Forming a Joint Venture in Korea? Beware a Common Pitfall

A client, a minority shareholder in a foreign-capital invested company in Korea is involved in litigation with other company shareholders (Korean shareholders) over issues the client had with the majority and other shareholders. The client requested me to post this article to warn others entering the Korean market via a Joint Venture or similar arrangement.

This article is note intended to discourage entering the Korean market via a joint venture. JVs in Korea are, often, beneficial for businesses looking to expand their operations, however, they also come with risks and challenges. Common issues that arises in joint ventures is the lack of alignment between the parties on the purpose and goals of the joint venture. This can lead to disagreements over management, decision-making, allocation of resources and expenses. Many of these challenges can be alleviated, in most cases, by carefully drafted shareholder agreements and articles of incorporation and Listening to my Mother: JVs in Asia.

Joint Ventures Caution — Korean Joint Venture Pitfalls

Shareholder Dispute in Korea (Client Requested I Post this Warning)

Korean Joint ventures are a common business arrangement in Korea (and throughout much of Asia) that allow two or more parties to collaborate and work together while sharing risks and rewards via the formation of a company in Korea. A joint venture can be formed between domestic or foreign entities, and it can take various forms, such as contractual joint venture, equity joint venture, or a combination of both.

The dispute I shall, briefly, discuss is a joint venture between Korean companies and a multinational company headquartered in the United States.

A majority majority shareholder of the company that is a shareholder in the joint venture controls the Representative Director of the Korean JV, thus, causing little power of day-to-day activities to be in the hands of the minority shareholder.

Under Korean law, a Representative Director (대표이사) is a director who is authorized to represent and act on behalf of the Korean company. The representative director has the legal authority to enter into contracts, make business decisions, and manage the day-to-day affairs of the Korean company.

Under the Korean Commercial Code, a company in Korea, in most cases, must appoint at least one representative director (exception applies to certain one director companies).

The problems occurred since the representative director is under the control of a shareholder and the representative director is not acting in the best interest of all shareholders. This shareholder has been helping himself to the company cashflow through liberal expensing and interested transactions with the joint venture company and a personal company he owns. The majority shareholder is also threatening to block distributions and is possibly increasing the stickiness of his fingers. This matter was forced to go to litigation and to the prosecutors, expenses and time that often harm the future of a business. You can lessen these risks.

The Problem

Like situations will occur where a Korean Joint venture is not completed through a carefully drafted shareholder agreement and articles of association. A majority shareholding will not, always, prevent this situation from occurring, because of the nature and power of the representative director, power of holding a seal and power of local staff.

Don’t use form agreements, get an experienced attorney to draft all the agreements and go through the agreements with your attorney. At a minimum you need a custom-drafted Korean shareholder agreement and articles of association. Make sure for Korean attorney knows what the heck he/she is doing. Make sure the attorney is not merely going to give you form agreements. Every joint venture in Korea is different and form agreements are a sign of a lack of care and trouble in the future. Don’t skimp at this stage and thus don’t use form articles, form shareholder agreements, and form by-laws.

Solution to Joint Venture Disputes (Not Exhaustive)

Due Diligence, Due Diligence, Due Diligence;
Limit the Powers of the Representative Director;
Retain the Power to Appoint and Remove the Representative Director;
Maintain Control over the Company Seal;
Retain Majority Control or include other Minority Protection Clauses;
Have Carefully Crafted Shareholder Agreements; and
Hire an Independent Accountant and Utilize a Neutral REAL Statutory Auditor.

IPG Legal’s Experience in Joint Venture Negotiations in the Korean Market

IPG Legal is a renowned legal services firm that has gained recognition for its expertise in joint venture agreement, negotiation, drafting and joint venture due diligence. With a team of experienced attorneys, accountants, retired judges and former in house attorneys, IPG Legal has established itself as a leader in providing comprehensive legal services for joint venture and m&a projects in Korea.

Joint ventures are increasingly becoming a popular business model for companies looking to expand their operations, access new markets, and share resources and expertise. However, entering into a joint venture with a Korean company requires careful planning, negotiation, and drafting to ensure that the agreement aligns with the parties’ goals and interests, while limiting risks of disputes.

IPG Legal has extensive experience in drafting joint venture agreements for various industries, including technology, healthcare, manufacturing, chemical, new tech, fintech, construction, defense and infrastructure. The firm’s attorneys work closely with clients to understand their business objectives, identify potential risks and challenges, and draft a comprehensive agreements that addresses the needs of the client.

IPG Legal’s joint venture agreement drafting services include:

Developing an appropriate ownership and management structure for the joint venture.
Drafting clear and concise terms and conditions that govern the joint venture’s operations, including decision-making, governance, and management.
Outlining the roles and responsibilities of each party in the joint venture, including the allocation of resources, profits, and liabilities.
Drafting dispute resolution mechanisms that help the parties resolve any disputes that may arise.

In addition to joint venture agreement drafting, IPG Legal also provides joint venture due diligence services. Joint venture due diligence is a critical process that involves assessing the financial, legal, and operational risks associated with a potential joint venture partner. IPG Legal’s attorneys are experts in conducting comprehensive due diligence, including:

Reviewing the potential joint venture partner’s financial statements, tax returns, and other financial information.
Evaluating the potential joint venture partner’s legal and regulatory compliance, including their intellectual property rights and any potential legal disputes.
Assessing the potential joint venture partner’s operational capabilities, including their management team, infrastructure, and supply chain.

With its extensive experience in joint venture agreement drafting and joint venture due diligence, IPG Legal has become a trusted partner for companies looking to establish joint ventures in Korea. The firm’s attorneys work closely with clients to identify potential risks and opportunities, develop a comprehensive joint venture agreement, and conduct due diligence that ensures a successful partnership.

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