case
From all the records and examination, making the Applicants to fulfill the obligations related to the Contract is substantially against the principle of good faith. Therefore, the Contract of the Case is lawfully terminated upon delivery of a copy of this application, which manifests intention of termination. (Delivered to the Respondent Bank on Nov. 3)
① The Contract of the Case has a structure categorized as a continuous contract for which payment is made based on the market exchange rate at the time of expiration for every tranche expiring every month during the contract period of 1~3 years. (but, since the total values of the Applicants’ put-option and the Respondent Bank’s call-option are the same considering the whole contract period, not every tranche, option premiums may need to be calculated on termination of contract)
② That ‘Implied volatility for KRW-USD’ was the key variant in deciding the values of each option the Applicants and the Respondent have upon concluding the Contract is an objective circumstance being the basis of the Contract. Also, as shown before, both the Applicants and the Respondent Bank signed the Contract with an anticipation that the exchange rate will go up and down within a certain range, so it is the common and fundamental perception of the Parties, which was the basic element of the Contract.
③ However, the KRW-USD exchange rate surged and its implied volatility also has sharply increased after the Contract of the Case was concluded (KRW-USD exchange rate: 3.6~5.4 at the time of contract conclusion, 10.025 on Mar 18 2008, 10295 on Sep 1, 15.8325 on Sep 16 2008, 20.7475 on Oct 6 2008, 25.7575 on Oct 7 2008, 31.3725 on Oct 16 2008, 37.86 on Oct 28 2008), such a significant change of circumstances would not have been anticipated by the Applicants or the Respondent considering the trend of the KRW-USD exchange rate for the previous 3~4 years before the contract was concluded, and prediction reports from renowned financial or research institutions.
④ As above, with the increasing KRW-USD exchange rate, the Applicants have faced great damages and more losses are expected unless the exchange rate does not sharply fall in the future during the remaining period of the Contract, the amount is estimated to exceed the figure predicted or could be predicted by the Applicants. Also, there is an imbalance between profit and losses of the Applicants and the Respondent Bank from the Contract of the Case.
⑤ According to the Contract of the Case, Contract conditions including the event price specified upon concluding the Contract is settled to remain for the contract period of 1~3 years, and there is no measure to help adjust to the situation where the Applicants’ losses increase more than expected with the increasing KRW-USD exchange rate or where the contract condition based on the implied volatility is no longer reasonable as the implied volatility of the KRW-USD exchange rate surged.
⑥ Generally, banks should not recommend OTC derivatives to those not capable enough to take such risks when they are considered inadequate based on the type of occupation, financial status, level of financial transactions, purpose of transaction, level of understanding the product, risk management ability and product type. Furthermore, the banks have a duty to fully explain important facts to clients like the transaction structure, risk entailing the transaction, major influential element on losses. Considering the Applicants’ experience in transaction of OTC derivatives and qualifications of bank officials, the Applicants did not have the capability in managing risks on OTC derivatives. Since the Contract not only has a complex and eccentric structure, but also implies limitless losses, the Respondent Bank should have complied with the suitability and duty to explain. But, the Respondent Bank seems to have not met the obligation and as a result, the Applicants face a great deal of damages regarding the fulfillment of the Contract.
i) Violation of the Suitability Principle
The Respondent Bank should check in advance whether the content of the Contract is suitable for the Applicants’ purpose of avoiding currency risk and whether the Applicants would not be exposed to excessive risk compared to their financial structure, operation structure or risk management ability, and if not, the Bank should not have recommended the product or have changed the content to make it suitable for the Applicants.
However, since the Applicants are exposed to unlimited losses, the Contract conditions are not suitable for them considering the transaction purposes, financial structure, operation status and risk management ability. The Respondent Bank had a duty to recommend other conditions (for example, limiting the Applicants’ total amount of losses, compensating a reasonable amount when the exchange rate rises above a certain level and allow the Applicants to terminate the Contract, or that limit the Applicant’s losses upon conclusion of the Contact) but did not fulfill it.
On this notion, the Respondent Bank asserts that the Applicants would not have accepted such conditions as above even if they will be disadvantaged anyhow including that the put-option event exchange rate will go down . However, if the Respondent Bank had fulfilled the duty of explanation which will be dealt later, it cannot be considered that there was no possibility at all that the Applicants would not have accepted the conditions taking risks of plummeting event exchange prices. Therefore, the Respondent Bank’s claim is not acknowledged.
ii) Violation of Duty to Explain
As shown above, since the Contract of the Case has a structure for which the Applicants would have damages when the exchange rate surges, it seems that the Respondent Bank has a duty to explain clearly and sufficiently about the risks implied in the Contract when the Respondent recommended it. (Simply notifying the risks in general and abstract is not enough considering the scope of the potential risks, and further, the Bank must have checked if the Applicants would still go on with signing the Contract after telling them what will happen in the worst case in detail clearly to make them fully understand.) Also, the Respondent Bank has a duty not to disturb the Applicants’ decision-making or risk cognition act by providing conclusive judgment on the future KRW-USD exchange rate that is directly related to the risk.
However, on recommending to sign the Contract, the Respondent Bank notified the Applicants the risks only in general and abstract (even though it was written that the Applicants had the duty to sell twice the price of the contract amount when the knock-in condition was satisfied in red in the contract proposal, product description, this also is deemed as general notification), the Respondent did not clearly and sufficiently explained what kind of situation the Applicants would face when KRW-USD exchange rate rises as present (According to Exhibit So-eul 23. 12, the Respondent notified the Applicants on the profits and losses with the estimation of fluctuation about ±6~70 KRW). Also, the Respondent emphasized only that the exchange rate will gradually go down and did not sufficiently explain on the possibility of its increase.
(4) Conclusion
Therefore, the Contract of the Case is lawfully terminated upon delivery of the Application copy manifesting the Applicants’ will to terminate the Contract, the tranche which expires after termination is considered to be ineffective. So, the Respondent Bank has a duty not to implement call-option based on the Contract regarding the ineffective tranche or carry out any disadvantageous disposition presuming the Contract of the part remains effective.
Na. The Need of Preservation
Considering the circumstances indicated in all the records and examination, in particular, up-to-date transaction losses of the Applicants or the amount of future appraisal losses and aggravation in the financial structure operation status (as of 1st to 3rd quarter of 2008, Applicant (DELETED) had an amount of derivative transaction losses of KRW 5.8 billion, losses of derivative appraisal of KRW14.7 billion that resulted in KRW -7.1 billion net profit of current period. For (DELETED)’s case derivative transaction losses amounted to KRW 9.8 billion, losses of derivative appraisal KRW 101.7 billion leading to KRW -64.1 billion), falling creditability in the market and illiquidity, necessity of temporarily put a halt in the part that became ineffective by the Applicants’ manifesting opinions to terminate the Contract is persuasively shown. ((DELETED) is a case of ‘over-hedge’ since the total amount of contract amount for various KIKO currency option contracts exceeds the amount of available dollars, but since the Respondent bank had a duty to check its status of ‘over-hedge’ of the other party in accordance with the suitability principle, only (DELETED) cannot be denied the need for preservation.)
On this issue, the Respondent Bank asserts that it would face great damages since it carried out a counter transaction like Back To Bank regarding the dollar it gets to achieve due to the Contract between the third party like other financial institutions in order not to exceed the foreign currency limit a bank can reserve, but it still fulfill obligations in regard to the counter transaction without being able to exercise the rights when the Contract of the Case becomes ineffective as above. However, full explanation on the above counter transaction is not sufficient, and the damages the Respondent will face are not as serious as that of the Applicants when the Contract is continuously be in effect. (Net profit related to derivatives for the Respondent is \448.7 billion as of 1st to 3rd quarter, risen fivefold from \95 billion in the same period last year). Therefore, the Respondent Bank’s claim is not acknowledged.
Also, the Respondent Bank asserts that the Fast Track Program of the government will be futile when the provisional disposition is accepted. But, the effectiveness of the program is questionable according to all the records and examination, and since the above program is created on the premise that the KIKO currency option contract is carried out as stated. Therefore, the necessity for preservation cannot be denied considering the circumstances above.
3. CONCLUSION
This Application is accepted in that it has a reasonable ground and other applications are dismissed with no reasonable grounds.
January 7, 2009
Financial Arms of Mass Destruction (Part 2)
By Sean Hayes (Korea Times 01/08/09)
In last week's article I noted that ``Warren Buffett, who used to utilize credit-default swaps (CDS), called them financial weapons of mass destruction (WMDs). I love Warren Buffett and was a student of his every word during my pre-attorney stockbroker days, but blaming CDS for our present financial difficulties is as logical as blaming the Iraq War on oil or skin cancer on the sun."
The heart of our current difficulties was not `complex financial instruments but many governments the world over, particularly the American government, being hell-bent on distorting markets.
Their policies led to distorted interest rates and asset prices, loans to un-creditworthy borrowers and, eventually, the destruction of our markets.
The first culprit was Alan Greenspan and his serfs at the Federal Reserve. Since 2001, it has drastically increased the money supply while reducing the federal funds rate.
The drastic increase in the money supply led to the increased availability of credit, which overwhelmingly went into real estate. This Fed-induced, credit-fueled artificial demand led to an overheated real estate market and a drastic increase in the construction of new homes.
The dramatic decrease in the federal funds rate from 6.25 percent to 1.75 present led to a negative rate, in real terms. The interest rates were lower than the inflation rate, leading to more adjustable-rate mortgages (ARMs), since short-term interest rates were much lower than long-term interest rates.
The Fed-induced low short-term interest rates led to almost 40 percent of homebuyers choosing ARMs by 2004. When short-term rates began to climb and mortgages adjusted up, many of these new homeowners were unable to pay their mortgages.
The second culprit was a government that encouraged and even mandated the writing of risky mortgages. In 2006, over 23 percent of them were classified as ``nonprime.'' The vast majority included only a small down payment.
The culprits in the government include an administration that extended the Community Reinvestment Act and the Home Mortgage Disclosure Act, the Department of Housing and Urban Development, the Federal Housing Administration, and Fannie Mae and Freddie Mac.
The Community Reinvestment Act and related acts made it more difficult for lenders to receive acceptable bank ratings, which, after the amendments, were heavily influenced by how well a lender ``served'' low, moderate income and minority borrowers.
Without acceptable ratings, banks did not receive permission to merge or establish new branches.
Secondly, the Department of Housing and Urban Development (HUD) lowered payment requirements to only 3 percent. Many private lenders, in order to compete, followed suit. These low down payment mortgages were some of the first to fail.
The Department of Housing and Urban Development also strong-armed lenders to offer loans to ``nonprime'' borrowers by suing lenders who declined higher percentages of minority applicants, leading to many lenders not only evaluating credit risk but evaluating lawsuit risk.
Finally, Fannie and Freddie Mac grew to hold over half of the U.S. mortgage market. HUD set ``affordable housing'' goals; 52 percent of borrowers had to be below-median income earners.
Institutional investors were more than willing to feed these goliaths since they had the implicit guarantee of the U.S. government.
Many in D.C. tried to reign in on them but they had the strong backing of some of the most powerful people in Washington, including our usually regulation-friendly Barney Frank, chairman of the House Financial Services Committee, who strongly opposed plans to monitor Fannie and Freddie Mac, noting that the agencies ``are not facing any kind of financial crisis … The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''
He added, in a House hearing, that ``there has been more alarm raised about potential unsafety and unsoundness than, in fact exists … I want to roll the dice a little bit more in this situation toward subsidized housing.''
Hopefully, we can give credit where credit is due and learn, as Professor Lawrence White has noted, that ``Cheap-money policies by the Federal Reserve system do not produce a sustainable prosperity. Hiding the cost of mortgage subsidies off-budget, as by imposing `affordable housing' regulatory mandates on banks and by providing implicit taxpayer guarantees on Fannie and Freddie Mac bonds, does not give us more housing at nobody's expense.''
Sean Hayes is a New York attorney working with the Seoul office of LOGOS Law LLC, one of Korea's largest law firms, with offices in Beijing, Hanoi, Ho Chi Minh City, Incheon, Moscow, Phnom Penh, Seoul and Songdo. He formerly worked as a law faculty member and for the Constitutional Court of Korea. LOGOS Law LLC has recently formed a financial crisis practice group, which contains some of the best and brightest minds in the banking, finance, and litigation areas. He can be reached at http://www.thekoreanlawblog.com/
In last week's article I noted that ``Warren Buffett, who used to utilize credit-default swaps (CDS), called them financial weapons of mass destruction (WMDs). I love Warren Buffett and was a student of his every word during my pre-attorney stockbroker days, but blaming CDS for our present financial difficulties is as logical as blaming the Iraq War on oil or skin cancer on the sun."
The heart of our current difficulties was not `complex financial instruments but many governments the world over, particularly the American government, being hell-bent on distorting markets.
Their policies led to distorted interest rates and asset prices, loans to un-creditworthy borrowers and, eventually, the destruction of our markets.
The first culprit was Alan Greenspan and his serfs at the Federal Reserve. Since 2001, it has drastically increased the money supply while reducing the federal funds rate.
The drastic increase in the money supply led to the increased availability of credit, which overwhelmingly went into real estate. This Fed-induced, credit-fueled artificial demand led to an overheated real estate market and a drastic increase in the construction of new homes.
The dramatic decrease in the federal funds rate from 6.25 percent to 1.75 present led to a negative rate, in real terms. The interest rates were lower than the inflation rate, leading to more adjustable-rate mortgages (ARMs), since short-term interest rates were much lower than long-term interest rates.
The Fed-induced low short-term interest rates led to almost 40 percent of homebuyers choosing ARMs by 2004. When short-term rates began to climb and mortgages adjusted up, many of these new homeowners were unable to pay their mortgages.
The second culprit was a government that encouraged and even mandated the writing of risky mortgages. In 2006, over 23 percent of them were classified as ``nonprime.'' The vast majority included only a small down payment.
The culprits in the government include an administration that extended the Community Reinvestment Act and the Home Mortgage Disclosure Act, the Department of Housing and Urban Development, the Federal Housing Administration, and Fannie Mae and Freddie Mac.
The Community Reinvestment Act and related acts made it more difficult for lenders to receive acceptable bank ratings, which, after the amendments, were heavily influenced by how well a lender ``served'' low, moderate income and minority borrowers.
Without acceptable ratings, banks did not receive permission to merge or establish new branches.
Secondly, the Department of Housing and Urban Development (HUD) lowered payment requirements to only 3 percent. Many private lenders, in order to compete, followed suit. These low down payment mortgages were some of the first to fail.
The Department of Housing and Urban Development also strong-armed lenders to offer loans to ``nonprime'' borrowers by suing lenders who declined higher percentages of minority applicants, leading to many lenders not only evaluating credit risk but evaluating lawsuit risk.
Finally, Fannie and Freddie Mac grew to hold over half of the U.S. mortgage market. HUD set ``affordable housing'' goals; 52 percent of borrowers had to be below-median income earners.
Institutional investors were more than willing to feed these goliaths since they had the implicit guarantee of the U.S. government.
Many in D.C. tried to reign in on them but they had the strong backing of some of the most powerful people in Washington, including our usually regulation-friendly Barney Frank, chairman of the House Financial Services Committee, who strongly opposed plans to monitor Fannie and Freddie Mac, noting that the agencies ``are not facing any kind of financial crisis … The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''
He added, in a House hearing, that ``there has been more alarm raised about potential unsafety and unsoundness than, in fact exists … I want to roll the dice a little bit more in this situation toward subsidized housing.''
Hopefully, we can give credit where credit is due and learn, as Professor Lawrence White has noted, that ``Cheap-money policies by the Federal Reserve system do not produce a sustainable prosperity. Hiding the cost of mortgage subsidies off-budget, as by imposing `affordable housing' regulatory mandates on banks and by providing implicit taxpayer guarantees on Fannie and Freddie Mac bonds, does not give us more housing at nobody's expense.''
Sean Hayes is a New York attorney working with the Seoul office of LOGOS Law LLC, one of Korea's largest law firms, with offices in Beijing, Hanoi, Ho Chi Minh City, Incheon, Moscow, Phnom Penh, Seoul and Songdo. He formerly worked as a law faculty member and for the Constitutional Court of Korea. LOGOS Law LLC has recently formed a financial crisis practice group, which contains some of the best and brightest minds in the banking, finance, and litigation areas. He can be reached at http://www.thekoreanlawblog.com/
January 4, 2009
Seoul Bar Association Implements Assessment of Judges
Seoul Bar Association announced that it will begin assessing 700 judges in almost all Seoul courts including Seoul High Court, Seoul Administrative Court, Seoul Family Court, and all Seoul district courts.
The results, according to the Seoul Bar Association, will be kept confidential. A report on the outcome of the evaluations will be given to the Supreme Court. However, the Seoul Bar Association noted, according to Law Times, that the evaluations could be made public if the evaluations are not reflected in judicial evaluations conducted by the Supreme Court next February.
I was quoted by Asian Legal Business as being opposed to the plan.
The results, according to the Seoul Bar Association, will be kept confidential. A report on the outcome of the evaluations will be given to the Supreme Court. However, the Seoul Bar Association noted, according to Law Times, that the evaluations could be made public if the evaluations are not reflected in judicial evaluations conducted by the Supreme Court next February.
I was quoted by Asian Legal Business as being opposed to the plan.
January 3, 2009
KIKO: Injunction Granted Against SC First Bank
A Korean law firm has won a bellwether case (injucntion granted) for two medium- sized Korean companies with combined losses of over $21 million in KIKO contracts. Hundreds of other cases are in the pipeline.
The Seoul Central District Court issued a preliminary injunction holding that "The bank has not met its obligation to recommend additional measures to limit loses . . . and to clearly and sufficiently explain possible risks in the contracts." The preliminary injunction frees the companies from their obligations under the contract until the final ruling. The final ruling is unlikely to conflict with the injunction based on the strong language used by the court.
Knock-in Knock-out (KIKO) contracts are currency option contracts. The knock-in or knock-out events are tied to certain currency levels and are utilized by mainly exporters.
These option contracts were aggressively sold to small and medium size (SMEs) enterprises. These banks encouraged exporters to hedge against a stronger won, since it was nearly universally believed that the Korean currency would continue its appreciation against the dollar.
However, the won weakened to nearly 1,500 to the dollar from a level of less than 1,000 to a dollar. The won on January 2, 2009 was trading at 1,330 won to the dollar.
The final outcome of these cases will have great implications for the Korean banking sector, because of the amount of money in contest and the manner in which financial products are marketed.
A translation of the injunction decision can be found on this blog HERE.http://http://www.thekoreanlawblog.com/2009/01/kiko-win-by-logos-law-llc-against-sc.html
The Seoul Central District Court issued a preliminary injunction holding that "The bank has not met its obligation to recommend additional measures to limit loses . . . and to clearly and sufficiently explain possible risks in the contracts." The preliminary injunction frees the companies from their obligations under the contract until the final ruling. The final ruling is unlikely to conflict with the injunction based on the strong language used by the court.
Knock-in Knock-out (KIKO) contracts are currency option contracts. The knock-in or knock-out events are tied to certain currency levels and are utilized by mainly exporters.
These option contracts were aggressively sold to small and medium size (SMEs) enterprises. These banks encouraged exporters to hedge against a stronger won, since it was nearly universally believed that the Korean currency would continue its appreciation against the dollar.
However, the won weakened to nearly 1,500 to the dollar from a level of less than 1,000 to a dollar. The won on January 2, 2009 was trading at 1,330 won to the dollar.
The final outcome of these cases will have great implications for the Korean banking sector, because of the amount of money in contest and the manner in which financial products are marketed.
A translation of the injunction decision can be found on this blog HERE.http://http://www.thekoreanlawblog.com/2009/01/kiko-win-by-logos-law-llc-against-sc.html
January 2, 2009
Financial Arms of Mass Destruction
Financial Arms of Mass Destruction (1)
By Sean Hayes (Korea Times 1/1/2009)
Warren Buffett, who used to utilize credit-default swaps (CDS), called them ``financial weapons of mass destruction (WMDs)."
I love Warren Buffett and was a student of his every word during my pre-attorney stockbroker days, but blaming CDS for our present financial difficulties is as logical as blaming the Iraq War on oil or skin cancer on the sun.
The $55 billion CDS market is certain to be regulated, since they are perceived by the vast majority of the public as the very epicenter of our problems and the cause for the spread of U.S. difficulties overseas.
This perception is far from the truth and probably originated from a fear and anathema, in America and throughout much of the world, of everything even remotely considered ``complex.''The CDS derivative market, however, is not the heart of the problem and if we leave the math out of it, is even not so complex.
For us to learn from our mistakes we need to put the credit where the credit is due and not vilify poorly understood financial tools.
The blame must be placed on our government; a government that was determined to facilitate the extension of every imaginable type of home loan to the most unqualified of borrowers.CDS, in essence, are nothing more than insurance policies on bonds and securities. CDS are not, as often noted, ``some kind of speculative wager by people who are betting money they don't have, it's an orderly process that provides a credit insurance to a market that uses it and needs it'' as stated by Prof. Roy Smith from NYU Stern School of Business to Reuters at the end of last month.
For example, at the end of 1997, JP Morgan pooled over 300 loans worth over $9.5 billion and cut the loans into different slices (tranches).
JP Morgan then sold the riskiest 10 percent tranche to investors. The tranche was entitled the Broad Index Securitization Trust Offering (Bistro).Most of the underlying loans were to financially secure companies such as IBM and Wal-Mart. Therefore, even Bistro was considered, by most, a safe investment.
The reason for the creation of this financial instrument was to increase liquidity in the credit market. Banks, because of government regulations, were mandated to reserve a percentage of their capital.Banks wishing to free up this reserve capital created CDS. These CDS were sold to investors, thus the third party investor would assume the risk of default, in exchange for regular payments from the banks.
The banks were able to free their books and thus were able to lend more.The problems in the CDS markets began when mortgages went south, not by ``complex'' financial instruments such as derivatives and securities, but the same bone-headed government that intends to fix these troubles with more regulation.
The government, hell-bent on distorting our markets, created distortions that motivated all to ignore market realities, which led to loans to credit unworthy borrowers.These market distortions were caused by the Federal Reserve, the unmitigated backing by Congress of Fannie Mae and Freddie Mac, the Federal Housing Administration loosening of down-payment requirements, the strengthening of the Community Reinvestment Act, and the Department of Housing asserting pressure on lenders to lend.
Without the government's hand in the markets few would have ever known, or even questioned, the soundness of these financial tools.
By Sean Hayes (Korea Times 1/1/2009)
Warren Buffett, who used to utilize credit-default swaps (CDS), called them ``financial weapons of mass destruction (WMDs)."
I love Warren Buffett and was a student of his every word during my pre-attorney stockbroker days, but blaming CDS for our present financial difficulties is as logical as blaming the Iraq War on oil or skin cancer on the sun.
The $55 billion CDS market is certain to be regulated, since they are perceived by the vast majority of the public as the very epicenter of our problems and the cause for the spread of U.S. difficulties overseas.
This perception is far from the truth and probably originated from a fear and anathema, in America and throughout much of the world, of everything even remotely considered ``complex.''The CDS derivative market, however, is not the heart of the problem and if we leave the math out of it, is even not so complex.
For us to learn from our mistakes we need to put the credit where the credit is due and not vilify poorly understood financial tools.
The blame must be placed on our government; a government that was determined to facilitate the extension of every imaginable type of home loan to the most unqualified of borrowers.CDS, in essence, are nothing more than insurance policies on bonds and securities. CDS are not, as often noted, ``some kind of speculative wager by people who are betting money they don't have, it's an orderly process that provides a credit insurance to a market that uses it and needs it'' as stated by Prof. Roy Smith from NYU Stern School of Business to Reuters at the end of last month.
For example, at the end of 1997, JP Morgan pooled over 300 loans worth over $9.5 billion and cut the loans into different slices (tranches).
JP Morgan then sold the riskiest 10 percent tranche to investors. The tranche was entitled the Broad Index Securitization Trust Offering (Bistro).Most of the underlying loans were to financially secure companies such as IBM and Wal-Mart. Therefore, even Bistro was considered, by most, a safe investment.
The reason for the creation of this financial instrument was to increase liquidity in the credit market. Banks, because of government regulations, were mandated to reserve a percentage of their capital.Banks wishing to free up this reserve capital created CDS. These CDS were sold to investors, thus the third party investor would assume the risk of default, in exchange for regular payments from the banks.
The banks were able to free their books and thus were able to lend more.The problems in the CDS markets began when mortgages went south, not by ``complex'' financial instruments such as derivatives and securities, but the same bone-headed government that intends to fix these troubles with more regulation.
The government, hell-bent on distorting our markets, created distortions that motivated all to ignore market realities, which led to loans to credit unworthy borrowers.These market distortions were caused by the Federal Reserve, the unmitigated backing by Congress of Fannie Mae and Freddie Mac, the Federal Housing Administration loosening of down-payment requirements, the strengthening of the Community Reinvestment Act, and the Department of Housing asserting pressure on lenders to lend.
Without the government's hand in the markets few would have ever known, or even questioned, the soundness of these financial tools.
December 23, 2008
Korean Financial Supervisory Commission Annual Report in English
The Korean Financial Supervisory Commission has published it 2009 report to the President.
The report can be found at: http://www.fsc.go.kr/eng/
The Commission noted many needed steps to stregthen Korea's economy including:
The report can be found at: http://www.fsc.go.kr/eng/
The Commission noted many needed steps to stregthen Korea's economy including:
- Extending loans to SMEs
- Supplying most loans in the first half of 2009
- Allowing Conglomerate Privity Equity Funds to Purchase other companies
- Allowing Conglomerates, that register as a holding companies, to own controlling interests in financial companies
- Privatize the Korean Develpment Bank
- Extension of maturity date of home loans for low and medium income workers with declining home values
The most significant issue to be recommended by the Commission is allowing holding companies to purchase controlling interests in financial institutions.
Spansion v. Samsung accepted by ITC
In an update to an article that I wrote for the Korea Times on 11/20/2008 the U.S. International Trade Commission (ITC) has accepted a patent infringement case against Samsung. Spansion claims the alleged infriging technology accounted for over U.S. $30 billion worth of profits for Samsung.
This is one of the largest patent infringement cases in U.S. history. If the past is any sign of the future, Samsung will settle this case prior to the finding by the ITC.
This is one of the largest patent infringement cases in U.S. history. If the past is any sign of the future, Samsung will settle this case prior to the finding by the ITC.
Liberalizations Taking Root in Korea
By Sean Hayes (Korea Times 12/18/2008)
The mobile phone market has been opened to foreign competition by the President Lee administration.
The government's reforms are finally being realized and consumers should herald this reform and welcome additional reforms proposed by the administration and the Regulatory Reform Committee in order to take Korea out of the darkness of its protectionist past and into the light of free trade and liberalism.
On Dec. 10, the Korean Communications Commission dropped the Wireless Internet Platform for Interoperability (WIPI) barrier to entry to the Korean handset market. Hopefully, the numerous other barriers to entry will be lifted in order to encourage investment, competition, innovation, and lower the burdens, while raising the benefits for consumers.
In 2005, with the Blackberry introduction into Korea looming on the horizon, the regulatory body, under pressure from Samsung and LG, passed a rule that mandated that all cell phones which connect to the Internet operate using the home-grown WIPI software.
Samsung and LG dominated the local handset market and of course welcomed the regulation.The commission, on the surface, mandated the standard for efficiency reasons, but few considered the ruling anything more than a barrier to entry created to protect the local phone makers.
The measure successfully produced a situation where most phone carriers were reluctant to break the barrier because of the prohibitive costs associated with developing phones equipped with this software.
Most of the handset makers were unwilling to use this software as Korea was the only nation utilizing it, and the market was not big enough to justify the expenditure.
In 2005, Research In Motion's Blackberry was denied permission to sell in Korea since the device lacked the WIPI software. RIM, a Canadian company, petitioned the Korean government vigorously through the Canadian Embassy in Korea, but to no avail.President Lee should be praised for opening the handset market to competition against the interest of two of Korea's biggest conglomerates.
It is doubtful that Samsung and LG will maintain their near absolute dominance of the local handset market.President Lee must have realized that the lack of competition, in the Korean market, led to some of the world's highest prices for phones, a noticeable dearth of smartphones, many phones being ``tested'' on the Korean consumer prior to shipment to Europe and the Americas, and numerous foreign businesses that castigated and maybe even avoided investment in Korea, because of the nation's perceived anti-foreign capital sentiment.
The scrapping of this regulation will likely lead to more competition in the mobile phone market, which will ultimately lead to higher quality phones, more handset options, and lower prices.My law firm is representing one of the large foreign phone manufacturers.
The company has a large manufacturing plant in Korea, but has not sold units domestically, since the regulation. Hopefully, they will enter the market with one of their great smartphones.
Likely, the introduction of this competition will lead to Samsung and LG upping the game and producing a more diverse and innovative range of even higher quality phones.We are also likely to see many progressive regulatory initiatives by the Regulatory Reform Committee.
The committee is headed by Choi Byung-sun, one of Korea's greatest minds and the dean of the Graduate School of Public Administration at Seoul National University.I had the pleasure to teach for his graduate school and we all had the pleasure of the work of a scholar dedicated to lasting change.
On the committee's Web site (www.rrc.go.kr) Dean Choi notes that: ``The Regulatory Reform Committee (RRC) is committed to transforming such malicious regulation into quality regulation and to finding alternatives other than direct regulation.''``The RRC will ensure that regulation does not stand in the way of market competition.
We will not let the privileged take advantage of regulations as a way to benefit from the sacrifice of the underprivileged or to protect their vested interests,'' he continued.
Sean Hayes is a New York attorney working with the Seoul office of LOGOS Law LLC, one of Korea's largest international law firms with offices in Beijing, Hanoi, Ho Chi Minh City, Incheon, Moscow, Phnom Penh, Seoul, and Songdo. He formerly worked as a law faculty member and for the Constitutional Court of Korea. He can be reached at SeanHayes@LawLogos.com
The mobile phone market has been opened to foreign competition by the President Lee administration.
The government's reforms are finally being realized and consumers should herald this reform and welcome additional reforms proposed by the administration and the Regulatory Reform Committee in order to take Korea out of the darkness of its protectionist past and into the light of free trade and liberalism.
On Dec. 10, the Korean Communications Commission dropped the Wireless Internet Platform for Interoperability (WIPI) barrier to entry to the Korean handset market. Hopefully, the numerous other barriers to entry will be lifted in order to encourage investment, competition, innovation, and lower the burdens, while raising the benefits for consumers.
In 2005, with the Blackberry introduction into Korea looming on the horizon, the regulatory body, under pressure from Samsung and LG, passed a rule that mandated that all cell phones which connect to the Internet operate using the home-grown WIPI software.
Samsung and LG dominated the local handset market and of course welcomed the regulation.The commission, on the surface, mandated the standard for efficiency reasons, but few considered the ruling anything more than a barrier to entry created to protect the local phone makers.
The measure successfully produced a situation where most phone carriers were reluctant to break the barrier because of the prohibitive costs associated with developing phones equipped with this software.
Most of the handset makers were unwilling to use this software as Korea was the only nation utilizing it, and the market was not big enough to justify the expenditure.
In 2005, Research In Motion's Blackberry was denied permission to sell in Korea since the device lacked the WIPI software. RIM, a Canadian company, petitioned the Korean government vigorously through the Canadian Embassy in Korea, but to no avail.President Lee should be praised for opening the handset market to competition against the interest of two of Korea's biggest conglomerates.
It is doubtful that Samsung and LG will maintain their near absolute dominance of the local handset market.President Lee must have realized that the lack of competition, in the Korean market, led to some of the world's highest prices for phones, a noticeable dearth of smartphones, many phones being ``tested'' on the Korean consumer prior to shipment to Europe and the Americas, and numerous foreign businesses that castigated and maybe even avoided investment in Korea, because of the nation's perceived anti-foreign capital sentiment.
The scrapping of this regulation will likely lead to more competition in the mobile phone market, which will ultimately lead to higher quality phones, more handset options, and lower prices.My law firm is representing one of the large foreign phone manufacturers.
The company has a large manufacturing plant in Korea, but has not sold units domestically, since the regulation. Hopefully, they will enter the market with one of their great smartphones.
Likely, the introduction of this competition will lead to Samsung and LG upping the game and producing a more diverse and innovative range of even higher quality phones.We are also likely to see many progressive regulatory initiatives by the Regulatory Reform Committee.
The committee is headed by Choi Byung-sun, one of Korea's greatest minds and the dean of the Graduate School of Public Administration at Seoul National University.I had the pleasure to teach for his graduate school and we all had the pleasure of the work of a scholar dedicated to lasting change.
On the committee's Web site (www.rrc.go.kr) Dean Choi notes that: ``The Regulatory Reform Committee (RRC) is committed to transforming such malicious regulation into quality regulation and to finding alternatives other than direct regulation.''``The RRC will ensure that regulation does not stand in the way of market competition.
We will not let the privileged take advantage of regulations as a way to benefit from the sacrifice of the underprivileged or to protect their vested interests,'' he continued.
Sean Hayes is a New York attorney working with the Seoul office of LOGOS Law LLC, one of Korea's largest international law firms with offices in Beijing, Hanoi, Ho Chi Minh City, Incheon, Moscow, Phnom Penh, Seoul, and Songdo. He formerly worked as a law faculty member and for the Constitutional Court of Korea. He can be reached at SeanHayes@LawLogos.com
ASEAN Charter Online
The ASEAN Charter can be found online at: http://www.aseansec.org/ASEAN-Charter.pdf
The charter has been ratified by all 10 ASEAN member states (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam).
The ASEAN Charter is an interesting step for Southeast Asia. It is interesitng to note that the decision making functions will be decided only through consensus. If consensus is not reached the decision may be made at the ASEAN Summit. The Summit is to be held twice per year and will include the heads of the 10 ASEAN member states.
The ASEAN Charter, facially, is intended to be a step to the creation on a single market by 2015.
I will be writing a law review article on this charter. The article will be published in the Spring. I will post it HERE after publication.
The charter has been ratified by all 10 ASEAN member states (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam).
The ASEAN Charter is an interesting step for Southeast Asia. It is interesitng to note that the decision making functions will be decided only through consensus. If consensus is not reached the decision may be made at the ASEAN Summit. The Summit is to be held twice per year and will include the heads of the 10 ASEAN member states.
The ASEAN Charter, facially, is intended to be a step to the creation on a single market by 2015.
I will be writing a law review article on this charter. The article will be published in the Spring. I will post it HERE after publication.
Egyptian Cell Service Introduced in North Korea
I had the displeasure of visiting North Korea on a few occasions. Maybe on my next trip I will be able to use my cell phone.
The Egyptian company, Orascom Telecom, announced that it is investing $400mil in North Korea to develop a 3G Mobile Network. CHEO Technologies, which is 75% owned by Orascom and 25% owned by North Korea, won a 25-year-license to operate the network.
The network went online today. Orascom noted that service will be expanded to most major cities by the end of the year.
It is puzzling why this company would invest in North Korea. At present, most North Koreans are not allowed to own phones and the Internet is strictly controlled. Also, I hope Orascom realizes that they have no remedy for contractual breaches and North Korea is not known for honoring contracts.
The Egyptian company, Orascom Telecom, announced that it is investing $400mil in North Korea to develop a 3G Mobile Network. CHEO Technologies, which is 75% owned by Orascom and 25% owned by North Korea, won a 25-year-license to operate the network.
The network went online today. Orascom noted that service will be expanded to most major cities by the end of the year.
It is puzzling why this company would invest in North Korea. At present, most North Koreans are not allowed to own phones and the Internet is strictly controlled. Also, I hope Orascom realizes that they have no remedy for contractual breaches and North Korea is not known for honoring contracts.
Korean Investment in Asia and the West is on the Decline
A few news sources, including Law Times, have announced the financial crisis is curtailing Korean company’s investments abroad.
Kumho Tire has announced that it will suspend the building of a tire plant in Georgia. The project was scheduled to be completed in the second half of 2009.
Kia motors will likely not go forward with a $1 billion assembly plant in Georgia.
Posco Steel planed to continue its plans of building a $12 billion mill in India and a $5million mill in Vietnam. However, news has spread that the plans were scraped because of disputes with the governments.
I have a few clients that have suspended their Southeast Asia projects because of the Won’s collapse. One of the projects is the building of one of the tallest buildings in Cambodia. The foundation and a few floors have already been built.
Many in the real estate market believe that many Korean invested projects will be suspended until the won stabilizes at 1,15o. I am a little more hopeful and believe that projects that have commenced will proceed on schedule, if positive economic sentiment returns early in the New Year.
Kumho Tire has announced that it will suspend the building of a tire plant in Georgia. The project was scheduled to be completed in the second half of 2009.
Kia motors will likely not go forward with a $1 billion assembly plant in Georgia.
Posco Steel planed to continue its plans of building a $12 billion mill in India and a $5million mill in Vietnam. However, news has spread that the plans were scraped because of disputes with the governments.
I have a few clients that have suspended their Southeast Asia projects because of the Won’s collapse. One of the projects is the building of one of the tallest buildings in Cambodia. The foundation and a few floors have already been built.
Many in the real estate market believe that many Korean invested projects will be suspended until the won stabilizes at 1,15o. I am a little more hopeful and believe that projects that have commenced will proceed on schedule, if positive economic sentiment returns early in the New Year.
Financial Crisis: Doopey Hacks and Savvy Crooks
By Sean Hayes (Korea Times 12/11/08)
Discord in our financial institution is not caused by structured finance (securitization) or other ``complex" financial instruments, but dopey hacks and savvy crooks.
I had a conversation with an attorney from one of Korea's best known law firms. The attorney, to my surprise, was obviously not familiar with securitization and thus naively blamed the financial crisis on these ``complex schemes.''Securitization may be considered a complex scheme, but complex does not necessarily have to lead to tribulations.Chess is one of the most complex games man has made.
Few understand or can even spell Latvian Gambit or Alehine's Defense.However, chess and the complex tools (moves) used are not maligned because of complexity. However, a hack player leads to poor games and cursing by eccentric masters.
Likewise, the securitization tool in the hands of hacks leads to poor performing markets and cursing taxpayers. When we throw the crooks into the mix the situation is exasperated and leads to lawsuits, defaults, write-downs and eventually government bailouts.Securitization should not be maligned because of its players, since without it our access to capital would be stymied, interest rates would rise, and our growth rates would decrease.
In America, the advent of our modern structured finance, in the mortgage industry, began in the early 1970s by Ginnie Mae.Ginnie Mae, a government corporation, intended, through securitization, to create a secondary market for residential mortgages, thus, increasing liquidity. This increased liquidity led to an increase in homeownership.Securitization is not as complex as one would imagine.
Securitization, in short, is simply when a non-marketable asset is converted into a marketable security. This is accomplished, in the mortgage context, by the pooling of an originator's illiquid individual mortgages.The new pooled security is then sold by the originator to other financial institutions, thus, replacing a potentially non-performing asset on the originator's books with cash.The cash can then be used to offer more mortgages.
Thus, the originator does not need to raise additional cash through the more expensive tools of issuing debt or equity.These mortgage-backed securities (MBS) are enticing to investors, since they guarantee a fixed rate of return.
All individuals, including homeowners, benefit from securitization, since it increases market efficiencies while promoting additional access to capital.Problems occur when markets are dominated by dopey hacks and savvy crooks.
For example, a type of security called a collateralized debt obligation (CDO) is a security, in short, where assets and loans are pooled and the pool is divided into classes (tranches).Each tranche represents a different risk with the higher risk tranche receiving a higher yield than a lower. The safer, lower yielding tranche, normally is the senior tranche, thus during default, will be paid first. CDOs allow great flexibility, thus encouraging more investment.Problems occur when language in the agreement is worded in a manner that obfuscates.
The unintentional obfuscation by the dopey hack or the intentional obfuscation by savvy crooks causes litigation.For example, Citigroup's billion-dollar CDO is ending in litigation because of conflicting language in the CDO contract.
This wouldn't occur if it was drafted in a clear manner and all parties were astute enough to understand the implications of their investments.These same dopey hacks and savvy crooks had their hands in our rating agencies, government sponsored enterprises, financial institutions, congressional hallways, academic institutions, think tanks and even in some of our best known law firms.
Sean Hayes is a New York attorney working with the Seoul office of LOGOS Law LLC, one of Korea's largest international law firms with offices in Beijing, Hanoi, Ho Chi Minh City, Incheon, Moscow, Phnom Penh, Seoul, and Songdo. He formerly worked as a law faculty member and for the Constitutional Court of Korea. He can be reached at SeanHayes@LawLogos.com
Discord in our financial institution is not caused by structured finance (securitization) or other ``complex" financial instruments, but dopey hacks and savvy crooks.
I had a conversation with an attorney from one of Korea's best known law firms. The attorney, to my surprise, was obviously not familiar with securitization and thus naively blamed the financial crisis on these ``complex schemes.''Securitization may be considered a complex scheme, but complex does not necessarily have to lead to tribulations.Chess is one of the most complex games man has made.
Few understand or can even spell Latvian Gambit or Alehine's Defense.However, chess and the complex tools (moves) used are not maligned because of complexity. However, a hack player leads to poor games and cursing by eccentric masters.
Likewise, the securitization tool in the hands of hacks leads to poor performing markets and cursing taxpayers. When we throw the crooks into the mix the situation is exasperated and leads to lawsuits, defaults, write-downs and eventually government bailouts.Securitization should not be maligned because of its players, since without it our access to capital would be stymied, interest rates would rise, and our growth rates would decrease.
In America, the advent of our modern structured finance, in the mortgage industry, began in the early 1970s by Ginnie Mae.Ginnie Mae, a government corporation, intended, through securitization, to create a secondary market for residential mortgages, thus, increasing liquidity. This increased liquidity led to an increase in homeownership.Securitization is not as complex as one would imagine.
Securitization, in short, is simply when a non-marketable asset is converted into a marketable security. This is accomplished, in the mortgage context, by the pooling of an originator's illiquid individual mortgages.The new pooled security is then sold by the originator to other financial institutions, thus, replacing a potentially non-performing asset on the originator's books with cash.The cash can then be used to offer more mortgages.
Thus, the originator does not need to raise additional cash through the more expensive tools of issuing debt or equity.These mortgage-backed securities (MBS) are enticing to investors, since they guarantee a fixed rate of return.
All individuals, including homeowners, benefit from securitization, since it increases market efficiencies while promoting additional access to capital.Problems occur when markets are dominated by dopey hacks and savvy crooks.
For example, a type of security called a collateralized debt obligation (CDO) is a security, in short, where assets and loans are pooled and the pool is divided into classes (tranches).Each tranche represents a different risk with the higher risk tranche receiving a higher yield than a lower. The safer, lower yielding tranche, normally is the senior tranche, thus during default, will be paid first. CDOs allow great flexibility, thus encouraging more investment.Problems occur when language in the agreement is worded in a manner that obfuscates.
The unintentional obfuscation by the dopey hack or the intentional obfuscation by savvy crooks causes litigation.For example, Citigroup's billion-dollar CDO is ending in litigation because of conflicting language in the CDO contract.
This wouldn't occur if it was drafted in a clear manner and all parties were astute enough to understand the implications of their investments.These same dopey hacks and savvy crooks had their hands in our rating agencies, government sponsored enterprises, financial institutions, congressional hallways, academic institutions, think tanks and even in some of our best known law firms.
Sean Hayes is a New York attorney working with the Seoul office of LOGOS Law LLC, one of Korea's largest international law firms with offices in Beijing, Hanoi, Ho Chi Minh City, Incheon, Moscow, Phnom Penh, Seoul, and Songdo. He formerly worked as a law faculty member and for the Constitutional Court of Korea. He can be reached at SeanHayes@LawLogos.com
Politics Takes Backdoor to Progress
Politics Takes Backdoor to Progress
By Sean Hayes (Korea Times 12/03/08)
South Korea and India are scheduled to sign a Comprehensive Economic Partnership Agreement (CEPA). The accord will offer more opportunities for trade. However, many reforms are needed in both nations before the full benefits of the pact and free trade are realized.
For my Korean and international clients looking to invest in India, one of the most alarming discoveries is the dreadful state of the Indian banking sector.Many investors are hopeful for the continuation of 9 percent growth in India, but fear that if foreign direct investment (FDI) decreases, because of our present financial situation, it is likely that India's growth rate will drastically fall, which will naturally lead to fewer opportunities and benefits from investing in India.An interesting seminar, which I had the pleasure to present a paper at, hosted by the Asia-Europe Perspective Forum and the India-Korea Business and Policy Forum, was held Thursday.
The seminar discussed some of the necessary reforms that both nations need to quickly adopt. My presentation, at the seminar, emphasized business opportunities for Korean and Indian companies, while noting reforms that are needed in both countries.
In India, necessary reforms must be immediately implemented, according to many observers, in the banking sector. However, many fear that political interest groups in Korea and India, for their own self-interest and possibly self-preservation, will never allow them and that the status quo is likely to remain unchanged in the foreseeable future.
For example, India is vigorously seeking FDI mainly because of the lack of funding opportunities for local companies and the difficulty Indian companies face in obtaining external commercial borrowing (ECB).One reason for the funding difficulties, amongst others, is that India's financial sector is controlled by state-owned commercial banks, which are required to lend to ``priority" sectors.The Statutory Liquidity Rules (SLR) require that 25 percent of bank deposits in government securities, the nation has a low savings rate, the local stock markets only account for around 140 percent of GDP, and the bond market is dominated by the debt-ridden government (90 percent of the bond market in government debt).
These facts led to an economy that lacks the ability to adequately fund needed industries and corporations. Thus, FDI and ECB are vigorously sought.The answer to this problem, at first blush, is obvious. However, India is often, for political motivations, not willing to pursue the obvious.
India, first, needs to privatize banks. Nearly 80 percent of the assets and deposits in the banking sector are controlled by state-owned commercial banks. These banks are notorious for allocating capital in an inefficient manner.Secondly, India must lower the amount mandated to be loaned to priority sectors. Regulations mandate that state-owned banks must provide 40 percent and private banks 25 percent of their funds to priority sectors.
These sectors include politically sensitive entities such as agriculture enterprises and small businesses. These sectors' loans have a high likelihood of being non-performing and often are in industries that are returning very low returns on investment, thus leading to an inefficient use of capital.Additionally, India's high amount of government debt, SLR, and low stock market capitalization effectively creates a situation where companies have few internal sources of funding.
The answer lies in these and other liberalizations and the development and fostering of a vibrant and liquid market for corporate bonds.Koreans played an instrumental role in launching the Vietnamese stock market and will launch a Cambodian stock market. There experience in developing markets could be beneficial to an India striving to maintain consistent growth.
Hopefully, for the sake of India, politics will take a back door to development.
Sean Hayes is a New York attorney working with the Seoul office of LOGOS Law LLC, one of Korea's largest international law firms with offices in Beijing, Hanoi, Ho Chi Minh City, Incheon, Moscow, Phnom Penh, Seoul, and Songdo. He formerly worked as a law faculty member and for the Constitutional Court of Korea. He can be reached at SeanHayes@LawLogos.com
By Sean Hayes (Korea Times 12/03/08)
South Korea and India are scheduled to sign a Comprehensive Economic Partnership Agreement (CEPA). The accord will offer more opportunities for trade. However, many reforms are needed in both nations before the full benefits of the pact and free trade are realized.
For my Korean and international clients looking to invest in India, one of the most alarming discoveries is the dreadful state of the Indian banking sector.Many investors are hopeful for the continuation of 9 percent growth in India, but fear that if foreign direct investment (FDI) decreases, because of our present financial situation, it is likely that India's growth rate will drastically fall, which will naturally lead to fewer opportunities and benefits from investing in India.An interesting seminar, which I had the pleasure to present a paper at, hosted by the Asia-Europe Perspective Forum and the India-Korea Business and Policy Forum, was held Thursday.
The seminar discussed some of the necessary reforms that both nations need to quickly adopt. My presentation, at the seminar, emphasized business opportunities for Korean and Indian companies, while noting reforms that are needed in both countries.
In India, necessary reforms must be immediately implemented, according to many observers, in the banking sector. However, many fear that political interest groups in Korea and India, for their own self-interest and possibly self-preservation, will never allow them and that the status quo is likely to remain unchanged in the foreseeable future.
For example, India is vigorously seeking FDI mainly because of the lack of funding opportunities for local companies and the difficulty Indian companies face in obtaining external commercial borrowing (ECB).One reason for the funding difficulties, amongst others, is that India's financial sector is controlled by state-owned commercial banks, which are required to lend to ``priority" sectors.The Statutory Liquidity Rules (SLR) require that 25 percent of bank deposits in government securities, the nation has a low savings rate, the local stock markets only account for around 140 percent of GDP, and the bond market is dominated by the debt-ridden government (90 percent of the bond market in government debt).
These facts led to an economy that lacks the ability to adequately fund needed industries and corporations. Thus, FDI and ECB are vigorously sought.The answer to this problem, at first blush, is obvious. However, India is often, for political motivations, not willing to pursue the obvious.
India, first, needs to privatize banks. Nearly 80 percent of the assets and deposits in the banking sector are controlled by state-owned commercial banks. These banks are notorious for allocating capital in an inefficient manner.Secondly, India must lower the amount mandated to be loaned to priority sectors. Regulations mandate that state-owned banks must provide 40 percent and private banks 25 percent of their funds to priority sectors.
These sectors include politically sensitive entities such as agriculture enterprises and small businesses. These sectors' loans have a high likelihood of being non-performing and often are in industries that are returning very low returns on investment, thus leading to an inefficient use of capital.Additionally, India's high amount of government debt, SLR, and low stock market capitalization effectively creates a situation where companies have few internal sources of funding.
The answer lies in these and other liberalizations and the development and fostering of a vibrant and liquid market for corporate bonds.Koreans played an instrumental role in launching the Vietnamese stock market and will launch a Cambodian stock market. There experience in developing markets could be beneficial to an India striving to maintain consistent growth.
Hopefully, for the sake of India, politics will take a back door to development.
Sean Hayes is a New York attorney working with the Seoul office of LOGOS Law LLC, one of Korea's largest international law firms with offices in Beijing, Hanoi, Ho Chi Minh City, Incheon, Moscow, Phnom Penh, Seoul, and Songdo. He formerly worked as a law faculty member and for the Constitutional Court of Korea. He can be reached at SeanHayes@LawLogos.com
December 22, 2008
Garnishing Pay in Korea
Garnishing Wages in Korea
I received a call from a friend asking about information concerning collecting on a large debt. He loaned money to a “friend” and the friend never made a payment on the loan. Word to the wise, don't make large loans to friends----cry poverty instead.
In Korea, after a judgment or order to pay by a court, a plaintiff can collect on an unpaid debt through garnishing of wages. Garnishing of wages is normally the best way to guarantee the collection of debt when a debtor doesn’t have real or personal property. Most law firms can perform the service for a modest fee.
I received a call from a friend asking about information concerning collecting on a large debt. He loaned money to a “friend” and the friend never made a payment on the loan. Word to the wise, don't make large loans to friends----cry poverty instead.
In Korea, after a judgment or order to pay by a court, a plaintiff can collect on an unpaid debt through garnishing of wages. Garnishing of wages is normally the best way to guarantee the collection of debt when a debtor doesn’t have real or personal property. Most law firms can perform the service for a modest fee.
- Less than W1.2mil (No wages can be garnished)
- W1.2mil - W2.4mil (Monthly Wage – W1.2mil)
- W2.4mil –W6mil (1/2 Monthly Wage)
- Over W6mil (Half monthly Wage minus W3mil divided by two plus W3million minus monthly wage)
Examples:
1. W2,000,000 Monthly Pay (Can garnish monthly W800,000)
2. W3,000,000 Monthly (Can garnish monthly W1,500,000)
3. W5,000,000 Monthly Pay (Can garnish W2,500,000)
4. W6,000,000 Monthly Pay(Can garnish W3,000,000)
5. W12,000,000 Monthly Pay (Can garnish W7.500,000)
6. W20,000,000 Monthly Pay (Can garnish W13,500,000)
November 28, 2008
Lack of Office Space in Seoul
Lack of Office Space in Seoul
By Sean Hayes (Korea Times 11-26-2008)
Korea, in this global economic turmoil, must become a more attractive location for foreign investors. The answer to attracting more foreign capital is obviously to improve the overall investment climate.
Along with the ubiquitous mention of tax reductions, regulatory revisions, and an improved living environment; Korea also must reduce expenses in doing business in the country including access to affordable office space.
The access to affordable office space may be as important for the short- and long-term development of the economy and the nation's goal of becoming the hub of Asia as many of the regulatory, legal, political, and economic reforms that have been proposed by the Lee Myung-bak administration.
For example, a few of my clients mentioned that one of the major obstacles to expanding their presence in Korea is the lack of office space. One, in particular, is simply unable to find office space near their present address and is forced to delay recruitment.
I have also heard, over the years, from many medium size companies shocked at finding the price of quality real estate, in Seoul, to be on par with their foreign headquarters.
The situation is also troubling for local companies. My law firm leases four floors in a prime building in Samseong-dong that is 100 percent occupied. The firm is salivating at the chance that they may be able to rent a part of a floor within the next couple of months.
The situation is well represented in Colliers International estimates, in its last report, that the vacancy rate in Seoul's central business district, the Gangnam business district, and the Yeouido business district of prime buildings is 0.36 percent, 0.53 percent, and 0.82 percent respectively and the net effective price per 3.3 square meters, in these same areas, respectively, is 220,000 won, 217,000 won, and 170,000 won.
This low vacancy rate and high price places Korea at or near the top of lists of cities with the highest office occupancy rates and high amongst lists of the most expensive office rental rates.With President Lee's experience in the construction industry, successful leadership of the Seoul metropolitan government, and proactive style, hopefully, he will set his staff in motion to address a problem that is pushing some foreigner companies to forego investment in Korea and encouraging others, already in Korea, to not increase investment in human capital.
Korea, accordingly, must increase the supply of quality office space in the three major business districts and also attempt to curb price increases.
Some of the issues that the administration should address in order to achieve this goal is how to expedite zoning and inspection procedures, and ensure access to government guarantees to the experienced, innovative, but now cash strapped developers. Additionally, it must promote the conversion of underutilized retail space to prime office space, convert lower quality office developments into higher quality prime office spaces, and reduce the tax and regulatory obligations on landowners.
If Korea, during these difficult times, is able to make itself more attractive than its neighboring investment locales it will overcome this crisis with a net gain. Hopefully, the administration will look outside the box and consider the total investment costs associated with doing business in Korea including the lack of affordable quality office space in Seoul.
Sean Hayes is a New York attorney working with the Seoul office of LOGOS LLC, one of Korea's largest international law firms with offices in Beijing, Hanoi, Ho Chi Minh City, Incheon, Moscow, Phnom Penh, Seoul, and Songdo. He formerly worked as a law faculty member and for the Constitutional Court of Korea. He can be reached at SeanHayes@LawLogos.com
By Sean Hayes (Korea Times 11-26-2008)
Korea, in this global economic turmoil, must become a more attractive location for foreign investors. The answer to attracting more foreign capital is obviously to improve the overall investment climate.
Along with the ubiquitous mention of tax reductions, regulatory revisions, and an improved living environment; Korea also must reduce expenses in doing business in the country including access to affordable office space.
The access to affordable office space may be as important for the short- and long-term development of the economy and the nation's goal of becoming the hub of Asia as many of the regulatory, legal, political, and economic reforms that have been proposed by the Lee Myung-bak administration.
For example, a few of my clients mentioned that one of the major obstacles to expanding their presence in Korea is the lack of office space. One, in particular, is simply unable to find office space near their present address and is forced to delay recruitment.
I have also heard, over the years, from many medium size companies shocked at finding the price of quality real estate, in Seoul, to be on par with their foreign headquarters.
The situation is also troubling for local companies. My law firm leases four floors in a prime building in Samseong-dong that is 100 percent occupied. The firm is salivating at the chance that they may be able to rent a part of a floor within the next couple of months.
The situation is well represented in Colliers International estimates, in its last report, that the vacancy rate in Seoul's central business district, the Gangnam business district, and the Yeouido business district of prime buildings is 0.36 percent, 0.53 percent, and 0.82 percent respectively and the net effective price per 3.3 square meters, in these same areas, respectively, is 220,000 won, 217,000 won, and 170,000 won.
This low vacancy rate and high price places Korea at or near the top of lists of cities with the highest office occupancy rates and high amongst lists of the most expensive office rental rates.With President Lee's experience in the construction industry, successful leadership of the Seoul metropolitan government, and proactive style, hopefully, he will set his staff in motion to address a problem that is pushing some foreigner companies to forego investment in Korea and encouraging others, already in Korea, to not increase investment in human capital.
Korea, accordingly, must increase the supply of quality office space in the three major business districts and also attempt to curb price increases.
Some of the issues that the administration should address in order to achieve this goal is how to expedite zoning and inspection procedures, and ensure access to government guarantees to the experienced, innovative, but now cash strapped developers. Additionally, it must promote the conversion of underutilized retail space to prime office space, convert lower quality office developments into higher quality prime office spaces, and reduce the tax and regulatory obligations on landowners.
If Korea, during these difficult times, is able to make itself more attractive than its neighboring investment locales it will overcome this crisis with a net gain. Hopefully, the administration will look outside the box and consider the total investment costs associated with doing business in Korea including the lack of affordable quality office space in Seoul.
Sean Hayes is a New York attorney working with the Seoul office of LOGOS LLC, one of Korea's largest international law firms with offices in Beijing, Hanoi, Ho Chi Minh City, Incheon, Moscow, Phnom Penh, Seoul, and Songdo. He formerly worked as a law faculty member and for the Constitutional Court of Korea. He can be reached at SeanHayes@LawLogos.com
November 23, 2008
Patent Bullies vs. Samsung
Patent Bullies
By Sean Hayes (Korea Times 11/24/08)
Samsung is embroiled in one of the world's largest patent infringement suits. Most large profitable companies, from Apple to GE, are facing increasing exposure to such suits.
These companies must take a more aggressive stance by engaging in more concerted efforts, creating systematic internal mechanisms to handle disputes and aggressively defend, in court, against attacks that are without merit.Without such efforts from our companies, patent bullies and patent trolls will gain at the expense of consumers, employees, and our most successful companies.
For example, Samsung, for the benefit of its reputation and its bottom-line, needs to devise a coherent, transparent, and yet aggressive, legal structure and system to deal with patent infringement suits, while engaging in more cross-licensing schemes.
The answer to Samsung's problems must come from a revamping of the role of in-house and outside counsel. If Samsung, the lifeblood of the Korean economy, is not willing to adapt to the realities in the intellectual property realm, I fear that its brand image and eventually its bottom-line will be negatively affected.
This, of course, will have lasting effects on all of Korean society.The most recent battle facing Samsung is over two suits filed by Spansion, the third largest maker of flash memory chips, behind Samsung and Toshiba, for infringing on Spansion's patents. In an aggressive posture, it filed a complaint at the U.S. International Trade Commission (ITC) for exclusion of the allegedly infringing products from entry.
Spansion also filed, in a federal district, a case requesting an injunction and Treble damages. If the ITC complaint prevails, it would effect the import of over 100 million gadgets, including phones, MP3 players, cameras, and digital recorders. The ITC usually takes little less than one and a half years to make a disposition.
If Spansion's case at the district court prevails, an injunction against the sale and import of the infringing products could be ordered, along with damages not specifically alleged in the filing, which, based on Samsung sales, could reach a sum of over $20 billion. A decision at the district court could take multiple years to reach.
Over the past two decades, Samsung has been investigated and has initiated investigations at the ITC on almost two-dozen occasions. In the vast majority of completed investigations, a settlement was reached before a relevant disposition. In a recent case, Samsung reached a settlement with Renesas Technology Japan.
Both Renesas and Samsung claimed violation of their respective patents.Samsung is also no stranger to actions in U.S. district courts and has also been willing to settle matters prior to disposition in the district court.
If the past is a sign of the future, Samsung again will settle the case.We will likely hear more of Spansion in the future. Spansion recently purchased an Israeli semiconductor company with numerous ``high-level" patents.
Spansion seems to be transforming itself from a producer of flash memory chips into an intellectual property licensing house.Spansion, in the future, may make little in the way of tangible products and rely on its thousands of patents for revenues.
Its first foray into large-scale complex intellectual property litigation may be simply a tool to increase awareness, stock value, and get their hands in the deep pockets of one of the world's most profitable companies. The outcome, if Samsung follows its not so distant past, is a settlement with a little gravy in the hands of a possible emerging patent bully.
Samsung, if the Spansion claims are not valid, must fight this case to the end in order to avoid the increasing number of patent bullies and trolls pursuing the deep pockets of our most successful companies.
Sean Hayes is a New York attorney working with the Seoul office of LOGOS Attorneys at Law, one of Korea's largest international law firms with offices in Beijing, Hanoi, Ho Chi Minh City, Incheon, Moscow, Phnom Penh, Seoul, and Songdo. He formerly worked as a law faculty member and for the Constitutional Court of Korea. He can be reached at SeanHayes@LawLogos.com
By Sean Hayes (Korea Times 11/24/08)
Samsung is embroiled in one of the world's largest patent infringement suits. Most large profitable companies, from Apple to GE, are facing increasing exposure to such suits.
These companies must take a more aggressive stance by engaging in more concerted efforts, creating systematic internal mechanisms to handle disputes and aggressively defend, in court, against attacks that are without merit.Without such efforts from our companies, patent bullies and patent trolls will gain at the expense of consumers, employees, and our most successful companies.
For example, Samsung, for the benefit of its reputation and its bottom-line, needs to devise a coherent, transparent, and yet aggressive, legal structure and system to deal with patent infringement suits, while engaging in more cross-licensing schemes.
The answer to Samsung's problems must come from a revamping of the role of in-house and outside counsel. If Samsung, the lifeblood of the Korean economy, is not willing to adapt to the realities in the intellectual property realm, I fear that its brand image and eventually its bottom-line will be negatively affected.
This, of course, will have lasting effects on all of Korean society.The most recent battle facing Samsung is over two suits filed by Spansion, the third largest maker of flash memory chips, behind Samsung and Toshiba, for infringing on Spansion's patents. In an aggressive posture, it filed a complaint at the U.S. International Trade Commission (ITC) for exclusion of the allegedly infringing products from entry.
Spansion also filed, in a federal district, a case requesting an injunction and Treble damages. If the ITC complaint prevails, it would effect the import of over 100 million gadgets, including phones, MP3 players, cameras, and digital recorders. The ITC usually takes little less than one and a half years to make a disposition.
If Spansion's case at the district court prevails, an injunction against the sale and import of the infringing products could be ordered, along with damages not specifically alleged in the filing, which, based on Samsung sales, could reach a sum of over $20 billion. A decision at the district court could take multiple years to reach.
Over the past two decades, Samsung has been investigated and has initiated investigations at the ITC on almost two-dozen occasions. In the vast majority of completed investigations, a settlement was reached before a relevant disposition. In a recent case, Samsung reached a settlement with Renesas Technology Japan.
Both Renesas and Samsung claimed violation of their respective patents.Samsung is also no stranger to actions in U.S. district courts and has also been willing to settle matters prior to disposition in the district court.
If the past is a sign of the future, Samsung again will settle the case.We will likely hear more of Spansion in the future. Spansion recently purchased an Israeli semiconductor company with numerous ``high-level" patents.
Spansion seems to be transforming itself from a producer of flash memory chips into an intellectual property licensing house.Spansion, in the future, may make little in the way of tangible products and rely on its thousands of patents for revenues.
Its first foray into large-scale complex intellectual property litigation may be simply a tool to increase awareness, stock value, and get their hands in the deep pockets of one of the world's most profitable companies. The outcome, if Samsung follows its not so distant past, is a settlement with a little gravy in the hands of a possible emerging patent bully.
Samsung, if the Spansion claims are not valid, must fight this case to the end in order to avoid the increasing number of patent bullies and trolls pursuing the deep pockets of our most successful companies.
Sean Hayes is a New York attorney working with the Seoul office of LOGOS Attorneys at Law, one of Korea's largest international law firms with offices in Beijing, Hanoi, Ho Chi Minh City, Incheon, Moscow, Phnom Penh, Seoul, and Songdo. He formerly worked as a law faculty member and for the Constitutional Court of Korea. He can be reached at SeanHayes@LawLogos.com
November 14, 2008
Radical Liberals Rule
Radical Liberals Rule
By Sean Hayes (Korea Times on 11/14/2008)
The Lee Myung-bak administration's bold ``747 Vision'' of achieving 7 percent growth over 10 years, a per capita GDP of $40,000 by 2017 and turning Korea into the seventh largest economy in the world has been stymied by vocal interest groups with often radically liberal ideologies.
The President's highly anticipated reforms have nearly universally been moderated or abandoned so the President will avoid further conflict with these interest groups. The only losers in this battle are the Korean people.
A good example of the effectiveness of the actions of these interest groups is the recent tax law proposals by the administration. The measures, if approved, are to come into effect on Jan. 1, 2009.
The proposals include a modest reduction in the corporate tax rate. The corporate tax rate for companies with a tax base of over 200 million won will be reduced, under the proposal, by 3 percentage points, in fiscal year 2009, to 22 percent exclusive of the 10 percent resident surtax.
The rate is still notably high compared to other Asian economies such as Hong Kong, Malaysia, Thailand, and Singapore and on an effective rate basis will still be higher than most nations of the world. Before the proposed deduction Korea had the sixth highest effective corporate tax rate amongst the wealthiest 79 nations in the world.
The reduction in tax rate, coupled with other modest changes, will only drop the effective tax rate by percentages that will have little effect on Korea's global competitiveness.
The modest reduction is welcomed by companies presently in Korea, but will have only a marginal effect on encouraging additional investment in Korea and will encourage few companies in Korea, because of the only modest tax savings, to further invest in Korea.
The proposals also include a token reduction in personal income tax rates. For tax payers earning more than 88 million won, which includes the largest percentage of individuals that invest in the Korean stock market and who own and invest in small and medium business, the rate will be reduced, in the proposal, by one percent to 34 percent and the foreign worker flat tax will be reduced by two percent to 15 percent.
Such a modest reduction will have little influence in encouraging more investment and will motivate few foreign company employees to choose Korea over more taxpayer friendly Asian locales such as Hong Kong and Singapore.
The proposals also include an extension of the tax loss carry-forward period from five to 10 years, measures to reduce the tax burden on foreign individuals and corporations including an exclusion, in some cases, of most foreign source income for foreign workers, a 5 percent reduction in the interest and dividend withholdings paid by Korean companies to foreign companies or non-residents and the possibility of excluding a higher percentage of R&D expenditures from taxes.
The proposals, as a whole, are steps in the right direction, but until the Korean people allow the radically liberal to have a voice only equal to their numbers we will never see the real reforms needed to move Korea down the path to further economic, social, and political development.
If the President and his advisors had their way we would most likely see a drastic cut in corporate and personal income tax rates which would lead, according to the vast majority of the world's economists including Christina and David Romer, professor of economics at the University of California at Berkeley, to ``very large and persistent positive output effects.'' Studies, nearly universally, show that lower taxes will increase growth and tax revenues.
Hopefully, Korea can settle the difficulties with this vocal minority by standing behind the President and allowing him to lead the nation down the path towards his ``747 Vision.''
Sean Hayes is a New York attorney working with the Seoul office of LOGOS Attorneys at Law, one of Korea's largest international law firms with offices in Beijing, Hanoi, Ho Chi Minh City, Incheon, Moscow, Phnom Penh, Seoul, and Songdo. Sean Hayes formerly worked as a law faculty member and for the Constitutional Court of Korea. SeanHayes@LawLogos.com
By Sean Hayes (Korea Times on 11/14/2008)
The Lee Myung-bak administration's bold ``747 Vision'' of achieving 7 percent growth over 10 years, a per capita GDP of $40,000 by 2017 and turning Korea into the seventh largest economy in the world has been stymied by vocal interest groups with often radically liberal ideologies.
The President's highly anticipated reforms have nearly universally been moderated or abandoned so the President will avoid further conflict with these interest groups. The only losers in this battle are the Korean people.
A good example of the effectiveness of the actions of these interest groups is the recent tax law proposals by the administration. The measures, if approved, are to come into effect on Jan. 1, 2009.
The proposals include a modest reduction in the corporate tax rate. The corporate tax rate for companies with a tax base of over 200 million won will be reduced, under the proposal, by 3 percentage points, in fiscal year 2009, to 22 percent exclusive of the 10 percent resident surtax.
The rate is still notably high compared to other Asian economies such as Hong Kong, Malaysia, Thailand, and Singapore and on an effective rate basis will still be higher than most nations of the world. Before the proposed deduction Korea had the sixth highest effective corporate tax rate amongst the wealthiest 79 nations in the world.
The reduction in tax rate, coupled with other modest changes, will only drop the effective tax rate by percentages that will have little effect on Korea's global competitiveness.
The modest reduction is welcomed by companies presently in Korea, but will have only a marginal effect on encouraging additional investment in Korea and will encourage few companies in Korea, because of the only modest tax savings, to further invest in Korea.
The proposals also include a token reduction in personal income tax rates. For tax payers earning more than 88 million won, which includes the largest percentage of individuals that invest in the Korean stock market and who own and invest in small and medium business, the rate will be reduced, in the proposal, by one percent to 34 percent and the foreign worker flat tax will be reduced by two percent to 15 percent.
Such a modest reduction will have little influence in encouraging more investment and will motivate few foreign company employees to choose Korea over more taxpayer friendly Asian locales such as Hong Kong and Singapore.
The proposals also include an extension of the tax loss carry-forward period from five to 10 years, measures to reduce the tax burden on foreign individuals and corporations including an exclusion, in some cases, of most foreign source income for foreign workers, a 5 percent reduction in the interest and dividend withholdings paid by Korean companies to foreign companies or non-residents and the possibility of excluding a higher percentage of R&D expenditures from taxes.
The proposals, as a whole, are steps in the right direction, but until the Korean people allow the radically liberal to have a voice only equal to their numbers we will never see the real reforms needed to move Korea down the path to further economic, social, and political development.
If the President and his advisors had their way we would most likely see a drastic cut in corporate and personal income tax rates which would lead, according to the vast majority of the world's economists including Christina and David Romer, professor of economics at the University of California at Berkeley, to ``very large and persistent positive output effects.'' Studies, nearly universally, show that lower taxes will increase growth and tax revenues.
Hopefully, Korea can settle the difficulties with this vocal minority by standing behind the President and allowing him to lead the nation down the path towards his ``747 Vision.''
Sean Hayes is a New York attorney working with the Seoul office of LOGOS Attorneys at Law, one of Korea's largest international law firms with offices in Beijing, Hanoi, Ho Chi Minh City, Incheon, Moscow, Phnom Penh, Seoul, and Songdo. Sean Hayes formerly worked as a law faculty member and for the Constitutional Court of Korea. SeanHayes@LawLogos.com
October 30, 2008
Defamation on Trial
By Sean Hayes
Appeared in the Korea Times on October 30, 2008
A renowned actress recently committed suicide after being traumatized by malicious comments posted on Internet message boards. The actress leaves behind her young children and adoring fans.
Politicians have reacted by proposing legislation that would impose a more rigorous real name registration requirement on the Internet and more heightened punishment for defamatory statements. Expansion of real name registration would assist prosecutors in obtaining the identity of those posting malicious comments and thus prosecute them under Article 309 and 311 of the Korean Criminal Act. Many have commented that these laws are needed, while others have noted that these laws should be discarded as archaic vestiges of the past.
In much of the developed West, these laws, as applied to this situation, would run afoul of their nations' constitutions. However, in Korea because of a profound difference in attitude toward speech and the right to privacy the founders of the Korean Constitution chose to protect speech to a lesser degree. For example, Article 21(1) of the Korean Constitution notes that ``All citizens shall enjoy the freedom of speech and the press and the freedom of assembly and association."On the face of it this article is similar to the First Amendment to the U.S. Constitution which states that ``Congress shall make no law … abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble …"However, the Korean Constitution modifies this seemingly absolute protection, by noting, in Article 21(4) that ``Neither speech nor the press shall violate the honor or rights of other persons nor undermine public morals or social ethics."
The Korean Constitution, thus, in short, balances the right to free speech with the right to privacy, public mores and social ethics. This balance creates less protection for the freedom of speech than in the United States. It is interesting to note that the privacy protected, in application of the right, is not only against violations by the government, but violations by private individuals. Most constitutions only protect against actions by government.
In contraposition, in America, the First Amendment has been interpreted as creating near absolute protection for the freedom of speech. Justice Benjamin Nathan Cardozo stated the reason for the near absolute protection of free speech by noting that ``our history, political and legal," recognized ``freedom of thought and speech" as ``the indispensable condition of nearly every other form of freedom."
Thus, in America, criminal punishment for speech not coupled with action is nearly impossible to successfully prosecute and civil liability is available for a defamed public figure only if the plaintiff can prove that the defamatory comment is false and that the statement was made with ``malice." Malice is defined, in law, as either knowledge by the defendant that the statement was false or a reckless disregard by the defendant for the truth of the statement. Because of this high standard and that the burden of satisfying the standard is placed on the defendant, it is nearly impossible, except with the most flagrant mendacious statement, for a plaintiff to win a lawsuit.
This situation in Korea is very alarming and upsetting. However, most Americans would rather hear of these difficulties, which America also has a good deal of and which I have written about in these pages, than have an often biased government choose if speech violates ``the honor or rights of other persons" or ``undermine public morals or social ethics."
However, Korea has a vastly different history and relies more on the government for solutions to difficulties.
This article was written in cooperation with Yuho ``Richard" Kim. Sean Hayes and Kim are New York attorneys working for the Seoul office of LOGOS Attorneys at Law, one of Korea's largest international law firms with offices in Beijing, Hanoi, Ho Chi Minh City, Incheon, Moscow, Phnom Penh, Seoul, and Songdo. Hayes formerly worked as a law faculty member and for the Constitutional Court of Korea. E-mail : SeanHayes@LawLogos.com; yhkim@LawLogos.com
Appeared in the Korea Times on October 30, 2008
A renowned actress recently committed suicide after being traumatized by malicious comments posted on Internet message boards. The actress leaves behind her young children and adoring fans.
Politicians have reacted by proposing legislation that would impose a more rigorous real name registration requirement on the Internet and more heightened punishment for defamatory statements. Expansion of real name registration would assist prosecutors in obtaining the identity of those posting malicious comments and thus prosecute them under Article 309 and 311 of the Korean Criminal Act. Many have commented that these laws are needed, while others have noted that these laws should be discarded as archaic vestiges of the past.
In much of the developed West, these laws, as applied to this situation, would run afoul of their nations' constitutions. However, in Korea because of a profound difference in attitude toward speech and the right to privacy the founders of the Korean Constitution chose to protect speech to a lesser degree. For example, Article 21(1) of the Korean Constitution notes that ``All citizens shall enjoy the freedom of speech and the press and the freedom of assembly and association."On the face of it this article is similar to the First Amendment to the U.S. Constitution which states that ``Congress shall make no law … abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble …"However, the Korean Constitution modifies this seemingly absolute protection, by noting, in Article 21(4) that ``Neither speech nor the press shall violate the honor or rights of other persons nor undermine public morals or social ethics."
The Korean Constitution, thus, in short, balances the right to free speech with the right to privacy, public mores and social ethics. This balance creates less protection for the freedom of speech than in the United States. It is interesting to note that the privacy protected, in application of the right, is not only against violations by the government, but violations by private individuals. Most constitutions only protect against actions by government.
In contraposition, in America, the First Amendment has been interpreted as creating near absolute protection for the freedom of speech. Justice Benjamin Nathan Cardozo stated the reason for the near absolute protection of free speech by noting that ``our history, political and legal," recognized ``freedom of thought and speech" as ``the indispensable condition of nearly every other form of freedom."
Thus, in America, criminal punishment for speech not coupled with action is nearly impossible to successfully prosecute and civil liability is available for a defamed public figure only if the plaintiff can prove that the defamatory comment is false and that the statement was made with ``malice." Malice is defined, in law, as either knowledge by the defendant that the statement was false or a reckless disregard by the defendant for the truth of the statement. Because of this high standard and that the burden of satisfying the standard is placed on the defendant, it is nearly impossible, except with the most flagrant mendacious statement, for a plaintiff to win a lawsuit.
This situation in Korea is very alarming and upsetting. However, most Americans would rather hear of these difficulties, which America also has a good deal of and which I have written about in these pages, than have an often biased government choose if speech violates ``the honor or rights of other persons" or ``undermine public morals or social ethics."
However, Korea has a vastly different history and relies more on the government for solutions to difficulties.
This article was written in cooperation with Yuho ``Richard" Kim. Sean Hayes and Kim are New York attorneys working for the Seoul office of LOGOS Attorneys at Law, one of Korea's largest international law firms with offices in Beijing, Hanoi, Ho Chi Minh City, Incheon, Moscow, Phnom Penh, Seoul, and Songdo. Hayes formerly worked as a law faculty member and for the Constitutional Court of Korea. E-mail : SeanHayes@LawLogos.com; yhkim@LawLogos.com
October 26, 2008
Don't Only Blame Bush
Don't Only Blame Bush
By Sean Hayes
(Appeared in Korea Times on October 23, 2008)
Most ``mainstream'' pundits and the vast majority of editorial writers have blamed the current financial mayhem on the Bush administration's ``deregulation bias.''
Democratic presidential hopeful Sen. Barack Obama has noted, in a campaign speech, that John McCain and the Bush administration ``fought against the very rules of the road that could have stopped this mess.''
Let's put blame where blame is due; Republicans and Democrats played a significant role in this mess. Without this realization we will never learn from our mistakes.
Those espousing Sen. Obama's viewpoint have not cited one Bush-term regulatory change that is the culprit for our present difficulties nor have they explained away the fact that the U.S. financial market is one of the most regulated markets in the world.
The reason we hear no explanation is the obvious disingenuousness of these statements. The reality is that a Bush regulation that would have assisted in alleviating these problems was strongly opposed by the same regulation bellwethers and regulation is a major culprit behind our current situation.
First, we can't put all the blame on a deregulation-biased Bush administration. The administration proposed a regulatory framework that would have helped prevent the coming crisis, however, Democrats strongly opposed the plan and Republicans, because of more pressing Iraq issues were unwilling to strongly push for the regulations.
In 2003, the Bush administration attempted to create an agency ``to regulate and supervise the financial activities" of Fannie Mae and Freddie Mac. It perceived that a problem with one of these agencies could ``cause strong repercussions in financial markets, affecting federally insured entities and economic activity."
However, our usually regulation-friendly Democrat Barney Frank, chairman of the House Financial Services Committee, strongly opposed the plan, noting that the agencies ``are not facing any kind of financial crisis … The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''
He added, in a House hearing, that ``there has been more alarm raised about potential unsafety and unsoundness than, in fact exists … I want to roll the dice a little bit more in this situation toward subsidized housing.''
The Bush administration renewed its efforts in 2004 and 2005, but again Barney Frank and his liberal cohorts vigorously opposed the plan. Frank's ``dice roll'' failed, but he is unwilling to take an iota of blame for this crisis and still has a major role in the inevitable regulatory backlash.
Secondly, over-regulation was a major catalyst. The Clinton administration, motivated by a debunked Boston Federal Reserve Bank study, extended the scope and impact of the Carter-era Community Reinvestment Act and the Home Mortgage Disclosure Act.
The acts, and particularly the Clinton amendments, made it more difficult for lenders to receive acceptable bank ratings. Acceptable ratings, after the amendments, were heavily influenced by how well a lender ``served'' low, moderate income and minority borrowers.
The bank examiners looked at federal home loan data and broke the data down by income group, neighborhoods, race, and tax brackets and determined how well the banks were servicing these groups.
Without an acceptable rating banks would not be given permission to merge or to establish new branches and may even be subjected to costly class action lawsuits.
The impetus for the bills was a study that incorrectly claimed that banks were not giving loans to minorities because of their race. Holes and possible fabrication of data were found by a noted economist who, adjusting for the irregularities, found no mortgage discrimination based on race.
Lastly, the Clinton administration encouraged Fannie Mae to underwrite loans to subprime borrowers.
Franklin Raines, the former chairman and CEO of Fannie Mae, noted that ``Fannie Mae has expanded home ownership for millions of families in the 1990s by reducing down payment requirements … Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Clinton fixed this with a program in 1999 to underwrite loans to subprime borrowers.
Republicans, Democrats, and of course some unscrupulous lenders are to blame for these difficulties. However, if we can't force them to take a good look in the mirror we will never learn from the present melee.
By Sean Hayes
(Appeared in Korea Times on October 23, 2008)
Most ``mainstream'' pundits and the vast majority of editorial writers have blamed the current financial mayhem on the Bush administration's ``deregulation bias.''
Democratic presidential hopeful Sen. Barack Obama has noted, in a campaign speech, that John McCain and the Bush administration ``fought against the very rules of the road that could have stopped this mess.''
Let's put blame where blame is due; Republicans and Democrats played a significant role in this mess. Without this realization we will never learn from our mistakes.
Those espousing Sen. Obama's viewpoint have not cited one Bush-term regulatory change that is the culprit for our present difficulties nor have they explained away the fact that the U.S. financial market is one of the most regulated markets in the world.
The reason we hear no explanation is the obvious disingenuousness of these statements. The reality is that a Bush regulation that would have assisted in alleviating these problems was strongly opposed by the same regulation bellwethers and regulation is a major culprit behind our current situation.
First, we can't put all the blame on a deregulation-biased Bush administration. The administration proposed a regulatory framework that would have helped prevent the coming crisis, however, Democrats strongly opposed the plan and Republicans, because of more pressing Iraq issues were unwilling to strongly push for the regulations.
In 2003, the Bush administration attempted to create an agency ``to regulate and supervise the financial activities" of Fannie Mae and Freddie Mac. It perceived that a problem with one of these agencies could ``cause strong repercussions in financial markets, affecting federally insured entities and economic activity."
However, our usually regulation-friendly Democrat Barney Frank, chairman of the House Financial Services Committee, strongly opposed the plan, noting that the agencies ``are not facing any kind of financial crisis … The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''
He added, in a House hearing, that ``there has been more alarm raised about potential unsafety and unsoundness than, in fact exists … I want to roll the dice a little bit more in this situation toward subsidized housing.''
The Bush administration renewed its efforts in 2004 and 2005, but again Barney Frank and his liberal cohorts vigorously opposed the plan. Frank's ``dice roll'' failed, but he is unwilling to take an iota of blame for this crisis and still has a major role in the inevitable regulatory backlash.
Secondly, over-regulation was a major catalyst. The Clinton administration, motivated by a debunked Boston Federal Reserve Bank study, extended the scope and impact of the Carter-era Community Reinvestment Act and the Home Mortgage Disclosure Act.
The acts, and particularly the Clinton amendments, made it more difficult for lenders to receive acceptable bank ratings. Acceptable ratings, after the amendments, were heavily influenced by how well a lender ``served'' low, moderate income and minority borrowers.
The bank examiners looked at federal home loan data and broke the data down by income group, neighborhoods, race, and tax brackets and determined how well the banks were servicing these groups.
Without an acceptable rating banks would not be given permission to merge or to establish new branches and may even be subjected to costly class action lawsuits.
The impetus for the bills was a study that incorrectly claimed that banks were not giving loans to minorities because of their race. Holes and possible fabrication of data were found by a noted economist who, adjusting for the irregularities, found no mortgage discrimination based on race.
Lastly, the Clinton administration encouraged Fannie Mae to underwrite loans to subprime borrowers.
Franklin Raines, the former chairman and CEO of Fannie Mae, noted that ``Fannie Mae has expanded home ownership for millions of families in the 1990s by reducing down payment requirements … Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Clinton fixed this with a program in 1999 to underwrite loans to subprime borrowers.
Republicans, Democrats, and of course some unscrupulous lenders are to blame for these difficulties. However, if we can't force them to take a good look in the mirror we will never learn from the present melee.
February 29, 2008
Debtor's Liability to New Owner after Transfer of Business and Trade Name
A developer recently contacted me concerning a dispute with a supplier of building materials. The developer purchased building materials from a supplier with payment to be forwarded 30-days after receipt of the materials. This is a common practice when a supplier has a long-term relationship with a developer, provides a consistent flow of supplies to a developer, and the developer is solvent.
Here comes the problem. The supplier was sold and the business and trade name was transferred to a new owner. The problem arose when the developer paid the old owner, who the manufacturer believed was still the owner of the supplier, for the building materials.
The developer paid the old owner at the business office of the supply business without noticing any difference in ownership and without being informed by the old owner of the change of circumstances.
As expected, the new owner charged the client for the supplies, since the new owner claims that the old owner, through the sales contracts, transferred all rights including the credits for the shipped supplies to the new owner.
The old owner is nowhere to be found and likely collected from multiple creditors leaving the new owner with credits that were reflected in the sale price of the supply business.
Article 25 of the Korean Commercial Code states that:
The business trade name was properly transferred and registered by the new owner under Article 25.
However, Article 43 states that:
Therefore, since the old owner did not inform the developer of the transfer, the payment was made at the companies business address - the developer is not liable to to the supplier.
To clarify for the author of another law blog who seemed a little confused - The transferee-old owner was paid by the obligor-developer and acted in good faith and without gross negligence, since the developer paid at the company office and was never informed of the transfer -thus the developer is not liable.
The converse and what the court will look to is the bad faith of the old owner. The deceptive practice of taking the money at the business office of the company will alleviate the burden on the plaintiff to prove good faith. I was trying to state this in my former post, but I assumed a level of understanding that I should have not assumed.
A letter from a law firm explaining the law on the matter would usually settle these types of disputes +and often the business relationship can still continue.
Here comes the problem. The supplier was sold and the business and trade name was transferred to a new owner. The problem arose when the developer paid the old owner, who the manufacturer believed was still the owner of the supplier, for the building materials.
The developer paid the old owner at the business office of the supply business without noticing any difference in ownership and without being informed by the old owner of the change of circumstances.
As expected, the new owner charged the client for the supplies, since the new owner claims that the old owner, through the sales contracts, transferred all rights including the credits for the shipped supplies to the new owner.
The old owner is nowhere to be found and likely collected from multiple creditors leaving the new owner with credits that were reflected in the sale price of the supply business.
Article 25 of the Korean Commercial Code states that:
(1) A trade name may be transferred on in cases where business is discontinued or it is transferred together with the business.
(2) Transfer of a trade name shall not be effective as to third persons unless it has been registered.
The business trade name was properly transferred and registered by the new owner under Article 25.
However, Article 43 states that:
. . . a performance made to the transferee in respect of any obligation that has arisen from the business of the transferor shall be valid, in cases where the obligor effecting the performance has acted in good faith and without gross negligence.
Therefore, since the old owner did not inform the developer of the transfer, the payment was made at the companies business address - the developer is not liable to to the supplier.
To clarify for the author of another law blog who seemed a little confused - The transferee-old owner was paid by the obligor-developer and acted in good faith and without gross negligence, since the developer paid at the company office and was never informed of the transfer -thus the developer is not liable.
The converse and what the court will look to is the bad faith of the old owner. The deceptive practice of taking the money at the business office of the company will alleviate the burden on the plaintiff to prove good faith. I was trying to state this in my former post, but I assumed a level of understanding that I should have not assumed.
A letter from a law firm explaining the law on the matter would usually settle these types of disputes +and often the business relationship can still continue.
Korean Company Law
Appeared in the Korea Times on Feb. 29, 2008
by Sean Hayes
Dear Mr. Sean Hayes:We are considering opening a subsidiary in Korea. We are a NASDAQ listed company that will enter the Korean market in this coming year. Our first question is what corporate forms are allowed in Korea? We would also like to know what corporate form is the most common for Korean companies and foreign companies in our shoes? Michael in the United States.
Dear Michael, under the Korean Commercial Code four basic corporate entities are available. Part III of the Korean Commercial Code details the four corporate entities available in South Korea. It must be noted that most incorporated businesses in Korea chose the ``jusik hoesa'' corporate form.
1. Jusik Hoesa (StockCompany)
Jusik Hoesa is the only form of corporate entity that is allowed to publicly issue shares. The vast majority of corporations in Korea chose the Jusik Hoesa corporate form. It is also the most common corporate form that foreign companies chose for their subsidiaries.
2. Yuhan Hoesa (Limited Liability Company)
Yunhan Hoesa is a closely held company that is prohibited from having more than 50 shareholders. In recent years a few foreign companies have chosen the Yuhan Hoesa, however, most foreign companies are advised and will form a Jusik Haesa. A few companies, recently, have chosen this form because of possible U.S. tax benefits.
3. Hapja Hoesa (Limited Partnership)
In a Hapja Hoesa one or more partners may have unlimited liability and one or more partners may maintain limited liability. The entity, as all incorporated entities, is responsible for corporate taxes.
4. Hapmyeong Hoesa (Partnership)
In a Hapmyeong Hoesa two or more partners form the partnership. The partners must maintain unlimited liability. The entity, as all incorporated entities, is responsible for corporate taxes.For more details on the requirements for forming a company please take a look at the Korean Commercial Code and information available at http://www.ahnse.blogspot.com
American attorney Sean Hayes is a law professor at Kookmin University, a researcher for the Constitutional Court and a Legal Consultant for Ahnse Law Offices. He is pursuing a doctorate in law at Seoul National University.
by Sean Hayes
Dear Mr. Sean Hayes:We are considering opening a subsidiary in Korea. We are a NASDAQ listed company that will enter the Korean market in this coming year. Our first question is what corporate forms are allowed in Korea? We would also like to know what corporate form is the most common for Korean companies and foreign companies in our shoes? Michael in the United States.
Dear Michael, under the Korean Commercial Code four basic corporate entities are available. Part III of the Korean Commercial Code details the four corporate entities available in South Korea. It must be noted that most incorporated businesses in Korea chose the ``jusik hoesa'' corporate form.
1. Jusik Hoesa (StockCompany)
Jusik Hoesa is the only form of corporate entity that is allowed to publicly issue shares. The vast majority of corporations in Korea chose the Jusik Hoesa corporate form. It is also the most common corporate form that foreign companies chose for their subsidiaries.
2. Yuhan Hoesa (Limited Liability Company)
Yunhan Hoesa is a closely held company that is prohibited from having more than 50 shareholders. In recent years a few foreign companies have chosen the Yuhan Hoesa, however, most foreign companies are advised and will form a Jusik Haesa. A few companies, recently, have chosen this form because of possible U.S. tax benefits.
3. Hapja Hoesa (Limited Partnership)
In a Hapja Hoesa one or more partners may have unlimited liability and one or more partners may maintain limited liability. The entity, as all incorporated entities, is responsible for corporate taxes.
4. Hapmyeong Hoesa (Partnership)
In a Hapmyeong Hoesa two or more partners form the partnership. The partners must maintain unlimited liability. The entity, as all incorporated entities, is responsible for corporate taxes.For more details on the requirements for forming a company please take a look at the Korean Commercial Code and information available at http://www.ahnse.blogspot.com
American attorney Sean Hayes is a law professor at Kookmin University, a researcher for the Constitutional Court and a Legal Consultant for Ahnse Law Offices. He is pursuing a doctorate in law at Seoul National University.
February 25, 2008
Elimination of Automatic Acquisition of a Patent Attorney License for Korean Lawyers
The Legal Times reports, in Korean, that attorneys may no longer be able to use the title "Patent Attorney," but attorneys will still be able to perform patent attorneywork if a bill pending at the Legislation Judiciary Committee passes.
The Legal Times reports that:
The Legal Times reports that:
After a revised bill of the Tax Accountant Act, which eliminates automatic acquisition of a tax accountant license for lawyers, was presented to the Legislation Judiciary Committee, a revised bill of the Patent Attorney Act, having the same contents as the Tax Accountant Act was passed by the Commerce, Industry and Energy Committee and now is waiting deliberation at the Legislation Judiciary Committee.
Especially, because the new president of the Korea Patent Attorneys Association, who was elected on Feb 20. 2008, advocated the bills, patent attorneys are expecting that they are likely to pass.
On the other hand, lawyers understand that "it is reasonable to grant licenses of tax accountants and patent attorneys to lawyers" according to the Act 3 on the Attorney Law. Therefore they are anticipating that even though these bills pass, they will have no effect on lawyers' work.
A person with the Korea Patent Attorneys Association said that "Although the field of lawyers' work won't be curtailed on the basis of the interpretation by the Ministry of Justice, lawyers won't be able to act using a title of patent attorney anymore. And nobody knows whether or not the court would admit the interpretation by the Ministry of Justice."
February 22, 2008
Female Judges on the Rise
67 of the 96 judges appointed this year are woman. Woman judges now comprise 21.5% of the total judiciary.
The selection of judges is determined by averaging the judicial exam score with the grade point average at the Judicial Research and Training Institute (2 year training program). The highest grades are able to be offered jobs as judges and the second highest as prosecutors. Most Korean judges and prosecutors begin their service in their late 20s.
The selection of judges is determined by averaging the judicial exam score with the grade point average at the Judicial Research and Training Institute (2 year training program). The highest grades are able to be offered jobs as judges and the second highest as prosecutors. Most Korean judges and prosecutors begin their service in their late 20s.
Transfer Pricing Reform In Korea
A U.S. NASDAQ listed company requested information concerning a specific transfer price scheme, amongst other issues, in Korea. The company has recently decided to enter the Korean market after having successfully entered the Japanese and other Asian markets.
For obvious reasons, I can’t answer the question here, but a brief description of recent amendments to the law may be of interest to those that have considered global transfer price issues.
The transfer pricing rules underwent a major change a couple of the years back. In 2006, the Law for the Coordination of International Tax Affairs (LCITA) and a Presidential Enforcement Decree were amended.
The Law and Decree were amended in order to codify the “substance over form” rule, encourage investment overseas by Korean companies, improve the application of the “arm’s length principle,” to discourage treaty shopping, and to clarify the numerous ambiguities that have developed, since the enactment of the original law in January 1, 2006.
The most notable changes are:
1. Substance over Form
The first major change was the codification of the substance over form rule. It seemed that before the change the National Tax Service employed the substance over form rule for the interpretation of international transactions and treaties. This amendment codifies this changed practice.
2. Berry-ratio Method
The amendment recognizes the Berry-ratio method as having the same priority as the transactional-net-margin method and the profit split method..
3. Cost Contribution Arrangement (CCA)
Cost contributions, according to the law, must reflect the expect benefit. The amended law, however, allows adjustments to cost contributions when the CCA is held to be in violation of the arm’s length principle.
4. Rollback of Unilateral APAs.
Rollbacks are now available for unilateral and bilateral advance price agreements for the length of the statutory corporate tax amendment period of three years.
5. Offset of Transfer Prices
Non-arm’s length transfer prices can be offset if the transactions occur in the same taxable years, are performed in the same overseas office, or there is an advance agreement.
For obvious reasons, I can’t answer the question here, but a brief description of recent amendments to the law may be of interest to those that have considered global transfer price issues.
The transfer pricing rules underwent a major change a couple of the years back. In 2006, the Law for the Coordination of International Tax Affairs (LCITA) and a Presidential Enforcement Decree were amended.
The Law and Decree were amended in order to codify the “substance over form” rule, encourage investment overseas by Korean companies, improve the application of the “arm’s length principle,” to discourage treaty shopping, and to clarify the numerous ambiguities that have developed, since the enactment of the original law in January 1, 2006.
The most notable changes are:
1. Substance over Form
The first major change was the codification of the substance over form rule. It seemed that before the change the National Tax Service employed the substance over form rule for the interpretation of international transactions and treaties. This amendment codifies this changed practice.
2. Berry-ratio Method
The amendment recognizes the Berry-ratio method as having the same priority as the transactional-net-margin method and the profit split method..
3. Cost Contribution Arrangement (CCA)
Cost contributions, according to the law, must reflect the expect benefit. The amended law, however, allows adjustments to cost contributions when the CCA is held to be in violation of the arm’s length principle.
4. Rollback of Unilateral APAs.
Rollbacks are now available for unilateral and bilateral advance price agreements for the length of the statutory corporate tax amendment period of three years.
5. Offset of Transfer Prices
Non-arm’s length transfer prices can be offset if the transactions occur in the same taxable years, are performed in the same overseas office, or there is an advance agreement.
February 21, 2008
Bills Pending at National Assembly Concerning the Relationship between Lawyers and Tax Accountants
There are a couple of pending bills concerning the relationship between lawyers and tax accountants at the National Assembly. One bills concerns allowing lawyers to obtain tax accountant licenses and the second bill concerns allowing tax accountants to jointly represent clients with lawyers.
The first bill proposed by Lee Sang Min, a assemblyman in the United New Democratic Party, was transferred to the Legislation Judiciary Committee through the Finance and Economy Committee. Deliberations have begun on the bill at an Investigative Committee.
The bill is likely to pass. The bill was proposed by an attorney and received no objections at the Legislation Judiciary Committee on February 13, 2008. However, the Korean Bar Association has noted that the bill may cause confusion, in that some of the public may believe that attorneys are not able to represent clients in these matters even though the Attorney Act allows lawyers to represent clients in tax matters. I suspect this will be the major sticking point for the bill, but since it is proposed by an attorney it is likely to pass.
The second bill, concerning allowing tax accountants to jointly represent clients with attorneys, will have an uphill battle. The Korean Bar has already expressed its intention to oppose the bill. The Korean Bar Association expressed in a written opinion to the Finance and Economy Committee and the Ministry of Justice that "In a view that lawyers has as much specialty as tax accountants and jobs similar to lawyers should be eliminated because there would be many specialized lawyers graduating from law schools, the bill is incompatible with future's tendencies . . .As following the bills logic, it means that we should permit all professional specialists to represent clients in lawsuits, which is nonsense. Moreover, clients would bear added economical burdens since they should appoint both a lawyer and a tax accountant at the same time."
It seems, however, that the real concern is that the Korean Bar Association, as expressed in their opinion, fears “that lawyers would be assigned by tax accountants who made reliable relationship with clients before and lawyers assigned by tax accountants couldn't help performing only in a way tax accountants want. This would bring about a result different from the purpose of the bill which lets tax accountants just assist lawyers assigned by clients.”
I will update the reader if and when the bills pass HERE.
The first bill proposed by Lee Sang Min, a assemblyman in the United New Democratic Party, was transferred to the Legislation Judiciary Committee through the Finance and Economy Committee. Deliberations have begun on the bill at an Investigative Committee.
The bill is likely to pass. The bill was proposed by an attorney and received no objections at the Legislation Judiciary Committee on February 13, 2008. However, the Korean Bar Association has noted that the bill may cause confusion, in that some of the public may believe that attorneys are not able to represent clients in these matters even though the Attorney Act allows lawyers to represent clients in tax matters. I suspect this will be the major sticking point for the bill, but since it is proposed by an attorney it is likely to pass.
The second bill, concerning allowing tax accountants to jointly represent clients with attorneys, will have an uphill battle. The Korean Bar has already expressed its intention to oppose the bill. The Korean Bar Association expressed in a written opinion to the Finance and Economy Committee and the Ministry of Justice that "In a view that lawyers has as much specialty as tax accountants and jobs similar to lawyers should be eliminated because there would be many specialized lawyers graduating from law schools, the bill is incompatible with future's tendencies . . .As following the bills logic, it means that we should permit all professional specialists to represent clients in lawsuits, which is nonsense. Moreover, clients would bear added economical burdens since they should appoint both a lawyer and a tax accountant at the same time."
It seems, however, that the real concern is that the Korean Bar Association, as expressed in their opinion, fears “that lawyers would be assigned by tax accountants who made reliable relationship with clients before and lawyers assigned by tax accountants couldn't help performing only in a way tax accountants want. This would bring about a result different from the purpose of the bill which lets tax accountants just assist lawyers assigned by clients.”
I will update the reader if and when the bills pass HERE.
Microsft Loss to Korean Professor at Seoul High Court
Microsoft lost a case to a Korean professor of the Korean Aerospace University. Microsoft was held to have violated part of a patent held by Professor Lee Keung-hae.
The patent Prof. Lee prevailed on was for a program that automatically switches characters from Korean to English in Microsoft Word. I despise this function in Word, since because of my poor typing skills I often miss type and the program often switches from Korean to English or English to Korean.
The damages in the case have not yet been announced.
The patent Prof. Lee prevailed on was for a program that automatically switches characters from Korean to English in Microsoft Word. I despise this function in Word, since because of my poor typing skills I often miss type and the program often switches from Korean to English or English to Korean.
The damages in the case have not yet been announced.
February 20, 2008
Bank Antipathy To Foreigners
This article appeared in the Korea Times on Feb. 20, 2008.
By Sean Hayes
President-elect Lee Myung-bak's plan to make Korea a more hospitable place for foreigners is a welcome development for many of us long-term residents of Korea; however, the plan will fail unless private enterprises follow suit and realize that foreigners play an integral part in the Korean economy.
I have been writing legal Q&A column for this and other papers for over five years. I receive more complaints and questions about the banking sector than any other area combined. The complaints are real and the questions are because of the banks seeming incapability of understanding and explaining bank rules and government regulations.
Since I came to Korea more than 10 years ago, I have seen little development in the consumer banking sector and my bank, Kookmin Bank, has even deteriorated.
Bank employees are ill informed, incapable of performing even the most rudimentary transactions in an efficient manner and are too often willing to blame most of their missteps on the government. Senior management is unwilling to provide even the most basic services to foreigners in a convenient and consistent fashion.
For example, many foreigners, including myself are plagued with the problem of not being able to use our Korean ATM cards in foreign countries even though the card states, in Korean, that the card can be used in foreign nations. I was hit by this new bank rule a few years back when I went to the Philippines to present a speech. I brought my bankcard, a few hundred thousand Korean won, and the understanding that since I used the same card in the Philippines in the past that the Kookmin card would work.
Too my surprise, the card didn't work, the airport banks wouldn't exchange Korean money, and Philippine taxi drivers are so kind that they even take passengers without money. Luckily, the hotel was generous enough to overcharge my credit card and give me a cash refund for the overcharged amount and a former student was kind enough to send me money by Western Union. Obviously, this caused a good deal of embarrassment and a great deal of anxiety.
When I returned to Korea I confronted the bank manager at my local bank. He, in a not so kind manner, explained that this was a new Korean government regulation. I informed him that he was full of hot air. Korea has no regulation prohibiting foreigners from using international ATM cards, but the nation does prohibit foreigners from withdrawing more than $10,000 per exit from the country. Kookmin and other banks just feel its easier to block foreigners from using cards, than to create a system that prohibits foreigners from withdrawing more than $10,000 per exit from the country.
I was also a little alarmed by my bank a few weeks ago when I went to the bank to transfer funds overseas. I was given a form, in Korean, that stated that I must inform the bank of my reason for transferring the money. The form has multiple boxes and I was forced to pick one if I wanted to send money. I was also informed that I could only send money from this specific branch. I was lucky enough to be able to read and understand the form, but many foreigners would not have been.
I asked the bank to translate the form and get the form back to me, but three weeks later I never heard a word from the bank. I assume, as usual, Kookmin Bank employees are still pointing to a box and simply telling foreigners to check here, sign here, and initial here without foreigners even knowing what they are signing.
The Korean bank industry and other service industries will never improve until they realize that foreigners are a needed component for the future development of the local economy. This realization should be pushed on private industries by the new administration.
American attorney Sean Hayes is a law professor at Kookmin University and researcher for the Constitutional Court. He is pursuing a doctorate in law at Seoul National University.
By Sean Hayes
President-elect Lee Myung-bak's plan to make Korea a more hospitable place for foreigners is a welcome development for many of us long-term residents of Korea; however, the plan will fail unless private enterprises follow suit and realize that foreigners play an integral part in the Korean economy.
I have been writing legal Q&A column for this and other papers for over five years. I receive more complaints and questions about the banking sector than any other area combined. The complaints are real and the questions are because of the banks seeming incapability of understanding and explaining bank rules and government regulations.
Since I came to Korea more than 10 years ago, I have seen little development in the consumer banking sector and my bank, Kookmin Bank, has even deteriorated.
Bank employees are ill informed, incapable of performing even the most rudimentary transactions in an efficient manner and are too often willing to blame most of their missteps on the government. Senior management is unwilling to provide even the most basic services to foreigners in a convenient and consistent fashion.
For example, many foreigners, including myself are plagued with the problem of not being able to use our Korean ATM cards in foreign countries even though the card states, in Korean, that the card can be used in foreign nations. I was hit by this new bank rule a few years back when I went to the Philippines to present a speech. I brought my bankcard, a few hundred thousand Korean won, and the understanding that since I used the same card in the Philippines in the past that the Kookmin card would work.
Too my surprise, the card didn't work, the airport banks wouldn't exchange Korean money, and Philippine taxi drivers are so kind that they even take passengers without money. Luckily, the hotel was generous enough to overcharge my credit card and give me a cash refund for the overcharged amount and a former student was kind enough to send me money by Western Union. Obviously, this caused a good deal of embarrassment and a great deal of anxiety.
When I returned to Korea I confronted the bank manager at my local bank. He, in a not so kind manner, explained that this was a new Korean government regulation. I informed him that he was full of hot air. Korea has no regulation prohibiting foreigners from using international ATM cards, but the nation does prohibit foreigners from withdrawing more than $10,000 per exit from the country. Kookmin and other banks just feel its easier to block foreigners from using cards, than to create a system that prohibits foreigners from withdrawing more than $10,000 per exit from the country.
I was also a little alarmed by my bank a few weeks ago when I went to the bank to transfer funds overseas. I was given a form, in Korean, that stated that I must inform the bank of my reason for transferring the money. The form has multiple boxes and I was forced to pick one if I wanted to send money. I was also informed that I could only send money from this specific branch. I was lucky enough to be able to read and understand the form, but many foreigners would not have been.
I asked the bank to translate the form and get the form back to me, but three weeks later I never heard a word from the bank. I assume, as usual, Kookmin Bank employees are still pointing to a box and simply telling foreigners to check here, sign here, and initial here without foreigners even knowing what they are signing.
The Korean bank industry and other service industries will never improve until they realize that foreigners are a needed component for the future development of the local economy. This realization should be pushed on private industries by the new administration.
American attorney Sean Hayes is a law professor at Kookmin University and researcher for the Constitutional Court. He is pursuing a doctorate in law at Seoul National University.
February 19, 2008
Korean Corporate Forms under the Korean Commerical Code
There are four basic corporate entities under the Korean Commercial Code.
1. Chusik Hoesa (Joint Stock Company)
Only form of corporate entity that is allowed to publicly issue shares. An article will be posted on the specifics of forming a Chusik Hoesa in the next couple of weeks and a link will appear HERE when the article is completed.
2. Yuhan Hoesa (Limited Liability Company)
A closely held company that is prohibited from having more than 50 shareholders. In recent years a few foreign companies have chosen the Yuhan Hoesa, however, most foreign companies are advised and will form a Chusik Hoesa. A few companies, recently, have chosen this form because of possible U.S. tax benefits. I will explain the tax benefits in a follow-up article. A link will appear HERE when the article is completed.
3. Hapja Hoesa (Limited Partnership)
One or more partners may have unlimited liability and one or more partner may maintain limited liability. The entity is responsible for corporate taxes.
4. Hapmyung Hoesa (Partnership)
Must be formed by two or more partners and each partner maintains unlimited liability. The entity is responsible for corporate taxes.
1. Chusik Hoesa (Joint Stock Company)
Only form of corporate entity that is allowed to publicly issue shares. An article will be posted on the specifics of forming a Chusik Hoesa in the next couple of weeks and a link will appear HERE when the article is completed.
2. Yuhan Hoesa (Limited Liability Company)
A closely held company that is prohibited from having more than 50 shareholders. In recent years a few foreign companies have chosen the Yuhan Hoesa, however, most foreign companies are advised and will form a Chusik Hoesa. A few companies, recently, have chosen this form because of possible U.S. tax benefits. I will explain the tax benefits in a follow-up article. A link will appear HERE when the article is completed.
3. Hapja Hoesa (Limited Partnership)
One or more partners may have unlimited liability and one or more partner may maintain limited liability. The entity is responsible for corporate taxes.
4. Hapmyung Hoesa (Partnership)
Must be formed by two or more partners and each partner maintains unlimited liability. The entity is responsible for corporate taxes.
New Minister of Justice
Korean President-elect Lee Myung Bak nominated Kim Kyung-Han as the new Minister of Justice. Mr. Kim served as the Prosecutor General at the Supreme Public Prosecitors' Office and Vice-Minister at the Ministry of Justice.
Mr. Kim wrote and interesting law review article entitled: "The Study on the Evaluation of the Korean Government Reform Performance: Focusing to the Introduction of New Management Programs in the Kim Dae Jung Administration (김대중정부의 신관리기법 도입을 중심으로)"
The article is critical of the performance-based reform measures implemented by the Kim Dae Jung Admininstration.
The article is published in Korean in the 서울행정학회 (2005/02).
Mr. Kim wrote and interesting law review article entitled: "The Study on the Evaluation of the Korean Government Reform Performance: Focusing to the Introduction of New Management Programs in the Kim Dae Jung Administration (김대중정부의 신관리기법 도입을 중심으로)"
The article is critical of the performance-based reform measures implemented by the Kim Dae Jung Admininstration.
The article is published in Korean in the 서울행정학회 (2005/02).
February 17, 2008
Report on Korea-US FTA by Peterson Institute
The Peterson Institute, the most influential nonpartisan think tank dedicated to international economics, published an excellent work assessing the Korea-U.S Free Trade Agreement. All interested in Kor-US FTA should read this report.
The summary of the report notes:
The complete report can be found HERE.
The summary of the report notes:
The Korea-United States Free Trade Agreement (KORUS FTA) opens up substantial new opportunities for bilateral trade and investment in goods and services and promotes important foreign policy interests of both countries.
The FTA quickly removes most tariff barriers to auto trade and substantially reduces tax and regulatory burdens that impede sales of US cars in Korea; improves access to the Korean market for a wide range of US farm products; and opens up the Korean services market in key areas such as financial services, insurance, express delivery, and legal and accounting services. onetheless the ratification of the KORUS FTA has been controversial.
In the United States attention has focused on both the auto sector, which accounts for almost one-quarter of bilateral trade and a large share of the US trade deficit with Korea, and Korean restrictions on US beef imports due to bovine spongiform encephalopathy (BSE) concerns. Several automakers and auto unions have opposed the deal, and the Democratic leadership in the US House of Representatives has demanded that the auto provisions be recast.
In the US Senate, the resolution of the beef problem-which is now being addressed by Korean regulators-is a prerequisite to passage of implementing legislation. No clear timetable exists for the congressional vote and action may be deferred until 2008.
The Bush administration will have to respond constructively to Democratic concerns about the FTA before the deal can be ratified and should consider new federal programs to help promote the competitiveness of US automakers. Doing so should attract a substantial minority of Democrats in the House, along with the majority of Republicans, to support the FTA.
The stakes-in terms of both US economic and security interests in East Asia-are too great, and the costs too high, to reject the pact or defer a decision.
The complete report can be found HERE.
Korean Labor Law Checklist for Employers and Employees
Ministry of Labor created the list with revisions by Sean Hayes and Ahnse Law Offices. I will update the list periodically. The checklist is intended for all employers that employ five or more workers.
The list contains some generalizations - for a more specific and exhaustive explanation please contact Sean Hayes.
KOREAN LABOR STANDARDS ACT
- A company should conclude a labor contract with every worker whom it directly employs.
- An employer, when concluding a labor contract, should clearly state terms of employment prescribed by the act. (Fine up to 5 million Won)
- An employer ordinarily, employing ten workers or more, should prepare the rules of employment and submit them to the Ministry of Labor. (Civil fine up to 5 million Won)
- An employer ordinarily, employing ten workers or more, should keep workers informed of the rules of employment by posting or keeping the rules where workers can have free access them. (Civil fine up to 5 million Won)
- Wages are paid more than once per month on a fixed day. (Imprisonment up to 3 years or fine up to 20 million Won)
- If a worker retires, an employer should pay the wages, compensation, and other money or valuables within 14 days after the cause for such payment has occurred. (Imprisonment up to 3 years or fine up to 20 million Won)
- An employer should preserve a register of workers and other important documents regarding labor contracts for three years. (Civil fine up to 5 million Won)
- An employer should additionally pay fifty percent or more of the ordinary wages for overtime work, night work (work provided from 10 p.m. to 6 a.m.) or holiday work. (Imprisonment up to 3 years or fine up to 20 million Won)
- Over-time work is done based on agreement with workers. Overtime should not exceed 12 hours per week. (Imprisonment up to 2 years or fine up to 10 million Won)
- An employer should not make a pregnant female worker and a worker aged less than 18 years old work from 10 P.M to 6 A.M. and on holidays.( Imprisonment up to 2 years or fine up to 10 million Won)
- For each minor under 18, an employer should keep, in the workplace, a certificate proving the child's family relationship and the written consent of child's parent or guardian. (Civil fine up to 5 million Won)
- An employer should allow a worker more than one-day holiday with pay per week on the average. (Imprisonment up to 2 years or fine up to 10 million Won)
- An employer should grant 15 days' paid leave to a worker who has registered more than 80 percent of attendance during one year. After the first year of service, an employer should grant one day's paid leave for each two years of consecutive service in addition to the leave for the first year. (Imprisonment up to 2 years or fine up to 10 million Won)
- An employer should grant one day's paid leave per month to a worker whose consecutive service period is shorter than one year, if the worker has offered work without absence throughout a month. (Imprisonment up to 2 years or fine up to 10 million Won)
- Working hours per week should not exceed 40 (or 44) hours excluding break hours. (Imprisonment up to 2 years or fine up to 10 million Won)
- Working hours of a person aged between 15 and 18 should not exceed seven hours per day and 40 hours per week. (Imprisonment up to 2 years or fine up to 10 million Won)
- An employer should grant a pregnant female worker 90 days of maternity leave before and after childbirth and should allocate 45 days or more after the childbirth. The first 60 days of leave is paid. (Imprisonment up to 2 years or fine up to 10 million Won)
- Employer should not dismiss any worker during a period of temporary interruption of work for medical treatment of an occupational injury or disease and within 30 days thereafter and any female worker before and after childbirth during a period of maternity leave and within 30 days thereafter. (Imprisonment up to 5 years or fine up to 30 million Won)
- An employer should give advance notice to a worker at least thirty days before dismissal. If the notice is not given thirty days before dismissal, ordinary wages of thirty days or more should be paid to the worker. (Imprisonment up to 2 years or fine up to 10 million Won)
- If an employer intends to dismiss a worker, the employer should notify the worker of the reasons for dismissal and the dismissal day in writing.
EMPLOYEE RETIREMENT BENEFIT SECURITY ACT
- An employer should pay workers who retire 30 days or more of average wages for each year of their consecutive service as severance pay.
(Imprisonment up to 3 years or fine up to 20 million Won) - If an employer intends to choose a type of retirement benefit scheme or change the chosen type into a different one, the employer, if there is a labor union composed of the majority of worker, should obtain the consent of the labor union, and if there is no such labor union, should obtain the consent of the majority of workers. If an employer intends to change the contents of a retirement benefit scheme, the employer should hear the opinion of workers in the same way as above. (Fine up to 5 million Won)
MINIMUM WAGE ACT
- An employer should pay a worker a wage not less than minimum wage.
(Imprisonment up to 3 years or fine up to 20 million Won) - An employer should keep workers informed of the minimum wage by posting it where workers will have free access or by other appropriate means. (Civil fine up to 1 million Won)
EQUAL EMPLOYMENT ACT
- An employer, senior workers, or other workers should not engage in sexual harassment at work. (Civil fine up to 10 million Won)
- An employer should conduct educational programs in order to prevent sexual harassment at least once a year pursuant to act. (Civil fine up to 3 million Won)
- An employer does not discriminate, in recruitment and hiring, based on gender. When recruiting and hiring female workers, an employer should not present nor demand certain physical conditions such as appearance, height, weight, etc., unmarried status, and other conditions determined by the ordinance of the Ministry of Labor which are not required to perform a certain job for which the employer intends to recruit or hire. (Fine up to 5 million Won)
- An employer should keep documents related to recruitment and hiring as determined by the act for 3 years. (Civil fine up to 3 million Won)
- An employer should pay an equal wage for work of equal value in the same business regardless of gender. (Imprisonment up to 3 years or fine up to 20 million Won)
- An employer should not discriminate against men or women in managing welfare programs, training, deployment, and promotion. (Fine up to 5 million Won)
- An employer should not discriminate against men or women with respect to retirement age, retirement and dismissal. (Imprisonment up to 5 years or fine up to 30 million Won)
ACT ON THE PROTECTION OF DISPATCHED WORKERS
- An employer should not use a dispatched worker who is offered by a person who did not acquire the permission for worker dispatch undertakings from the Ministry of Labor or who violated restrictions on employment and reasons for worker dispatch as prescribed by the act. (Imprisonment up to 3 years or fine up to 20 million)
- The length of a dispatch period of a dispatched worker should not exceed two years in total. (Imprisonment up to 3 years or fine up to 20 million Won)
- An employer should directly employ a dispatched worker if the employer uses the worker in excess of two years. (Civil fine up to 30 million Won)
- An employer should selects a person in charge of the management of using dispatched workers, prepare a ledger for management of using dispatched workers and preserve it for three years. (Civil fine up to 3 million Won)
ACT ON THE PROTECTION OF FIXED-TERM AND PART-TIME EMPLOYEES
- When an employer makes a labor contract with fixed-term or part-time employees, the employer should clearly state in writing matters determined by the act. (contract period, working and rest hours, wages, holidays and leave, place of work, jobs to do, and etc) (Civil fine up to 5 million Won)
- An employer should hire fixed-term employees for a period not exceeding two years.
- If an employer hires fixed-term employees for more than two years, the fixed-term employees are considered as workers who have made a labor contract with no fixed-term.
ACT ON THE PROMOTION OF WORKER PARTICIPATION AND COOPERATION
- A company with 30 or more permanent workers should establish a labor-management council, draw up bylaws governing the organization and operation of the council, and submit related documents to the Ministry of Labor. (Failure to establish the council: Fine up to 10 million Won) (Failure to submit the bylaws:Civil fine up to 2 million Won)
- A labor-management council should be composed of an equal number of members representing the employer and the workers, respectively, the number of which is not less than 3 nor more than 10. There should be a chairman and a secretary for the council.
- A labor-management council should hold a meetingsonce every three months. The council should draw up and keep minutes of its meetings.
(Failure to hold meetings:Civil fine up to 2 million Won) - A company with 30 or more permanent workers should has grievance handling members consisting of three members or less representing labor and management. (Civil fine up to 2 million Won)
- A grievance handling members should draw up and keep a ledger relating to the receipt and handling of grievances and should preserve the ledger for one year.
- An employer should seek resolution of the labor-management council on matters determined by act. The council should notify workers, without delay, on matters on which resolutions are made.
(Failure to seek the resolution: Fine up to 10 million Won) - The hours spent by a member to attend the labor-management council and engage in activities directly related thereto are regarded as hours devoted to work.
February 16, 2008
Sailing in Korea
My yacht club, 700 Yacht Club, which I am the vice-commodor of, is commencing an interesting project. We will be building four i550 sportsboats.
If anyone is interested in sailing or knows how to build boats, please contact me and we can discuss a membership. The membership fee is reasonable for most (W3.8mil/year) and includes sailing lessons and the use of the boats. Please see the website for more details.
The yacht club presently has a 33-foot cat, four 21-foot racing trimarans, a 26-foot yamaha, a 25-foot Hunter, a Campion 545i powerboat, and the yacht clubs racing team has an Admiralty 30. Oh, I almost forgot our two dingies which are often used, but never appreciated.
February 15, 2008
Law School Plan May Be Delayed
I was photographed, in what I have been told is the "worst hate in the world," protesting against the Ministry of Justices selection and quota for law schools next to the President of Kookmin University. They forced me to hold up the English sign, but I was not forced to wear the hat.
A number of universities have formed a union to protest against the plan, some schools are to file a suit at the Constitutional Court, Korea University has threatened to withdrawal its application because the number of students allowed is too small, many students have demonstrated, and numerous articles have been written blasting the plan.
It is probable that the plan will be delayed and the new administration will increase the cap. It will be interesting to see what the Constitutional Court does when a case is filed.
I wrote an article for the Korea Times on the unconstitutionality of a lawyer cap. The article can be found on this blog and HERE.
Many other article appear on this blog concerning this issue. Korea Times also has many good articles on the issue.
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