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ATTORNEY [ licensed to practice in KOREA, U.S.A., ILLINOIS ] LEE, JAE WOOK
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(February 10, 2015)
Set forth below is a general overview of the necessary procedures and documentation for
incorporating a new joint venture company (“JVC”) in Korea by a foreign investor (“Foreign
Investor”) along with a Korean partner, certain considerations when choosing the corporate form
for the JVC and other select aspects for consideration in operating the JVC.
I. Incorporation of a Korean Company
1. Overview of General Requirements and Procedures
Set forth below are the actions, which are required in connection with incorporating a new
Korean company by a foreign investor:
(i) Obtain foreign investment authorization under the Foreign Investment Promotion
Law (the “FIPL”);
(ii) register the incorporation of the new Korean company with the court;
(iii) register the new Korean company with the local tax office; and
(iv) if the parties surpass certain threshold requirements (as set forth below), file a
business combination report with the Korea Fair Trade Commission (“FTC”) as
required under the Korean Monopoly Regulation and Fair Trade Law (the “FTL”);
2. Foreign Investment Authorization
To obtain foreign investment authorization, the Foreign Investor must file a report (the “FIPL Report”) with one of the authorized foreign exchange banks (“FX Bank”). In
most cases, this step is a routine procedure, except where the contribution is an in-kind
contribution and/or contribution of intellectual property rights.
In connection with the FIPL Report, the following documents are required:
(i) Cover report form in a format specified under the FIPL;
(ii) Certificate of Nationality (this document is to evidence the Foreign Investor’s
current good standing as a corporate entity in its jurisdiction of incorporation (e.g.,
a good standing certificate)); and
(iii) notarized power of attorney for the person to act on behalf of the corporate foreign
investor with respect to certain acts. Notarization of the power of attorney must
be accompanied by a certificate of a public authority that authenticates the official
capacity of the notary public (e.g., a certificate that the notary is duly licensed by
the licensing entity and is authorized to issue such a notarial certificate).
To qualify as a foreign investment under the FIPL and take advantage of the benefits
afforded under such statute, the minimum foreign investment amount would have to be
KRW 100 million or higher. 3. Incorporation
The incorporation process of the JVC in Korea consists of the following steps: (i) The
“promoters” would execute the articles of incorporation of the JVC (the “AOI”); (ii) the
“promoters” would subscribe and pay for the shares to be issued to them upon
incorporation; (iii) the inaugural meetings of the shareholders/promoters and the board of
directors of the JVC (the “Board”) would be held; and (iv) the JVC’s incorporation would
be registered with the appropriate district court.
4. Tax Office Registration for VAT
For value-added tax (“VAT”) purposes, an “Application for Registration of Business
Entity” must be filed within 20 days from the date of “commencement of business.”
Such date is when the JVC actually commences its business. However, a company may
apply for such business entity registration before it commences its business. The JVC
may not obtain a refund of input VAT (i.e., VAT paid by JVC to vendors when
purchasing goods or being provided services) or credit the input VAT against its output
VAT (i.e., VAT collected by JVC from its customers) until the business entity registration
is completed. Thus, the JVC should be registered with the tax office as soon as possible
after the incorporation.
A copy of the office lease agreement for the JVC is required for tax office registration.
In addition, should the JVC prefer to have notifications from the tax authorities sent to an
address other than the registered address, a separate Delivery Address Report would have
to be submitted.
5. Filing Business Combination Report with the KFTC
When two or more parties create a JVC, the largest shareholder must file a business
combination report with the FTC, if the following requirements are met:
(i) At least one of the parties (including affiliates) has assets or revenues equal to or
great than KRW 200 billion; and
(ii) at least one of the other parties (including affiliates) has assets or revenues equal
to or greater than KRW 20 billion.
If at least one of the parties (including the affiliates of the parties) has assets or revenue
equal to or greater than KRW 2 trillion, the report should be filed before the date of the
incorporation of the JVC.
6. Registration as a Foreign Invested Enterprise
The JVC must be registered as a foreign invested enterprise (“FIE”) with the foreign
exchange bank with which the FIPL Report is filed (i.e., the JVC’s designated FX Bank),
after the incorporation is completed. Thereafter, the JVC may remit dividends to the
shareholders, subject to other applicable laws and regulations.
7. Licenses
There could be separate business licenses or registrations that may be required to conduct
business in a particular business sector. The types of business license or registration
necessary will be determined by the nature and the actual features of the businesses
contemplated to be conducted by the JVC.
8. Summary of Documentation Requirements
The following documents are required in connection with incorporating the JVC:
(i) AOI;
(ii) Notarized Letter of Acceptance of Appointment executed by all the directors,
including the representative director, and statutory auditor of the JVC; provided
that the individual who will serve as the representative director will have to sign
both a letter of acceptance as a director and another letter of acceptance as the
representative director;
(iii) power of attorney authorizing a Korean legal advisor to draft the Korean versions
of the JVC’s board of directors meeting minutes and to obtain notarization of the
executed version of such minutes (the “Director’s POA”);
(iv) Certificate of Impression of Representative Director’s Seal, with the signature
duly notarized; and
(v) copy of the passport page showing the full name, nationality, date of birth, and
address for all the directors and statutory auditor of the JVC.
II. Choosing the Entity Form (Joint Stock Company vs. Limited Company)
Under the Korean Commercial Code (the “KCC”), foreign investors generally prefer
either of the two forms for the purposes of forming a joint venture and engaging in commercial
activities which offer limited liability, namely, jusik hoesa (joint stock corporation with limited
liability) and yuhan hoesa (limited company).
The key differences between a jusik hoesa and a yuhan hoesa are, among others, as
(i) flexibility in the type of investment for a jusik hoesa (e.g., availability of common
and preferred stock, bonds and debentures);
(ii) jusik hoesa may offer its shares to the general public; and
(iii) possibility of passing resolutions of general meetings of the members of a yuhan
hoesa in writing without convening an actual meeting if all members consent to
the procedure.
In practice, of the two, most foreign invested companies in Korea are structured as jusik
hoesas. Investors prefer the jusik hoesa form because it is generally considered more
prestigious than yuhan hoesa, which is associated principally with small family-owned
businesses. However, some foreign investors do choose to use the yuhan hoesa form. Most of
the foreign investors who choose yuhan hoesa over jusik hoesa as the corporate structure make
such decision primarily because of (i) more favorable tax treatment for a yuhan hoesa under the
tax statutes in the jurisdiction of the parent company; and/or (ii) flexibility of passing resolutions
in writing, which is not viable for a jusik hoesa. Do note however that, since the promulgation of the amended KCC effective April 15,
2012, another type of entity known as yuhan chaekim hoesa (“YCH”) has been made available in
Korea. The YCH is modeled after limited liability companies in the U.S., which acknowledge
the limited liability of members while granting more flexibility in terms of corporate formalities,
management and corporate structure. While there is restriction on the transfer of membership
interest in an YCH, the members may agree otherwise in the applicable AOI. In addition, there
is no minimum capital requirement for establishing an YCH. Further, similar to yuhan hoesa, there is no mandatory requirement to have a board of directors or an auditor and furthermore, the
members’ meeting is not mandatory for an YCH. Moreover, unlike jusik hoesa and yuhan hoesa, YCH can be managed by a juridical person (as opposed to an individual) and can be converted to
a jusik hoesa by a resolution of its members. However, in terms of taxation, unlike limited
liability companies in the U.S., the current Korean Tax Code does not afford pass-through
treatment of YCH and therefore, YCH are taxed at the entity level as well as the owner level. Despite YCH becoming a possible option since April 15, 2012, when compared with yuhan hoesa, there still appears to be a preference for the latter given the familiarity thereof, together with the
fact that most of the operational schemes permissible under the YCH are also feasible under the
yuhan hoesa.
III. In-Kind Contributions
Under the KCC, any item that can be stated as an asset on the balance sheet can be
contributed as an in-kind contribution in exchange for shares. Thus, in principle, whether a
Foreign Investor’s intellectual property rights (“IPR”) can be contributed in-kind depends on
whether it can be recognized as assets under the Korean IFRS. Contribution of IPR by a
Foreign Investor requires a more complicated procedure, chiefly involving the evaluation of the
IPR to confirm that the IPR in fact has the value claimed. To confirm the value of the IPR, the
foreign investor must obtain an appraisal of its IPR from one of the government-approved
appraisal agencies (there are seven government-approved agencies). The process may take
anywhere from one month to six months on average (but could take more than a year for highly
complex technology), with the costs of the appraisal depending on the nature of the IPR (e.g., if
the appraisal needs to be conducted abroad, the cost will be higher).
In the case of a jusik hoesa (most popular for foreign investors), parties contemplating on
making in-kind contributions generally undergo a preliminary appraisal. The outcome of the
preliminary appraisal is then used in connection with the negotiations between the parties
regarding price before entering into an in-kind contribution agreement. Subsequent to execution
of a contribution agreement but prior to the incorporation of a jusik hoesa, a third party appraisal
(“Appraisal Report”) must be conducted. The appraisal may be conducted by either a
court-appointed examiner or a certified appraiser, selected by the parties. In practice, however,
if the preliminary appraisal has been conducted by a certified appraiser, the report therefrom can
be used in lieu of conducting a separate and additional third party appraisal. The completed
Appraisal Report will then be submitted to the court having jurisdiction over the proposed
principal office of the JVC for review and approval. The time period required for the court
review process varies depending largely on the size and complexity of the contributed assets and
the court has full discretion in this respect. If the contributed assets include numerous fixed and
non-fixed assets and liabilities, it generally takes three to four weeks to complete the court review
IV. Corporate Governance
As a general matter, the majority shareholder (i.e., the shareholder holding more than 50%
in a company) is afforded broad governance rights under the law, such as the ability to determine
matters subject to a simple majority vote, control over the board of directors, and control over the
appointment of key officers and employees. The minority shareholders, for the most part, are
only afforded such rights as have been secured by negotiation with the majority shareholder.
There is usually considerable pushback from the majority shareholder during the negotiation
process, as it is generally accepted that in a Korean joint venture context, the majority
shareholder will have control over the management of the company and its day-to-day operations. 1. Shareholders’ Meeting
The majority shareholder is, in principle, able to pass resolutions on most issues to be
resolved at the shareholders’ meeting pursuant to the KCC, which provides for such matters to be
passed by a simple majority vote (i.e., the affirmative vote of the majority of the voting rights of
the shareholders present at the meeting and representing at least one-fourth (1/4) of the total
issued and outstanding shares). These matters include the appointment of directors, approval of
financial statements, and declaration of dividends. For such matters, the minority shareholders
would not have veto power. In practice, however, the minority shareholders of a JVC often
request a veto right over certain simple majority matters, right which will be stipulated in the
joint venture agreement or shareholders agreement. To further heighten enforceability of such
matters set forth in the joint venture agreement or shareholder agreement, minority shareholders
would generally request such terms be reflected in the AOI, which is generally feasible under
Korean law, other than under certain limited circumstances.
In addition, there are certain matters that require a “super-majority” (i.e., the affirmative
vote of at least two-thirds (2/3) of the voting rights of the shareholders present at the meeting and
representing at least one-third (1/3) of the total issued and outstanding shares) under the KCC. Such special resolution matters include amending the AOI, effecting a merger or dissolution of
the company, dismissing directors, transferring important business, and capital reduction.
2. Board of Directors
Shareholders of a company typically each have the right to nominate directors in
accordance with their equity-holding ratio; thus, the majority shareholder would normally be
entitled to nominate a majority of the directors of the JVC. Under the KCC’s default rule, all resolutions adopted at board meetings require a simple
majority, that is, an affirmative vote by more than one-half (1/2) of the directors present at a
meeting in which a quorum (presence of more than one-half (1/2) of all the directors in office) is
present. Nevertheless, it is not uncommon for minority shareholders of a JVC to demand that
certain matters be resolved by super-majority vote so that they can exercise veto power. Typical
matters in which minority shareholders demand to be subject to a super-majority vote include
material capital expenditures, approval of annual and long-term budgets, borrowing or providing
guarantees above a threshold amount, and the appointment of senior officers and employees. Similar to aggravated thresholds for matters to be resolved at the shareholders’ meeting as
agreed in the joint venture agreement or the shareholders agreement, minority shareholders would
generally also request the agreed super-majority board agendas be reflected in the AOI of the
JVC, which is generally feasible under Korean law, other than under certain limited
circumstances. 3. Representative Director and Other Officers
The party obtaining a majority equity stake and control over the board will be able to
appoint all the major officers and employees such as the representative director, CEO, CFO,
facility managers, and brand managers. This would be the case, for example, if the joint venture
agreement were to be silent on the issue. On the other hand, the minority shareholders of the
JVC typically demand that the joint venture agreement specify such shareholder’s right to
appoint certain key positions. For example, when a majority shareholder has the right to
appoint the CEO, the minority shareholders typically request the right to appoint the CFO. The
minority shareholders also sometimes demand that each party appoint one representative director
each, and for the two representative directors to act jointly.
V. Exit Considerations
A joint venture agreement could be terminated by mutual agreement (whereupon the
parties would negotiate the consequences of the termination, usually a buy-out by one party or a
liquidation), based on the default of a shareholder (such as a material breach of the joint venture
agreement or shareholders agreement by a shareholder with certain cure period), direct or indirect
change of control of a shareholder resulting in a competitor of the other shareholder acquiring
control, insolvency events, upon a force majeure event and/or by deadlock. The defaulting
shareholder could be subject to penalties, including damages, liquidated damages and/or put or
call obligations at a discount or premium. In addition to the breach of the joint venture
agreement by a party, the parties could also include any material breach of ancillary agreements
by a party as a trigger for termination of the joint venture agreement by the other party.
In practice, upon termination of a joint venture agreement, the parties tend to negotiate a
settlement without necessarily being bound by the original agreement’s provisions as to, for
example, who will buy whose shares at what price. Nevertheless, it is important to provide for
detailed provisions in the joint venture agreement so as to maximize clarity and predictability to
the extent possible, as well as set a baseline for any further negotiation by the parties closer to
The minority shareholders should be mindful that the termination of the joint venture
agreement or shareholders agreement is not a remedy, since the minority shareholders will
generally lose the contractual protections afforded therein. Accordingly, the minority
shareholder may try to minimize the list of termination events. Conversely, the majority
shareholder typically tries to include a long list of termination events.


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