Korea Corporate Governance: One of the Worst in World According to Economist

What is the cause of the Korean discount? An economist article hits the nail right on the head. So what is the source of the “Korea discount”, which means that the KOSPI has a forward price-to-earnings ratio of under ten, below most other Asian stockmarkets (see chart)? There are a few possibilities. The national economic model is still built on exports, often in highly cyclical industries such as shipbuilding. The capital structure of South Korean firms has historically been debt-heavy.In this section But the prime cause of the discount is more likely to be poor corporate governance at the family-run chaebol conglomerates that dominate the economy. Nefarious schemes to pass on control to sons, avoid taxes and exploit company assets for the benefit of family members are widely discussed in private. They are also lambasted abroad: a 2010 survey by CLSA, a broker, placed the country third-from-bottom in Asia on

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Korean Economy Ranked as a Moderately Free Economy by Heritage Foundation

South Korea has ranked a mediocre 69.9 (moderately free) behind major regional allies and behind nearly 30 countries that are “free” or “mostly free.”  Korea ranks, rightfully, very low in the categories “freedom from corruption” and “labor freedom.”  Korea has an excellent ranking in business freedom and a mediocre ranking in all other major categories.   There has been no major change in Korea’s ranking for many years. Regional Rankingrank                      country                  overall score                 change from previous1                           Hong Kong           89.9                                0.22                           Singapore              87.5                                0.33                           Australia                83.1                                0.64                           New Zealand         82.1                                -0.25                           Taiwan                   71.9                                1.16                           Macau                    71.8                                -1.37                           Japan                      71.6                                -1.28                           South Korea           69.9                                0.19                           Malaysia                66.4                                0.110                         Thailand                 64.9                                0.2 The complete report can be found at the Heritage Foundation.__________ [email protected] (c) Sean Hayes – SJ IPG. All Rights reserved.  Do not duplicate any content on this blog without the express written permission of the author. [email protected]

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Maximize Benefits of Korea’s FTAs with U.S. and EU via Legal and Business Consultants in Korea

IPG Legal is happy to announce the formation of the first team of professionals dedicated to providing clients advice and representation on how to maximize the benefits of the KORUS and KOREU FTAs for EU, U.S. and Korean companies. IPG has compiled a team of Korean and international attorneys, senior company executives, patent attorneys, accountants, recruitment professionals, business consultants, custom agents and other professionals to provide services to American and EU companies doing business in Korea under the KOREU and KORUS FTAs.  Since, we are not simply a team of lawyers, we are proud to be the first one-stop shop for all companies wishing to import products into Korea, form strategic relationships with Korean companies and entrepreneurs, retain Korean employees, resolve disputes in Korea and obtain approvals to import and export products from and into Korea. Our extensive research over the last few months of the US and EU FTAs

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Acquiring Shares in Closed Korean Corporation in Exchange for Product at Discount: Don’t Forget the Due Diligence in Korea

I just received a phone call from a prospective client with a wonderful product that has been offered a sweetheart deal.  Whenever I hear that someone has received a no risk or sweetheart deal in Korea, a red flag immediately goes up in my head and I immediately request the client to let me do a couple of weeks of due diligence. The, ubiquitous, sweetheart deal is ownership of shares in company in exchange for some benefit from the foreign partner.  Too often, the Korean company is a shell.  The shell is broke with liabilities that far exceed assets.  The shell, however, is paying his management handsomely through a variety of interested transactions and access to the expense account.  In one case I regrettably saw, the company was under investigation of the prosecution. Thus, your sweetheart deal may lead to unexpected liabilities, the deterioration of your brand image, the eyes

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Korea Fair Trade Commission to Enforce Mislabeling and Misleading Advertisement Law in Korea: May the Seller Beware

In June of 2011, the Korea Fair Trade Commission (KFTC) has begun to enforce Notification of the Standards on Imposing Penalties on Companies that Act on Fair Labeling and Advertising.  The KFTC is very aggressive in enforcing law.  We suspect to see a few public cases this year concerning mislabeled foreign products A penalty may be imposed only if:  The Act was violated on two or more occasions in a three year period; or Serious harm is realized by customers; or Seller engages in prohibited acts that are intentional or are a clear violation of law (typical vague catchall language). We have run into a few companies over the years that were exporting products from a particular country, but the country of origin of the product was actually a third country.  Check your labeling an insure that your labels reflect the proper quantity, quality, ingredients and country of origin.  __________ [email protected]

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Compliance Control Standards in Korea: Amended KCC

I just realized that I have written an article on the new Compliance Officer System in the Korean language, but have not written about the matter in the English language.  Sorry to the handful of the readers of this blog that may be interested in this article. The Korean article appeared in the Korean Language Legal Times.  The new system will come into effect when the amended KCC comes into effect in April of 2012. Compliance Control Standards under Article 542-13 of the amended Korean Commercial Code (KCC) will be only applied to listed companies with capital holdings above a threshold amount. The determination of the threshold amount and the qualification to become a “Compliance Officer,” along with other key aspects of the amended KCC, has been delegated to the President through his power to issue presidential decrees. Thus, this post will be updated when the presidential decree is issued

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Mandatory Audit Committee/Statutory Auditor in Amended Korean Code

The Amended Korean Commercial Code (KCC), that comes into effect in April of 2012, will require listed Korean companies with less than KRW 2 trillion in assets to either: Appoint a Statutory Auditor; OR Form a “Mandatory Audit Committee If a Mandatory Audit Committee is formed, a shareholder with more than 3% of the voting shares is prohibited from voting the shares in votes concerning the Mandatory Audit Committee. Prior to this amendment, the “3% Rule,” Mandatory Audit Committee and statutory auditor were, previously, avoidable by listed companies in Korea with less than KRW 2 million in assets through the adoption of a General Audit Committee. The General Audit Committee allowed a shareholder with more than 3% of the voting shares of the company to vote for the appointment of members of the Committee. Because of perceived transparency issues, the exception, available for smaller listed companies under the present KCC

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Limited Liability Companies under the Amended Commercial Code of Korea

Yuhan Hoesa is a form of a company in Korea similar to a western Limited Liability Company.  It has only been utilized, to date, by small privately held corporations and some financial companies under the Korean Asset-Backed Security Act, Korean Capital Markets Act or the Financial Investment Services Act. The revised Korean Commercial Code (KCC) allows for the more efficient and effective utilization of the Yuhan corporate entity.  I will be advising the use of this company form for some of my clients.  In the past, few clients would be advised to form a Yuhan Hoesa.  The new Korean Commercial Code is scheduled to be implemented in April 2012.  No benefits from the amended KCC may be availed of prior to the implementation of the amendments.  Major Revisions KCC Respecting Yuhan Hoesa: Unlimited Number of Members.  Prior to the amendments only 50 members was authorized without the express approval of the courts.

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Don’t Mess with the Big Boys in Korea: The Google Korea Saga Continues

In the past, raids have been conducted by the National Police Agency concerning alleged violations of Korea’s privacy law stemming from mapping software that is in direct competition with a product from the same parties that filed this present complaint. This time, the Korean Fair Trade Commission (FTC) raided Google headquarters in Seoul. The raid is intended to reveal information that Google is prohibiting or using tactics to delay the use of Korea’s Naver browsers and other browsers on the Android operating system. A complaint by the owners of Naver was filed to the FTC in April alleging, in short, that Google Korea has restricted the ability of smart phone manufacturers from pre-loading search engines onto the Android operating system. According to a Wall Street Journal article, a Google spokesperson is credited with noting that “Android is an open platform, and carriers and OEM partners are free to decide which

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Conflict of Interests in Korea: Lawyers as Outside Directors of Listed Korean Companies

The Korea Times published an interesting article that all of us at local law firms in Korea know very well.  Korean listed companies love to hire lawyers as outside directors.  Many of these companies know that these lawyers will make very little noise when it comes to board action or inaction because of the often strong financial relationship between the firm and the company.  Additionally, many of these lawyers are hired by majority shareholder or friends that are company directors.  The Korea Times article notes that: According to the report by Chaebol.com, of the 454 outside directors hired by the top 100 listed companies in the country, 76, or 16.7 percent, are lawyers or advisers for local legal firms . . . The Financial Supervisory Service, meanwhile, said it has no authority to regulate outside directors hired by companies, while the Justice Ministry said it could slap fines on violators for hiring lawyers,

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Fair Transactions with Subcontractors Act of Korea: So Buyer Beware or Simply Avoid the Risk and Buy the Seller?

Because of perceived abuse by Korean conglomerates of subcontractors, the Korean Fair Transactions in Subcontracting Act was passed in March of 2011. The Act was effective since the beginning of July of 2011. The Act, in short, grants wide discretion to the Korea Federation of Small and Medium Businesses. This agency is now authorized to request adjustments to Korean subcontractors contractually obligated delivery prices and additionally may impose treble damages for certain violations of this Act, including for the act of misappropriation of the technology of subcontractors. The Act also reverses the burden of proof in many instances, while requiring conglomerates to make technical requests in writing and to conduct formal subcontractor practice surveys. The treble damages component of this Act is very rare in Korea. Punitive damages are only available in the most rare of cases and only if authorized by statute. The inclusion of treble damages in Korea

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So Your Korean Company’s Employees Violated Law in Korea: What you Should Do? by Tom Coyner at Soft Landing Consulting

This is not a pleasant topic, but multinational firms and/or their employees occasionally trip over the law in Korea. Actually, this is sometimes easier to do than one might imagine. To illustrate the point, a long-term foreign resident investigated why his vehicle had been issued a parking ticket, given that others had been parking along the same curb for years. He soon discovered that most parking along curbs in Seoul is technically illegal. And such is the case for many things in Korea. This foreigner, a somewhat notorious wag, declared, “The whole country is illegal!” That is obviously an exaggeration but the notion works surprisingly well as a working theory. The problem can be traced to two major areas. First, the Korean laws are open to interpretation by enforcement officials and the community at large, given their vagueness and/or sometimes their impracticality. And second, since society is routinely cutting legal

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Classification of Directors in Korea under the Korean Commercial Code: Inside, Outside and Other Directors in Korea

In Korea, all company directors are listed on the Korean Commercial Register.  If you are doing business with a Company, always check the Commercial Register to determine if you are doing business with a person authorized to do business with your company.   Additionally, if you have been told that you are a director of a company (I have seen this trick a few times) make sure that you are listed on the Commercial Register. The members of a Korean board of directors may be listed as either: “inside directors”; “outside directors” or “other directors not directly engaged in the regular business of the company.”  In many Korean companies, one of the insider directors is, also, classified as the representative director.   The Korean company may also be required to have a statutory auditor.  Inside DirectorThis director is a director that is responsible for the day-to-day activities of the company. The director is

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Electronic Voting in Shareholders Meetings in Korea: To Vote or Not to Vote

Prior to the 2009 amendments to the Korean Commercial Code, electronic voting was not specifically authorized. I highly recommend to most clients the utilization of electronic voting if the foreign shareholder is in a closed corporation in Korea.  The method to include this voting  is well known by most attorneys experienced in the drafting of Korean joint venture agreements and shareholder agreements for non-Korean clients. In order for a company to utilize electronic voting: The board of directors must approve voting by electronic means; The Company’s articles of association must not exclude voting via electronic means; The notice of the general meeting of shareholders, must note that electronic voting is allowed, must note the internet address to cast the vote, the period in which votes may be cast and the basic technical details. The voting must end the day before the shareholder meeting; Prior to voting, the shareholder must have a “registered electronic signature.”  This

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Limiting Director Liability under Korean Law: Don’t Drop the Insurance Policy Yet

Prior to recent amendments to the Korean Commercial Code (KCC) it was impossible to limit the liability of directors of Korean companies without the agreement of all shareholders. Obviously, this was difficult, if not impossible, for most listed-companies. In order to relieve the burden on directors (and their insurance companies) and also to encourage qualified individuals to be willing to become directors (facial purpose), the KCC was amended to exempt directors from some liability in certain cases.  The details are found below.  Article 400(2) of the newly amended KCC allows the exemption of a director for liability of sums in excess of six times remuneration for inside directors and three times remuneration for outside directors. The specific details of what is considered “remuneration” is not yet clear.  I assume this may be made clear by the not, yet, implemented enforcement decree.  It will be interesting to see if bonuses and

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Resolving Korean Joint Venture/Partner Disputes without an Attorney — Maybe

Conflicts are inevitable, but not unresolvable. Since the circumstances surrounding Korean JV/partner conflicts can vary greatly and since the personalities of the involved parties play a major role in the confrontation, there may not be any ready-made prescription for the solution. There are however, some general ideas that may help in resolving conflicts in the local business environment. Personal ConsiderationsWestern logic, alone, is not usually sufficient to influence a Korean counterpart. Re-opening or referring to the exact stipulations of a contract is not desirable; it has been said “don’t confuse me with facts.” Such a factual confrontation will only raise the defenses of the local partner and even block any attempt at resolution. Once again, the matter of “kibun” plays a subconscious role in the resolution of conflict. Try to appeal to his emotional common denominator.Control Emotions Showing one’s emotions in a demonstration of anger can only exacerbate the situation;

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Squeezing-out Minority Shareholders under Korean Corporate Law

The amended Commercial Code of Korea provides for “squeeze-out” rights for shareholders holding 95% or more of the shares of a company. The law will be promulgated from April of 2012. The law also provides for a right of minority shareholders to demand a “sell-out.” It seems possible, under the very vague wording of the amended clauses, for a sell-out to take place at the same time as a squeeze-out with the potential of conflicting appraisals and procedures. We wish the amended clauses would have been more specific, since so many holes are evident that litigation is bound to occur and the outcome of cases will be near impossible for legal counsel to predict. For a squeeze-out the majority shareholder must establish that:  The squeeze-out is “necessary” to accomplish the company’s specific “business purpose.” The wording is so vague that it renders the clause meaningless without guidance from a court.

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Independent Contractors and Obligations under Korea LSA Speech to Amcham Korea

During a recent speech the head of the Korean Labor & Employment Law Team and I gave to the American Chamber of Commerce in Korea, a few interesting topics came up that seemed to be of particular interest to participants. For the Power Point of the presentation click HERE. Factors Courts use to Determine if an Individual is an Employee and Thus Obligated to Provide Severance and Employment Security etc. Under the Korea Labor Standards Act (LSA). These following factors are used by the Korean Supreme Court to determine if one is an “employee” under the Korean LSA. The factors are not weighted equally by courts in Korea. Please note that these factors are not weighted equally by courts and all factors are not required to be met for an independent contractor to be deemed an employee under the LSA. An answer in the affirmative to anyone one of the

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Who Won with the Korean Compliance Law?

Appeared in the Korea Times on June 3, 2011. The National Assembly of Korea has handed Korean companies a fantastic opportunity with the recent passing of amendments to law requiring the appointment of compliance officers to large listed companies. Various pressure groups in Korea have expressed support and opposition to the new requirements that listed companies employ lawyers or law professors of five years experience to oversee the companies’ compliance obligations and to act proactively to head off legal issues before they escalate. Some critics of the new law say it is just a way to find employment for some of the thousands of Korean lawyers who, now, qualify each year. Others, such as Ryu Kwang-choon, the manager of the Korean Listed Companies Association, was quoted as saying, “Large companies have a team of lawyers or a legal department and deal with related issues, but small- and medium-sized firms don’t

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Korean Commercial Code Revisions Make Capital Reductions in Korea Easier

The recently amended Korean Commercial Code (KCC) will make it simpler for local and Korean foreign-capital invested companies to make nominal capital reductions. The law will come into effect next year. Previously in the KCC, there was no differentiation between a real capital reduction, in which assets are distributed to shareholders in proportion to their holdings, and a nominal capital reduction (also known as a reduction of capital “without consideration.”) A nominal capital reduction is, obviously, inherently less cumbersome than a real capital reduction. In the case of a nominal capital reduction, the company in Korea could choose to reduce the book value of assets to, in turn, reduce losses shown in financial statements. This tactic was often used in Korea to help a company show more accurate figures when the real value of the loss is significantly less than the book loss. However, even though there is no reduction

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