My wise mother once told me to: look both ways before crossing the street; carry an umbrella to school in the spring; and don’t go out alone at night. The advice can go along way when doing business in Korea or even in most parts of the world.
Getting involved in business in Korea is unwise without due diligence (Look both ways before crossing the street), carefully drafted shareholder agreements (carry and umbrella in the spring) and some Korean know-how (don’t go out alone in the dark). Korean statutory law provides less protection to non-controlling shareholders than in Europe, States and in many other parts of the world.
This article is not intended to discourage investors. Don’t avoid joint ventures in Korea; just enter them with understanding, care and a Korea-savvy guide.
The horror stories about the pitfalls of doing business in Korea can fill a book. However, the same can be said of success stories. Many have found Korea to be a wonderful place to do business; however, they have followed some good old fashion Korean know-how and guidance.
The horror stores abound. I saw a director representing minority shareholders investigated by the prosecution for actions that the majority has noted that the director was involved in. The revelations to the prosecutor only occurred after a heated debate over the lack of adequate financial oversight.
I saw numerous instances were minority shareholders’ shares had no market value and Korean law provided no adequate answers other than the slim chance of prevailing in a dissolution, buyout, or other like actions. Even in the unlikely case of piercing the corporate veil, often only a fraction of the initial investment is recoverable.
In a recent case that received a good deal of media attention, a director/minority shareholder was held personally liable for the debts of the company based on his alleged lack of management oversight.
This is not meant to discourage investors. This nation can be a profitable, enjoyable, and personally satisfying place to do business. However, the business waters are teeming with sharks and without a little water savvy and a guide you will become the next meal.
My motivation for writing this article stems from a practice that has reemerged in the past few years. Non-Korean companies have been offered “sweetheart” deals by local investors. Often the face of the deal is sweeter than the deal.
Some of these local “investors” offer foreign investors small non-controlling share percentages in a venture in order to attract the attention of potential local investors and government officials. The foreign company, in many cases, is a key supplier of technology and/or unique products.
For example, a Korean manufacturing company may offer a share percentage to a foreign high-tech manufacturer. The Korean manufacturer would like to be granted permission to develop land owned by the local government and also receive bank or private equity. The local manufacturer receives recognition from local government officials and other local investors by wielding MOUs proclaiming that a foreign manufacturer will contribute technology, know-how, and potential investment to the project.
Sometimes these arrangements are beneficial to all involved. The minority receives preferential consideration of their products, increased market access and potential benefits from the joint venture and the majority receives added credibility with investors and the government and potentially favorable tax treatment.
Also, in some instances, a foreign-capital invested company is needed in order for the government to transfer the property to the company, since in most cases government property transferred to non-foreign-capital invested companies require competitive bidding. However, sometimes these projects are merely the brain-child of punters without the capabilities necessary to accomplish the project goals and sometimes they are, simply, frauds.
Therefore, as in the rest of the world, the first thing before involvement in any joint ventures is to investigate the potential co-owners. Those that haven’t spent a considerable time in Korea are often unable to evaluate the unique characteristics of the Korean businessman. Therefore, it is advisable to consult an individual with in depth savvy of the Korean business environment, culture and players.
Secondly, all joint ventures must have carefully drafted shareholder agreements with minority protection clauses. The agreements can’t simply be drafted by any Korean attorney, but must be drafted by an attorney in Korea with significant experience with international transactions. Without this experience, the attorney will likely not able to evaluate the risks involved in the venture.
Thirdly, the foreign investor should have a local contact to closely monitor and manage the joint venture activities for the investor.
These words are not too different from the words of good mothers. Look both ways before crossing the street, carry an umbrella to school in the spring and never go out alone in the dark.
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- Starting a Manufacturing Business in South Korea: Top 14 Things to Know Before you Start a Business in Korea
- Basics to Successfully Outsourcing Production of your Product to Korea: Korea OEM Basics
- Statutes & Regulations Governing Business Combinations in Korea: Korean Mergers & Acquisitions Basics
- 7 Musts to Succeed in Business in Korea
- Korea Due Diligence for Joint Ventures, Licensing, OEMs and Buying a Korean Company
- Fiduciary Duties of Korean Directors/Representative & Controlling Shareholders of Korean Companies