Succeeding in Business in Korea

Since 1977, I have observed the rise and fall of many foreign companies in South Korea. I have witnessed the trials and tribulations as a bank employee, a high-tech salesman, a country manager and as a business consultant of foreign and Korean companies doing business in Korea . Bluntly speaking, while some foreign ventures have had some unlucky breaks, those companies that have succeeded in the Korean market have done so for good reasons.  And those who have failed have done so, largely, because of their own inadequacies and often the lack of understanding of the needs of businesses in the Korean market. Those companies who for a period “succeed” do so by largely having some kind of a monopoly in technology, a lock on a particular resource, or an overwhelming marketing advantage that makes Korean copycats look decidedly second class.  But many initially successful companies ultimately fail by not getting adequately

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Korea Due Diligence for Joint Ventures, Licensing, OEMs and Buying a Korean Company

Intending execute a joint venture agreement with a Korean company? Buying a Korean company? Licensing technology to a Korean company? OEM with a Korean supplier? Selling to a Korean company?Before going to bed with a Korean company – do a little due diligence.  The motivation for this article is an article by my friends over at the China Law Blog. Due diligence in Korea is not much different than due diligence in China.  However, don’t forget what is said below: “get someone who truly knows what he or she is doing” to assist with the due diligence.  We see too many Korean lawyers and Korean business professionals with a lot of ego, but little on-the-ground high-level Korean experience or an inability to think strategically.  The few great due diligence professionals are, typically, not found easily at the ubiquitous Korean Law Firms, because of issues of the over-delegation of tasks to

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Material Breach of Korean Contracts Under Korean Law: Primary Obligations vs. Secondary Obligations in Korea Courts

In most Western nations a “material” breach of a contract leads to the non-breaching party not having to perform its obligations under the contract, while allowing the non-breaching party to immediately sue for all damages (or performance).The Restatement (Second) of Contracts 241 notes that the following criteria can be used to determine whether a specific action/inaction constitutes a material breach: “In determining whether a failure to render or to offer performance is material, the following circumstances are significant: (a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived; (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform or to offer

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Building Systems Before JVs in Korea to Build Trust between Partners

A blog referred to me by the China Law Blog has a wonderful post on Developing Trust in China by Building Trustworthy Systems/Processes.  The same advice given in this blog post is relevant to work done in Korea, Southeast Asia, China and even the West.  We believe that the verification of the developing and implementation of these system is, often, necessary before building a joint venture relationship with a Korean company. The value of building systems is not to be underestimated in Korea.  Koreans, in most respects, are wonderful at performing tasks that are well dictated and explained. While in the West, we often appreciate more autonomy and, often, don’t strive when systems are too rigid. In the East, many strive on ordered guidance. My law firm often works with business consultants to assist client in implementing systems that reward following these systems/processes. These “systems” are, often, incorporated by reference

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Contract Drafting in South Korea

The following post considers some of the basics of contract drafting in South Korea. The following post is meant to be, only, a basic explanation of the basics of a good Korean contract based on a few observations. This post is not meant to be an exhaustive explanation of this issue, books have been written on contract drafting and we will not be drafting a book with this post. The main purpose of drafting a contract is to avoid a dispute. This article and a great Korean-experienced lawyer with an understanding of business in Korea and your industry should assist you in avoiding a legal dispute in Korea. Basics Considerations Before Signing a Contract in Korea Contract Clarity.  We see all too often, Korean contracts that lend themselves to unnecessary ambiguity. In some cases, ambiguity may be a benefit to our clients doing business in Korea, but in other cases, ambiguity

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Minority Squeeze-outs in Companies in Korea

The amended Korea Commercial Code of 2012 allows majority shareholders with 95% of the shares of a company in Korea, to purchase the shares of the minority for “fair value.”  Thus, allowing a statutory means under Korean Law to squeeze-out a minority shareholder. Fair value may be determined by the court if the parties are unable to reach an agreement within 30 days of a request by the majority shareholder to purchase the shares of the minority. We advise that you place a mechanism within your shareholder agreement (if possible) noting the manner of determining fair market value. ___ Sean Hayes may be contacted at: [email protected] Sean Hayes is co-chair of the Korea Practice Team at IPG Legal. He is the first non-Korean attorney to have worked for the Korean court system (Constitutional Court of Korea) and one of the first non-Koreans to be a regular member of a Korean

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Liquidated Damages v. Penalties in Korean contracts

As an American attorney, it’s a bit strange for me to read a Korean contract and see how the word “penalty” is used.  In the United States (as well as other common law jurisdictions), when a contract contains a “penalty,” the clause is invalidated. Korea, however, allows some “penalties” in contracts. Cutting to the chase, this is merely an issue of confusing and overlapping terminology.  But since its confusing, its worth explaining. To start with, a bit of background on liquidated damages.  Liquidated damages refer to damages, the amount of which, the parties designate during formation of a contract as compensation for non-breaching parties in the event of breach.   In the US and other common law jurisdictions, liquidated damages clauses are invalidated if the purpose is to punish the breaching party, rather than to compensate the injured party.  These clauses are referred to by the court as “penalties.” Now, contrary

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Choice of Law Issues in Employment Disputes in Korea

Choice of law/jurisdiction issue often arise in Korea when an agreement chooses a law/jurisdiction for resolution of a dispute other than Korea, internal conflicts in the agreement exist (yes this happens) or no choice of law/jurisdiction clause was chosen and the agreement seems to be better handled by a foreign court, or by the law of the foreign jurisdiction, because of, inter alia, the locale of witnesses and the subject matter of the agreement. Choice of law/jurisdiction issues are governed in Korea mainly by Korea’s Private International Act (KPIA).  However, other acts often trump the KPIA, or else the courts use built-in “public policy” arguments to allow Korean law to trump the non-Korean chosen law. For example, in the majority of employment law disputes, Korea courts have invalidated choice of the law and jurisdiction clauses that note a law or jurisdiction other than Korea. For example, if a employer hiring someone for

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Employment Background Checks in Korea: Not so Different from China

My friends over at the China Law Blog posted an article quoting the Chinese Business Leadership blog that noting that: “We were placing a GM for a Western family owned factory. They are small and troubled.  We found 15 thoroughly qualified candidates for the position. We had candidates tell us they worked at a company 5 years when they only worked. We had candidates tell us they were super valuable,  and the company does not want to let them go. We were able to find out that they were fired a year before while still in probation. As the last of the group of 15 refused to come clean and give us an accurate resume, we shook our heads in dismay. We are excellent at interviews and interview 90 minutes as our goal is to know. Despite that, we were unable to uncover these issues before the background check. We

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Distribution Agreements in Korea: Crawl before you Walk

Prior to going into any relationship with a distributor/agent in Korea, please read my post entitled: Finding a Korean Distributor: The Top 10 Things to Know Before Going to Bed with a Distributor in Korea. Please read that post in combination with this post, prior to engaging a distributor in Korea. We see too many Korean distribution agreements that are mere spun U.S. or European agreements.  Please have your Korean distribution agreement and all agreements you have in Korea drafted by an experienced and proactive attorney that has on-the-ground experience in Korea.  We see too many issues that could have been easily resolved by a carefully drafted agreement and a little due diligence. Issues to consider for your Korean Distribution Agreement: Will your distributor in Korea be your agent?  If the Korean distributor is an agent, generally, you will, only, be paying your agent In Korea a commission and you will be

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Korean Business Culture vs. Western Business Culture Explained by IPG Attorneys

We, often, have clients that proclaim that they can’t understand the way that Koreans do things.  They complain about an inability to reason, keep promises, express opinions and give a straight answer. Koreans have plenty of complaints about Westerners also.  Koreans, often, complain that Westerners concentrate too much on details and not enough on the big picture, care about money more than friendship and focus too much on efficiency. The root of these issues is vastly different cultural realities. Korean Business the Gangnam-Style Way The Lewis Cultural Model does an excellent job of explaining these differences.  The Lewis Cultural Model breaks cultures into three distinct categories: Linear-Active; Multi-Active; and Reactive. Linear-Active Cultures Linear-Active cultures base decisions and actions on logic.  Individuals in these cultures tend to be efficient, schedule oriented, and base decisions on a plan and reason.  These individuals are often criticized for focusing too much on the task at

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Can you Succeed in Korea without Resorting to Bribery?

Perhaps in a few warped ways, I have a bit of affection for the Foreign Corrupt Practices Act, which bars American companies from bribing officials overseas. From a nostalgic perspective, I recall when this act was made into law while I was at my first “real job” at The Chase Manhattan Bank in Seoul. The immediate reactions around me in the US business community were those of dread. We were certain that we would be put to disadvantage when competing with the locals as well as with other foreign nationalities. It turned out not to be the case. In fact, by and large we discovered the act gave us legitimate cover not to “go local” in conducting unethical and potentially sordid business practices. In time, other Western nations passed similar laws. While this clean business movement has hardly eradicated corruption, it has contributed to reducing unethical business behavior – most

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Korea Licensing Agreements: Licensing of Technology, Trademarks and other IP in Korea

We always advise our clients for every license agreement that there is a very high probability that at the end of the agreement license payment obligations will not be honored by the Korean licensee. The same holds true for our Chinese and Southeast Asian practices. If a Korean licensee is not going to continue the relationship with the foreign licensor, many Korean companies simply choose to forego the obliged payments in favor of not responding to emails, phone calls and mail.  We represent many foreign companies that retain us to collect on overdue payments from the Korean licensees. We are often disappointed at seeing license agreements that are simply form agreements from U.S./European Law firms or agreements drafted by Korean law firms with Korean and foreign attorney hacks. Sorry to call fellow attorneys hacks, but after reading one of the license agreements from one of the “ubiquitous big firms,” the term

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So you want to do business in Korea? Listen to my Mother. Korean Joint Venture/Partnership Basics

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

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Wills, Trusts, Pre-Nuptial Agreements, Living Wills, and Power of Attorneys in Korea

We receive numerous calls requesting the notarization of wills, living wills, general and specific power of attorneys, prenuptial agreements and other like agreements and documents in Korea. These documents are, often, just pulled from the internet.  Pulling these documents from the internet is not adequate – in most cases. We, sometimes, notarize these agreements for clients, however, in most cases we refer the client to their local embassy in Seoul, since the embassy stamp has a far less chance of not being recognized in a foreign jurisdiction than a Korean notarial stamp.  We, often, also, advise a redraft of the document. This post was not written to tell you not to call me about notarial issues (actually don’t contact me about notarial issues unless your nation does not have an embassy in Korea- contact your embassy), but to be aware that many of the agreements and documents that I have

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Basics to Successfully Outsourcing Production of your Product to Korea: Korea OEM Basics

So you have decided to outsource the manufacturing of your products to Korea. Good choice in choosing quality-focused Korea over quantity-focused China, but don’t make the bad choice of not considering basic basic legal due diligence necessary to protect your good name, technology, brand and the future of your business. If you plan on just dealing through a purchase order (PO) in Korea, you are heading down a path that may lead to a kick in the behind. The recession hit small/medium-sized manufacturers even harder than large manufacturers. Many of these SMEs have decided that the only way to survive is OEM (original equipment manufacturing) outsourcing to China, India, and other parts of Asia. I, also, do a good deal of enjoyable work in China. I am, however, always happy to see clients choose Korea over China, since many of the headaches you will experience in China and India will never

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Definition of “Ordinary Wage” in Korea: Korean Employment & Labor Law Basics

The courts of the Republic of Korea, for years, has struggled to find a consistent interpretation of an “Ordinary Wage.”  The definition of Ordinary Wage, under Korean Law, was clarified by the Korean Supreme Court in two decisions handed down on December 18, 2013.  The calculation of Ordinary Wages is important, since it is utilized to calculate statutory entitlements, and thus has an impact on the aggregate amount of contributions necessary to be paid to employees. For example, according to Article 56 of the Korean Labor Standards Act, an employer must pay 50% of the Ordinary Wage plus the Ordinary Wage for overtime, night and weekend work performed by the employee. Because of the potential for a large unknown future liability, this issue became the most significant issue, in the last few years, among domestic and foreign employers in labor and employment law in Korea. The basic Korean test is

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Rights of “Non-Registered” Shareholders in Korea

Questions arise, often, in Korean companies if a non-registered shareholder (not placed in the Korean corporate registry), that can prove that the shareholder is the beneficial “owner” of shares of the company, may exercise rights of a owner of the company.  The Supreme Court has recently made a running on this issue. Supreme Court 2015Da248342 Decided March 23, 2017 The Supreme Court, in this case, ruled that: “In light of the legal nature of a company whereby its ownership structure constantly changes depending on the issuance and transfer of shares, the purpose of the shareholder registry system under the Commercial Act lies in making it easier for a company to externally distinguish its legal relationship with numerous shareholders based on a cursory and uniform standard, thereby improving efficiency in handling matters related to the exercise of shareholder rights and ensuring legal certainty. Only a person owning a company’s shares and

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Privity of Contract in Franchise Agreements in Korea: Korean Franchise Law Updates

Normally, in Korea, a contract/agreement cannot confer rights nor impose obligations upon a person who is no a party to the contract/agreement.  One interesting case, in franchise law, applied this principle to the benefit of the franchisor and the detriment to a supplier.  A Supplier delivered food through a Distributor to a Franchisee based on a franchisee requirement iterated in a franchise agreement with a franchisor.  The case brings to light, also, the potential liability of franchisors for acts of Korean franchisees.  The dispute occurred, of course, since the Supplier was not paid for an outstanding order, since the Franchisee was insolvent.  The Franchisor (deep pocket) was not insolvent and, thus, the only available option for collection was via the Franchisor.  One caveat is that the Franchisor was paid a commission by the Supplier/Distributor for sales to the Franchisee and as noted above, the Franchisee was mandated to use this specific Supplier.  Thus, the

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Expiration Versus Termination of a Distribution Agreement in Korea: Korean Distributor Basics

While Korean Law does not specifically detail the differences in treatment in law between the non-renewal (expiration) of a distribution agreement versus the termination, in reality, Korean courts are less likely to rule in favor of distributors in cases where a distribution agreement is not renewed.  Thus, typically, it is advisable to have a distribution agreement based on a specified term of years.  However, even with the expiration of the Korean Distribution Agreement, termination risks exist. In some cases, Korean courts have noted that termination and even non-renewal is a violation of Korean Law since the non-renewal or termination of the Korean distributor was not based on “good faith.”  In many cases, Korean courts have required a showing of “good cause” to terminate or even to not renew a relationship.  Contractual formalities and structural realities often assist in allowing a non-performing distributor from prevailing in court.  Thus, a nuanced and

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