Korea Annual Review 2012

Korea Annual Review

2012

Published in conjunction with:

A dedicated jurisdictional REVIEW

Introduction INDIA

Introduction

Publisher Peter Ollier peter.ollier@euromoneyasia.com +852 2842 6944 Published by Asia Law & Practice Euromoney Institutional Investor (Jersey) Ltd 27/F, 248 Queen’s Road East Wanchai, Hong Kong © Euromoney Institutional Investor (Jersey) Ltd 2012 Disclaimer The material in this periodical does not constitute advice and no liability is assumed in relation to it. The materials referred to in this publication are publicly available.

All rights reserved Directors, Euromoney Institutional Investor (Jersey) Ltd Peter Richard Ensor, Tony Shale, Anita Rye Divisional director, Legal Media Group Danny Williams Head of marketing, Asia Tom Berry CEO, Euromoney Institutional Investor, Asia Tony Shale Subscriptions & Customer Service: Subscriptions Manager, Asia Fiona Leung Tel: +852 2842 6929 Fax: +852 2842 7019 Email: fiona.leung@euromoneyasia.com UK hotline: +44 (0) 207 779 8999 US hotline: +1 212 224 3570 Email: hotline@euromoneyplc.com

Published in conjunction with:

A dedicAted jurisdictionAl reVieW

2012

Associate publisher Denny Squibb denny.squibb@euromoneyasia.com +852 2842 6945

Review

Annual Review 2012

Production manager Andy Alcock andy.alcock@euromoneyasia.com +852 2842 6928

KOREA AnnuAl KOREA

Staff writer Katherine Jo katherine.jo@euromoneyasia.com +852 2842 6963

IFLR | asialaw

Managing editor Stephen Mulrenan stephen.mulrenan@euromoneyasia.com +852 2842 6992

The inaugural Korea Annual Review is being published at a pivotal time in the country’s development. On October 12 2011, the US Congress approved President Obama’s submitted legislation for the implementation of the United States-Korea Free Trade Agreement (KORUS FTA). Among other things, the KORUS FTA will open Korea’s US$580 billion services market to US companies in sectors ranging from delivery and telecommunications services to education and healthcare services.

In addition to the Korea-EU FTA, which came into effect on July 1 2011, the KORUS FTA signifies the beginning of a predicted escalation in trade between Korea and the rest of the world.

Much of the recent speculation has been focused on outbound acquisitions. Encouraged by the Korean government, and emboldened by the strength of the Won, Korean brands have become global leaders.

In comparison, foreign direct investment (FDI) into Korea has not enjoyed such a glorious recent past. For example, in 2008, the country secured only US$11.7 billion in FDI. This was considerably less than the US$66 billion gained by Spain, or even the US$44 billion that went to Sweden.

There remain concerns over issues such as union reform risks, unclear regulations, and the continued presence of cartels. And yet, the country’s potential is there for all to see.

This US$1 trillion-plus economy is the 15th largest in the world, and recorded a very healthy 6.2% economic growth in 2010. Home to some 50 million increasingly active consumers, Korea also offers foreign investors geographical access to the low-cost labour market of China and the sophisticated consumer market of Japan. Collectively, these three jurisdictions account for roughly 25% of global GDP. It is against such a backdrop, and indeed because of it, that IFLR and Asialaw present the inaugural edition of Korea Annual Review. Following extensive interviews and faceto-face meetings with leading legal practitioners, in-house counsel and government officials, this publication covers 10 of the most salient areas of practice in Korea.

Input and insight was gathered from a variety of sources, including individuals from both domestic and international law firms, corporate houses and financial institutions.

The editorial team has utilised the ample resources of IFLR and Asialaw to connect investors with the most informed people in Korea’s legal market.

Korea Annual Review aims to provide investors with an easily accessible overview of legal and regulatory developments in Korea over the last 12 months. It also provides some insight into what may be on the legislative agenda in the year ahead.

ASIALAW Korea Annual Review 2012

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COntents

Contents For attribution

“

The interpretation of Basel III is focused on the regulatory side, and how exactly we interpret this is the key issue

”

Woo Young Jung, Partner, Lee & Ko

28

“

Korea strikes a fascinating balance between being the traditional hermit kingdom and being on the international investment community’s radar

4

”

Steve Kim, Assistant general Counsel, JP Morgan

“

Each year, we review between 500 and 600 proposed merger plans for any anti-competitiveness

”

Joong-weon Jeong, Director General, Korea Fair Trade Commission

“

There has been a reaction against the government’s conservative policies and a backlash against the dominance of the chaebol

”

Jamie Allen, secretary general, Asian Corporate Governance Association

18

4

BANKING & FINANCE

Looking beyond Basel III CASE STUDY: How K-Exim and K-sure financed a petrochemical facility in Singapore CO-PUBLISHED: Recent developments in Korean regulations – by Kim & Chang

18

CAPITAL MARKETS

ASIALAW Korea Annual Review 2012

28

COMPETITION

KFTC maintains ever-watchful eye on conglomerates PROFILE INTERVIEW: Joong-weon Jeong, Director General, Korea Fair Trade Commission CO-PUBLISHED: Major legislative developments and regulator policies – By Yulchon

42

Corporate governance

Foreign investors learn to love Korea

Governing increased corporate awareness

Feature: Improving underwriting practices

PROFILE INTERVIEW: Jamie Allen, secretary general, Asian Corporate Governance Association

CO-PUBLISHED: Recent trends in Korean capital markets – BY Jipyong Jisung

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42

CO-PUBLISHED: Recent changes in Korean Corporate Governance – By Hwang Mok Park

Contents INDIA

“

Unlike other jurisdictions such as the US, a breach of fiduciary duty is a criminal liability in Korea

”

Sang Hyuk Park, Partner, Kim & Chang

58

82

“

In order to bolster the existing roster of arbitrators, the KCAB has revised the ranges of the arbitrator’s fees

”

Kayla Byun, international counsel, Korean Commercial Arbitration Board

68

54

DISPUTE RESOLUTION

90

100

82

LABOUR & EMPLOYMENT

Go forth and multiply

Korea’s trade union troubles

PROFILE INTERVIEW: Kayla Byun, international counsel, Korean Commercial Arbitration Board

PROFILE INTERVIEW: David Yu, general counsel, Diageo CO-PUBLISHED: New era of union pluralism in Korea – By Shin & Kim

“

Korea’s broadcasting regulations have been undergoing substantial changes in order to keep up with the rapidly changing industry’s technology and products

”

Kum Ju Son, partner, Yulchon

58

Energy & Natural Resources

Government encouragement leads to deal momentum Feature: Korea’s future is away from oil and gas CO-PUBLISHED: Introduction of RPS and phase-out of FIT in renewable energy policy – By Jipyong Jisung

68

INTELLECTUAL PROPERTY & TMT

Keeping up to speed Feature: Regulations place high barriers for foreign investors Profile interview: David Waters, Regional Counsel, IBM CO-PUBLISHED: A year of reform – by Yoon & Yang

90

MERGERS & ACQUISITIONS

KCC amendments call for diversification and flexibility PROFILE INTERVIEW: Peter Kang, division director, Macquarie Securities Korea CO-PUBLISHED: Overview and recent trends in Korean M&A – By Kim & Chang

100

Taxation

Substance over form aims to address loose regulations PROFILE INTERVIEW: Henry An, tax partner, Samil PricewaterhouseCoopers CO-PUBLISHED: Recent tax developments in Korea – By Lee & Ko

“

Obviously, the biggest concern for employers is that union pluralism will make it difficult to conduct collective bargaining

”

David Yu, general counsel, Diageo

“

The new KCC expressly provides for cash-out-mergers, allowing cash or other assets, such as bonds or shares, to be used as consideration in mergers

”

Peter Kang, division director, Macquarie Securities Korea

ASIALAW Korea Annual Review 2012

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Banking & Finance

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ASIALAW Korea Annual Review 2012

News Analysis

News Analysis

Banking & Finance INDIA

Looking beyond Basel III Korean banks learnt lessons from the crash of 1997 and have impressive reserves of cash. An amendment to the Bank Act has been made to ensure compliance with Basel III, but the framework coming into effect next year does not seem to be causing too much concern among the country’s financial institutions

K

orea is in a transition period of complying with various global financial standards. As a result of the 2008 financial crisis, the Basel committee put forward the Basel III framework, which strengthens the pillars that formed the previous Basel II regime. Basel III is designed to enhance minimum capital and liquidity requirements, the supervisory review process for risk management and capital planning, as well as risk disclosure and market discipline. Korea has proven its commitment to complying with these standards through regulatory adjustments and monitoring, but further measures may be needed.

The Financial Supervisory Service has been encouraging banks to retain more capital, especially foreign-currency, for fear of unstable financial markets. A compliance officer at Shinhan Bank notes that “Korea has been well prepared for the Basel III implementation for a long time. Korea is a very competitive market with thin margins and increased equity.” The enhanced minimum capital and liquidity requirements of Basel III are the crux of the new framework, but Korean banks have so far performed well in meeting these standards. “Ever since the first significant financial crisis Korea weathered in 1997, the financial sector has already been up to speed. It has

ASIALAW Korea Annual Review 2012

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News Analysis

Banking & Finance

The “interpretation of Basel III is focused on the regulatory side, and how exactly we interpret this is the key issue

”

Woo Young Jung, Lee & Ko

long prepared financial institutions’ commitment to cash reserve, for reasons such as crisis preparation and regulations,” he says.

Some market observers believe the Basel III requirements have affected the investment market. Basel III imposes increased capital requirements and stricter regulations on banks, which limit the available funds for projects, so it has a profound impact on Korea as its businesses are investing all over the world. However, this has allowed for diversified transactions and is also expected to open up niche markets, such as a market for project bonds to finance these projects.

Woo Young Jung, head of banking and finance at Lee & Ko, explains the significance of Basel III from a legal perspective: “We will soon see an incredible effect on lawyers. The interpretation of Basel III is focused on the regulatory side, and how exactly we interpret this is the key issue.”

Basel III comes into full effect on January 1 2013, and the Financial Services commission has amended the Presidential Decree of the Bank Act to change the scope of interpreting the Tier 1 and Tier 2 capital which form a bank’s equity capital. This amendment comes into effect on the same date. The FSS has been making efforts to conduct financial health testing for major banks, and has actively raised capital holdings of banks to meet the Basel III requirements.

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ASIALAW Korea Annual Review 2012

A difficult transition Korean accounting standards are now in line with international standards thanks to the adoption of the IFRS standards, but the transition has not been easy and some companies have seen their financial performance affected

A

s the global marketplace converges and more companies engage in international activities, a consistent basis for interpreting accounts is becoming increasingly important for investors. The International Financial Reporting Standards (IFRS) are now used in many parts of the world, and Korea has taken a step towards applying these standards as well. Although all financial institutions and listed companies over KRW2 trillion (US$1.7 billion) in Korea were required to

do so last year, other companies now have to comply. Despite the efforts the Financial Services Commission has made to facilitate the adoption of the IFRS, the discrepancies in accounting standards are posing challenges for some.

Setting a global standard K-IFRS replaced the K-GAAP (Generally Accepted Accounting Principles). One key difference between the GAAP and

News Analysis

Banking & Finance INDIA

Korean Air has been adversely affected by the IFRS and its treatment of intangible assets

IFRS is that the IFRS is more flexible in its accounting principles while the GAAP maintains strict guidelines and procedures.

As transactions have become more complex, such strict rules are incompatible with the increasingly complicated nature of business activities.

Another difference is that, with the IFRS, intangible assets and financial instruments are revalued to fair value, which creates liabilities for some, while tangible assets such as land and buildings provide benefits to the businesses in adopting the new standards. Yong Jae Chang of Lee & Ko says Korean Air is an example of a company adversely affected by the IFRS and its treatment of intangible assets. “Their mileage accounts now showed up as liabilities so the company’s financial performance was drastically negatively affected. Their performance looks weak all of a sudden because of this change.”

“The IFRS tries to set a global standard so there isn’t so much of a discrepancy, but to do so certain companies are affected, like Korean

Air, as well as some financial institutions in terms of how they treat their debt obligations and so on,” he explains.

Moreover, under the IFRS accounts receivables are only considered revenue until there is actual cash inflow. Many construction and shipbuilding companies’ receivables are accounted as liabilities until their projects are actually completed, showing their books in a more negative light.

The IFRS also requires a single, consolidated set of financial statements, which aims to underline the importance of all subsidiary activities, while the current GAAP only requires businesses in which the parent company is the major shareholder to be reported. However, the significance of this specific change is that it makes it easier for domestic companies to be compared with foreign companies. Businesses’ compliance with a single global set of standards is designed to facilitate cross-border activity in line with Korea’s involvement in the international market and its drive for openness, as

The domestic “securitisation market isn’t as active compared to the past, in part because, under the IFRS, there is less incentive for originators to engage in transactions

”

Hoin Lee, Kim & Chang

ASIALAW Korea Annual Review 2012

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Banking & Finance

News Analysis

How K-Exim and K-sure financed a petrochemical facility in Singapore T

he Export-Import Bank of Korea (K-Exim), Korea Trade Insurance Corporation (K-sure) and a group of 11 international commercial bank lenders raised financing for a US$2.5 billion greenfield petrochemical facility for Jurong Aromatics on Jurong Island, Singapore in June last year in a pioneering deal.

Stephen McWilliams, managing partner of Latham & Watkins in Singapore, says that the deal required a balancing of competing priorities between senior and junior lenders.

“Standard Chartered and Icon wanted voting rights and control provisions from their subordinated debt position like equity holders, so we had to balance out,” he explains.

The debt-to-equity was sized conservatively, and all equity and subordinated debt was contributed before funding of the senior loans, including contingent equity.

“Subordinated debt is expensive debt since it’s lower in the waterfall, but it can also leverage up equity to a higher degree,” said McWilliams. “While there are no current plans to refinance the debt, the project will likely have enough cash flow to be capable of prepaying some of the debt in the future, assuming continued buoyant markets.”

The deal structure also allows the borrower to fund its working capital requirements through a security arrangement with suppliers of gas condensate.

Negotiating a mutually acceptable intercreditor package between senior/subordinated project lenders on the one hand, and suppliers on the other was a challenge, says James Murray, project finance partner at Milbank Tweed Hadley & McCloy in Singapore.

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ASIALAW Korea Annual Review 2012

contract was drafted “withThelimited claims and alternative plans should the deal be met with delays – that got the lenders comfortable

”

Stephen McWilliams, Latham & Watkins

“To reduce the working capital needs of the company, we negotiated better than normal credit terms such that we could repay suppliers over 30 days instead of the customary few days,” says McWilliams.

Taking into account suppliers’ risks and security, a lender security package was carved out that did not include raw petrochemical materials stored in new underground rock caverns in the lender’s package. These were instead included in the supplier’s package.

The project was also unusual in terms of sponsorship. With eight sponsors in total from across several continents, no sponsor held majority share in equity. The single largest sponsor was SK Energy, who was also the ISBL EPC contractor, and Glencore, another sponsor, was a major supplier and offtaker.

“There’s no other recent project that we are aware of like this that was financed without a lead sponsor in a shareholding group,” says McWilliams.

In other financings of this nature, the Korean ECAs have been co-lenders along with other ECAs and multi-laterals, enabling them to share the due diligence process with ECA peers/counterparts in international transactions. However, in this case the Korean ECAs led on their own.

“The lynchpins of the lender group were the Korean ECAs,” says Young Joon Kim, Korean counsel and project financing partner who also worked on the transaction. “ Between them K-Exim and K-sure took on around US$1.2 billion of financing through a combination of direct loans and comprehensive guarantees and insurance for covered commercial bank loans.”

The project had two EPC contractors, one as the primary building constructor and another to build utilities and supply lines. “Normally, due to completion risk, lenders insist on completion guarantees from the sponsors, but there were no guarantees this time at all,” says McWilliams.

“The contract was drafted with limited claims and alternative plans should the deal be met with delays – that got the lenders comfortable.”

“EBDI’s involvement as a sponsor, albeit with a relatively small stake, was also important, with sovereign participation from the host country being viewed positively by the ECAs and commercial banks,” says Murray.

“This project also benefited from the participants having a favourable view of Singapore – a stable environment and well-developed legal system in which to lend and invest.”

News Analysis

shown by the free trade agreements now in place with the EU and US.

Tax troubles Daniel Joe of Kim & Chang says the new set of rules has had a significant impact: “Korean GAAP was the accounting principle for Korean companies for a long time. With the introduction of a new accounting system in IFRS, everybody has had to reformulate their thoughts and analyses on its application and effect on businesses.” For example, he says that some instruments that were treated as equity could now be construed as debt.

The effect of the implementation of IFRS on derivatives and financial instruments has had an impact on their usage. “The domestic securitisation market isn’t as active compared

to the past, in part because, under the IFRS, there is less incentive for originators to engage in transactions,” notes Hoin Lee of Kim & Chang.

Although regulatory efforts have been made to ease the transition, the Korean market is still in a state of flux. Tax attorney Soo Jeong Ahn at Yulchon says the accounting effects on tax have had an overall impact on corporate transactions and activity. “Tax law has been amended to accommodate the IFRS, as some companies are using the IFRS and some using the existing GAAP. Because they have different methods for the same transaction, there are disparities between the two companies involved.” Tax laws usually follow the treatment of accounting, and since the accounting principles differ so do the

Banking & Finance INDIA

tax liabilities, she explains. This is why the tax laws have been amended to address the accounting treatment.

Aside from the regulatory efforts, the FSC has also actively supported smaller companies below the current IFRS requirement to adapt to the new system, giving them some more time and providing a consulting team with IFRS and tax experts.

Despite the challenges, movement towards international standards even in accounting principles shows that Korea is ready to be a legitimate player in the global market. The main drive behind the adoption of the IFRS is to propel the Korean market further – to enhance the value of Korean companies, obtain capital from foreign investors and position the country in line with major jurisdictions.

Korea’s regulatory challenge Korea has long been viewed as a difficult market to enter, with laws that restrict room to manoeuvre. But as Korea’s rising status in the global economy becomes increasingly clear, authorities are grappling with how to best regulate – and deregulate – the market

F

ree trade agreements with the US and EU have opened up channels between the Korean market and the world. Korea has recognised the importance of overseas business, just as the world has also realised the growing investment opportunities in this small but dynamic country. Although foreign entities’ concerns in conducting business focus on the strict regulatory environment, there are also areas of the law which lack clarity. The government is making efforts to both liberalise and fill in regulatory gaps.

But in a year that has also featured a global financial crisis and domestic elections, these efforts are proving difficult.

Given the current state of the world economy, it is no surprise that even a relatively stable market like Korea is cautious about setting the right regulatory standards.

“Korea is at a crossroads,” says Lee & Ko finance partner Yong Jae Chang. “After what’s happened in the US and Europe, it’s trying

to regulate and deregulate as appropriate.

But it’s hard to determine where exactly to do that, so the government has a pretty hard time making a definitive choice.” Previously a heavily regulated economy, Korea was only indirectly affected by the financial crises occurring all around it. “Korea is trying to deregulate to a certain extent. It doesn’t want to follow the footsteps of those in trouble, but at the same time, the Korean market is relatively saturated,” Chang explains.

Chang adds that Korea’s currency, the Won, is relatively vulnerable because it isn’t a global standard and, as Korea is export orientated, foreign exchange volatility creates risk and can affect the domestic economy.

The market “is becoming more globalised, and because you cannot stand alone in the world, naturally everyone gets affected by what’s happening

”

Yong Jae Chang, Lee & Ko

Striking the right balance Korea has been relatively fortunate in many aspects, but how long it can maintain this remains to be seen. “It’s an especially difficult question when the market is more saturated,”

ASIALAW Korea Annual Review 2012

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Banking & Finance

News Analysis

Korea’s revised FISCMA threatens domestic banks

R

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evisions to Korea’s Financial Investments Services and Capital Markets Act (FISCMA) could lead to the cannibalisation of domestic banks, Korea’s Financial Services Commission (FSC) has warned.

The FSC published amendments to the 2007 FISCMA in July 2011. These revisions include provisions for the development of home-grown investment banks and asset management businesses as well as the introduction of new stock exchanges and a legal foundation for establishing a central counter party (CCP).

They are designed to open up the country’s financial sector by creating a level playing field not only for domestic but also global financial institutions and also to develop Korea’s capital markets from a sector dominated by plain-vanilla banking products to a more-inclusive and complex platform.

FSC spokesperson, J Ernst Lee says the revisions could be a rude awakening for ill-prepared local financial service providers. As global institutions become able to operate to the same scope and quality of domestic businesses in the region, competition between the two will intensify.

“If domestic banks hesitate or slack in the face of such competition, they will undoubtedly be some nature of cannibalisation by the international banks qualified to meet our new standard,” he says.

Korea’s financial markets have been operating on very comfortable ground because until now the sector had been well-protected from global competition, he said. But in this environment, the

sector had become too heavily reliant on basic banking products.

Lee hopes an amended FISCMA would upgrade the country’s capital markets to give greater support to areas of the economy lagging behind in terms of development, such as electronics and motors. “This is the moment to move forward,” he says.

In order for Korea to match the global standard, and take on board lessons learnt from countries more affected by the financial crisis, it needs to deregulate in a very controlled manner.

“It’s time to move in a more open direction and to a market more inclusive of capital markets services so domestic and global financial consumers are equally free to trade the same products,” he says.

The country’s financial sector had been removed from much of the stresses caused by the global financial crisis, primarily because it lacked the ability to recognise or understand complicated financial products, such as credit default swaps, he adds.

“There is a big difference between avoiding risk by chance because you are not aware of it, and avoiding it because you know it’s there and how to keep away from it,” he says. Korea’s financial market now has to work hard to fully prepare for upcoming changes because the revised FISCMA would throw the market wide-open.

He adds that the amendments were introduced following consistent and constant demand from Korea’s capital markets and a strong drive from the FSC.

says Chang. The internationalisation of accounting standards and banking regulations which strengthens the market’s connection to the world pushes further at this vulnerability.

“The market is becoming more globalised, and because you cannot stand alone in the world, naturally everyone gets affected by what’s happening.”

For the most part, the Korean market has been maintaining a steady balance. “There has been a significant amount of deregulation and transparency in terms of government administration of foreign invested companies.

There have been significant improvements…

Corruption is now much better than before and militant unions are becoming a lesser concern,” observes Paul Cho of Kim & Chang. The government is making efforts to address the opinions of both companies and

consumers, argues Cho, using changes to the tax legislation as an example.

New legislation made to protect the interests of financial consumers are evidence of an enhanced regulatory trend. Higher sales restrictions and classification requirements of financial products as well as increased penalties for violations of these restrictions show that authorities are very closely supervising the banking sector.

Chang states that from a legal perspective, the increasingly complex regulatory environment and transaction styles have led to a subsequent increase in corporate activity.

“It’s a very important transitional period right now, in the sense that Korea needs to look at the past and predict the future, and make a bet. But this is easier said than done.”

ASIALAW Korea Annual Review 2012

News Analysis

Banking & Finance INDIA

Key Finance Deals Project Finance Jurong Aromatics financing LAW FIRMS

Al Tamimi & Company Essar Projects Allen & Gledhill Royal Bank of Scotland, ING Bank and BNP Paribas Allen & Overy The subordinated creditors Baker & McKenzie, Wong & Leow Kadmos, the EPC Contractor, SempCorp, Worley, SKIIS and SK Energy & Construction Bae Kim & Lee The Korea Trade Insurance Corporation, SK Energy, SK Global Chemical and SK Energy & Construction C&A Law ICON Mauritius Inca Law Jurong Consultants Latham & Watkins Jurong Aromatics Corporation Lee & Lee JTC Corporation Norton Rose BP Maples & Calder UVM Investments, Jiangsu Sanfangxiang and Shefford Investments Morris Nichols UOP Milbank Tweed Hadley & McCloy The Export-Import Bank of Korea, the Korea Trade Insurance Corporation, ING Bank, Royal Bank of Scotland, Intesa san Paolo, Korean Development Bank, Standard Chartered Bank, ANZ Bank, BNP Paribas, DnB NOR Bank, Natixis and DZ Bank Pestalozzi Attorneys at Law Glencore International Run Ming ING Bank, Royal Bank of Scotland, Intesa san Paolo, Korean Development Bank, Standard Chartered Bank, ANZ Bank, BNP Paribas, DnB NOR Bank, Natixis and DZ Bank Rajah & Tann Jurong Aromatics Corporation and Economic Development Board Investments of Singapore Rodyk & Davidson Singfuel, Glencore and Glencore Singapore Solomon Harris Arovin Mitra and Vinmar Group Yuan Wen Shanghai Law Jiangsu Sanfangxiang Why: In May 2011, Jurong Aromatics’ US$1.6 billion senior secured financing to build its Singapore greenfield petrochemical plant was completed after a two-year delay provoked by a funding shortage following the 2008 global financial crisis.

The limited recourse financing is widely considered to be one of the most complex project financings on non-recourse terms in the region. It is one of the first project financings of its type in the world to include a secured subordinated debt tranche.

The funding for the project will be on a 60/40 debt equity ratio, with the equity being contributed up front before the

senior debt is drawn. Some US$1.24 billion, or 80% of the debt, was part guaranteed by two South Korean government export agencies for a tenor of up to 16 years.

The transaction also involved novel security sharing arrangements over gas condensate entered into with the suppliers of the condensate. Additionally, it had a large and diverse sponsor group without any sponsor holding a majority or controlling stake.

The 10 banks participating in the project financing comprise ING Bank, Royal Bank of Scotland, Intesa san Paolo, Korean Development Bank, Standard Chartered Bank, ANZ Bank, BNP Paribas, DnB NOR Bank, Natixis and DZ Bank.

South Korea’s SK Group and Chinese polyester maker Jiangsu Sanfangxiang Group are the project’s largest shareholders, with 30% and 25% stakes respectively.

The other JAC shareholders included Swiss trader Glencore with a 10% stake, Singapore’s EDB Investments with 5%, Thai KK Industry Co Holding with 5.1% and India’s Essar Group Holding with the final 4.9%. Oil major BP will provide a subordinated debt facility to the project, as well as being both a supplier and offtaker.

The US$2.4 billion JAC project involves the development of a condensate splitter and aromatics facility on Singapore’s Jurong Island. The plant will produce 1.5 million tonnes of aromatics and 2.5 million tonnes of transport fuels per year.

It is expected to come on stream in 2014.

Mong Duong 2 BOT Power Plant project financing LAW FIRMS

Bae Kim & Lee Korea Trade Insurance Corporation DLA Piper Ministry of Industry and Trade of the Socialist Republic of Vietnam Haiwen Law Firm China Investment Corporation Freshfields Bruckhaus Deringer AES, Posco Power and Stable Investment Corporation Latham & Watkins The Export-Import Bnak of Korea, BNP Paribas, Credit Agricole, HSBC, ING, Korea Trade Insurance Corporation, Natixis, Société Générale, Sumitomo Mitsui Bank, Mizuho Corporate Bank, Unicredit, Standard Chartered Bank, Credit Industriel et Commercial, Deutsche and Zentral-Genossenschaftbank Lee & Ko Posco and Posco Power Corporation LVN Associates Vietnam Electricity Nauta Dutilh AES Investor Orrick Herrington & Sutcliffe Vietnam Electricity Paul Hastings Janofsky & Walker The Export-Import Bank of Korea Richards Layton & Finge AES Investor Shearman & Sterling AES, Posco Power and Stable Investment Corporation YKVN The Export-Import Bnak of Korea, BNP Paribas, Credit Agricole, HSBC, ING, Korea Trade Insurance Corporation, Natixis, Société Générale, Sumitomo Mitsui Bank, Mizuho Corporate

ASIALAW Korea Annual Review 2012

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Banking & Finance

News Analysis

Key Finance Deals continued Bank, Unicredit, Standard Chartered Bank, Credit Industriel et Commercial, Deutsche and Zentral-Genossenschaftbank Vietbid Law Firm AES Corporation Why: The July 2011 closure of the US$1.5 billion long-term non-recourse financing for the construction of AES’s 51%-held 1,200MW Mong Duong II coal-fired power plant in Vietnam’s Quang Ninh province set a precedent as the first-ever coal-fired project to close under the country’s build-operatetransfer (BOT) regulatory regime.

The US$1.95 billion project, Vietnam’s largest private sector power project to-date, also offered the first opportunity for South Korean export credit agencies to participate in the country. It marked the first time an independent power producers (IPP) project had reached financial close in Vietnam since Phu My 3 in 2003.

The complicated cross-border transaction involved multiple sponsors including 12 commercial banks and, unusually, two South Korean government export credit agencies, K-EXIM and KSURE. It raised a host of complex issues under Vietnamese law including the rights of foreign lenders, acting through an agent, to secure loans with assets located in Vietnam and equity in Vietnamese enterprises. And then there were the necessary approvals and waivers under Vietnam’s constitutional law, foreign exchange law and law on government organisation.

Regulatory approvals from the State Bank and other authorities had to be obtained accordingly, and direct agreements needed to be executed between lenders and all Vietnam side project counterparties. This included a direct agreement with the Ministry of Industry and Trade, acting on behalf of the Government, and a direct agreement with Electricity Vietnam.

Mong Duong II will sell electricity to state-owned Vietnam Electricity under the terms of a 25-year power purchase agreement. The plant is expected to begin commercial operations in the second half of 2015.

AES’s partners in the project are POSCO Power subsidiary PSC Energy Global, with a 30% stake, and China Investment Corporation’s subsidiary, Stable Investment Corporation, which owns the remaining 19%. The deal establishes a new benchmark for Vietnam’s BOT projects.

Structured Finance & Securitisation ING funding for Hyundai Card LAW FIRMS

Ashurst Hyundai Card Kim & Chang ING Bank, Citibank and Calyon Linklaters ING Bank Maples & Calder Hyundai Card Funding I Shin & Kim Hyundai Card Sidley Austin Hyundai Card Co Yulchon Hyundai Card Co

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ASIALAW Korea Annual Review 2012

Why: The US$400 million cross-border funding for Hyundai Card involved novel structuring to incorporate a guaranteed term loan instead of notes in the offshore leg of the transaction.

The structure and documentation for the Korean-originated consumer receivables thereby had to be revised and adapted to take into account Korean legal and withholding tax implications.

The two legs of the transaction were also required to be documented, as much as possible, as if they were separate.

But, at the same time, the deal needed to operate as a single transaction – to ensure that payment flows, reporting, decision-making, controls and protective provisions operated in the expected way for cross-border securitisations, while still satisfying Korean legal and tax provisions relevant for cross border securitisations.

There were also novel features in the loan documentation and loan guarantee terms to reflect the agreed commercial basis of risk sharing between the lenders and the guarantor, and this also impacted the transaction documentation and needed to be structured around.

The structure opens the possibility of a different investor base also investing in securitised assets.

Korean Airlines ticket receivables LAW FIRMS

Kim & Chang Standard Chartered Bank Lee & Ko Korean Airlines Orrick Herrington & Sutcliffe Korea Development Bank O’Melveny & Myers Standard Chartered Bank and Citibank Richard Layton & Finger Citibank Walkers Standard Chartered Bank Frederikson & Byron Standard Chartered Bank Why: Korea Airlines’ landmark US$300 million asset-backed securities issue in November marked the first US dollar receivables securitisation by the airline and involved a highly complex new multi-jurisdictional and multi-layer structure.

The transaction, involving receivables that arose under Minnesota law, included a US trust as well as special purpose vehicles in Korea and the Cayman Islands. It therefore needed to be structured under Delaware, Minnesota, California, New York, Korean, English and Cayman laws so that the US dollar receivables could be remitted out of the US and securitised through Korea and the Cayman Islands. The structure also needed to take into account the myriad tax, accounting and Korean regulatory issues that arose.

Korea Development Bank provided the credit facility to the structure that permitted the Notes to receive their A1(sf) rating from Moody’s.

Leading Banking and Finance lawyers Banking Soo Man Park Kim & Chang Zoltan Simon IPG Legal Woong Soon Song Shin & Kim Kent Wong Apex Law Yong Jae Chang Lee & Ko

Project Finance Young Joon Cho Bae Kim & Lee Ick Ryol Huh Kim & Chang Tom Shin Lee & Ko

Structured Finance Yong-Jae Chang Lee & Ko Mee-Hyon Lee Lee & Ko Source: Asialaw Leading Lawyers 2012

market Analysis

Banking & Finance INDIA

Co-published feature

Recent developments in Korean regulations

By Stephane Park, senior foreign attorney, and Ie-Hwan Yoo, attorney, Kim & Chang

I

n recent years, Korea has committed to liberalise its financial services industry.

Beginning with the adoption of the 2007 Financial Investment Services and Capital Markets Act (FSCMA), a number of measures and pieces of legislation have been announced to that effect. Thus, in 2011, the Financial Services Commission (FSC) announced a proposed amendment to the FSCMA that would permit the establishment and operation of hedge funds in Korea1. In parallel with such liberalisation measures, the Korean regulators (consistent with global trends) also saw the need to provide added protection to consumers of financial products. On December 16 2011, the FSC also proposed two new pieces of legislation, the Act on Financial Consumer Protection (the AFCP) and an amendment to the Act on Establishment of Financial Services Commission, which were intended to strengthen the protection of consumers of financial products.

Separately, the Personal Information Protection Act (PIPA) was enacted and became effective in September 2011. PIPA governs the processing and use of personal information, covering both the public and private sectors. It is intended to prevent the type of leakage, misuse and abuse of personal information, as recently experienced in Korea. For financial institutions, this will be an additional requirement to the customer data related requirements under existing laws such as the ‘Act on Real Name Financial Transactions and Guarantee of Secrecy’, the ‘Use and Protection of Credit Information Act’ and ‘Act on Promotion of Information and Communication Network Utilization and Information Protection’. As PIPA provides specific requirements relating to the processing, use, storage and destruction of personal information, applies with regards to customer and employee information, and provides civil and criminal penalties, it may have a significant impact on the operation of financial institutions in Korea.

Set forth below is a brief summary description of these recent changes and developments.

Introduction of hedge funds and prime brokerage Until recently, funds established in Korea had to be categorised as a specific type of fund, and were subject to investment restrictions (for example, as to the types of assets) based on such classification (for example, derivative funds). The recent volatility in the securities market and the surge in demand for tailored investments beyond traditional

The Korean private equity fund (“PEF”) market is already at US$30 billion. Some estimate that the size of the hedge fund market may reach as much as US$40-50 billion in 3 years.

1

In 2011, the Financial Services Commission (FSC) announced a proposed amendment to the FSCMA that would permit the establishment and operation of hedge funds in Korea

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market Analysis

securities and bonds have called for the introduction of new players in the market, such as hedge funds and prime brokers. In this regard, a recent amendment to the Enforcement Decree of the FSCMA, which became effective on September 30 2011, introduced changes intended to address such market demands, including the ability to establish hedge funds, which are able to invest in a large variety of assets. The following are some of the key points of the FSCMA amendment with respect to hedge funds and prime brokerage activity:

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The FSC is seeking implementation of the Proposed Legislation in light of recent controversies involving improper sales of financial products

1) Eligible investors

Certain financial institutions including banks and financial investment companies and qualified professional investors (i.e., individuals investing KRW5 billion (US$4.41 million) or more and corporate entities investing KRW10 billion or more) and high net worth individuals (investing KRW500 million (US$441,300) or more) can invest in hedge funds.

may delegate their custody services for hedge funds to third parties who hold a trust business licence.

7) Chinese wall for the prime brokerage business

2) Management

There are no restrictions on the type of assets that hedge funds may invest in. Leveraged transactions (i.e., borrowings) and investments in derivative products are also permitted, up to 400% of the net assets of the relevant hedge fund.

3) Eligibility requirements for hedge fund managers

A new ‘hedge fund management’ licence is available to securities companies, asset management companies and investment advisers that meet certain requirements, including: (i) a minimum capital equity requirement of KRW6 billion, (ii) an additional capital requirements or minimum track record requirement and (iii) a staffing requirement (a minimum of three (3) licensed investment managers).

4) Reporting obligation of hedge fund managers

Hedge fund managers are required to file a quarterly report with the FSC containing information regarding investment strategy, types of assets for investment, leverage and any derivative transactions.

5) Prime brokerage

Prime brokerage was also introduced to provide comprehensive services to hedge funds, including securities lending, funding, custody, execution and settlement services. Securities companies satisfying certain regulatory requirements (for example, minimum capital requirement, having an internal risk management system) will be qualified to act as a prime broker for hedge funds.

6) Regulations on prime brokerage business

Prime brokers are permitted to engage in credit lending and securities collateralised lending with hedge funds. Securities lending and borrowing transactions between a prime broker and a hedge fund will also be allowed. In addition, prime brokers

While current rules prohibit activities relating to securities dealing or brokerage from being conducted within the same department as a trust business (for example, acting as custodian for fund assets), under the new rules, a prime brokerage business may be conducted from within the same department as a trust business, provided that, such department is segregated from all other departments through appropriate Chinese walls and procedures to prevent the sharing of personnel and information.

New proposed legislation to strengthen financial consumer protection On December 16 2011, the FSC proposed two new pieces of legislation, the AFCP and an amendment to the Act on Establishment of Financial Services Commission (together with the AFCP, the ‘Proposed Legislation’). The Proposed Legislation, which remains to be passed by the National Assembly, aims to strengthen the protection of consumers of financial products.

The FSC is seeking implementation of the Proposed Legislation in light of recent controversies involving improper sales of financial products, such as unsecured subordinated notes being issued to individual investors by mutual savings banks that have become insolvent.

In addition to providing additional protective measures, the Proposed Legislation is intended as a unified law to govern sales activities of banks and other financial institutions. Currently, consumer protection provisions are scattered in different laws and regulations governing different sectors. The Proposed Legislation is also intended to regulate all phases of the sale of financial products, ranging from information disclosure, sales process and compensation for damages suffered by financial consumers. The Proposed Legislation also calls for the establishment of a new regulatory body for protecting financial consumers (the ‘Consumer Agency’).

The following is a summary of some of the key points of the Proposed Act:

1) Regulation based on financial product categories and seller classifications

The AFCP applies identical rules to all financial products falling

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Banking & Finance

market Analysis

under the same product category. Under the Proposed Legislation, financial products will be categorised as deposit type products, investment type, insurance type and lending type. Further, financial institutions dealing in such products will be classified as direct sellers, agent/ brokers or advisers.

2) Sales restrictions on all financial products

Under the AFCP, the sale of financial products must satisfy certain requirements such as a duty to explain the product and to confirm customer suitability. The law expressly prohibits illegal solicitation, and imposes limitations on advertisement and packaged-marketing with other products. The restrictions applicable to each type of financial product will vary depending on the level of risk applicable to that product.

3) Strengthened sanctions

Under the AFCP, a separate administrative penalty will be imposed for violations of the sale restrictions. This is in addition to the administrative fines and other sanctions that are available under existing laws and regulations. The new administrative penalty is intended to serve as a deterrent and ensure compliance with the sale restrictions. For example, under the AFCP, if a financial institution violates the requirement to properly explain the product to an investor, a penalty of up to three times the profit earned from the illegal sales activity may be imposed.

4) Vicarious liability of financial institutions for damages suffered by financial consumers

The AFCP adopts the concept of ‘vicarious liability’ for purposes of determining whether a financial institution can be held liable for damages caused by the actions of an individual sales agent or broker. Under the AFCP, once a financial consumer suffers damages due to an agent/ broker’s fault, the financial institution and agent/ broker may be held liable for damages suffered by the financial consumer. In this regard, we should note that if the relevant financial institution can prove that it had exercised proper supervision of its sales agent/ broker, it may avoid being held vicariously liable. Nonetheless, the burden of proving proper supervision falls on the financial institution.

5) New establishment of the consumer agency

The newly established Consumer Agency will be under the supervision of the Financial Supervisory Service (the FSS). The Consumer Agency will handle customer disputes and complaints regarding financial products, and conduct research and education programmes on issues relating to consumer protection and financial products in general.

Enactment of the Personal Information Protection Act PIPA generally governs the processing of personal information, defines the rights of an information owner, and further provides for criminal, administrative and potential civil penalties for violation

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of the rules thereunder. Personal information subject to the requirements of PIPA will include not only customer data, but also information regarding a company’s own employees.

1) Scope of application

Personal information is broadly defined to include that pertaining to any living individual. This may contain information identifying an individual, such as a name or resident registration number or similar, including information in the form of an image and that, when combined with other information, may so identify a person. All companies, either for-profit or non-profit, that process personal information in connection with its business, must comply with the requirements of PIPA.

About the authors Stephane Park T: +82 2 3703 1414 E: stephane.park@kimchang.com Stephane Park is a senior foreign attorney at Kim & Chang.

His practice focuses on corporate and finance matters, including general corporate, mergers and acquisitions, derivatives, and securities and capital market transactions.

Park has extensive experience in a wide range of crossborder transactions, including mergers and acquisitions, joint ventures, corporate and acquisition financing.

Prior to joining Kim & Chang, Park was associated with the New York firm Coudert Brothers. He has also served as director and head of Korea Legal for the Seoul branch of Credit Suisse AG. Park received his B.A. from the University of California at Berkeley and his J.D. from the University of California, Hasting College of the Law. He is admitted to practice in New York, and is fluent in English, Korean and French.

Ie-Hwan Yoo T: +82 2 3703 1467 E: ihyoo@kimchang.com Ie-Hwan Yoo is an attorney for Kim & Chang in its finance department. He has extensive experience in various financing transactions, securities and bank regulations, regulatory compliance, securities-related litigations, establishment and licensing of securities companies, and asset management companies.

Throughout his career, Yoo has been actively involved in many financing transactions in Korea or those relating to Korean businesses. These include structured financing, acquisition financing, ship financing and real estate financing transactions. He represents a broad range of multinational commercial banks, investment banks, investment funds and securities companies on various financing transactions, capital markets and other projects. Yoo has extensive experience advising clients on issues relating to securities and bank regulations, as well as regulatory compliance.

Yoo received his B.A. in economics from Seoul National University and his LL.M. from Georgetown University Law Center. He is a member of the Bar of Korea.

market Analysis

Banking & Finance INDIA

2) Disclosure and prior consent requirements

A key principle of PIPA is that when any personal information of a ‘principal’ (i.e., owner of the personal information) is collected or used, certain disclosures must be made and consents be obtained.

When seeking consents from the principal for the collection and use of his/ her information, companies are legally required to disclose certain information. This may include the purpose for, and period of, the collection/ use of the personal information. In particular, sensitive information (which includes information as to one’s ideology/ faith, union membership, medical information or unique identification information (for example, one’s resident registration number)) cannot be processed unless a separate consent is obtained from the principal.

In addition, if personal information is to be provided to a third party, a separate disclosure must be made indicating:

A key principle of PIPA is that when any personal information of a ‘principal’ (i.e., owner of the personal information) is collected or used, certain disclosures must be made and consents be obtained

3) Establishment and disclosure of personal information processing guidelines and appointment of personal information protection officer

(i) The identity of the third party to which the personal information is to be provided; (ii) The purpose behind the use of the personal information by the third party; (iii) The specific items of personal information to be provided; and (iv) The time period of retention and use by the third party.

In order to delegate the processing of personal information to an outside contractor, the delegating company must disclose the following matters in writing: (i) The outside contractor delegated to process the information and a description of the delegated work; and (ii) Technical and managerial measures to protect the personal information being delegated for processing If such delegation is intended for purposes of marketing goods or services, the company must also separately notify the principal.

Companies must appoint a Chief Privacy Officer (CPO), who shall (i) establish and implement procedures to protect personal information, (ii) establish an internal control system to prevent the leakage or misuse of personal information, and (iii) take corrective measures against any security breach (for example, leaks and hacking).

Companies must establish and disclose a set of guidelines for processing personal information. Such guidelines must include: (i) the purpose for processing the information, (ii) time period during which the information will be used and retained, (iii) guidelines relating to the delegation of personal information processing or transfer of personal information to a third party, (iv) rights and obligations of the information owner and ways to exercise or satisfy such rights and obligations.

4) Technical, managerial and physical protective measures

Companies must implement technical, managerial and physical measures necessary to prevent any personal information from being lost, stolen, leaked, altered or damaged. In this regard, regulatory guidance outlining such specific technical requirements was recently provided by the Ministry of Public Administration and Security (MOPAS), which is the principal government authority in charge of enforcing the PIPA.

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News Analysis

Foreign investors learn to love Korea After seeing some turbulence after the 2008 financial crisis, last year saw important developments in capital markets. Revised regulations have opened up new opportunities and foreign investors are becoming increasingly confident

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News Analysis

K

“the Considering maturity of the Korean capital market, there is no particular incentive for issuers with large-scale funding needs to do concurrent dual listings

”

Myoung Jae Chung, Kim & Chang

orea is an export-driven nation and so the global financial crisis of 2007 and 2008 had a severe effect on all areas of the economy.

International investments plummeted just as Korea was in the process of opening up its markets. But the country has been leading the recovery by keeping its doors open to the global financial community and regaining the confidence of international investors.

The Financial Services Commission has made some of the most important amendments to the Financial Investment Service and Capital Markets Act to take into account the global financial situation and to market participants and investors.

Song-il An, partner at Kim Chang & Lee, says that until 2007 and 2008 there was a lot of capital markets activity as the law favoured foreign debt and securities, which meant many small companies were issuing debt overseas.

“But relevant laws changed and that market crashed. Now it’s mostly being done by big corporations and banks. After the financial crisis, the investment banking market really suffered,” he says.

But 2011 marked a year of change.

“Starting last year, small private equity and hedge funds have been coming into Korea for investment opportunities. These deals aren’t exactly plain-vanilla; those who have never invested in Korea before are seeking a niche market. All sorts of new deals are arising,” says An. An also highlights the first foreign IPO on the Korea Exchange (KRX) in 2009 as a key event in making Korea a more attractive destination for investment. Now more foreign

Capital markets INDIA

companies are coming to list in Korea. “It’s appealing compared to other jurisdictions because in China the waiting period to list is something like four years, whereas in Korea it’s much easier, just a year or so,” he adds.

Moving away from dual listings Diversification efforts have been one of the factors affecting recent market activity. Hoin Lee of Kim & Chang observes that “[i]n the past few years, many foreign companies entered the Korean IPO market, especially Chinese companies, and we expect this trend to continue in the near future.” The markets are changing, as are the very tools used for various transactions and equity deals. For large scale equity financings in the past, Korean companies would go to the depository receipt market, which was the only way for them to access the international market (particularly the US) for equity funding at a time when the domestic capital market was not yet sufficiently mature.

“In the past 10 years or so, we have seen the Korean capital market mature dramatically.

This perhaps may be one of the reasons why equity financing transactions were moving away from depository receipts and towards concurrent dual listings, meaning the deals would be listed in both Korean and a major foreign stock market, typically the NYSE or London Stock Exchange,” he explains. Several Korean companies have completed IPOs using concurrent dual listing starting from the early 2000s, such as LG Display and Lotte Shopping.

“There appears to be a general consensus forming amongst market participants and

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News Analysis

The amendments in detail

I

n its press release from the Financial Services Commission announcing the first revision to the Financial Investment Services and Capital Markets Act, the Commission admitted that the FISCMA “was not successful in creating leading domestic investment banks and there is an increased need for further development and restructuring of the capital market and financial services industry”.

To remedy the situation, the reforms focus on promoting large, home-grown investment banks, streamlining asset management business, reforming the capital markets infrastructure

The provision of prime brokerage service will allow investment banks to function as one-stop shops (introduction of alternative trading system (ATS) and central counterparty (CCP)), improving corporate financing, and strengthening investor protection.

The amendments create a new category of financial investment business, called a comprehensive financial investment business.

The investment banking business may include corporate lending and prime brokerage services.

To qualify as an investment bank, a financial

investment company (an FIC) with a brokerage and dealing licence must satisfy the following requirements: it must be a chusik hoesa (joint stock company) established pursuant to the Korean Commercial Code; it must be engaged in securities underwriting business; it must have an equity capital of KRW3 trillion (US$2.59 billion) or more (the exact threshold to be confirmed with a presidential decree); and it must satisfy the capital adequacy requirement as prescribed by the presidential decree.

The provision of prime brokerage service will allow investment banks to function as one-stop shops providing a comprehensive range of services, including stock lending, financing, custody of customer assets, clearing and reporting for hedge funds. Hedge fund customers can also obtain financing for non-securities transactions as well.

Another proposed amendment allows private equity funds to invest in a broader range of securities, on the condition that the investment is related to acquiring control. To promote consolidation of the industry, the procedures governing the merger of small funds are simplified.

A broader range of financing alternatives will also become available to Korean listed companies when the amendments take effect. In addition to the traditional bonds, such as convertible bond, bond with warrants, and exchangeable bond, listed companies will be able to issue convertible bonds that will convert into shares upon specified events.

funding needs to do concurrent dual listings and this probably is why we have not seen Korean issuers doing IPOs through the concurrent dual listing method recently.”

Regulations strike a delicate balance investors in the past few years that the maturity of Korean capital markets has reached a level where foreign investors are comfortable with the market,” Lee continues. This is evident in large scale IPO deals where the transaction structure being used has been moving away from concurrent dual listings and migrating to a structure in which the offering takes place both domestically and offshore but the offered shares are listed only in Korea. “There would be a global offering on a 144A/Reg S basis but they wouldn’t be listed anywhere else. They would only be listed in Korea and offered to the public in Korea on an international basis

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to institutional investors. This trend is still ongoing in large scale equity deals.”

Kim & Chang’s Myoung Jae Chung explains the incentive for engaging in equity deals that are listed only in Korea as opposed to concurrent dual listings: “Compared to concurrent dual listings, the advantage is that the issuers can avoid the costs and regulatory burden of maintaining their listing on the NYSE or London Stock Exchange and simultaneously lower the transaction costs involved in the offering itself. Considering the maturity of the Korean capital market, there is no particular incentive for issuers with large-scale

The extreme caution required in abiding by regulations which aim to protect Korean capital markets has traditionally worried even keen investors overseas. “The Korean capital markets act has quite a stringent provision on foreign investors. It’s quite difficult for them to conduct business activities in Korea,” says Sang Man Kim of Shin & Kim. Kim adds that authorities are closely examining activities as they have been finding violations, mainly relating to audit.

Regulatory efforts are underway to liberate the market, as the amendments to the Financial Investment Services and Capital Markets

News Analysis

Act (FISCMA) include the introduction of hedge funds (although their activities will be closely monitored by the government), prime brokerage services, and an Alternative Trading System in addition to the existing securities exchange. At the same time, rules have been strengthened to protect consumers of financial products and Korean investors. This is mainly in response to the recent delisting of China Gaoxian from the KRX, as a result of accounting fraud.

KRX listing regulations now require all foreign and domestic companies to establish an internal accounting control system and submit a report by an outside auditor. The regulations have also enhanced the role and responsibility of underwriters to align their interests with those of investors taking part in the IPO. With 18 foreign companies listed (five out of 784 on Korea Composite Stock

Price Index (KOSPI) and 13 out of 1020 on Korean Securities Dealers Automated Quotations (KOSDAQ)), the KRX has adopted an expansion and liberalisation strategy to attract more foreign companies while simultaneously toughening its regulations and requirements (see box).

“Some view the Korean market as being heavily regulated but I think we are making progress,” says Chung. “The overall direction of the regulatory changes appears to be towards less regulation but there is still some way to go,” he adds. On the other hand, the various deals and listings are clear indicators that global investors have increasing confidence in the Korean capital market, and from a regulatory perspective, these developments only seek to enhance this.

“The Korea Exchange and financial regulators are keen to ensure that the exchange and

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Korea strikes “a fascinating balance between being the traditional hermit kingdom and being on the international investment community’s radar

”

Steve Kim, JP Morgan

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Improving underwriting practices

T

o promote investment banking activities and investor protection, the Korean Financial Supervisory Service (FSS) has announced the introduction of various measures which are designed to improve underwriting practices.

From October 2011 it was expected that the FSS and other associated governmental authorities would amend applicable regulations on the process of underwriting in the corporate bond primary market to require lead arrangers to conduct due diligence on the issuers and to carry out mandatory demand forecasting.

The FSS has also announced a formal action plan which includes a survey, guidelines, and ways to support underwriters to improve their operations. Between November 2011 and April 2012, securities companies, as licensed underwriters, were required to take part in a survey which was conducted by the survey team made up of staff from FSS and the Korea Financial Investment Association (Kofia).

For the survey, 51 securities companies engaged in the underwriting business in Korea (as of June 30 2011), including subsidiaries or branches of foreign securities companies, were classified into three groups based on size, performance and other criteria. Based on the outcome produced by the survey, the FSS and Kofia will propose a set of best practice guidelines on underwriting rules and internal standards to each of the groups.

The FSS’s plan is to publish interpretations and guidelines in accordance with market conditions and follow-up amendments to the regulations. It is also expected that Kofia will operate programmes to provide training to the employees of underwriters, and also promote and encourage securities companies to operate internal education programmes.

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Recent deals include the Lotte Shopping dualcurrency convertible bond and the Hyundai Steel debt offering

market function in a fair manner, in the way it’s supposed to, giving investors the right level of protection for their investment. Measures implemented recently have been in line with political and general movements we’ve been seeing in the international market,” he continues.

From a legal perspective, Lee’s outlook on the future of the market remains positive. “Firstly, it’s an issue of foreign investors getting familiar with the Korean regulations and, as time goes by, the comfort level will only increase. The government and regulators

are keen to make sure the market develops in a manner consistent with international standards. We do see bumps here and there that might not appear to be so consistent with the trend of globalisation but as a general matter we are heading in the right direction. This will only enhance the appetite of foreign investors in the Korean market.”

JP Morgan counsel Steve Kim sees Korea has having a unique place in the global economy. “Korea strikes a fascinating balance between being the traditional hermit kingdom and being on the international investment community’s radar. Even 10 years ago it was considered one of the tigers, an emerging market but it’s not anymore; it’s a mature market.” The full effects of this tradition have yet to play out, he argues: “There are some vestiges of a regulated society, but it will be interesting to see what comes.”

News Analysis

Capital markets INDIA

Key ECM and DCM Deals Debt and Equity-Linked CJ CheilJedang Corp dim sum bond issuance LAW FIRMS

Lee & Ko Issuer and Guarantor DLA Piper Issuer on Hong Kong law Linklaters BNP Paribas as sole lead manager on Hong Kong law Why: This deal involved the issuance of so-called dim sum bonds by CJ Cheiljedang Corp, which is Korea’s leading food manufacturer. In this deal, CJ Cheiljedang Corp raised RMB1.1 billion (US$170 million) by issuing the three-year dim sum bonds carrying an interest rate of 2.25% in Hong Kong. The proceeds from the issuance of the dim sum bonds will be used to invest in a plant in Shenyang, located in northeast China.

The Shenyang factory will produce an additional 100,000 tons of lysine and 3,000 tons of nucleic acid.

This deal is significant in that it represents the first ever dim sum bond issuance by a Korean company. Given that the dim sum bonds are gaining popularity in the global debt market as an alternative means of raising funds, this deal would likely act as a catalyst in generating more similar issuances by other Korean companies.

Fila Acushnet acquisition financing LAW FIRMS

Yulchon Borrower McDermott Will & Emergy Borrower Lee & Ko Korea Development Bank as lenders Orrick Herrington & Sutcliffe Korea Development Bank as lenders Why: This deal consisted of three following loans: (1) a Korean law governed loan to Fila Korea; (2) a NY law governed revolving credit facility loan to a Delaware SPC (Alexandria Operations Corp) which would acquire Acushnet Company; (3) a NY law governed bridge loan to Alexandria Operations Corp which would eventually be refinanced through the issuance of FRNs. Fila Korea, together with other investors (such as Mirae Assets), incorporated Alexandria Operations Corp for the purposes of acquiring Acushnet Company. The proceeds of the Korean law governed loan to Fila Korea were used to refinance the existing debt of Fila Korea and to capitalise Alexandria Operations Corp. The proceeds of the loans made available to Alexandria Operations Corp were used to acquire Acushnet Company.

This deal was unique in that the financing was for the acquisition of a global brand (Titleist and FootJoy) company by a Korean company. The deal was arranged by the Korea Development Bank and all the lenders were Korean financial institutions. The deal was remarkable in that the financing was made available by Korean financial institutions for the purposes of allowing a Korean company to acquire a major global brand.

Hyundai Steel debt offering LAW FIRMS

Simpson Thacher & Bartlett Issuer Kim & Chang Joint bookrunners and lead managers Bank of America Merrill Lynch, Citi, Credit Suisse, HSBC and JP Morgan Cleary Gottlieb Joint bookrunners and lead managers Bank of America Merrill Lynch, Citi, Credit Suisse, HSBC and JP Morgan Why: This Rule 144A/Reg S offering by Hyundai Steel Company of $500 million 4.625% notes due 2016 was Hyundai Steel’s inaugural offering in the international capital markets.

The notes were listed on the Singapore Stock Exchange.

Korea Gas Corporation GMTN Takedown

Equity Hi-mart IPO LAW FIRMS

Bae Kim & Lee Issuer Cleary Gottlieb Issuer Kim & Chang Underwriters Simpson Thacher & Bartlett Underwriters Why: The KRW420 billion (US$385 million) IPO of common shares by Hi-mart, the largest consumer electronics retailer in Korea, represented the first IPO with international tranche by a Korean retailer. The shares were sold through a public offering in Korea and a Rule 144A/Reg S offering elsewhere.

LAW FIRMS

Kim & Chang Issuer Cleary Gottlieb Issuer Simpson Thacher & Bartlett Underwriters Why: Korea Gas Corporation’s Regulation S offering of C$300 million, 4.580% notes due 2016, was a takedown from the company’s US$3 billion global medium term note programme.

It was the first successful placement of Canadian dollardenominated ‘Maple’ bonds by an issuer from Korea, and the first by an Asian company other than banks.

Lotte Shopping dual-currency convertible bond LAW FIRMS

Yulchon Issuer Shook Lin & Bok Issuer Paul Hastings Janofsky & Walker Goldman Sachs and Nomura Why: The offering was the first dual-currency convertible bond (CB) in Asia ex-Japan in almost five years and marked the largest CB in Asia ex-Japan last year. It was also the largest CB in the consumer retail sector in the region ever and the largest Korean CB since 2006.

The deal was launched after the Korean market closed on June 15 at a time which followed with selling pressure as Dow Jones fell 1.5% overnight shortly after the books closed. The deal was initially launched at a size of US$700 million – a US$500 million tranche and a ¥16 billion tranche. It also had an upsize option of US$300 million.

Despite such uncontrollable externalities, the demand of the bond offering was strong and fairly distributed between the two tranches. The dollar tranche was kept at US$500 million resulting in a total deal size of approximately US$900 million.

OCI GDDR placement LAW FIRMS

Bae Kim & Lee Issuer Orrick Herrington & Sutcliffe Issuer Yulchon Underwriters Barclays Capital, Credit Suisse and RBS Clifford Chance Underwriters Barclays Capital, Credit Suisse and RBS Why: OCI Company’s issue of 14,888,000 global depository receipts (GDR) was listed on the Singapore Exchange Securities Trading Limited. The company used the proceeds of this offering towards the construction of two new polysilicon plants to triple its annual production capacity to 86,000 tonnes by the end of 2013 from 27,000 tonnes at the end of 2010. This deal represented the largest of its kind by an Asia issuer (ex-Japan) since November 2007. This also represented a shift in market sentiment that had been adversely impacted by the recent financial crisis.

Leading Capital Markets lawyers Heejae Ahn Yoon & Yang Hyunjoo Oh Lee & Ko Kent Wong Apex Law Source: Asialaw Leading Lawyers 2012

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market Analysis

Co-published feature

Recent trends in Korean capital markets

By Haeng-Gyu Lee, partner, Jipyong Jisung

L

ast year, there were several big news stories in Korean capital markets. The suspension of the trading of China Gaoxian on the Korea Exchange (KRX) due to its accounting fraud in March 2011 made the IPO market freeze and many foreign companies delay or withdraw their IPO plans on the KRX. As a response to this occurrence, the KRX amended its listing regulations in November 2011. The amended listing regulations include the requirement that an underwriter purchase a minimum number of new shares in addition to the shares being offered for an IPO, as well as the requirement that puts a higher obligation of public disclosure to protect Korean investors. Moreover, the amended listing regulations allow for a Korean Special Purpose Company (SPC), which has its subsidiaries in foreign jurisdictions, to be listed on the KRX with the result of boosting the number of IPOs of foreign companies on the KRX. The amended listing rules became effective from March 1 2012.

Another notable change in Korean capital markets was the introduction of hedge funds in Korea. By amending the presidential decree of Financial Investment Services and Capital Markets Act (FISCMA), the Korean government introduced Korean hedge funds amid some controversy over what impact they may have on Korean capital markets.

Furthermore, the Korean government prepared the amendment to the FISCMA (the Amendment) in order to help Korean securities companies be competitive with investment banking institutions in the international financial markets. The Amendment allows for the provision of credit facilities to companies by investment banks for M&A, principal investments, or other financial transactions. The Amendment also clarifies the requirement for prime broker services to be provided by big investment banks and, with several conditions for the listed companies in place, allows for naked warrants which are prohibited under the current FISCMA. The Financial Services Commission (FSC), which is the competent authority of the FISCMA, and the Korea Financial Investment Association, which is the association of broker firms and asset management companies, attempted to pass the Amendment during the last session of the 18th National Assembly in early May, which signified the last chance for the 18th National Assembly to pass the Amendment. However, the National Assembly failed to pass the Amendment due to strong disapproval by the opposition party of loosening restrictions on the investment banking sector, especially in light of the recent protest movement against the current state of capitalism. Market partici-

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The Korean government introduced Korean hedge funds amid some controversy over what impact they may have on Korean capital markets

market Analysis

pants and relevant authorities have no choice but to wait until the 19th National Assembly convenes in September 2012 for further consideration of the Amendment.

New listing rules for foreign companies With continuing promotional efforts by the KRX since 2007, 18 foreign companies have successfully completed listing on the KRX. This includes four companies on the KOSPI Division and 14 companies on the KOSDAQ Division. However, Japanese company Nepro IT and China-based company Cowell e Holdings were delisted last year. Nepro IT was delisted due to its embezzlement of subscription money from Korean investors, and Cowell e Holdings has voluntarily delisted its shares from the KRX. China Gaoxian, the trading of whose shares is halted due to accounting fraud, may be also delisted if it cannot provide a sufficient plan and take measures to protect Korean investors.

Given the aforementioned situation, the KRX and FSC instituted new listing rules for foreign companies. According to these new listing rules, all foreign companies must establish an internal accounting control system and submit a report by an outside auditor, as is necessary for a Korean company to be listed on the KRX. Another notable measure under the new rules is the obligation of underwriters to purchase a minimum number of shares of the issuing company, so as to raise their responsibility and align their interests with those of investors who will participate in the public offering.

More specifically, an underwriter of a foreign company to be listed on the KRX has to purchase 10% of the new shares (up to KRW10 billion (US$8.88 million) for the KOSPI market and up to KRW5 billion for the KOSDAQ market) of the issuing company aside from purchasing them to be offered for an IPO. It is also prohibited from selling the purchased shares for six months from the listing. In addition, the KRX compels the foreign company to perform its public disclosure obligations through the underwriter for two years. There is an exception to this rule for the KOSPI market (no exception for the KOSDAQ market) in cases where a foreign company keeps an office in Korea with a staff of Korean residents.

These new listing rules also try to revitalise the market, while shoring up on regulation to protect Korean investors. This is a fine balance to strike. Foreign companies are now allowed to list on the KRX by setting up a special purpose company in Korea (the Korean SPC), effectively removing the need to set up such a company in the Cayman Islands or Hong Kong. Many Korean companies with overseas subsidiaries, such as ones in China, can use this Korean SPC to avoid taxation on the establishment of an SPC to list subsidiaries on the KRX or Hong Kong Stock Exchange. Foreigners may also use this Korean SPC, and the KRX and Korean investors may be more comfortable using the Korean SPC than SPCs in foreign jurisdictions. The new listing rules became effective on March 1 2012.

Introduction of hedge funds in Korea The Korean government has allowed hedge funds by amending the Presidential Decree of the FISCMA last year. When the FISCMA

Capital markets INDIA

These new listing rules also try to revitalise the market, while shoring up on regulation to protect Korean investors. This is a fine balance to strike

was legislated in 2008, it was the government’s intention to create hedge funds in Korea in order to help Korean securities companies be competitive with investment banking institutions in the international financial markets. However, as a result of the financial crisis in 2008 when the FISCMA came into effect, the Korean government delayed the introduction of hedge funds in Korea. Many Korean securities companies therefore set up their investment banking centres in Hong Kong or Singapore, and conducted their hedge fund business outside of Korea. Moreover, many global hedge funds were sold to Korean institutional investors and high-net worth individuals through Korean securities companies. Given this situation and the rapid rebound of the Korean economy, the government has decided to introduce hedge funds into the Korean capital markets. This provides Korean securities companies and asset management companies with various business opportunities relating to hedge funds, such as hedge fund management and prime brokerage services.

Korean hedge funds are able to leverage up to 400% of their total assets; however, the derivative risk exposure cannot exceed 400% of its total net assets. Unlike in other jurisdictions, Korean hedge funds need to be registered in advance with a designated regulatory body, as is the case with private equity funds. This is so that the government may monitor the hedge fund market more closely and take effective measures to protect investors. This is because the Korean government is wary of any negative effect that hedge funds may have on Korean capital markets, especially in light of the role that hedge funds played in the recent financial crisis in the US. Many market participants believe that it will take some time for Korean hedge funds to become competitive with other global hedge funds.

According to the FSC, 11 hedge funds were registered as of December 23 with a total fund size of approximately KRW150 billion (US$132 million). Most of the hedge funds are using the strategy of long/ short. Four investment banking companies such as Woori Securities, KDB Daewoo Securities, Samsung Securities and Korea Investment Securities are providing prime broker services (Hyundai Securities will be added soon) for each hedge fund. It looks as though it will take some time for Korean hedge funds to expand as expected. Nonetheless, the introduction of Korean hedge funds will impact the asset management market and affect the revenue source of Korean securities companies.

Amendment to the Capital Markets Act Even if the Amendment did not pass in the 18th National Assembly, it is still meaningful to review its contents to predict the outlook of the Korean capital markets.

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About the author Haeng-Gyu Lee Partner T: +82 2 6200 1744 F: +82 2 6200 0800 E: hglee@jipyong.com Haeng-Gyu Lee specialises in initial public offerings (IPO), private investment funds (private equity, venture capital and hedge fund), project financing and cross-border investments. He has been advising the Korea Exchange, Korea Securities Depository and the Korea Financial Investment Association for several years. In particular, he recently participated in the preparation of the IPO Guidebook for the Korea Exchange.

The main objective of the Amendment is to invigorate the investment banking business in capital markets by allowing full-service brokers to provide companies with a credit facility to engage in M&A, principal investment, and other financial transactions. The full-service broker is required to have not less than KRW3 trillion (US$2.64 billion) as paid-in capital, and a new standard in calculating equity capital of such full-service brokers will be adopted.

The Amendment clarifies the definition of a collective investment, specifying the requirement of at least two beneficiaries in comparison to the previous definition that requires the solicitation of at least two persons.

There are several changes to private equity fund (PEF) markets.

There is currently no requirement to be a general partner (GP) of the PEF under the FISCMA. However, in order to keep from indiscriminate creations of PEFs and to protect investors from poorly managed PEFs, the Amendment prevents an individual from participating in the PEF as a GP. It requires that only a company be registered with the FSC in conducting business as a GP for the PEF. Therefore, when the company is planning to play the role of a GP in the PEF, it must be registered with the FSC and be equipped with a certain level of capital and management manpower.

As the PEF falls under the buy-out type of fund, it is required to manage its property through (i) investment in 10% or more of

Capital markets INDIA

the total number of outstanding voting shares of a company, or (ii) investment that enables it to exercise de facto control over the major business affairs of an invested company, such as the appointment and dismissal of executives. Furthermore, the PEF may invest in securities such as convertible bonds or bonds with warrants limited to investment requirements as set forth in (i) or (ii) above. For the purpose of boosting investment in convertible bonds or bonds with warrants, the Amendment details requirements for such investment, and such requirements are planned to be prescribed by a Presidential Decree to the FISCMA. The Amendment also modifies laws and regulations on trusts by allowing various assets for trust purposes and banks and insurance companies to operate trusts.

The Amendment introduces Alternative Trading System (ATS) and the possibility of another securities exchange in Korea. The KRX is currently the sole securities exchange granted by the FISCMA. The Amendment strengthens the obligation of due diligence of broker firms in underwriting or brokerage transactions. Even when broker firms do not underwrite but merely mediate a deal, they are liable for any misstatement or omission of material facts in the securities registration statement.

However, as mentioned previously, the Amendment did not pass in the last session of the National Assembly in early May 2012, and it remains to be seen whether it could be approved by the new National Assembly.

Conclusion Overall, the Korean capital markets have the advantage of a relatively robust economy following the global financial crisis. A new regulatory framework for the IPO of foreign companies may affect relevant markets positively from the long-term perspective. The introduction of Korean hedge funds will also impact the asset management market and affect the revenue source of Korean securities companies. We hope that the next National Assembly will take sufficient time to review and pass the Amendment, which must be resubmitted for approval. We are optimistic that efforts by the Korean government and market participants will achieve positive results for the Korean capital markets in the future, and that the Korean capital markets will play an increasingly significant role in Asia.

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Competition INDIA

KFTC maintains ever-watchful eye on conglomerates As one of the busiest competition authorities in the world, the Korean Fair Trade Commission continues its consumer-oriented approach and takes its monitoring of conglomerates one notch higher

K

orea’s economy has surged up the global rankings over the past 50 years, and one of the driving forces behind this performance has been the growth of its domestic conglomerates, or chaebol, and the fostering of such growth.

However, the now mature market has led to increased opportunities for all and this in turn has led to a growing social movement for change. The voices of consumers and small and medium-sized enterprises (SMEs) now demand to be heard on the subject of exercising regulatory control over these gargantuan businesses, and the Korean Fair Trade Commission (KFTC) has been responding to the challenge – attempting, over the last few

years, to crack down on unfair trade practices by these corporations in an effort to maintain a fair economy.

A foreign attorney at a law firm, who did not want to be identified, notes the increasing regulatory restrictions on market dominance: “Korea is highly conglomerate-centered, so now their activity is scrutinized. There were many suspicions on undue support and criticisms on unfair trade practices which is why the KFTC has become so active in enforcing antitrust law..”

The bulk of these criticisms emanate from SMEs, many of whom feel that these conglomerates have accumulated an unfairly large slice of the market pie. “The KFTC for

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Competition

KFTC “hasThe been highly active in its enforcement over subcontract issues, and has been vigorously scrutinising this area

”

Yong Seok Ahn, Lee & Ko

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the past few years has always been pursuing international cartels of market dominance cases,” the foreign attorney says. “Since 2010, it has been active in ‘shared growth’, the government policy of trying to give more benefits to SMEs and consumers. Korea has traditionally had an export-driven economy, and while we came out of the global financial crisis relatively unscathed, a lot of profits accrued on global conglomerates. The SMEs felt that these profits weren’t trickled down to tangible benefits for all.”

The KFTC has also been highly active over the past three or four years in scrutinising how the larger players are abusing their powers against the smaller players in the area of intellectual property (IP) rights. Lee & Ko antitrust head Yong Seok Ahn says: “For example, the KFTC has been highly active in its enforcement over subcontract issues, and has been vigorously scrutinising this area.”

Subcontracting is a form of IP abuse where conglomerates force smaller vendors to sign over their IP rights, or technology, in order to maintain their dominance in the market. The Subcontracts Law has been recently amended to allow for increased penalties for violation and misappropriation of technology.

The Korean government’s stance on defending consumers and SMEs will likely continue. In the elections this year, for

example, both majority and minority parties stressed that they would uphold legislation that protect Korean consumers, regardless of undue conglomerate activity.

The foreign attorney states that “alongside the recent increase in prices of various goods, they are trying to handle consumer prices in a direct manner. But of course this is very difficult as it takes very complicated economic analyses as there are legitimate reasons as to why prices go up in the absence of illegal behavior like cartel or retail price maintenance.”

The oligopolistic nature of all industries in Korea will likely dictate a permanently heavy workload for the KFTC, says Ahn. “Only a handful of companies are gaining majority shares in each and every industry sector. It is difficult for the KFTC to pinpoint which industry to target for enforcement, so it moves from one industry to another for every case depending on the size of the market and companies.”

Examples of the measures taken by the government to check market dominance include an escalation in general monitoring and an increase in the number of investigations, regulatory crackdowns on conglomerates’ internal activities, and merger control regulations. Moreover, the government recently amended regulations to strengthen sanctions against interference of its activities, and increased the level of administrative fines for unfair business.

Agency rankings have placed the KFTC in the top 10 most active competition agencies since the mid-2000s, and its recent enforcement of fair trade policies aims to preserve this global status. Norton Rose partner Marc Waha says: “When you say antitrust in Asia, you first think of Japan. But Korea has actually been most aggressive in its enforcement.

They started 30 years ago and now they are the ones imposing excessive fines of billions of dollars, year in year out. Since Korea is a major exporter of goods, a lot of cartels and cases will involve cross-border conduct.”

With the Korean economy increasingly opening up to the world, and countless deals being made both in and out of Korea, the KFTC is likely to maintain its status as one of the most strict and active competition authorities in the world.

NEWS Analysis

Competition INDIA

Korea introduces its age of consent Provisions regarding consent orders were one of the notable features of the Korea-US Free Trade Agreement. Announced benefits include lightening the caseload of Korea’s Fair Trade Commission, the cutting of time and costs, and giving consumers a better deal. But will it catch on?

K

orea has finally introduced consent orders this year following enactment of the Korea-US Free Trade Agreement (FTA). The consent order system had been considered for a long time as a means to strengthen the capacity of the Korean Fair Trade Commission (KFTC), the primary governmental agency responsible for the enforcement of the country’s competition laws. Yet despite its overdue arrival, commentators suggest there may be limitations.

Requiring a partial amendment to the Monopoly Regulation and Fair Trade Act (MRFTA), the introduction of consent orders is designed to cater not only to the KFTC but to businesses and consumers alike.

The consent order system has been in effect in many developed jurisdictions worldwide, including the US, the EU, India and Japan. Under the system, a business under investigation can propose a corrective plan of action under its own initiative in antitrust cases. If the competition authorities recognise the reasonableness of the plan, the investigation concludes promptly.

The KFTC has been intensifying its monitoring of all industry sectors in Korea of late, and the introduction of consent orders aims to strengthen the capacity of the Commission by reducing its filing workload. The hope is that this will provide more efficient and speedy enforcement proceedings to counter anti-competitive activity in the market.

Targeted businesses being investigated for unfair trade practices will be provided amnesty as long as they promise to stop such activity and compensate their consumers for damages. Although the procedure is inapplicable to serious illegalities and cartels (where more than one party is likely to be involved), it will help companies to save time and costs as well as ‘face’ since they are not having to admit guilt.

Gene (Gene-Oh) Kim of Kim & Chang says: “The Commission expects the system to provide “rapid and effective recovery of the competitive order through measures that are most suited to the market situation; reduction of time and costs through rapid resolution of cases; prevention of damage to the corporate

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Ensuring a level playing field Korea Fair Trade Commission director general Joong-weon Jeong gives his assessment on the development of competition law in Korea, and throws a spotlight on the internal workings of one of the most aggressive fair trade commissions in Asia What is the KFTC’s role in monitoring anticompetition in South Korea?

The Korea Fair Trade Commission (KFTC) is a quasi-judicial organisation functioning as a court of first instance, and a ministerial-level government body whose head (chairman) attends Cabinet meetings to provide insight from the competition’s perspective. We also manage competition policy, consumer policy and subcontracting laws, and this is very unique compared to our foreign counterparts and a strong point of the KFTC. Our main functions are to promote competition, guard consumer rights, create a level playing field – especially for small- and medium-sized enterprises (SMEs) – and prevent economic power concentration in the market. To facilitate competition, which is our overarching goal, the KFTC works to redress anti-competitive behaviours and market structures while supporting the other government agencies of South Korea to adopt the idea of competition in their policy-making process. The KFTC, as a main consumer-policy managing body in South Korea, has been engaged in diverse efforts to empower consumers. For example, we redress unfair adhesion contract provisions, unlawful labelling and advertising practices, and prevent consumer damages arising, for example, in the process of installment payments, door-to-door sales, and electronic commerce. With a view to ensure fair competition for SMEs, we also crack down on the various kinds of unlawful trading practices that large companies pursue mainly by leveraging imbalances in their trading relationship. One of the unique functions of the

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KFTC is to tackle problems in the country’s large business groups – whose affiliates tend to invest, guarantee for debt, and internally transact with each other illegally – which would hamper the sound function of the market economy principle.

Increased merger control has been observed in Korea over the last couple of years. What are the reasons for this and what are the implications for businesses, both domestic and foreign?

The KFTC imposed remedial measures on three proposed merger deals in 2009, three in 2010, and two in 2011. These figures stand at a similar level to those before.

Any company involved in a merger deal that falls under certain requirements on trading volume and others, is obliged, in Korea, to notify the Commission of such deals. Each year, we review between 500 and 600 proposed merger plans for any anti-competitiveness. In 2011, M&A deals between domestic firms increased in terms of their number and amounts of money involved.

Merger deals between foreign firms rose in number but fell in amounts of money in the same period.

These days, with the ever-deepening economic globalisation and the much elevated exposure of the South Korean market to foreign merger deals, the Commission is trying to tighten its monitoring over foreign merger deals. In the case of foreign deals, advance notification to the KFTC is mandatory if a deal in question falls under the requirements and its participating companies’ sales

image and reduction of the administrative costs that are involved in making a finding of illegality.”

Not only does the consent order system promote the rapid resolution of antitrust investigations for both government and businesses, this system is also in line with the KFTC’s consumer-oriented goals for a fair market economy.

Lee & Ko competition head Yong Seok Ahn says: “The parties can agree with the agencies without acknowledging the violation.

And they must agree on proactive voluntary measures to give benefits to consumers.

Consumers can then promptly seek direct compensation for damages.”

The consent order system also aims to provide incentives for all parties involved to gauge the risk of certain actions on their own and settle antitrust reviews on a voluntary basis. Kim says: “If an investigation is launched against a company and it enters into an agreement with the KFTC to voluntarily take certain remedial steps, and even provide compensation to consumers who have been allegedly harmed by the practice, the KFTC will in turn not decide upon the illegality of behaviour.”

As handling an increasing number of cases becomes increasingly difficult to manage on

If an “investigation is launched against a company and it enters into an agreement with the KFTC to voluntarily take certain remedial steps … the KFTC will in turn not decide upon the illegality of behaviour

”

Gene Kim, Kim & Chang

NEWS Analysis

the authorities’ side, Kim adds that part of the responsibility lies within the businesses themselves to make sure that their practices are within safe harbours. “It still remains to be seen how much this system will be utilised at this moment.”

Despite the best of intentions to achieve a more efficient approach to investigating and monitoring anti-competitive practices in the marketplace, some legal advisers feel that there are limitations to this new system.

From a consumer perspective, negotiations between the KFTC and businesses that have engaged in illegal conduct may be viewed as an attempt by companies to avoid or delay punishment or further problems with the authorities. This may act as a barrier to actu-

ally making use of the consent order system, as companies may instead continue to ‘negotiate’ with authorities through prolonged litigation thus challenging the whole point of the system.

On the other hand, there have been some concerns that the introduction of the consent decree system may result in the habitual misuse of the system by businesses and/ or the lowering of the KFTC’s level of punishment.

In such cases, the authorities may need to provide incentives to businesses to apply for consent orders, as well as generally raise awareness among companies and consumers of the potential benefits of utilising this system.

Other administrative difficulties lie in the possible lack of objectivity with the review of

Competition INDIA

these consent orders. There are also limitations to its scope of use, as the consent orders are only applicable to relatively minor or unclear violations and not to cartels or serious violations that require criminal punishment.

Kim says: “The KFTC must provide interested parties the opportunity to submit their opinions prior to the date of issuance of the consent decree. The KFTC must also give notice to the interested government agencies and consider their opinions, and must consult with the Prosecutor General prior to issuing the consent decree.”

Consent orders have been a long time coming in Korea, and it will be interesting to see whether the country’s businesses effectively utilise the new system.

Merger permission slips require KFTC signature With an increasing number of regulations being introduced to combat any anti-competitive consequences from the rise in global mergers and acquisitions, Koreas’ Fair Trade Commission has been escalating its merger control responsibilities.

Companies engaged in such deals should take note

I

n response to the steady increase in the number of outbound transactions that Korean companies are engaged in, the KFTC has announced amendments to bridge any regulatory gaps and enhance its merger review process to level the playing field for small and mid-sized players.

Revisions made to the Business Combination Review Standard in November 2011 have enhanced the KFTC’s standards of determining whether a business combination is anti-competitive. Such a determination is

The global SeagateSamsung acquisition caught the attention of the KFTC

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NEWS Analysis

turnover in the South Korean market exceeds KRW20 billion (US$17.6 million), respectively.

In line with the rising number of global M&A deals that would affect the financial market worldwide, we have pursued active cooperation with our foreign counterparts in reviewing such deals.

To further facilitate international cooperation, in December 2011 the KFTC established a ‘Manual on International Merger Review Cooperation’. This explains the process and grounds for recently increasing global collaboration among antitrust agencies to improve company acceptance and remedial measure enforcement.

Acting upon our principle of focusing more resources on priorities, we expanded the scope of merger deals subject to a simplified review process, easing the corporate burden. On the other hand, however, our review standard for possible anti-competitive deals was tightened in a more practical way as part of efforts to adopt global standards in our systems.

efforts across all industries in the country for efficient market economy operation so that the benefits of the market opening under the FTAs will not be offset by any anti-competitive attempts underway in the global arena. If the gap between import price and retail price seems unduly wide, we will analyse and make it public to induce competition pressure on the demand side and draw the public’s attention to possible problems. To this end, we plan to expand the provision of information to consumers to assist in them making a reasonable and informed choice. Both foreign and domestic companies with market dominance will be more closely watched for any unlawful trading practices, such as excluding rival firms from distribution or hindering price competition among domestic distributors. An institutional approach will be considered if there are some product items that do not see more lively competition, despite implementation of the FTAs, because of government regulations or other obstacles.

What are some of the landmark cases over the last few years that reflect this trend?

There have been two foreign company M&A deals that the KFTC has viewed as being anticompetitive so far. First was the deal between Australian firms BHP Billiton and Rio-Tinto in 2010. We worked closely with the EU and other antitrust agencies on that case. After we released an examination report indicating the competition restricting nature of the deal, the involved firms voluntarily withdrew the plan.

The other deal was the proposed purchase of Hitachi GST of Japan by Western Digital Corporation of the US. The KFTC, in this case too, worked jointly with its foreign counterparts including those in the US, EU and Japan.

We imposed a structural remedy that included selling off some sales units that carried a high risk of curbing competition by raising prices and reducing the supply amount.

The KFTC is said to be one of the most aggressive fair trade commissions in Asia, and this is evident in its recent strict policymaking and regulatory monitoring. What are the KFTC’s aims moving forward?

Korea has attracted increasing amounts of FDI inflows, which benefit society by bringing in more capital, technologies, effective business management techniques and jobs.

The country’s 2011 FDI amount stood at US$13.57 billion. This is partly because the Korean market’s predictability has improved as it concluded FTAs with the EU and US and adopted advanced systems.

The KFTC will work hard to make the Korean market a level playing field, and make it an open market where enterprises, regardless of their nationality, are able to realise their potential to the full extent. In this era of rapid change, including ever more globalised enterprise activities and technological innovations, the KFTC will actively respond with more effective antitrust enforcement based upon legal and institutional systems meeting global standards.

With the FTAs with the EU and US now in place, in which sectors of the economy do you expect to be handling more cases?

The KFTC will engage in many competition

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The burden “is placed on the applicants to show that the merger won’t bring up these anti-competitive concerns. If the figures do not fall within the safe harbours, the KFTC will scrutinise the deal

”

Brian Tae-hyun Chung, Kim & Chang

Western Digital-Hitachi Storage: the KFTC imposed structural remedies

made after reviewing a business combination report filed by the companies. Moreover, an Enforcement Decree amendment to the Monopoly Regulation and Fair Trade Act (MRFTA), made in January 2012, expands the scope of pre-closing reporting requirements for the combination of large companies, such as those with a total asset value of KRW2 trillion (US$1.75 billion) or more. It also requires reporting in the acquisition of shares in a securities market or through a tender offer.

Kim & Chang foreign attorney Brian Taehyun Chung says: “There are two thresholds to the presumption of anti-competitiveness; when a combined firm ends up having 50% or more of the market share, or if the top three companies have 75% or more, and the gap between the number one company and the number two company is 25% of the number one company’s market share. The burden is placed on the applicants to show that the merger won’t bring up these anti-competitive concerns. If the figures do not fall within the safe harbours, the KFTC will scrutinise the deal.”

Recent M&A deals such as those of Fila’s with Acushnet, SK Telecom’s with Hynix, Google’s with Motorola, Texas Instruments’ with National Semiconductor, and Hite’s with Jinro all underwent intense merger review processes. The review proposal must have

Competition INDIA

no anti-competitive effect and the businesses must not be mutually complementary or substitutable.

Another transaction, Western Digital’s with Hitachi, was one of note, as the KFTC imposed structural remedies as a preference over behavioural remedies. Yet another deal that held the attention of the KFTC was the global Seagate-Samsung acquisition, which occurred in a similar timeframe.

Lee & Ko antitrust head Yong Seok Ahn represented Samsung on the deal. “It was reported before the Western-Hitachi deal so ours was cleared first and the other was subject to somewhat deeper scrutiny,” he says.

“The timings for both deals were similar. The EU reviewed the merger controls in order of the filings and, when they reviewed SeagateSamsung, they assumed that Western-Hitachi would remain as it is. But when they reviewed the latter deal, they assumed that Seagate and Samsung had already merged.”

Greater regulatory developments in the antitrust area in active jurisdictions such as China, India and Malaysia, as well as Korea, mean that merger control is an increasingly important factor for companies to consider in transactions. “The timing of merger filings is very important,” says Ahn. “It can make all the difference to the success of a transaction.”

Leading Competition lawyers Yong Seok Ahn Lee & Ko Youngjin Jung Kim & Chang Paul S Rhee Yoon & Yang Sung Joo Yoon Kim & Chang Hoil Yoon Yoon & Yang Sinsung Yun Yoon & Yang Sai Ree Yun Yulchon Source: Asialaw Leading Lawyers 2012

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Competition INDIA

Co-published feature

Major legislative developments and regulator policies

By Kyoung Yeon Kim, partner, Yulchon

T

he Korean Fair Trade Commission (KFTC) spent a busy year in 2011 refining its laws and regulations. In terms of merger control, for example, the KFTC revised the applicable guideline/ public notification as a part of its effort to close any loopholes and at the same time further facilitate the merger review process. With respect to cartels, the KFTC’s revision of the governing law and the applicable guideline/ public notification generally focused on tightening the regulations covering the operation of its leniency programme and reducing the scope of availability of leniency status.

(a) Merger control On June 15 2011, the KFTC issued a notice on merger remedies, which replaces the former merger remedy guidelines of the KFTC. This notice on merger remedies includes (i) explicit preference on the structural remedies over the behavioural remedies, and (ii) basic principles of the remedies such as effectiveness, proportionality, transparency and enforceability. On December 21 2011, the KFTC imposed structural remedies including the divesture of certain assets essential to producing 3½ inch HDD products in the proposed merger between Western Digital Corporation and Viviti Technology (formerly HitachiGST). This is known as the first case where the KFTC imposed a structural remedy on a foreign-to-foreign merger other than the one imposed on the Owens Corning and Compagnie de Saint-Gobain Vetrotex case in 2007.

The amended Enforcement Decree of the Monopoly Regulation and Fair Trade Act (the MRFTA), which came into effect on January 2 2012, expands the scope of the preclosing reporting requirement that applies to certain business combinations by large companies (companies whose total asset values or gross sales are KRW2 trillion (US$1.76 billion) or above). Under the former Enforcement Decree of the MRFTA, a company is subject to the pre-closing reporting requirement only if it acquires shares of another company, outside the securities market, in ways other than a tender offer and becomes another company’s largest shareholder. The amended Enforcement Decree of the MRFTA expands the scope of the pre-closing reporting requirement to include the acquisition of

In terms of merger control, for example, the KFTC revised the applicable guideline/ public notification as a part of its effort to close any loopholes and at the same time further facilitate the merger review process

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shares in the securities market or through a tender offer, with certain exceptions to apply where the date and amount of the acquisition are difficult to be estimated in advance.

Moreover, the Enforcement Decree amendment provides an exception to the application of the regular waiting period (30 to 120 days) for certain types of business combinations. Under the exception, the acquisition may be completed prior to the expiration of the waiting period in certain cases. These include where the acquisition of shares is proposed to be made through a tender offer or where other laws and regulations require the relevant acquisition to be completed. With respect to the shares acquired pursuant to this exception, however, the acquiring company cannot exercise its voting rights attached to such shares until the expiration of the applicable waiting period.

On November 7 2011, the Business Combination Review Standard was amended. This substantially enhances the standard for the determination of anti-competitive behaviour. Under the amended Business Combination Review Standard, a business combination report should be reviewed through a short-form review provided that: the proposed business combination has no significant anti-competitive effect, such as price increase; and, the businesses to be combined are not mutually complementary or substitutable. The short-form review is expected to lower the regulatory burden on companies because the review process, in principle, will be completed within 14 days after filing a business combination report. Also, in accordance with recent discussions by the international antitrust community, the KFTC enhances the standards for anti-competitive review. This includes (i) expansion of the scope of controlling person, (ii) enhancement of standards for potentially unfair collaborative act, (iii) new provision for anti-competitive effect of minority interest acquisitions, and (iv) new provision for anti-competitive effects of an increase in purchasing power.

(b) Cartel (1) Clarification of grounds for cancellation of leniency status The KFTC revised the guideline covering the operation of its leniency programme on July 21 2011 (the Notification on Exempting or Mitigating Corrective Measures under the Leniency Programme; the Notification). The revised Notification stipulates the reasons for which the Commission may cancel the status of a leniency applicant confirmed by the KFTC Secretary General as follows: (i) the leniency applicant fails to provide full cooperation until the completion of the deliberation by the KFTC; (ii) the leniency applicant submits falsified documents; (iii) the leniency applicant does not terminate their involvement in the concerted cartel being reported; (iv) the leniency applicant coerced other members to participate in the cartel; or (v) evidence submitted by the leniency applicant is not considered to prove the concerted cartel activities.

The revised Notification also clarifies a few aspects of its leniency programme. Firstly, while the old Notification stated that only ‘documents, goods, electronic materials and telecommunica-

Competition INDIA

The revised Notification stipulates the reasons for which the Commission may cancel the status of a leniency applicant confirmed by the KFTC Secretary General

tions materials’ were acceptable forms of supporting evidence by leniency applicants, the revised Notification clarifies that any other supporting evidence will be accepted as a part of a leniency application package. Secondly, while the KFTC grants up to 75 days from the date of filing for a leniency applicant to submit any further evidence to supplement its application, the KFTC may now grant an extension beyond the 75-day period if the KFTC views that such extension is merited.

(2) Less leniency for repeated offenders The Enforcement Decree of the MRFTA, amended as of January 1 2012, establishes an evidentiary clause. This prevents offenders who repeatedly violated the law within a five-year period from taking advantage of the leniency programme and thereby receiving deduction benefits for their penalty surcharges.

The Notification, which was also revised as of January 3 2012, supplements Article 35(1) para 5 of the Enforcement Decree by describing that the following cases are no longer subject to the leniency programme, including any deduction of penalty surcharges: (i) If a party, who has violated Article 19(1) of the MRFTA (the provision prohibiting cartel) and received a corrective order as well as an order to pay a penalty surcharge, again violates the said law and corrective order within five years from the day on which it had received the corrective order and surcharge; (ii) If a party, who has benefitted from the leniency programme after violating Article 19(1) of the MRFTA, commits a new violation of the said law within five years from the day on which it had received the leniency benefit.

As a result, the KFTC has reduced the availability of the leniency programme to repeat offenders thereby providing a sterner warning to businesses not to repeat an offence concerning the same or different goods and services.

(3) No leniency for the second-in in a two-party cartel The leniency programme of the KFTC stipulates that the first-in reporter receives complete exemption from the penalty surcharge while the second-in reporter is subject to a 50% deduction of the penalty surcharge. The KFTC recently announced, in early 2012, that since it is unreasonable to show leniency towards both companies (when only two companies are involved in collusive

ASIALAW Korea Annual Review 2012

39

Competition

market Analysis

About the author Kyoung Yeon Kim T: +82 2 528 5503 F: +82 2 528 5228 E: akykim@yulchon.com Kyoung Yeon Kim is a partner at Yulchon who practices primarily in the areas of antitrust, mergers and acquisitions, corporate general, and environment and energy matters. She joined Yulchon as an associate in 2001 and made partner in 2009. Kim also worked on secondment at Cleary Gottlieb Steen & Hamilton’s Hong Kong office from 2007 to 2008.

Kim has published many articles, including ‘Analysis of the Unfair Subsidization of Persons Controlling Group Companies’, Competition Case Law Review, Volume 4 (2007, in Korean), ‘Legal Review of the Plan for the Establishment of Holding Companies’, Holding Company and Law, edited by Kon Sik Kim and Hyeok Joon Roh (2005, co-authored, in Korean), ‘M&A Review Guidelines under Korean Competition Law’, Journal of Korean Competition Law, Volume 11, Korean Competition Law Association (2005, co-authored, in Korean), ‘Legal Issues Relating to Mergers Between Financial Institutions’, Business Finance Law, Volume 7, Business and Finance Center of Seoul National University (2004, co-authored, in Korean), and ‘The Merger Control Review’, Law Business Research Ltd (2010, 2011, co-authored, in English).

behavior), the programme will be amended so that only the first-in reporter will receive such immunity from the penalty. If the KFTC proceeds with the current plan, we may see the Enforcement Decree of the MRFTA soon being amended accordingly.

(c) Introduction of consent order system Owing to its civil law roots, the consent order system has been a foreign concept to Korea. However, as a result of the recently ratified Korea-US Free Trade Agreement (FTA), the KFTC has introduced the consent order system. This allows for the early resolution of a KFTC investigation pursuant to an agreement with parties that were subject to such investigation. The amended MRFTA, which took effect from December 2 2011, allows in essence that: (i) a person may reach an agreement with the KFTC with respect to the extent of the remedial measures to be taken against any anticompetitive effect or consumer damages that may have arisen as a result of such person’s action against which the KFTC’s investigation has been conducted; (ii) a consent order cannot be used as grounds for alleging violation of the law by a person to whom such consent order is issued.

Application for a consent order may be made with respect to any act that is subject to the KFTC’s investigation or review, provided that such application may not be made with respect to (i) any unfair collusive practice (i.e. cartel), or (ii) any act for which the KFTC is required to file a referral with the Prosecutor General for criminal investigation, or (iii) any act for which the application is withdrawn prior to the issuance of a consent order.

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ASIALAW Korea Annual Review 2012

The procedures for solicitation of interested parties’ opinions and withdrawal of the consent order are similar to those in the EU and the US. However, once the KFTC decides to commence its review of a consent order application, it is further obliged to (i) solicit the opinions of the relevant administrative agencies, and (ii) discuss with the Prosecutor General.

Direction and implications of KFTC policies in 2012 The year 2012 will be marked by two events that are to bring great changes in Korea: the election of members of the National Assembly in April and the presidential election in December. Traditionally, when faced with changes of regime, the KFTC has established policy plans that pursue stabilisation of the public’s livelihood and protection of the socially disadvantaged. This year is no exception.

The KFTC has set its policy slogan for 2012 as the ‘warm-hearted market economy with which small businesses, large corporations and consumers can sympathise’. It has set the following as specific tasks as a part of its annual policy plan: (i) To select several fields among the manufacturing and construction industries, which have continuously been suspected of violating competition law, and tighten the regulatory monitoring therein for the purpose of implementing a fair subcontracting practice; (ii) To tighten regulation, with its focus on the 30 major conglomerate groups in Korea, including the rules governing internal transactions among affiliates and the duty of public announcement; (iii) To intensify the monitoring of cartels and unfair trade practices over goods and services that show a large disparity between domestic and overseas prices, have high operating profit rates, or are related with the FTA. The last category mainly looks at export products from Korea’s FTA partners, with one of the carefullywatched areas being whether the decline in custom duties owing to the FTA would actually lead to a decrease in consumer prices in Korea); (iv) To prevent the exclusion of competitors by platform providers in, for example, the mobile OS market, and to prevent the abuse of patent rights by dominant players in the industrial servers, the software industry and the fields of machinery and chemicals; and (v) To build an ‘online consumer report’, in the form of Wikipedia, in order to expand the database for consumers’ use, and to strengthen remedial measures of consumer harm by utilising the consent order programme.

The year 2012 will be marked by two events that are to bring great changes in Korea: the election of members of the National Assembly in April and the presidential election in December

market Analysis

In particular, the proposed strengthened regulation over internal transactions among affiliates demonstrates the stricter position of the KFTC in its policymaking. This practice is already regulated by the Commercial Code and the Tax Code pertaining to the prohibition on ‘giving all or most of a firm’s external projects (e.g. purchase of supplies) to that firm’s affiliates’. This was a major legal issue in 2011. In addition to the Codes, the KFTC is planning to use the competition law as an additional means of regulating the conglomerates.

The Korea-EU FTA provisionally came into effect on July 1 2011, while the Korea-US FTA reportedly came into effect on March 15 2012. Whether the decline in custom duties that the FTAs create will sufficiently reflect on relevant imports to Korea has already been discussed during a KFTC case in 2011 (in which a company was fined for allegedly restraining the sale of cheaper Chilean kiwifruits by imposing ‘conditions to ban the sale of Chilean kiwifruits’ at large discount stores). The KFTC also sent out information requests to those involved with imported cars and their components in early 2012, which is viewed as a part of its effort to follow up on this FTA agenda. The information requests may soon be followed by the KFTC’s launch of official investigations.

There has been speculation that the KFTC’s regulatory measures will be especially directed towards cartel activities, as they have done in the past. Recent cartels have taken the form of the exchange of information between companies. However, because the relevant

Competition INDIA

There has been speculation that the KFTC’s regulatory measures will be especially directed towards cartel activities, as they have done in the past

KFTC guideline does not offer any detailed explanation on the risks of information exchange, in a level of detail prescribed under EU laws and regulations, we have to rely on Korean court precedents for further guidelines on the information exchange issue. Although the court has provided guidelines to a certain extent in the mill operators’ cartel case in 2009, it is expected that further judicial and legislative developments will be made with regards to information exchange activities in various industrial markets.

While the policy of consent order has been prompted by the Korea-US FTA, the KFTC had already been attempting to implement this policy since 2005. Accordingly, it is expected that the KFTC will follow up on the amended MRFTA by establishing internal guidelines for implementation. As cartel activities are excluded from the subject matters of consent order application, there is a keen interest on which area would most take advantage of the consent order system.

ASIALAW Korea Annual Review 2012

41

Corporate Governance

News Analysis

Governing increased corporate awareness As the Korean economy expands, the country’s companies are being made to realise the importance of meeting corporate governance standards – and not just in Korea

T

he year 2012 has already proven to be a watershed year for economical, political and social developments in Korea – with enactment of revisions to the Korean Commercial Code (KCC) and the Financial Investment Services and Capital Markets Act (FISCMA), the Korea-US FTA, and the National Assembly and presidential elections. Thanks to these developments and others, there are hopes that the year may end with an enlightened corporate culture about the need for good corporate governance.

Within only a few short decades, the

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ASIALAW Korea Annual Review 2012

Korean economy has risen to new heights, largely due to the traditional fostering and success of the conglomerates, or chaebols.

Regulatory developments have never been too far behind, however, with the government forced to react to rising competition and consumer criticism of unfair practices at the top conglomerates.

In particular, Kim & Chang partner Chang Hyeon Ko believes that the KCC amendments earlier this year have gone a long way in educating Korean companies about the need for good corporate gover-

News Analysis

Corporate Governance INDIA

Changing the corporate mindset The ACGA’s Jamie Allen, secretary general, and Charles Lee, research director for North Asia, believe that corporate governance in Korea is heading in the right direction, but that real progress will require a change in culture What is the role of the Asian Corporate Governance Association (ACGA) and what are its main areas of focus?

JA: The ACGA is an independent membership association formed in 1999 shortly after the Asian financial crisis. We’re an independent voice on corporate governance reform, and we began by tracking rules, regulations and enforcement across 11 Asian markets. We then expanded our work by looking into company implementation of best practices and shareholder engagement with companies.

We also look into accounting and auditing. We do a regional survey every two years and produce corporate governance scores for various countries.

We then talk to regulators to improve certain rules as well as persuade companies and institutional investors to undertake voluntary governance improvements. Our aim is to facilitate better corporate governance in Asia.

What is the general outlook on corporate governance in Asia?

JA: It’s improving overall and certainly compared to 10 years ago. We see more diverse boards with wider skill-sets, stronger shareholder rights and more voting. There have been many systemic improvements. But these run parallel with stock exchange competition and a certain decline in regulatory quality around the IPO approval process: as companies race to list on exchanges, and exchanges seek their business, problems are appearing. We see a lot of frauds, some of which could have been stopped or minimised if the regulators had scrutinised the governance of IPO companies more intently.

Which regions have seen the most progress with regulatory developments to improve corporate governance standards?

JA: In our table summarising comparisons from 2007 to 2010, you can see that the three markets

with the most improvements were Japan, Thailand and China. You can see that Malaysia and Indonesia have also improved. Over the last 18 months, however, there have been some changes: Singapore has improved quite a lot, as well as Taiwan and Korea. We were very negative on Korea in 2010, because its focus on corporate governance waned a few years ago for political reasons. More recently, things have improved somewhat, ironically mostly for political reasons – there has been a reaction against the government’s conservative policies and a backlash against the dominance of the chaebol in the economy.

How is Korea looking now, and have you seen improvement or regression in these standards compared to other jurisdictions?

CL: We’re seeing some progress, but the reform process is still not bottom-up. There hasn’t been a genuine change in corporate culture or mindset. If it were up to the companies, most would resist all of these regulations. But the government realised this isn’t tenable with the voters, so more changes will take place this year. But whether they will take root in corporate culture still remains to be seen.

JA: Compared to Japan, as far as our research is concerned, Korea is less open at the corporate level.

In Japan it’s much easier to meet senior executives, whereas in Korea it is almost impossible to meet anyone of C-level rank to discuss corporate governance. Investors also face the same difficulties. There’s a certain hostility not found in other markets.

CL: As far as regression is concerned, the possible introduction of poison pills in 2009 wasn’t exactly a move forward. But levels of improvement and regression are all relative. If all other markets are moving ahead, but Korea stays the same, then it’s falling behind. We now think it is starting to catch

up. A couple years ago, the possibility of introducing poison pills in companies created a lot of foreign opposition and, as a result, this issue remains stuck in parliament.

JA: Following his election in 2007, Lee Myung Bak focused on business as usual. The chaebols became more hostile to corporate governance and so 2008 to 2010 were pretty hostile years there for reform. We saw no major progress, less emphasis on governance policy, but to be fair also no major backtracking.

CL: Regulators in Korea don’t really seem to follow what’s going on in the rest of Asia. The government’s perspective has been that they’re way ahead of Asia, but they don’t realise what’s happening. So when we told them what was happening in Asia, that others are actually ahead, they were shocked, even offended when we said to look at the progress of Malaysia, etc. Now they’re talking about updating all sorts of regulations, best practice principles and so on.

JA: From a practical research perspective, Korea is quite frustrating. Getting to know officials and trusting each other is very difficult since they change every two years. In every other Asian market there is more continuity of people in regulatory agencies.

There were several amendments to the Korean Commercial Code addressing issues of corporate governance, such as increasing transparency in internal activities and the role of the board of directors. What are some remaining concerns and areas of improvement?

CL: The amendments call for more restrictions on directors relating to internal transactions, with more disclosure and board approval. The authorities are cracking down on inside-directors acting for

ASIALAW Korea Annual Review 2012

43

Corporate Governance

News Analysis

their own gain. This is mainly aimed at chaebols to monitor what they do with their subsidiaries and so on. The amendment to prevent exploitation of business opportunities was a reaction to abuses that have taken place, such as the move by Hyundai Motors a few years ago in which it set up a new company, Hyundai Glovis, under the son of the chairman of Hyundai Motors in a roundabout attempt to transfer family wealth to the next generation.

This happened when the corporate governance atmosphere in Korea became very loose as the economy improved from the aftermath of the Asian financial crisis. If the government doesn’t emphasise policy or enforcement, companies will do things thinking they will get away with it.

In the recent SK-Hynix deal, for example, Hynix was originally owned by banks that wanted to get rid of it and tried to do so three times until SK stepped in and bought it without approval from its own shareholders – because Korean law doesn’t require it. Many foreign shareholders of SK weren’t too happy with this, and there were a lot of negative votes for the SK Group head who became the new chairman of Hynix.

There’s also government intervention in SOEs, where the government calls the shots as a 51% majority shareholder. When the government tells KEPCO to sell electricity at a lower price regardless of the opinions of minority shareholders, well then what’s the point of listing the 49%? Even with their good corporate governance structures, companies like KEPCO and POSCO all have governance issues and ignore the interests of minority shareholders from time to time. Banks also receive significant government intervention.

There was a big scandal in KB Financial where the government got involved in the chairman appointment; it pushed out the elected chairman on the basis of some dubious foreign acquisitions he had pursued and put in place a college buddy of Lee Myung Bak. But there are improvements in progress; the government is working on strengthening the definition of outside directors. The problem is that even if a director is from outside of the company, he may not be independent. He may be a college or high-school friend of the executives. This is still

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ASIALAW Korea Annual Review 2012

being discussed and in the works, as well as on the banking side. Korea has two parallel tracks for corporate governance laws. One is for financial institutions, which is handled by the Financial Services Commission (FSC).

It’s in charge of drafting all the laws governing financial institutions, namely the FISCMA. The other is for non-financial institutions like chaebols.

This is handled by the Ministry of Justice, which puts forth amendments to the Commercial Act. Both of these acts are being updated right now addressing the independence of external directors. This will soon be put to the National Assembly, and if passed it will mark a significant improvement.

Does the corporate governance environment in Korea pose any difficulties for foreign investors?

CL: Foreign investors are mainly interested in investing in top chaebol companies. The big picture is that the overall regulatory policy is improving. Still, from a foreign perspective, many are skeptical of chaebol attitudes. Corporate governance is still not too high on the radar of Korean businessmen. The gap between the law and its implementation will continue to exist. There doesn’t seem to exist in Korean businessmen a general conviction that corporate governance must be improved. The traditional mentality of family ownership and control is very hard to change. Historically, corporate governance was imposed from the top. It never had a chance to bubble up from the bottom. For example, compare Samsung Electronics in Korea to TSMC in Taiwan. Both are the most successful and dominant companies in each country. The market cap for Samsung Electronics in Korea is just enormous. While TSMC has an excellent corporate governance structure, Samsung Electronics is run more like a personal empire.

When local companies in Taiwan look to an ideal structure they would look to TSMC, while Korean companies would look to Samsung, since it’s doing phenomenally well, and would have no reservations in adopting that family-centred structure.

Still, overall I would say Korea has some way to go, but it’s again starting to head in the right direction.

The “competition authorities’ interest in chaebol activities corresponds with the election year, and their intention is clear: they must take action

”

Hyung Soo Lee, Hwang Mok Park

nance. “Corporate governance has always been pretty strict legally. In connection with the recent Korea Commercial Code amendments, corporate governance has been strengthened where, for example, tougher rules govern corporate opportunities for directors and officers. What directors and officers can do in terms of corporate opportunities is much more restricted now,” says Ko. “We represent conglomerates in Korea, and from a firm’s perspective we do believe regulations are making headway.”

Transparency and fairness Developments in corporate governance regulations include increased requirements and restrictions on internal transactions, the prohibition of exploitation by directors of business opportunities, and reduced liabilities of directors.

Hwang Mok Park partner Hyung Soo Lee says: “Transactions within the board are regulated now for more transparency. This highlights a social and political movement in Korea, as many had criticised the internal activities of the chaebol for undue benefits.”

The prohibition of misappropriation of business opportunities by directors has also been addressed, as a result of increased opportunities to engage in illicit profit-making

News Analysis

Corporate Governance INDIA

New rules on South Korea disclosure

T

he Financial Supervisory Service (FSS) of South Korea has announced a new corporate disclosure system. The new system will include the computerisation of the entire disclosure process and follow-on examination procedure, as well as different review standards for both top-ranking and struggling companies.

The FSS anticipates greater efficiency in the examination process through selective concentration and enhancement of the predictability of standard criteria. It is envisaged that these changes will allow greater levels of transparency and investor protection.

Under the revised system, company management information is collected

automatically through the computerised system in the form of a paperless corporate management information report, with which companies are rated in accordance with their default risk. They are given one of five level ratings in three separate areas: financial, non-financial and comprehensive. An initial rating is given at the time the relevant report is submitted and subsequently updated on a monthly or quarterly basis.

As part of the new paperless examination of the corporate management information report, the FSS is authorised to collect seven items of information: company background, default risk ratings, ownership changes, funding

and operation status, legal compliance status, main financial information and miscellaneous information (change of name, and so on). The inspection of these items will enable FSS officials to accurately and comprehensively ascertain the true state of a given company’s affairs.

The examination history is then saved in a company-specific database, with standards for the review to be maintained by the FSS. The FSS will concentrate its functions to review lower-rated companies (with a higher risk of default) by way of cross-check examinations.

Higher-rated companies, on the other hand, will be subject to a simplified review.

ASIALAW Korea Annual Review 2012

45

Corporate Governance

News Analysis

Unlike other “jurisdictions such as the US, a breach of fiduciary duty is a criminal liability in Korea

”

Sang Hyuk Park, Kim & Chang

Leading Corporate Governance lawyers Dan Bibb IPG Legal Hee Chul Kang Yulchon Sang Gon Kim Lee & Ko Young-Moo Shin Shin & Kim Jiyul Yoo Yoon & Yang

Leading Government & Regulatory lawyers Dan Bibb IPG Legal Jiyul Yoo Yoon & Yang Hyeong Gun Lee Lee & Ko Source: Asialaw Leading Lawyers 2012

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ASIALAW Korea Annual Review 2012

as businesses expand. Meanwhile, Lee says that the amendment on the reduced liability of directors “means a lot to directors as they have more freedom and discretion to act more aggressively”.

But just how effective will these amendments prove to be? Kim & Chang partner Sang Hyuk Park believes that these amendments mark a significant stage in Korea’s progress and awareness. “Corporate governance has become stricter,” he says. “Even before the amendments, Korea took corporate governance very seriously. For example, unlike other jurisdictions such as the US, a breach of fiduciary duty is a criminal liability in Korea.”

The government’s stance on quality governance will affect all areas of business including areas such as fair trade, where the KFTC is really cracking down on practices. Lee says: “The competition authorities’ interest in chaebol activities corresponds with the election year, and their intention is clear: they must take action.”

The KCC revisions will have the largest impact on corporate activities in recent Korean corporate history. Park says: “When it comes to corporate governance, companies

have to be well aware of these so their business conduct in Korea is in line with the regulations.”

International implications And of course it is not just in Korea that regulators are clamping down on corporate wrongdoings. As domestic players increasingly look overseas to conduct business as a result of limited growth opportunities domestically, they expose themselves to the corporate governance regulations of other jurisdictions.

“Korea has a very strict anti-bribery law,” says Park. “Other countries such as the UK and US have even stricter anti-bribery laws that have extra-terrestrial reach, which means they may apply to non-UK and US companies.

Korean companies are therefore becoming aware of the importance of complying with foreign anti-bribery laws just as much as their local laws.”

With the need to comply with Korean regulations, and international standards and regulations, Korean companies will need to adopt a broader view of corporate governance regulations around the world in order to prosper.

News Analysis

Corporate Governance INDIA

Korean national pension service backs CSR

S

outh Korea’s National Pension Fund Operation Committee has amended the Guidelines for Voting of the Fund to deliberate on the independency of outside directors. This signals the start of an attempt by the National Pension Service (NPS) to strengthen its shareholder’s rights, which were previously almost neglected.

Ever since last year, when the chairman of the Presidential Council for Future & Vision asserted that the NPS should hold chaebol in check through exercising its shareholder’s right for social responsibility, there was a sea change in attitudes. The chairman of the NPS affirmed the so-called principles of ESG (environment, social, governance), which prevents the NPS from investing in companies that are inattentive to the environment, socially irresponsible, or unsound in governance structure.

Due to the immense number of shares held by the NPS in the Korean stock market, such change may establish a new order in the market; the NPS invests in 591 out of 1,819 public companies. It holds more than a 5% share in 190 public companies, including Samsung Electronics and Hyundai Motor Company, and more than a 9% share in 50 public companies. The NPS is the largest shareholder of the most financial holding companies in Korea.

It is crucial to recognise the standard followed

by NPS for actively exercising its shareholder’s rights. The interest of the insured, although important, does not provide enough incentive in reality because citizens are required to join the national pension plan by the National Pension Act. On the other hand, the NPS, an organisation affiliated with the Ministry of Health & Welfare, is likely to behave according to government policy, and corporate social responsibility may be considered per se by the NPS in addition to the nominal principles of profitability, stability and public interest.

Despite the uncertainty rising from the possible fluctuation of principles according to the change in government policies, government-sponsored CSR is expected to make up for existing capitalism.

ASIALAW Korea Annual Review 2012

47

News Analysis

Corporate Governance

Market Data Corporate Governance Watch market scores (%): 2007 vs 2010 Pos.

Country

2007

2010

Change

1

Singapore

2

Hong Kong

3

Japan

=4

Taiwan

=4

Thailand

6

Malaysia

=7

India

56

=7

China

45

9

Korea

10 11

Trend of CG reform

65

67

(+2)

Improving slowly, negatives cancel positives

67

65

(-2)

Some regression, static overall

52

57

(+5)

Improving, but will reform be sustained?

54

55

(+1)

Static overall, loss of focus

47

55

(+8)

Improving, but political uncertainties remain

49

52

(+3)

Improving, but held back by ‘CG culture’

49

(-7)

Over-rated last time, but slow improvements

49

(+4)

Improving, but held back by ‘CG culture’

49

45

(-4)

Regressing, turning inward

Indonesia

37

40

(+3)

Improving, but weak political system

Philippines

41

37

(-4)

Regressing, but new government may help

Gap analysis (%): Asia vs nominal world-class Corporate Governance benchmark Pos.

Country

2010 Score

World-class benchmark 80%

1

Singapore

67

(-13)

2

Hong Kong

65

(-15)

3

Japan

57

(-23)

=4

Taiwan

55

(-25)

=4

Thailand

55

(-25)

6

Malaysia

52

(-28)

=7

India

49

(-31)

=7

China

49

(-31)

9

Korea

45

(-35)

10

Indonesia

40

(-40)

11

Philippines

37

(-43)

Market category scores (%) Pos.

Country

Total

CG rules & practices

Enforcement

Political & regulatory

IGAAP

CG culture

1 2

Singapore

67

65

60

69

88

53

Hong Kong

65

59

63

67

80

54

3

Japan

57

=4

Taiwan

55

45

53

62

75

53

50

47

56

78

46

=4

Thailand

55

56

42

6

Malaysia

52

49

38

54

73

49

60

80

32

=7

India

49

46

36

54

63

43

=7

China

49

47

36

9

Korea

45

43

28

56

75

30

44

78

33

10

Indonesia

40

39

28

33

67

32

11

Philippines

37

35

15

37

75

25

Source: Asian Corporate Governance Association

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ASIALAW Korea Annual Review 2012

market Analysis

Corporate Governance INDIA

Co-published feature

Korean corporate governance:

Recent changes

By Sang-Il Park, senior partner, and Hyung-Soo Lee, senior associate, Hwang Mok Park

O

n April 11 2011, the Republic of Korea promulgated the Amendment to the Commercial Code (the Amendment). The host of changes contained in the Amendment, which are scheduled to take effect from April 15 2012, represents by far the largest amendment to the Korean Commercial Code (KCC) since its enactment in 1962.

The Amendment purports to promote free enterprise, raise accountability and transparency in corporate governance, and encourage responsible management of companies by removing unnecessary regulations. Some of the most notable aspects of the Amendment include: (1) adoption of limited partnership and limited liability company as new business entity types; (2) revisions to directors’ duties and responsibilities in corporate governance; (3) elimination of unnecessary regulations that are divorced from existing corporate finance practices; and (4) recognition of various methods of financing. The following pages shall preview the significant amendments made to the KCC that are relevant to the corporate governance sphere.

Introduction of executive officers Under the KCC, a board of directors faces limitations in that it is required to assume both execution and supervisory functions with the undesirable effect that it is tasked with overseeing the appropriateness of its own decisions. In practice, a board would frequently focus solely on the business functions rendering its supervisory role redundant. In particular, listed companies with assets in excess of KRW2 trillion (US$1.76 billion) are required to install a board of directors whose majority is comprised of external directors.

Therefore, most listed companies are frequently allowing a representative director and non-registered executive officers to reach decisions on behalf of the company. However, there is no specific regulation that governs the actions of such executive officers. Thus, the legal character, responsibilities of these offices, as well as their relationships with a board of directors, have been the subject of much dispute – all of which the Amendment seeks to comprehensively address as follows.

Under the Amendment, a board of directors of a stock company may elect to appoint an executive officer and, as with directors, the officers’ names and identification numbers will be recorded in the court register. The term of appointment may not exceed two years unless otherwise set forth in the Articles of Incorporation (AOI). The executive officer

The Amendment purports to promote free enterprise, raise accountability and transparency in corporate governance, and encourage responsible management of companies by removing unnecessary regulations

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Lawyers at Hwang Mok Park believe in their mission to provide business-focused advice and solutions contribute to your success in Korea.

Areas that of Practice Areas of Practice Admiralty & Aviation

Media & Telecommunication

Antitrust & Fair Trade

Mergers & Acquisitions

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Dispute Resolution

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market Analysis

The Amendment has introduced a new concept of ‘misappropriation of company’s business opportunity’, which seeks to cover activities that may not have been covered previously.

will carry out his duties at the company and make decisions on issues mandated by the company’s AOI or the board of directors’ resolution. Where a company elects to appoint an executive officer, it is not able to appoint a representative director but instead a chief executive officer (CEO) who will carry out the duties expected of a representative director. The CEO will be selected by the board of directors where there are two or more executive officers.

The board will continue to be made up of directors as per existing rules and will retain supervisory authority over the executive officer.

The Amendment contains no references to the possibility of dual appointment as director and executive officer, but it may be correct to assume that dual appointment is not feasible given that the objective of the Amendment is to allow for separation of business management and supervision obligations.

The executive officer will be required to assume the same duties and obligations as directors (including fiduciary duty, duty of care, duty to not engage in competitive business, duty to not engage in self-dealings and duty of confidentiality) and is also required to compensate the company for any intentional or negligent breach of relevant regulations or the AOI. The Amendment would therefore have the effect of holding accountable the existing unregistered executive officers at listed companies to numerous duties and obligations that were previously applicable only to directors.

Prohibition of misappropriation of business opportunity by director The KCC includes a rule that prohibits a director from entering into a conflict of interest situation, such as engaging in a business that competes with the business of the company or entering into a self-dealing arrangement. However, as businesses grow, a greater opportunity for unlawful profiteering by directors has been created, and various commentators have deemed the existing rules to be insufficient in protecting companies’ interests. In response, the Amendment has introduced a new concept of ‘misappropriation of company’s business opportunity’, which seeks to cover activities that may not have been covered previously.

According to Article 397-2(1) of the Amendment, in the absence of approval by two-thirds of the board of directors, a director shall not use, to the benefit of himself or third parties, current or future business opportunities of the company (i.e., (1) business opportunities of which the director became aware in the performance of his

Corporate Governance INDIA

duties or by use of information belonging to the company; and (2) business opportunities that are closely related to the business that the company conducts or will conduct). However, it remains difficult to ascertain from the wording of the Article as to: (1) what constitutes a ‘company’s business opportunity’; and (2) in what instances a director can be seen as ‘having used the company’s business opportunity to benefit himself or third parties’. Much controversy is expected in the real world application of the rule.

As for the legal effect of the decision made by the director in breach of the business opportunity misappropriation rules, the general consensus is that it would be difficult to treat the decision as being null and void. However, any director who acted in contravention of the above rules or other directors who approved such actions will be jointly liable to compensate the company for any losses incurred (Article 392-2(2) of the Amendment). Moreover, any gains derived by a director or third parties will also be deemed to be losses incurred by the company. For the breaching director to escape from his obligation to compensate the company, he would be required to show that the gain created has no connection with the losses suffered by the company or that there was no gain derived by him or third parties.

Approval for director’s self-dealings – extension of scope The KCC prohibits transactions between the company and its directors in order to protect the company’s interests. However, the dangers associated with such transactions could also occur in the company’s transactions with major shareholders or other related parties who share common interests with the directors and/ or major shareholders.

As such, the KCC has been revised to expand the definition of prohibited self-dealings to transactions between major shareholders and the company, as well as those between related parties of directors and/ or major shareholders and the company. Under Article 398 of the Amendment, any self-dealings must receive approval of the board of directors with support from two-thirds of the board with full disclosure of important facts surrounding the transaction in question. One could question the validity of selfdealing transactions that failed to receive approval of the board, but they are considered by most commentators as being null and void toward the company.

The KCC has been revised to expand the definition of prohibited self-dealings to transactions between major shareholders and the company, as well as those between related parties of directors and/ or major shareholders and the company

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Corporate Governance

market Analysis

Additional method for resolution by board of directors

The Amendment now necessitates that listed companies of certain sizes prepare legal compliance standards and employ one or more legal compliance officers who shall oversee compliance matters

Under the rules, a board of directors meeting can only be held with telecommunication devices that allow communication through motion picture and voice, i.e., video conferencing. However, there are instances where directors may need to participate in a board meeting when they have no access to video facility, and the Amendment also allows the use of voice-only conference calls (Article 391(2) of the Amendment).

Reduced liability for directors

About the authors Sang-Il Park Senior partner Hwang Mok Park P.C. T: +82 2 772 2703 E: sipark@hmplaw.com Sang Il Park is a senior partner and managing partner at Hwang Mok Park and is known as one of the leading lawyers in Korea in the areas of M&A, capital markets and telecommunications laws. Since 1983, he has served multinational corporate clients, both overseas and Korean, on general corporate law, securities and finance, and various cross-border transactions such as the offering of securities, international joint ventures and M&As. His more noteworthy experience includes representing: The Dow Chemical Company in its acquisition of Rohm and Haas, and also in its worldwide joint venture with a Kuwait partner; Lone Star in its various acquisitions of businesses in Korea and also in a criminal case; KT in its acquisition of telecommunication companies in Uzbekistan; financial institutions in their underwriting of notes and/ or bonds issued by Korean issuers in overseas securities markets, numerous cross-border securitisations and other structured financing transactions; and, corporate clients on their operations in Korea. He sits on the boards of various school foundations, charity organisations and Korean companies. He has been engaged in ICC arbitration and Korean arbitration, both as an arbitrator and counsel for the parties.

Hyung-Soo Lee Senior associate Hwang Mok Park P.C. T: +82 2 772 2826 E: hslee94@hmplaw.com Hyung-Soo Lee is a senior associate at Hwang Mok Park in Seoul and a member of the firm’s corporate and finance division. He primarily advises multinational corporate clients, whether publicly or privately held, with respect to cross-border M&A and financial transactions, corporate governance, and other general business matters.

His experience includes the representation of a US private equity fund in its various business acquisitions, as well as the defence of criminal and civil allegations of breach of fiduciary duty, stock price manipulation and tax evasion, in connection with its acquisition of financial institutions. He also advised a global reinsurance group in respect of its refund guarantee claims exceeding US$1 billion and negotiating settlements and recoveries. He frequently assists many foreign investors in their formulation and implementation of inbound investment strategies.

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Article 400 of the KCC provides that the director’s liabilities towards the company may be exempted with the consent of all shareholders.

In the case of listed companies however, obtaining the consent of all shareholders is a practical impossibility. Recent court decisions against directors for breach of duty that led to large compensation payouts highlighted that the rules focus solely on the actions of directors, with no sufficient protection afforded to them. The general assessment has been that enforcing such strict regulations hindered directors from actively participating in the management of companies, and has been the cause of much difficulty for companies to find the right people to appoint as directors.

In addition to the existing liability exemption that is possible with all shareholders’ consent, Article 400(2) of the Amendment allows companies to provide in their AOI an exemption for amounts exceeding six times (three times for external directors) any remuneration earned by the director (including bonus and income derived from exercise of stock options, etc.) from one year prior to the unlawful act. However, no such exemption may be granted where the director: (1) caused losses for the company due to his gross negligence or willful misconduct; or (2) violated his duties to not carry on a competing business, not misappropriate business opportunities and not engage in self-dealings.

Introduction of legal compliance standards and legal compliance officer to listed companies The internal control and legal compliance standards for companies are mostly codified in a set of finance related legislation, such as the Banking Act, the Financial Investment Services and Capital Markets Act, the Insurance Business Act, among others. However, in order to further strengthen the lawful management of companies other than financial institutions, the Amendment now necessitates that listed companies of certain sizes prepare legal compliance standards and employ one or more legal compliance officers who shall oversee compliance matters. These new requirements apply to listed companies with total assets of KRW500 billion (US$440 million) or more, although their application for listed companies with assets of KRW500 million to KRW1 trillion (US$440 million to US$880 million) has been deferred until December 31 2013.

Under Article 542-13 of the Amendment, the legal compliance officer shall be appointed for a term of three years and his employment shall be resolved by the board of directors. The legal compliance officer shall be any one of the following persons: (1) a registered

market Analysis

attorney; (2) a person who has maintained the position of associate professor or higher and taught law at a school recognised under Article 2 of the Higher Education Act for five years or more; (3) any other person designated by the Presidential Decree with significant levels of legal knowledge and experience. The legal compliance officer shall ensure that the company meets the legal compliance standards, shall report his findings to the board of directors, and shall attend to his tasks as a fiduciary.

Corporate Governance INDIA

Certain areas of the Amendment still remain vague and open to various interpretations. Applying such changes in practice must be done with great care as related precedents do not yet exist

Minority shareholder ‘squeeze-out’ provisions Under Article 360-24 of the Amendment, the shareholder owning 95% or more of a company’s shares (Controlling Shareholder) has the right to squeeze out the remaining minority of shareholders by forcibly acquiring shares owned by them. However, before a squeeze-out can be carried out, the company must: (1) be able to prove that a squeeze-out is necessary to reach its operational goals; (2) have received the approval of the shareholders resolved at a shareholders’ meeting; and (3) calculate the price of the minority shares fairly. However, it remains questionable at what point under the Amendment a squeeze-out becomes ‘necessary (for the company) to reach its operational goals’. The validity of any calculation method relied on by an unlisted company to ascertain the value of its minority share needs to be scrutinised further.

In contrast, the Amendment provides a sell-out right for minority shareholders to unload their shares to the Controlling Shareholder at any time. The new addition allows minority

shareholders to maximise the disposal price. But it will likely place an extra burden on the Controlling Shareholder who would have to potentially respond to each minority shareholder’s exercise of the sell-out right.

Conclusion By addressing practical problems that persisted for a number of years, the revisions made in relation to corporate governance under the Amendment have received much praise – for the implementation of rules that accurately reflects commercial realities, as well as perceived advancement in greater accountability and transparency. However, as examined in the foregoing, certain areas of the Amendment still remain vague and open to various interpretations. Applying such changes in practice must be done with great care as related precedents do not yet exist.

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News Analysis

Photo: So Yeon Park

Dispute resolution

Go forth and multiply Korea’s dispute resolution lawyers have long profited from the ultra competitive nature of the country’s leading companies. As these companies increasingly seek growth opportunities overseas, the Korean Commercial Arbitration Board has amended its arbitration rules accordingly

I

n September 2011 the Korean Commercial Arbitration Board (KCAB) marked the seventh amendment to its arbitration rules by clearly distinguishing between ‘international arbitration’ and ‘domestic arbitration’.

The move is in line with evolving deals and trade practices around the world, as transactions become increasingly complex.

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Korean companies are more engaged in international disputes these days as they increasingly seek growth opportunities all over the globe. Some observers have put this down to an inherent competitive disposition, and recent cases in the tech space – such as the IP battles of Samsung vs Apple and LG Electronics vs Osram – do little to dispel such a theory.

News Analysis

Dispute resolution INDIA

Riding the wave of increased arbitration awareness Korean Commercial Arbitration Board international counsel Kayla Byun tells Katherine Jo about the increasing role played by the institution in resolving disputes in the region, and what its priorities are moving forward What are the key responsibilities of your role, and how does this fit in with the functions of the Korean Commercial Arbitration Board (KCAB)?

Although the KCAB has been in existence since 1966, the active use of arbitration in international transactions only began since the 1990s in Korea.

With Seoul becoming a hotspot in not only investment but also in trade and finance, the KCAB has long recognised the growing need for alternative dispute resolution (ADR) services in the Northeast Asian region – and has been seeking to promote the use of ADR, such as arbitration and mediation.

As the international counsel of KCAB, I am part of the promotion and planning team. I work to bolster the use of arbitration within Korea, as well as other ADR services provided by our institution, and to promote the use of our newly-revised international rules of arbitration. A significant portion of my duties include monitoring developments in current arbitration practice and developing marketing plans and publications on current arbitration trends. In addition to the promotional activities for the KCAB, I conduct presentations for educational purposes and plan seminars providing relevant ADR information to Korean businesses, the legal community, law schools, and any potential users of ADR. What role does the KCAB play in international commercial disputes?

In addition to arbitration, the KCAB also offers a comprehensive mediation service. This is an entirely cost-free process in which one of the KCAB’s trained mediation consultants assists parties to negotiate a settlement. More recently, the KCAB has been working to introduce a new mediation system that reflects the current trends in mediation in order to provide even more advanced and sophisticated mediation services to parties.

The new KCAB Mediation Rules were enacted on February 28 2012 and will go into effect on July 1 2012. The new Mediation Rules were designed based on the mediation rules employed by major

institutions, such as the ICC, LCIA, AAA, and UNCITRAL. With the various developments to the rules of the KCAB, we have been hosting numerous seminars and forums to provide current information to the legal community, foreign and domestic corporations, and the general public. With the assistance of our international advisory committee, which is composed of nine prominent ADR practitioners

In order to bolster the “existing roster of arbitrators, the KCAB has revised the ranges of the arbitrator’s fees

”

within Korea, the KCAB is working to provide relevant and up-to-date information and superior services to meet the ADR needs of Korean and multinational businesses in Korea and abroad.

What are some of the significant new rules of KCAB international arbitration that came into effect last year?

The KCAB arbitration rules were revised last year and they went into effect on September 1 2011.

These new rules reflect the KCAB’s continuous efforts to offer world-class dispute resolution services to allow parties to employ the new KCAB international arbitration rules in any future dispute and consider Seoul a venue for arbitral proceedings. The most distinct change in the arbitration rules is the designation of the KCAB international arbitration rules. The former arbitration rules of the KCAB were divided into the domestic arbitration rules and the international arbitration rules.

Unlike the old rules, where the domestic rules were applied by default to all arbitration proceedings, the international rules will now automatically apply

to disputes where: a party has its place of business outside of Korea; or, the place of arbitration stated in the arbitration agreement is outside of Korea, as stipulated in Article 2 of the international rules of arbitration.

The new international arbitration rules also provide for expedited procedures to facilitate speedy and cost-effective resolution for smaller claims.

Chapter VI of the new international arbitration rules state that expedited procedures may be applied where claims are smaller than KRW200 million (US$173,378) or when the parties agree. For expedited procedures, a sole arbitrator will be appointed by default, but three arbitrators may be appointed if the parties agree. Most notably, the award is to be written by the arbitrators within three months from the time the arbitral tribunal is constituted.

One of the factors that draw parties to a particular arbitral institution is the roster of proficient international and domestic arbitrators maintained by the institution. In order to bolster the existing roster of arbitrators, the KCAB has revised the ranges of the arbitrator’s fees, which were previously set at a lower standard and are now listed in Appendix 2 of the international arbitration rules.

The KCAB is currently reviewing various applications from international arbitrators who will be included in the roster.

What are some key aspects of the Korean court system that foreign companies should be aware of when engaged in disputes?

The Korean court system is known for its support of ADR, in particular arbitration. Korea was one of the first countries in the region to adopt the UNCITRAL Model Law on International Commercial Arbitration and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and is a member of ICSID. The courts will not intervene in arbitration proceedings except in instances stipulated in the Korean Arbitration Act, and the Korean courts rarely set aside a foreign arbitral award.

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Dispute resolution

News Analysis

The Arbitration Act lists some instances where the court may assist arbitration proceedings. For instance, parties may seek the court’s assistance where they challenge an expert witness or an arbitrator, or where parties cannot agree upon the appointment of the arbitrators.

In the context of litigation, it may be beneficial for foreign parties or practitioners to take note of some aspects of the Korean legal system within the context of international disputes. The Korean legal system is based on civil law traditions, mainly the German legal system, and there is more of an emphasis on the efficiency of proceedings. Therefore, discovery is much more limited than the process found in common law countries, such as the UK or US. For example, requests for documents are submitted to the court and parties generally do not submit broad document requests.

Additionally, depositions are not conducted.

Another aspect that parties may wish to consider is attorney-client privilege. In Korea, the privilege belongs to the attorney, not the client, and there is no formal recognition of the attorney work product. In this respect, it is the attorney who would refuse to provide testimony contrary to her client’s interest. And there is the potential that attorney work product may not be protected under the privilege depending on where the work product is located (i.e. the client’s office or the attorney’s office).

Language is also a significant issue as most documents will need to be translated into Korean if a dispute is brought in a Korean court. Translation and interpretation involve a significant amount of time and money, and parties need to take this into account when opting for litigation in the courts.

The use of international arbitration by Korean and international companies is increasing. How do you see this trend developing?

It would not be an exaggeration to say that Korea is dependent on trade for its economic survival, and Korean corporations have no alternative but to continue fighting in this high-stakes competition. As a result, Korean businesses have to conduct increasing numbers of international transactions, and this trend in international transactions will ultimately result in more disputes.

As already noted from the IMF crisis in the early 90s and past performances, Korean businesses are known for their strong tendency to be early adapters. It is therefore expected that these

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businesses will choose to employ arbitration as a means to resolve disputes involving international transactions.

Especially noteworthy is the fact that a generation of young Korean students who studied overseas is now returning to Korea fully equipped with proficient skills in foreign languages. It is expected that there will no longer be a language barrier among the younger generation in Korea, and that these students will most likely be interested in international work or careers in international settings. Also, with various FTAs entering into effect, Korea has seen a number of multinational law firms beginning to enter its legal market, and this trend will more likely result in a rise in the preference for arbitration rather than litigation.

Are there any other major trends or developments that you have noticed in Korean arbitration?

With various FTAs that went into effect these past few months, such as the EU-Korea FTA and the KOR-US FTA, many developments are expected to occur in international trade, inbound and outbound investments, and finance. And, as mentioned above, where international transactions become more active, inevitably, the need for effective dispute resolution also rises. Due to this increasing demand for ADR, awareness regarding arbitration and mediation has risen markedly. Last year, with ratification of the KOR-US FTA, the general population was swept up in heated debates regarding the Investor-State Dispute Settlement.

It would not be an exaggeration to state that the entire nation’s focus was on the arbitration provision, which raised much awareness regarding international arbitration. With such great interest in arbitration stirring within Korea, it is perhaps not surprising to see major law firms from all over the world turning their attention to the Korean market for significant developments.

Furthermore, last year, the city of Seoul expressed its strong interest in promoting itself as the next up-and-coming venue for arbitration proceedings when it stated that it was pursuing plans to establish an international arbitration centre in its central business district. Although the plan is still in its initial stages, it is clear that Korea is taking bold steps to provide state-ofthe-art services and facilities in a neutral location where international disputes can be resolved.

Korean companies are notorious for engaging in disputes, says Lee & Ko dispute resolution partner Sean Sung-woo Lim. “Korean companies are traditionally known to be troublemakers,” he says, “and the number of cases is increasing.”

He adds: “Korean corporations are some of the most aggressive, but it also has to do with the economy of Korea. Disputes are becoming more complex. For example, we’re handling cases in Jordan, Iran, Malaysia … all over the place.”

The country’s leading law firms are handling disputes spanning all industry sectors, and across all four corners of the world.

Bae Kim & Lee international arbitrator Kevin Kap-you Kim, who is a member of Korea’s international arbitration committee, says that due to Korea’s growth in the last decade, there are still many M&A and postM&A disputes. “These are a major source of cases,” he adds. “There are also many significant shipbuilding cases, disputes involving construction companies, and insurance companies. Investor state disputes have a big potential market in the future, and there is an

News Analysis

Dispute resolution INDIA

LG Electronics recently filed a sales injunction in South Korea against local branches of BMW and Audi

Korean related disputes at HKIAC 15

No. of cases

10

5

0

2009

2010

2011

Source: HKIAC

indication of more disputes in China-related transactions.”

The dispute resolution practice at Yulchon is also benefiting from the expansion of Korean companies outside of Korea in places such as Russia, Africa, Latin America, China and South Asia. Partner Young-seok Lee says: “International disputes are growing at a high speed. It’s obvious that there will be more to come.”

To meet these growing demands, Korea’s Supreme Court made the seventh amendment to the KCAB’s international rules last year. It called for expedited procedures, increased arbitrator fees but reduced administrative costs, and the ability of the secretariat to consult Korea’s international arbitration committee in appointing a sole arbitrator for cases involving KRW200 million (US$173,378) or less. For cases under KRW20 million, the arbitration will proceed via documentary submissions.

The international arbitration committee is composed of renowned international arbitrators, from both Korea and abroad.

The KCAB international rules are now the governing rules applicable to all international

cases unless the parties involved do not agree.

These major amendments seek to enhance the KCAB’s role as a world-class arbitrator in line with Korea’s role in the global economy. These improved and internationalised standards should encourage foreign companies engaged in disputes to submit to the KCAB for a more neutral and prompt settlement.

“stateInvestor disputes have a big potential market in the future, and there is an indication of more disputes in Chinarelated transactions

”

Kevin Kap-you Kim, Bae Kim & Lee

Leading Dispute Resolution lawyers Benjamin Hughes Shin & Kim Sin-seob Kang Shin & Kim Kap-You (Kevin) Kim Bae Kim & Lee Beomsu Kim Shin & Kim Sae Youn Kim Yulchon Young Seok Lee Yulchon Sean (Sungwoo) Lim Lee & Ko Byung Chol Yoon Kim & Chang Yong Suk Yoon Lee & Ko Source: Asialaw Leading Lawyers 2012

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Energy & Natural Resources

News Analysis

Government encouragement leads to deal momentum Korea has been pushing local companies to pursue energy prospects overseas, leading to staggering deal amounts in both value and volume. But will this meet the government’s self-sufficiency ratio targets?

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News Analysis

K

orean foreign direct investment (FDI) was at a record high in 2011, and was driven in the most part by the natural resources sector and especially by mining and development projects. As Korea has no natural resources of its own, the Korean government’s priorities in this sector are most clearly demonstrated by its strong encouragement to state owned entities such as Korean National Oil Corporation (KNOC), Korea Gas Corporation (KOGAS) and Korea Resources Corporation (KORES) to invest overseas.

Under Korean President Lee Myung Bak, these entities have established projects and opened offices in various parts of the world since the mid-2000s, acquiring and purchasing foreign companies in places such as Peru, Congo, Canada, Iraq and Myanmar.

KNOC acquired UK’s Dana Petroleum in 2010 as well as Canadian oil producer Harvest in 2009. Meanwhile, KOGAS won development contracts of the Zubair and Badrah fields in Iraq in 2009, and in 2010 was awarded the role of operator of the Akkas and Mansuriya gas fields. These were significant achievements and President Lee (who is the former CEO of Hyundai Engineering & Construction) visited Iraq himself to ensure these deals went ahead.

This was consistent with his election promises of securing resources for the country’s energy security.

Korea’s oil self sufficiency rate increased from 4.2% in 2007 to 9% in 2009 largely due to government energy policies. The Ministry of Knowledge Economy, which is responsible for energy, commerce and industry, aims to make KNOC, KOGAS and KORES globally competitive firms, and has

Energy & Natural Resources

Korean “companies try to acquire shares of operating rights of relevant natural resources, such as oil, gas, steel and coal, on account of the sheer importance of being self-sufficient in energy and resources

”

Kyu Hwa Lee, Lee & Ko

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Energy & Natural Resources

News Analysis

set an oil and gas self-sufficiency ratio target of 20% in 2012 and 30% by 2019. Some market participants have stated that, despite the wellobserved progress of the sector, doubling the nation’s daily oil and gas production will not be an easy task.

Standard Chartered Bank counsel Jay Lee notes the intense M&A activity in the energy sector, both domestically and overseas. “From 2008 up to 2011,” he says, “fifty per cent of all cross-border deals from Korea were in the resources sector, like oil and gas.”

This trend has not been limited to Korea.

Kyu Hwa Lee, head of the M&A practice at Lee & Ko, says that the trend can be witnessed all over the world. “Korean companies especially try to acquire shares of operating rights of relevant natural resources such as oil, gas, steel and coal on account of the sheer importance of being self-sufficient in energy and resources,” he adds.

Further supporting this global trend is Mergermarket’s latest year-end report, which calculates that the Asia-Pacific region’s market share of the energy, mining and utilities sector in 2011 increased 829.1% from 2010. Korea ranked fourth place, after China, Australia and Japan, in both deal value and volume.

The resources industry in Korea has seen a staggering number of cross-border deals lately.

Jipyong & Jisung M&A practice head Seong Kang says: “The government isn’t even pushing it, it’s a lot of private sector work now.”

Industry observers note that even shipping companies have geared their focus towards offshore plants, as a result of a general downturn in the ship finance market. Recent deals involve Doosan Power Systems acquiring a 99.04% stake in AE&E Lentjes, and Samsung Total Petrochemicals buying a 100% stake in West Power and West Sea Water. POSCO & STX further acquired 10% of Roy Hill iron ore mines in Australia, while KORES became the largest shareholder (50%) of Capstone and completed a joint investment of Far West, increasing Korea’s self sufficiency ratio of copper to 30%.

These transactions are consistent with the Korean government’s aim of boosting self sufficiency in other resources, including soft coal, uranium, iron ore, copper, zinc and nickel.

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State-owned enterprise KOGAS is the world’s leading importer of LNG

Korea’s future is away from oil and gas The Korean government has grasped the importance of weaning the country off its dependence on imported fossil fuels and developing LNGs, nuclear and renewable energy sources. Korean companies have the cash and research to experiment, but there will be no success without foreign help

D

espite its continuing efforts to increase its market share in the international fuel space, Korea has come to realise the need to diversify its sources of energy. Its main focus has subsequently been on LNG, nuclear power, and renewable energy.

This issue spans environmental, societal, economical and political concerns. Mandatory air quality controls and stricter emissions

standards have been enforced. The Air Quality Preservation Act bans the use of thermal power plants that use fuels other than natural gas in Seoul. And many of the country’s policies encourage the use of relatively cleaner fuels by companies, as opposed to conventional fossil fuels such as oil and gas.

The country has set certain standards and aims to expand the supply of alternative fuels

News Analysis

Energy & Natural Resources

Key Energy deals Doosan Power Systems – AE&E Lentjes GmbH LAW FIRMS

Kim & Chang Acquirer DLA Piper UK Acquirer’s German counsel McDermott Will & Emery Seller

and plenty of transactional steps have been taken in both the public and private sectors to approach these short and long-term goals.

Liquefied Natural Gas Korea is the second largest national purchaser of Liquefied Natural Gas (LNG) in the world, while its state-owned enterprise KOGAS is the world’s leading importer of LNG. Together, Japan, Korea and Taiwan account for about two thirds of the world’s LNG demand.

Despite the slump in the ship financing market, due to the cutback in European shipowners’ activities and orders, the Korean Ministry of Knowledge Economy stated there will be consistent orders for offshore plants and particularly LNG ships as there are major gas development projects underway around the world.

Korea’s largest shipbuilders are said to have strong capabilities in producing such offshore plants, and the Ministry further predicted that they will be able to maintain the top spot in the volume of new orders and share

Why: On November 24 2011, the German subsidiary of Doosan Power Systems (an indirect wholly-owned UK subsidiary of Doosan Heavy Industries & Construction) acquired a 99.04% stake in AE&E Lentjes GmbH from the insolvency administrator of AE&E Deutschland GmbH. This transaction marked the second acquisition by Doosan from the now insolvent Austrian industrial group, A-Tec Industries AG, following Doosan’s acquisition in January 2011 of AE&E Chennai Works.

When Austrian industrial group A-Tec Industries AG confronted financial difficulties in the fourth quarter of 2010, Doosan Heavy and Doosan Power Systems pursued the acquisition of some of the core subsidiaries of AE&E Group, a direct subsidiary of A-Tec. Despite such efforts, A-Tec, AE&E Group and AE&E Deutschland (the direct parent of the target company) all ended up filing for insolvency in their respective jurisdictions in late 2010, and Doosan Heavy successfully acquired AE&E Chennai Works located in India in January 2011 through a court administered auction process in Vienna. With the knowledge accumulated, this transaction marked the second acquisition of the year by Doosan of an overseas corporation in a court administered auction. Due to distinct circumstances under which the target was situated, the transaction involved extensive negotiations with the insolvency administrator of the seller in Germany, the insolvency administrator of the seller-parent in Austria, as well as the 0.96% minority German shareholder, which had certain rights in and obligations to the target. Moreover, the transaction was meaningful in that the acquirer, Doosan Power Systems, is itself a product of successful outbound acquisitions by Doosan Heavy of the former Mitsui Babcock back in 2006 and Skoda Power in 2009.

in the global demand of LNG carriers. Overseas suppliers are taking advantage of higher returns in the Asian market.

Korean LNG imports rose 43% in February to 4.7 million tonnes, from 3.3 million tonnes in the same month last year. An agreement was also signed that month with Yemen LNG and Total Gas & Power to increase the number of LNG shipments to KOGAS from 2012 to 2014, while KEPCO’s Korea Midland Power signed a deal with Swiss Vitol to buy 400,000

KNOC – Altius Holdings LAW FIRMS

Kim & Chang Acquirer Bennet Jones Acquirer’s Canadian counsel Carey Olson Acquirer’s Channel Islands counsel De Brauw Blackstone Westbroek NV Acquirer’s Dutch counsel SNR Denton Kazakhstan Limited Acquirer’s Kazakhstan counsel McDermott Will & Emergy Seller Baker & McKenzie Seller’s Swiss counsel Why: Korea National Oil Corporation, together with a local joint venture partner, acquired 100% of the shares in Canadian company Altius Holdings at the Kazakhstan Stock Exchange at the price of US$515 million. Korea National Oil Corporation and the local partner acquired 95% and 5% of the target, respectively. Altius Holding owns four oil fields in Akzhar, Besbolek, Alimbai and Karataikyz in Kazakhstan, some of which are in the production stage.

This transaction was the acquisition of a target company in a heavily-regulated industry over a stock exchange involving multiple jurisdictions. The successful closing of this transaction was the result of five law firms working together closely. Kim & Chang coordinated this year-long transaction from the very initial stage of structuring and led the entire transaction process from due diligence, documentation, negotiation and closing. The firm also assisted the client in forming a consortium with a joint venture partner to acquire the target together, and assisted the client with post-closing matters. The transaction had a complex deal structure. It was a challenge to agree upon a deal structure that was tax efficient to both parties to the point that the transaction was once put on hold. Only after a mutually acceptable deal structure was prepared did the transaction resume. Another challenge was to bridge a significant gap in valuation by the parties, which was successfully addressed.

metric tonnes a year from 2015 to 2024. This US$3.4 billion deal marks the entity’s first LNG purchase from one other than KOGAS. Qatar’s RasGas is supplying KOGAS with nine million tonnes of LNG this year, a notch up from last year’s supply of eight million tones, which met almost a third of Korea’s total LNG requirements.

Korea’s largest suppliers are Qatar, Indonesia, Oman and Malaysia, but as Indonesian and Malaysian exports have faltered,

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News Analysis

Qatar’s RasGas is supplying KOGAS with nine million tonnes of LNG this year

For sponsors “looking for investment opportunities in Korea, a growing area is in the equipment for nuclear power or other types of power

”

Yong Jae Chang, Lee & Ko

the government is prioritising the diversification of its LNG portfolio in both types and sources. It has reached recent Memorandum of Understandings (MOUs) with the Canadian Kitimat project for two million tonnes a year for the next 20 years, and with Chevron’s Australian Gorgon project for 1.5 million tonnes for 15 years. So far, the Ministry appears to be confident in its diversification of gas sources, holding stakes in South Asia, the Middle East, Australia, Africa, Russia and Canada.

Korea firmly stands to maintain its place as a global leader in LNG imports, and market observers note that the LNG market is one to watch for investors.

Nuclear and renewable energy The Korean government aims to increase the nuclear power’s share of electrical generation to 59% by 2035, from its current 31%. It has also set a target rate of renewable energy resources up to 11% by 2030, arguably a long-shot having reached a rate of only 2.61% in 2010.

However, Korea’s industrial backbone includes companies with the core ability to research and develop turbines and solar panels. China and Taiwan are the world’s leading sources of solar cells and panels, but Korea aims to rival the two in the near future.

Samsung and LG are already making their own solar panels.

Lee & Ko project finance partner Yong Jae

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Chang says: “For sponsors looking for investment opportunities in Korea, a growing area is in the equipment for nuclear power or other types of power. Korea is gaining higher status in these industries, like telecom and strategic industries. Korea is definitely in a sort of transitional period.”

Korean companies are tapping into the global renewable energy market, as indicated by the nation’s reliance on European wind turbines and foreign solar research as a foundation for their own. The Silicon Valley thin film developer Stion recently received a US$130 million equity investment from Korean companies while on the verge of insolvency. It has proposed to build a factory in Korea that involves depositing a compound of copper, indium, gallium and selenium (CIGS) on glass, as it aims to enter the solar market in Korea. In addition, Texan company HelioVolt received US$50 million from SK Group, and is also setting up a Korean factory. And French company Saint-Gobain formed a joint venture with Hyundai Heavy Industries in early 2011 to build a 100MW factory that will also produce CIGS solar panels.

Although large Korean companies have only turned their attention to the renewable energy market recently, it is an area that the Korean government has been pushing. This is especially under the presidency of Lee Myung Bak, who continues to promote ‘Green Growth’ and who welcomes foreign investment with open arms.

market Analysis

Energy & Natural Resources INDIA

Co-published feature

Introduction of RPS and phase-out of FIT in renewable energy policy

By Do-Yo Kim, partner, Jipyong Jisung

D

espite the status of non-annex I parties under the UNFCCC, Korea is the ninth largest emitter in the world and has the fastest emission growth among OECD member countries. Korea has repeatedly announced the mid-term target of emission reduction at 30% compared to the BAU (business-as-usual) of green house gases. While this target is considered to be quite challenging and ambitious given the country’s energy intensive industrial structure, the efforts to cultivate a renewable energy business have not been sufficient as Korea has placed significant importance on the large-scale development of nuclear power and LNGs to lessen its dependence on imported fossil fuels. As of 2010, renewable energy resources comprised only 2.61% of primary energy sources produced, and energy generated from renewable resources comprised 1.24% of the total energy generated in Korea. These rates are the lowest among the 34 OECD member countries, and the government aims to increase the rate of renewable energy resources by up to 11% by the year 2030.

In 2012, a dramatic change in renewable energy policy has finally been introduced after much fierce discussion. Feed-in-tariffs (FIT), which had been adopted in most European countries, were previously assessed on each renewable energy source, and the renewable energy generators were able to earn a premium in accordance with the price table promulgated by the government. This usually represents the difference between the market price of the electricity and the power production cost using renewable resources.

From 2012, Renewable Portfolio Standards (RPS) has begun to be applied to major power generators. Under the RPS scheme, a certain portion of their supply of electricity is to be generated by renewable energy. The government replaced the FIT with the RPS on the grounds that the FIT did not promote the distribution of renewable energy technology as expected, bringing about instead an unexpected and heavy financial burden. In the meantime, opponents have been concerned that such policy change would discourage investment into renewable energy, especially that involving small-scale power technology such as solar and wind energy due to uncertainty of market price and demand.

In 2012, a dramatic change in renewable energy policy has finally been introduced after much fierce discussion

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Energy & Natural Resources INDIA

Mandatory RPS requirement The RPS applies to power generators with a capacity of 500MW or more, Korea Water Resources Corporation and Korea District Heating Corporation (Target Generators) – covering 13 publiclyowned and privately-owned power generators. The RPS in Korea does not directly regulate retail suppliers but instead imposes obligations on power generators. Both publicly-owned and privatelyowned power generators are subject to the RPS. This is because only one power retail distributor exists in the Korean market and most of the big power generators are still owned by the public sector. The renewable portfolio to be supplied by Target Generators starts from 2% of all power generated (net of power from renewable resources) in 2012, increasing by 0.5% each year up to 2016. Thereafter it will rise by 1% per annum until 2022, by which time the portfolio amounts to 10%. This ratio may be subject to adjustment based on a review of technology, performance and other circumstances by the Ministry of the Knowledge Economy (MKE) every three years.

The RPS programme has the solar carve-out provisions that are designed to promote photovoltaic technology for the first five years.

Such provisions require Target Generators to supply a certain amount of energy generated from photovoltaic facilities (Solar Carve-Out RPS). The amount gradually increases for a period of five years, beginning in 2012 and ending in 2016. Furthermore, a Target Generator that has a facility with the capacity of 5GW or more is required to purchase not less than 50% of solar energy from power generators other than Target Generators that have facilities with capacities of 5GW or more. This rule aims to promote small-scale photovoltaic energy generators, which expressed great concern that the RPS would seriously undermine any incentive to invest in photovoltaic power.

The MKE is responsible for announcing the amount of energy subject to the RPS, as well as the Carve-out-RPS applicable to each Target Generator for a given year by January 31 of that year.

Target Generators are permitted to borrow up to 20% of the total amount of renewable energy they require for a given year from their renewable portfolios for the following years by submitting the reason for borrowing and quantity to be borrowed.

Creation and trading of compliance RECs The Korean RPS programme also awards the Renewable Energy Certificates (REC) to a certified eligible facility to be used to demonstrate compliance with the RPS requirement. The REC is issued by the Korean New and Renewable Energy Center (KNRE) of the Korean Energy Management Corporation, as designated by the MKE. It documents one MWh of electricity generation from an eligible renewable energy facility. A renewable energy generator intending to qualify as an eligible facility (Eligible Facility) must apply for certification by the KNRE. The KNRE insists that the generator’s renewable energy facilities conform to designated standards for any given renewable resource. Within one month from the date of application submission, the KNRE inspects, usually by an onsite visit, the facility in question to decide whether it meets certification standards. Once certified, the generator (Eligible

Target Generators are permitted to borrow up to 20% of the total amount of renewable energy they require for a given year from their renewable portfolios for the following years by submitting the reason for borrowing and quantity to be borrowed Facility) is automatically registered with the New and Renewable Energy RPS Management System (Management System), which is created and operated by the KNRE for the issuance, trading and tracking of the RECs. Only Target Generators, Eligible Facilities and qualified and approved brokers are permitted to be registered with the Management System and to participate in the trading of the RECs. Currently, however, there are no such qualified and approved brokers registered.

The RECs may be issued generally to Eligible Facilities commencing commercial operation on and after January 1 2012, and exceptionally to: (i) renewable energy power facilities passing inspection for completion and operation on and after September 17 2010, (ii) water power facilities with capacity exceeding 5,000KW, (iii) certain renewable energy facilities receiving the FIT, (iv) certain renewable energy facilities that are not supported by the FIT and that are not covered under the renewable purchase agreements scheme (RPA), which was designed as the early action RPS plan, (v) off-gas power generators that obtained permits on or before April 12 2010 and passed the inspection for completion and operation on and before December 31 2011, and (vi) renewable energy facilities certified as green buildings. Furthermore, the RECs may be issued to governmental agencies that give financial support to renewable energy generators in proportion to the support they offer. The RECs issued to the government will be used for market-making and market stabilisation, but detailed plans have not yet been finalised.

The issuance of the RECs is determined by using a weighted basis, considering the actual electricity generated from renewable sources to electricity distributors. Licensed electricity distributors are Korea Electric Power Corporation (the publicly-owned entity and holding company for six publicly-owned Target Generators and of the Korean Electric Exchange), the retailer, and Korea Power Exchange, the wholesaler. For photovoltaic energy, four weighed points (0.7, 1.0, 1.2, 1.5) are assigned. These depend on whether the facility uses existing buildings or structures, which land the facility is located,

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market Analysis

If any Target Generator fails to meet its RPS requirement, it pays the penalty equivalent to 150% of the weighted average market price for each unit of shortage

or whether the capacity exceeds 30KW. For the rest of the energy sources, five weighed points exist from 0.25 to 2.0 – the lowest of which is assigned to IGCC and off-gas, and the highest of which is assigned to offshore wind and tidal energy without embankment and fuel cells.

Only Eligible Facilities may apply for the issuance of the RECs on a monthly basis, not later than 90 days from the end of the month in which they supply the corresponding amount of electricity. However, purchasers of the RECs under the RPA scheme may directly apply for the issuance of the RPS to themselves. Within 30 days of the application, the KNRE issues the RECs after checking the record of the electricity supply. The fee for the issuance of the RECs is KRW50 per one REC. Once issued, the RECs will be effective for thee years from the issuance date.

Target Generators must submit their performance report specifying the amount of their supply, as well as the amount of borrowing, if any, and the cause of borrowing to the KNRE by the end of February each year. When Target Generators submit the RECs for compliance purposes, the RECs are ‘retired’ and the KNRE removes such REC from the Management System.

For the purpose of satisfying its Solar Carve-Out RPS, the six publicly-owned Target Generators may use the RECs issued to the special purpose company in proportion to their equity ownership.

If any Target Generator fails to meet its RPS requirement, it pays the penalty equivalent to 150% of the weighted average market price for each unit of shortage. The method for calculating the weighted average market price is dependent on various factors: renewable energy sources, market prices for the corresponding year or three consecutive years prior to the corresponding year, and generation costs.

Transfer and settlement The RECs are traded in the over-the-counter (OTC) markets, in which seller and purchaser enter into a sale and purchase agreement and report the contract to the KNRE for the transfer of the RECs. They are also traded on the spot market, where the sales are executed via auction or tendering. The spot market opens once a month, every Wednesday and every Thursday of the third week of each month, the former for the photovoltaic RECs and the latter for the rest of energy sources. This year the first spot market of the year

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opened on February 28 and 29. Only 18 RECs were traded on the photovoltaic spot market at a price of approximately US$20.5, and 1031 RECs were traded on the spot market for the rest of energy sources at an average price of about US$4.

In order to meet the requirement of the Solar Carve-Out RPS, Target Generators may request that the KNRE select photovoltaic generators for them. They then enter into contract with qualified photovoltaic generators selected via tendering procedures, and the purchaser buys the entire amount of the RECs to be issued to such selected generators for not less than 12 years.

The secondary market is not created for the RECs in Korea since regulation prohibits REC purchasers from reselling the RECs. The settlement of the price is not made within the Management System but by the contracted parties. Within five business days of rendering payment, the parties register the transaction with the Management System. The transfer of ownership for the RECs occurs by later of either the registration date of payment by the seller, or the payment date for fees to the KNRE.

Legal issues In comparison to the FIT, the RPS scheme increases the uncertainty for investment in renewable resources. The price of the RECs is hard to estimate in advance, and the financial feasibility study for the development of renewable resources is more difficult. However, a generator that can produce electricity from renewable resources with lower generation costs may encounter better market opportunities under the new RPS scheme.

The general prohibition of resale of the RECs also operates as an obstacle for investment in renewable energy. Regardless of the OTC market and spot-market transactions, purchasers cannot re-transfer the RECs. But it is unclear whether this prohibition applies to forward contracts for buying and selling the RECs that have yet to be created. For example, it is unclear whether Target Generator A that enters into a sale and purchase agreement with a company desiring to be an Eligible Facility may transfer its right to Target Generator B. It is reasonable to interpret that the prohibition of resale of the

About the author Do-Yo Kim Partner T: +82 2 6200 1714 F: +82 2 6200 0800 E: dykim@jipyong.com Do-Yo Kim is a partner at Jipyong Jisung Attorneys at Law, adviser to the Ministry of the Knowledge and Economy on climate change, and is a member of the Korean Delegate to the UNFCCC conference. She specialises in climate change law, carbon finance, energy, insurance, environment, project financing and cross-border investments.

She has been advising major credit institutions and governmental agencies. She also participated in the UN’s Climate Change Conference (COP 17 and pre-Cop) as a member of the Korean Government’s delegation.

market Analysis

RECs applies only to the issued RECs, since the current registration requirement of the REC transaction and other regulations on the REC transaction market mainly focus on the issued RECs. Whether a borrower can pledge the RECs is also in dispute. It seems that the Management System does not recognise the creation of a security interest in the RECs. If the ownership of the RECs is to be construed as a right to environmental benefits and attributes relating to renewable energy generations, such ownership of right may be pledged by notifying the obligor with a fixed date stamp and by possessing the certificates. However, the RECs are a hybrid of property and administrative certification, and it is questionable whether such hybrid form can be secured under the Civil Act of Korea. Also, it is clearly stated in the regulations that possession of the certificate alone does not represent ownership of the effective rights, and the transfer and removal of the RECs are made through the Management System by the KNRE. Furthermore, it is hard to determine whether the KNRE owes obligations to owners of the RECs for their rights, which is the case for property rights under the Civil Act. Unclear attributes of the RECs raise further issues that have no clear precedents. It is highly likely that transactions regarding the RECs are subject to Value Added Tax, since intangible property under VAT laws include any manageable natural force and rights. However,

Energy & Natural Resources INDIA

If the ownership of the RECs is to be construed as a right to environmental benefits and attributes relating to renewable energy generations, such ownership of right may be pledged by notifying the obligor with a fixed date stamp and by possessing the certificates

it is still unclear whether the RECs are regarded as underlying assets or commodities under the Financial Investment Services and Capital Markets Act (FISCMA) or under the Debtor Rehabilitation and the Bankruptcy Act (DRBA). If the RECs are regarded as underlying assets or commodities, forward contracts with the price to be determined based on the market index as well as purchasers of such forward contracts fall under the purview of FISCMA. Accordingly, such forward contracts are not subject to cancellation or termination even in the case of the seller’s bankruptcy.

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News Analysis

Keeping up to speed As new technologies emerge at an increasingly rapid rate, regulators are struggling to keep up with the pace of change. Foreign investors need to be aware of changes to the law

T

he main players in the technology media and telecommunications (TMT) sector have no choice but to deal with conflicts as they expand their businesses. Korean firms such as Samsung and LG have been globally active through partnerships, but competition has led to heated disputes.

The global patent war between Samsung and Apple includes litigation in Korea and typifies the battle for market dominance.

The rapid evolution of business models has led to complex transactions and regulators have struggled to keep up.

Jae Hoon Kim, head of intellectual property at Lee & Ko, says the various segments of the technology sector are

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converging and this has posed important questions as to which firms are best placed to take advantage of this emerging model.

“Some companies worked exclusively in the telecommunications sector building smartphones, for example, while another company would focus on TV sets. Now these companies are moving into hybrid products which blur traditional tech lines such as smart TV,” he says. “Technology is becoming centralised and increasingly consolidated on the product front. Which company will lead this role will determine the destiny of this sector,” Kim adds.

The KCC gets strict Working closely with Kim’s team is the

Technology “is becoming centralised and increasingly consolidated on the product front. Which company will lead this role will determine the destiny of this sector

”

Jae Hoon Kim, Lee & Ko

News Analysis

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News Analysis

KT-Skylife’s hybrid satellite broadcasting service and SK Telecom’s 20.01% acquisition of Hynix Semiconductor both came under close scrutiny from regulators

firm’s TMT practice headed by Kwang Bae Park, who highlights that these company trends are spilling over into the sector’s law. “Regulations are generally based on conventional business models, but many are now designed based on convergence,” he says. He emphasises that the TMT area

is highly regulated and strongly advises companies to be cautious and check whether their new business or service violates the law.

Foreign attorney Daniel Sang-Wook Han, formerly at Yulchon, remarks: “This is really a momentous industry. New companies and businesses are popping up everywhere and

An evolving role David Waters is Korea regional counsel for IBM. He explains to Katherine Jo why his legal team has more than doubled in size since 2005 and what he looks for when recruiting law firms What are the key responsibilities of your role and how does this fit in with the rest of the legal function at IBM Korea?

I manage the IBM Korea Law Department. We support IBM Korea in all aspects of the company’s operations, which have annual revenue of around US$1.3 billion. IBM Korea is a wholly owned subsidiary of IBM Corporation. Our Korean business includes hardware and software sales and IT services, and the Law Department gets involved in all aspects of the company’s business. On transactions, we get involved as early as the RFI [request for information] or RFP [request for proposal] stage,

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the speed of the tech world is just amazing.

Korean law is really trying to play a catch-up game here to meet the industry’s needs and we’ve encountered a lot of novel issues that have not been tested anywhere else in the world.”

Yulchon has represented KT in its hybrid

contract professionals. Among the seven lawyers, three are Korea-licensed and four are US-licensed.

In addition to the transaction and dispute support mentioned above, our legal team helps address issues with privacy law, Korean labour standards, global M&A/integration, procurement, advertising/ marketing, corporate governance and ethical/ business conduct.

as we seek to help our business teams with a transaction structure that is beneficial to both IBM and our clients. We are also deeply involved with the negotiation of contract terms and conditions, right up until signing. The Law Department gets involved when disputes arise as well, whether with clients, business partners, competitors or third parties. We help the company form strategies to deal with such disputes and to resolve them in an amicable manner.

To what extent do you outsource work and how do you choose a law firm?

We outsource work that we cannot handle in house.

This includes matters where a particular expertise is needed, such as litigation, certain regulatory issues and other matters. In choosing a law firm, we look for lawyers that best understand our business, are able to provide good business advice and who are responsive to our needs.

What is the size of your legal team and what are its main areas of focus?

We have a team of seven lawyers and seven

How long has IBM been in Korea and what do you feel makes the Korean market stand out?

IBM has been in Korea since 1967. The Korean

News Analysis

broadcasting service product which was launched with Skylife and combined KT’s internet phone-TV service and Skylife’s satellite broadcasting service. Various service operators complained to the Korean Communications Commission (KCC), the regulatory body governing the media and telecommunications sector, that the product violated the Acts of both sectors (Telecommunications and Broadcasting), but eventually it gained approval for serving the interest of market consumers.

“There are plenty of hybrid products to match this example, but this is such a new service. The main concern is that regulators aren’t certain as to how to treat products like this – should they apply internet law, or telecom law? Or invent a new law? There are lots of delicate issues that require attention,” says Han. Bae Kim & Lee’s Sung Ho Moon agrees: “Korean TMT laws are indeed very strict.

Foreign companies will probably need to be strategic and test the waters first upon entering the market.” He predicts an increasingly strict attitude from the KCC. In addition, the antitrust-governing Korean Fair

market is an exciting place to conduct business.

Our clients tend to be large Korean conglomerates and government entities. Korean clients demand quality products and services in a rapidly moving business environment. They seek innovative and flexible solutions from IT vendors, and IBM feels that it is prepared for this challenge. Our Smarter Planet strategy fits well into a Korean society that is constantly demanding better and more efficient solutions.

Have there been any significant recent legal developments in the Korean market?

The Korean legal market is undergoing significant changes as a result of the opening up and the expansion in number of lawyers through the introduction of a US-style law school system. A dozen or so global law firms have announced plans to open offices in Korea, which will undoubtedly impact the nature of legal services in Korea. In addition, with the first class of Korean law school students graduating and passing the bar this year,

“TMTKorean laws are indeed very strict. Foreign companies will probably need to be strategic and test the waters first upon entering the market

”

Sung Ho Moon, Bae Kim & Lee

the number of newly qualified lawyers has more than doubled as compared to a year ago. This substantial increase in the number of lawyers will also force significant changes in the legal market, if not right away, certainly within the next few to several years.

How has the role of in-house lawyers changed in Korea in recent years?

In recent years, more Korean companies have chosen to employ lawyers in-house instead of relying solely on outside counsel. This started with the major Korean conglomerates about ten years ago and it is a trend that has extended to other large and mid-size Korean companies as well. In addition, multinationals (such as IBM) have seen substantial increases in the size of their in-house legal teams. Our team has more than doubled in size from three lawyers on 2005 to seven lawyers today, a trend seen at many other multinationals in Korea as well.

While many large Korean companies first

INtellectual Property & TMT

Trade Commission is increasingly watchful of the high activity in this sector. The recent 20.01% acquisition of Hynix Semiconductor

by SK Telecom had to be carefully approved by the Korean competition authorities, which allowed for clearance in other jurisdictions including Russia, Germany, Austria and China.

The intense activity in this sector is also reflected on a global level by the diversified transactions taking place, making the legal implications more complex and boosting the level of creativity and flexible thinking required by lawyers handling such deals.

A head of legal at a multinational bank in Hong Kong, emphasises the significance of technology for the future of all businesses: the need for continuous technological developments on products, and to guide this, the relaxation of regulatory control to ease M&A transactions. It is clear that regulations from multiple angles are adapting to keep up with the rapid pace of technological advancement, and multinationals need to keep one step ahead to realise their expanding business goals.

a law firm, “we Inlookchoosing for lawyers that best understand our business, are able to provide good business advice and who are responsive to our needs

”

began to employ foreign-licensed lawyers to help with outbound transactions and disputes arising overseas, these days Korean companies are finding a greater need to employee Korean-licensed lawyers in house to handle local legal issues.

The employment of lawyers in house helps to improve standards and transparency within these companies and contributes to their long-term sustainability.

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News Analysis

Regulations place high barriers for foreign investors

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News Analysis

Already one of the most heavily regulated jurisdictions in the world, Korea’s extended privacy laws are giving multinational investors headaches. But for those that persevere the rewards are high

K

orea is recognised as one of the worldwide leaders in IT. Equipped with a firstrate telecommunications infrastructure, the country provides easily accessible and affordable technological services and products.

A large number of multinational corporations have taken advantage of this highly receptive client and consumer base to make impressive profits. But the road to success in Korea isn’t easy for foreign investors; the dynamic market is extremely well – if not too well – regulated in TMT but also in other areas as the newly enacted Personal Information Protection Act (PIPA) spans all sectors of the economy.

Red tape increases The country’s desire to be at the global forefront of IT has propelled the market to new heights. Korean consumers are some of the most responsive to the latest gadgets and services, which makes it an effective testing ground for new product releases.

David Waters, counsel at IBM Korea shares his experience: “In Korea, clients are much more sophisticated than before. When I started in IBM seven or eight years ago, customers didn’t really negotiate or understand certain legal and technical provisions but now they do, and they’re much more savvy.”

He argues that Korean consumers, who like new not old, push companies to develop new products.

However, the market (and TMT sector especially) is wrapped in red tape, which can intimidate foreign investors. Korean economists have long stressed the importance of the government creating a more foreign-friendly business environment by relaxing regulations.

Excess regulations and complex administrative

procedures are formidable barriers to entry, even for keen foreign investors.

PIPA, which took effect in September 2011, overlaps with the two main previously existing acts on data protection which encompass the financial (Credit Information Act) and telecommunications (IC Network Act) sectors and now apply to data handlers – whether it be person, company or government agency – of all sorts. It strictly and broadly restricts collection and handling of any private or personal information which by itself or combined with other information can identify an individual. It has caused Korean and multinational companies a lot of trouble, as some have not done enough to protect their consumers’ information in accordance with these tightened standards.

The Korean Communications Commission has criticised domestic online service providers (OSPs) such as Daum and Nate for this reason and has also approached multina-

our “clientsSomeandofpeers have said that Korean TMT policy is perhaps the most stringent in the world

”

Brian Tae-Hyun Chung, Kim & Chang

INtellectual Property & TMT

tionals such as Facebook, which cooperated and adopted personal information policies in line with the local standards. This was the first instance of a global online company without an actual physical presence in Korea complying with Korean law.

Google under scrutiny The Korean Communications Commission has also targeted Google, which has a poor reputation on privacy issues, although a recent investigation into the company’s Admob product has been dropped. Kim & Chang acted as Google’s defence, and foreign attorney Brian Tae-Hyun Chung explains that “Korean privacy law is extremely strict, in terms of what needs to be notified to users and customers, what kind of consent needs to be obtained and what for”. “Some of our clients and peers have said that Korean TMT policy is perhaps the most stringent in the world,” he adds.

However these policies seem to be put in place for good reason. The KCC and the police have lately been highly active in data breach cases, as several financial institutions and the servers of online service providers have been attacked by hackers. “The legal issue here basically comes down to how negligent the companies were in fulfilling legal requirements and how they could have, and should have protected their users’ information from server hacks,” Chung says. These requirements include establishing technical and managerial securities such as files, level of encryption and so on.

While there are no 100% foolproof protection measures since hackers are always one step ahead of internet security, upon investigation the authorities look at what measures the companies have actually taken. “What matters is whether these companies have done what they were supposed to on a legal standard,” says Chung PIPA however, does not create an extra barrier to entry of the Korean market. As the export-driven Korean market economy undergoes liberalisation and opens up to the world through the KOR-EU and KOR-US FTAs, it has no choice but to reach out to foreign investors.

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News Analysis

Regulators deal with battle between domestic and foreign businesses

Leading IP & TMT lawyers Tae-Yeon Cho Cho & Partners Yeon Song Kim Kim & Chang Young-Chol Kim Kim Choi & Lim Jae Hoon Kim Lee & Ko Young-Mo Kwon Lee & Ko Youngpil Lee Y P Lee Mock & Partners Young-Hill Liew Yulchon Ho-Hyun Nahm Barun Law Kwang Bae Park Lee & Ko Ik Hyun Seo Cho & Partners Manho Song You Me Patent & Law Firm Jang Won Park Kim & Partner Chun Y Yang Kim & Chang Jay Young-June Yang Kim & Chang Suk-Jae Yim Wonjon Hee Woong Yoon Yulchon

Government regulatory authorities have to strike a difficult balance when regulating a telecommunications sector that is tough for foreign businesses to enter and an internet sector that risks being dominated by non-Korean firms

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Source: Asialaw Leading Lawyers 2012

Korea’s “broadcasting regulations have been undergoing substantial changes in order to keep up with the rapidly changing industry’s technology and products

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Kum Ju Son, Yulchon

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omestic companies have traditionally dominated the telecommunications, media and broadcasting sectors in Korea, leaving surprisingly little room for foreign investors. Global entities have instead managed to carve out a market share in internet services and IT, as limited regulations allowed them to take advantage of the wellconnected Korean population.

However as these domains converge, regulatory bodies are increasingly dealing with hybrid products, especially those combining both internet and telecommunications. This creates a complicated legal environment. The government needs to strike a balance in order to suit the needs of both local and foreign players.

KOR-US FTA brings change There are several limitations on foreign companies entering the broadcasting sector today, with barely any chance of their becoming a market or industry leader.

However, with the KOR-US FTA things are likely to change over the next three years, as 49% shareholding limitations will be lifted, allowing indirect ownership and the entry of foreign entities into the market to set up wholly owned subsidiaries of Korean broadcasting companies.

Joint ventures had been the only means for foreign companies to enter the broadcasting market. “Korea’s broadcasting regulations have been undergoing substantial changes in order to keep up with the rapidly changing industry’s technology and products,” says Kum Ju Son of Yulchon. He has recently advised HBO Asia on regulatory developments in the Korean broadcasting sector as it looks to establish a presence in Korea. Yet at present it remains a difficult sector for foreign companies to break into and become a major player.

“There are currently so many legal limitations in the broadcasting and telecommunications sectors, whereas there are no major regulations or legal barriers to enter the Korean market for internet service providers and IT companies,” notes Brian Tae-Hyun Chung of Kim & Chang. As examples he cites Google, Apple, Facebook, Twitter and Amazon.

Striking a balance While IT and the internet have given foreign investors room to enjoy their presence in Korea, convergence of products spanning multiple sectors is causing problems for the authorities. For instance, new internet related services on mobile devices such as mobile voice calling over 3G and Wi-Fi have led

News Analysis

INtellectual Property & TMT

KIPO welcomes new commissioner

Despite protests the KOR-US FTA is likely to bring change to the sector over the next three years

to discussions among regulatory authorities about how to deal with these products.

“From the perspective of existing telecom companies such as KT and SK Telecom, these new services are inflicting a lot of costs on their network. The KCC and the government have been facing many issues of how to recognise the services and what they should do about sharing costs between telecom companies and these new internet-based companies such as Skype,” says Foreign attorney Daniel Sangwook Han, formerly at Yulchon. This raises further regulatory concerns. “Do we apply the regular telecommunications laws on these players, or do we need a new ground of regulation? The KCC is still planning how to address these complex issues,” he adds.

If the government treats these internet-based companies using the telecommunications law, it argues that they are the same as those under the network service and should be treated like

network companies. This would mean they must obtain consent from the KCC and abide by telecommunication law.

This would however deter foreign investment into Korea, as the telecommunications sector is already too difficult for foreign players to enter. They have found solace in the internet sector, in which it is easier and more effective for them to do business. On the other hand, giving these internet-based services the upper hand in the law would mean significant losses for the domestic telecommunication companies.

Son explains that the challenge for the KCC is to find equilibrium: “Leaning one way would repel multinational investment into the Korean TMT market but keep the local companies happy, while leaning the other way would allow for the ease of multinationals entering but harm the circumstances of the already established local telecom companies.”

President Myung-bak Lee has appointed a new Commissioner, Ho-won Kim (below), to head the Korea Intellectual Property Office. Kim’s term began on May 1 .

According to Eun Kyul Park, deputy director of the multilateral affairs division, Kim stresses the importance of intellectual property as a source of global competitiveness. He also says that one of his goals is to increase the timeliness and quality of patent examinations in South Korea.

Kim has served in high-level positions in the Prime Minister’s Office as well as the Ministry of Knowledge Economy. His previous roles in the Korean government include deputy minister for regulatory reform, standing commissioner of the Korea Trade Commission, and director general of the Industrial Technology Bureau.

Most recently, he was the deputy minister for national agenda in the Prime Minister’s Office.

Kim has a PhD in public administration from Chung-Ang University, and master’s degrees from Seoul National University and the University of California, San Diego. He received his bachelor’s degree in economics from Pusan National University.

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Co-published feature

A year of reform: Updates in IP, personal data protection and the media

By Kwang Wook Lee and Sejung Lee, Yoon & Yang LLC

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otable reforms were made in Korean laws on intellectual property (IP), information technology, telecommunication and media in 2011. First, following the Korean National Assembly’s ratification of the US-Korea Free Trade Agreement (the KORUS FTA) in 2011, a handful of important IP related laws were amended to implement the KORUS FTA. Second, the Personal Data Protection Act was enacted and took effect, which set the standard for enhanced protection of personal data, while several high profile lawsuits arising out of leakage of personal data are pending decision. Finally, in the media industries, four new comprehensive programme providers were launched in 2011, and the Korean courts issued a significant ruling that will promote fair competition in the broadcasting sector.

Amendments to IP rights laws Various IP related laws have been amended to implement the KORUS FTA, of which the Copyright Act and the Patent Act saw remarkable changes. Most of the amended provisions will be enforced when the KORUS FTA and Exchange of Letters on KORUS FTA go into effect.

Copyright Act amendments The amended Copyright Act construes temporary storage of copyrighted materials in digital form as reproduction. Under the amended law, Korean legal authorities are expected to enhance the level of surveillance – in the past it appeared that such authorities were reluctant to enforce the provisions of the Copyright Act against those individuals who temporarily downloaded unlicensed copyright works from the internet.

Furthermore, the amended law has expanded the scope of the publication right for published works to encompass all copyrighted works, including e-books. The holder of the exclusive publication right has the right to use the copyrighted works, by way of publishing, reproducing and transmitting, to the extent permitted by the grant. This

Various IP related laws have been amended to implement the KORUS FTA, of which the Copyright Act and the Patent Act saw remarkable changes

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market Analysis

The Personal Data Protection Act (the PDPA) was enacted to protect the privacy of citizens and ensure citizens’ rights to and interests in their personal data

exclusive right is a usufructuary right as opposed to simple permission to use. Therefore, for instance, an exclusive licensee of a foreign licensor may readily claim for injunction and damages against copyright infringers to enforce its rights permitted by the grant. Moreover, if a publisher would extend the scope of its licence to electronic transmissions such as e-books, such publisher could henceforth have a right to electronically transmit any copyrighted work.

A copyright holder may make a claim for statutory damages up to KRW10 million (KRW50 million (US$44,000) in case of intentional infringement for profit) for each infringed copyrighted work. The law has been revised to provide the copyright holder with an option to choose either the actual amount of damages or the statutory amount of damages. The perceived advantage gained by a copyright holder as a result of this amendment (i.e., the ability to opt for the maximum amount of statutory damages) may not be so significant when considering that, previously, the court could use its discretion to grant a large damage award based on the pleadings and evidence presented, even when the exact amount of damages were not proven. Nevertheless, this amendment seems favourable for the copyright owner in cases where it is difficult to compute the actual amount of damages.

The amended law further narrows the scope of the OSP (Online Service Provider) exemptions. In some instances, the OSPs could be free from infringement liability only when they adopt and exercise a policy of terminating repeat infringers’ accounts, and allow copyright holders to voluntarily implement standard technical measures to screen the infringing contents.

In addition, the protection period for neighbouring rights except in the case of broadcasting has been extended to 70 years from 50 years. The amendment provides increased protection for performers and phonogram producers, and is expected to promote creative works and their distribution channels.

Patent Act amendments A provision stipulating that a treaty will prevail over a domestic law has been deleted in the amended Patent Act. This is consistent with the constitutional principle that an international treaty ratified by the National Assembly will have equal legal effect as domestic laws.

The amended law extends the period in which an invention can be patented, even after its disclosure in public, to a period of 12 months after disclosure. Before the amendment, in the event a patentable invention was publicly disclosed by the inventor, such invention

Intellectual PropertyINDIA & TMT

could be patented only if it was filed within six months after such disclosure. Moreover, the amended law provides that if a patent right has been belatedly registered due to reasons not attributable to the patent applicant, the term of such patent right will be extended by the period of such delay (such as delays in the patent examination and rejection process) to the extent such delay is not attributable to the applicant.

Additionally, the cancellation of a patent right due to non-exercise for a certain period was lifted under the amended law. Since many patents are not intended for exercise (e.g., when the primary purpose of the patent is for defence against a competitor’s patent), the amendment will likely strengthen the current patent holder’s position.

Further, the amendment introduced the court’s power to issue, in response to a party’s showing of trade secrets, an order to keep trade secrets confidential when such trade secrets are disclosed in connection with patent infringement lawsuits.

Protection of personal data Enactment of the Personal Data Protection Act There has been a steady increase in the number of cases where personal data has been wrongfully disclosed, misused or misappropriated. This has called for the need to establish standards for processing of personal data as well as measures to provide relief in cases where a breach of personal data has caused damages. The Personal Data Protection Act (the PDPA) was enacted to protect the privacy of citizens and ensure citizens’ rights to and interests in their personal data.

Previously, the Korean government enforced personal data protection mainly under the Act on Protection of Personal Information by Public Institutions, the Use and Protection of Credit Information Act, or the Act on Facilitation of Use of Information and Communications Network and Information Protection. Applicability of the standards and principles relating to the processing and use of personal data under these acts was limited to public entities or specific business sectors, such as internet service providers or credit information companies. The PDPA proposes comprehensive data protection principles applicable to public entities, businesses, organisations and individuals handling personal data in their databases.

The PDPA requires companies to obtain approval of the information holder when they collect, use or disclose personal data, and imposes a requirement to promptly dispose of personal data when they are no longer necessary. In addition, the PDPA prohibits collection and use of government-issued unique identifiers of individuals (such as the Resident Registration Number), which would discourage the widespread practice of collecting the Resident Registration Number.

Regarding the protection of personal data of children under the age of 14, the prior consent of a legal guardian is required before collecting, using or re-sharing such personal data. Regarding the protection of juveniles, telecommunications operators are required to appoint a person in charge of juvenile matters. They must immediately remove from their communications network any improper media that does not comply with the indication requirements, or

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Intellectual Property & TMT

market Analysis

improper advertisements that do not have appropriate measures in place to prevent access by juveniles.

Furthermore, the amendment adopted a collective dispute mediation system in consideration of the fact that personal data breaches frequently involve a large number of people with small amounts of damages. Similarly, in an attempt to minimise the social costs of litigating the same or similar personal data cases, a class action system for personal data suits has been adopted.

About the authors Kwang Wook Lee Yoon & Yang LLC 34th floor, ASEM Tower, 159 Samsung-Dong, Gangnam-Gu, Seoul 135-798, Korea T: +82 2 6003 7535 F: +82 2 6003 7034 E: kwlee@yoonyang.com W: www.yoonyang.com / www.hwawoo.com Kwang Wook Lee is a partner at Yoon & Yang LLC. His main areas of practice include antitrust law, telecommunications and energy, broadcasting and privacy law. Lee represents a broad range of companies in the telecommunications and media sectors, specialising in telecommunications and broadcasting regulations, licensing and establishing new business operations in Korea. In addition, he has extensive experience in providing legal advice concerning issues arising from operation of an internet business, including issues regarding e-commerce and the protection of personal information.

He received his LL.B from Seoul National University in 1995, his MBA from Ajou University Graduate School of Business Administration, MBA in 2002 and his LL.M. from University of Pennsylvania in 2007. He is a member of the Korean Bar.

Sejung Lee Yoon & Yang LLC 34th floor, ASEM Tower, 159 Samsung-Dong, Gangnam-Gu, Seoul 135-798, Korea T: +82 2 6003 7079 F: +82 2 6003 7031 E: sejunglee@yoonyang.com W: www.yoonyang.com / www.hwawoo.com Sejung Lee works in the IP and antitrust practice groups at Yoon & Yang LLC. Her practice focuses on copyrights, patents, trade secrets, trade marks, abuse of market dominance and fair trade. In particular, she has handled various new IP and antitrust issues arising from the development of information technology (IT), such as copyright infringement by internet service providers and cable television system operators, and abuse of dominance and unfair trade by a multinational company that holds patents on standard technologies for mobile communications. Besides, she has advised many leading multinational and domestic companies in matters arising in the IT, telecommunications, media and pharmaceutical industries.

She received her LL.B and LL.M degrees from Seoul National University, College of Law in 2000 and 2005 respectively, and graduated from the Judicial Training and Research Institute under the Supreme Court of Korea in 2007. She is a member of the Korean Bar.

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Key cases on personal information protection Collection of location information by Apple and Google In August 2011, the Korea Communications Commission (the KCC) determined that Apple Korea and Google Korea violated the Act on the Protection and Use of Location Information by saving users’ location information without encrypting the information on their mobile phones, and ordered Apple Korea and Google Korea to correct such violations.

Subsequently, 30,000 Apple iPhone users commenced a class action seeking compensation for damages against Apple Korea.

Another lawsuit for compensation for damages was commenced by a user of Apple’s iPad arguing that such user suffered emotional distress due to unauthorised collection of location information. These lawsuits are in their early stages and it will take time before the courts of first impression render their decisions.

Lawsuits for damages incurred by leakage of personal data In a case where SK Broadband provided its subscribers’ personal data to telemarketers without obtaining the subscribers’ consent, the Seoul Central District Court held that SK Broadband breached the subscribers’ constitutional right to make decisions regarding their own personal data. It ordered SK Broadband to compensate each subscriber approximately KRW100,000 to KRW200,000 (US$88 to US$175). This case is currently under appeal at the Seoul High Court.

Meanwhile, in another case where the personal data of GS Caltex’s members was leaked by an employee of GS Caltex, the Seoul High Court held that the “breach of one’s constitutional right to make decisions on one’s own personal data does not in itself establish the occurrence of emotional distress”. In light of the fact that GS Caltex immediately recalled the leaked information and actual damages to its members were effectively prevented, the court held that GS Caltex’s did not have the obligation to compensate damages. The GS Caltex case is currently under appeal at the Supreme Court.

Media industries Brief overview of media industries in Korea The KCC oversees the Korean media and telecommunications markets by making legislative proposals, establishing and enforcing policies, and making quasi-judicial decisions for disputes or objections. In particular, the KCC has the authority to approve applications for issuance or renewal of business permits of broadcasting operators and telecommunications service providers.

In Korea, foreign nationals, governments or organisations are not allowed to operate a cable relay broadcasting business or a cable music broadcasting business. Terrestrial broadcasters are prohibited from receiving investment or contribution from a foreign national, government or organisation, entities in which a foreign national, government or organisation owns more than a 50% stake, or entities in which a foreign national, government or organisation is the largest investor.

Digital broadcasts are currently distributed through paid media

market Analysis

services, including cable, satellite and IPTV. With the advent of digital transmission, new media platforms such as IPTV and DMB (digital multimedia broadcasting) emerged, increasing the number of channels. At the end of 2011, four additional comprehensive programme providers commenced their broadcasting service, which will intensify competition in the broadcasting content market and the media platform market.

Intellectual PropertyINDIA & TMT

It appears that the court has set the stage for fair competition in the paid media market and grounds for development of better content

Key case in the media industries Major terrestrial broadcasters’ case The case involves a dispute between terrestrial broadcasters and cable television system operators (SO(s)) over the free retransmission of digital terrestrial broadcasting. This is an increasingly important issue, considering the upcoming full-scale switchover of analogue broadcasting to digital broadcasting by terrestrial broadcasters in Korea.

Ever since cable television SOs started providing cable television services in Korea, they have been retransmitting all programmes owned by terrestrial channels without providing any payment to the relevant terrestrial broadcasters. This includes those channels subject to mandatory retransmission under the Broadcasting Act. Therefore, three terrestrial broadcasters filed a preliminary injunction seeking suspension and prevention of infringement against CJ HelloVision, a major cable television SO. They also filed a lawsuit seeking enjoinment and prevention of infringement against five major cable television SOs. The complaint alleged that such retransmission, excluding retransmissions mandated under the

Broadcasting Act, infringed the terrestrial broadcasters’ copyright and neighbouring rights.

The court affirmed the request of the three terrestrial broadcasters on the grounds that the simultaneous retransmission of digital terrestrial broadcasting by CJ HelloVision and other SOs infringed the neighbouring rights (retransmission right) as well as copyright of the three terrestrial broadcasters.

Meanwhile, other operators of paid media, such as operators of IPTV or satellite broadcasting, have been retransmitting the same programmes owned by terrestrial broadcasters while paying the appropriate retransmission fees. Since the cable television SOs saved considerable costs of retransmission fees, the court may have had an impression that they have enjoyed an unfair competitive advantage in the paid media market. It appears that the court has set the stage for fair competition in the paid media market and grounds for development of better content by affirming compensation for content provided by terrestrial broadcasters.

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Labour & Employment

News Analysis

Korea’s trade union troubles Multiple trade unions can now exist within a single company.

The move was designed to give employees more choice, but businesses leader have their doubts about how the system will work in practice

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orea is notorious for its labour union activity. It became deeply embedded in the culture and contemporary history as an active workforce and civil society propelled the nation towards democracy in the 1980s.

Workers have traditionally found themselves struggling as a result of malpractice at the top level but this has also always presented a problem for management of large businesses.

Labour laws were always a politically sensitive issue and maintaining a fine balance to suit the needs of both employer and employee has proven difficult. The recent amendment to the Labour Relations Act allowing plural trade unions was designed to be a proactive regulatory step towards this. However many are challenging the goals and efficacy of this system.

In Korea it is understood that trade unions will not disappear as they are fundamentally rooted in the nation’s identity. Paul Cho, co-chair of Kim & Chang’s labor and employment practice group explains: “Since it’s only been 25 years that Korea has had a non-military government and considering that there were two economic crises during this time period, it should not be a total surprise why unions have been active, particularly over issues such as job security.”

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Cho senses a change in the air as “the unions have been heading in the direction of industry unions and industry-based bargaining, like in Europe, where they work with management in a form of business partnership. We see that as one of the outcomes but for the time being they remain active, which is also due to the fact that there are some historical and cultural roots to the union movement.”

Although the courts have tried to be fair in upholding the interests of employers and employees, there have been some controversies. It is natural for the labour clauses in the law to reflect the interests of the workforce, but “the current government pushes market and business-friendly policies, strong policies that are against labour unions,” says Young Seok-ki of Shin & Kim.

A controversial reform As of July 1 2011, an amendment to the Trade Union and Labour Relations Adjustment Act enables multiple trade unions to be established within a company.

A single bargaining channel is also necessary to enhance communication and negotiation between the multiple unions and management. This revision was in response to criticism that allowing only a single union to exist in such large companies

“are Iffivethereunions in a single company does that mean the management has to deal with five different unions and five different strikes?

”

Chun Wook Hyun, Kim & Chang

News Analysis

Labour & Employment

Moving beyond confrontation David Yu, general counsel of Diageo in South Korea, talks to Katherine Jo about how his company has managed to avoid conflict with the country’s famously strong unions and the challenges posed by new regulations What are the key responsibilities of your role at Diageo North Asia?

Diageo North Asia is composed of two very important markets for Diageo; Korea and Japan.

As a member of the Diageo North Asia Executive Committee, I am responsible for proactive strategic, commercial and legal input. I provide a high level of commercial input and overall project management in relation to the other functions and external advisers.

What is the size of your legal team and what are your main areas of focus?

I work with a team of four professionals. I rely on my team to manage day to day legal issues covering the whole spectrum of the business including supply, distribution, agency, marketing, employment matters and compliance.

I’m currently spending most of my time on tax litigations and M&A projects.

To what extent do you outsource work and to which law firms?

We work very closely with Bae, Kim & Lee, Kim & Chang and Yulchon. These are all well respected law firms in Korea, but we value the capabilities of individual attorneys rather than purely relying on the firm’s reputation. The quality of attorney work product varies widely even within the same law firm and we have created a list of preferred attorneys for each practice area rather than have a go-to law firm for all matters. This has an advantage and disadvantage which is always a challenge to manage.

What are your thoughts on the dynamic between the values of a multinational company and those of its local employees?

The values of a multinational company should be simple and inspiring to its local employees so that they can be universally applicable to the local employees. The challenge is incorporating the local culture into the global values.

Unfortunately, sometimes local cultures conflict with our global values and we have to diligently explain and help our employees understand that there are further responsibilities for being a part of a multinational company.

What have been some of the concerns regarding labour and employment law and regulations, and how have authorities strengthened or relaxed such controls in relation to foreign companies?

There is no separate labour law standard for foreign companies and we have not seen any discrimination towards foreign companies by the Korea authorities on labour law issues. Labour rights are set forth in the Constitution of Korea and in more than two dozen individual labour laws. Most laws have separate enforcement decrees, which are presidential decrees providing concrete details on the implementation of the relevant laws.

These laws and regulations are administered by three sets of highly credible institutions: The Ministry of Employment and Labour which is the principal governmental labour authority in Korea responsible for enforcing labour laws and for developing and implementing policies; Labour Relations Commissions which serve as the principal entities for adjudication and mediation; and the Economic and Social Development Commission, which serves as a consultative and cooperative mechanism.

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News Analysis

Korean labour union activity is one of the strongest in the world. To what extent does this affect your work?

The Korean labour unions are infamous for their militant tactics.

Fortunately, our company has avoided this kind of conflict with the labour union in the last decade. We maintain proactive labour relations by consulting with employees as required by law, recognise and take firm action against unlawful labour actions and prepare for and adapt to new labour law amendments well in advance.

Obviously, the biggest “concern for employers is that union pluralism will make it difficult to conduct collective bargaining

”

The Trade Union and Labour Relations Adjustment Act was amended to allow multiple trade unions to exist within a single company and establish a bargaining channel to engage in collective bargaining with the employer. What are some advantages and disadvantages of this system (based on your experience)?

The Act was amended on July 1 2011 to allow multiple unions in a single work place. Obviously, the biggest concern for employers is that union pluralism will make it difficult to conduct collective bargaining. Although the Act requires the unions to appoint one union to act as a single bargaining counterparty, this could cause further complications and delays in the collective bargaining process.

The intended advantage of this system would be that employees have a freedom of association which allows employees to choose the union that is in line with each employee’s goals and

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ideals. However, Korean labour unions are dominated by two very large umbrella organisations which have, in my opinion, indistinguishable agendas and policies.

Are there any other important recent developments in Korean employment laws that you have had to work with?

The at-will termination of employees does not exist in Korea. In order to dismiss an employee, the employer must have what is called a “just cause” which is an extremely difficult standard to satisfy under the labour laws. This forces companies to avoid making an immediate and long-term commitment to an employee by hiring non-regular employees. Non-regular employees refer to fixed-term, part-time and dispatched employees who are provided by third party agencies.

In recent years, Korean courts have ruled in favour of non-regular employees in some cases, including a landmark Supreme Court ruling in 2010. The Supreme Court decision allowed, under certain circumstances, an employee of a subcontractor to successfully claim that the individual is a regular employee of the client company. This ruling is forcing many companies to reevaluate their employment practices.

What are the remaining challenges in the Korean labour market?

Korea is a dynamic place full of opportunities.

In recent years, Korea has undertaken reforms to improve its labour laws and practices in line with internationally accepted standards.

However, the labour market still faces several major challenges as it seeks to consolidate the recovery and the social sustainability of its development process. The first step is to create a less confrontational and more consensual system between employer and employees. Unfortunately, past confrontational attitudes between the parties have resurfaced, driven by umbrella labour unions. The result is that consensus on wage moderation and reforms of workforce practices are becoming increasingly difficult to achieve.

limited the workers’ constitutional rights to association.

The existence of more than one union appears to pose other problems. “Now as few as two people can form a second union,” says Chun Wook Hyun, partner at Kim & Chang.

“If there are five unions in a single company does that mean the management has to deal with five different unions and five different strikes?” Power issues among unions will increase, as while a single bargaining channel aims to reduce bargaining costs, only the top union may have full power. “If the number one union is a very militant one, management will be tempted to create a second union that is friendlier and easier to negotiate with.

However, they should be very careful as this could be an unfair labour practice.”

Ki notes that a significant portion of the workforce has raised this issue as minority trade unions will have difficulty engaging in

News Analysis

Labour & Employment INDIA

New pension plan rules to come into effect

Photo: So Yeon Park

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negotiations. Certain procedures and requirements were set to select the bargaining channel to promote equality and efficiency.

Foreign investors are likely to spend more time dealing with trade union issues.

“Many issues will arise with M&A and there are not many answers to refer to. Multiple trade unions mean more issues to address and less room to reach agreements between employer and employee.” However, Sangwook Cho, a partner of Yulchon, argues that foreign employers are not at a disadvantage, although employees’ expectations tend to be higher when they work for foreign companies. Grasping fundamental differences is also vital for maintaining a good dynamic between foreign management and the domestic workforce. “Usually foreign companies lack some understanding in Korean culture, which leads to disputes. I have seen some cases due to this discrepancy in culture,” he says.

Leading Labour and Employment lawyers Weon Jung Kim Kim & Chang Hyun Soo Kwak Lee & Ko Jeong Han Lee Bae Kim & Lee Sang Hoon Lee Lee & Ko Il Bong Moon Yulchon Sang Hoon Park Yoon & Yang Zoltan Simon IPG Legal

he retirement pension plan in Korea became available in 2005 when the Employee Retirement Benefit Security Act (ERBSA) came into force. In the beginning it was not compulsory to adopt a retirement pension plan but it could be determined with agreement between the employer and the worker. The worker was free to choose a plan from among defined benefit (DB) plans under which the level of a worker’s benefits is predetermined, or defined contribution (DC) plans under which the level of an employer’s contribution is specified, and the worker retains the right to decide how the contribution should be managed.

In 2011, the ERBSA was amended extensively to strengthen and offer a greater range of rights to workers and to allow for a more secure retirement. Once the amended Act becomes effective on July 26 this year, the volume of total pensions is expected to expand.

Any new business established after the new Act enters into force will be required to select its preferred pension plan within one year of incorporation. It is possible to implement a system which combines different attributes from defined benefit and defined contribution, allowing workers a wider choice.

Workers registered to retirement pension plans such as small business owners will now also be able to select an individual retirement pension plan so that contributions can be made independently.

Notifications must made by retirement pension trustees to users to inform them whether their annual contribution requirement has been met, to ensure there are no shortfalls.

Source: Asialaw Leading Lawyers 2012

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Co-published feature

New era of union pluralism in Korea

By Young-Seok Ki, partner, Shin & Kim

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he Constitution of the Republic of Korea provides that, as fundamental rights of the people, workers have the right to independent association, to collective bargaining, and to collective action. It is doubtless that, in the words of UN agency the International Labour Organization, “the right of workers and employers to form and join organizations of their own choosing is an integral part of a free and open society”.

Labor unions have been created in various forms in Korea. The Federation of Korean Trade Unions (FKTU) was first established as a nationwide union in 1946 under the name of the ‘Korean Labor Federation for Independence Promotion’. As of 2010, 2,292 trade unions with 728,649 members were affiliated with the FKTU. The second largest national trade federation next to the FKTU is the Korea Confederation of Trade Unions (KCTU), which was founded in December 1995. As of 2010, 432 trade unions with 580,064 members were affiliated with the KCTU. The Korean Labor Unions Confederation was most recently established in 2011 as a new national-level federation of trade unions, focusing more on the protection of the rights of workers and promoting workers’ welfare. On the other hand, many industry-based or regional unions were also established throughout the years, including the Korean Construction Industry Union, the Korean Financial Industry Union, the Korean Metal Workers Union and the Korean Public & Social Services and Transportation Workers Union.

In the past, Korean laws allowed only one enterprise-level trade union per company in general. If a trade union limited to company employees was already established, employees were prohibited from establishing another trade union whose membership is limited to the same category of employees in the same company. Critics argued that such single union system excessively restricted the employees’ constitutional right to association. In response, the Trade Union and Labor Relations Adjustment Act (TULRAA) was amended in 2010 and allowed multiple unions from July 1 2011. TULRAA stipulates that workers can freely establish one or more trade unions in a business, and join trade unions of their own choosing. Thus, the workers’ freedom to establish and choose a trade union at the enterprise level was guaranteed with the amendment.

The amended TULRAA mandates that if multiple trade unions are established in a company, the labour unions are required to select one representative bargaining union to engage in collective bargaining with the employer. The purpose of mandating a single bargaining channel is to reduce the burden of an employer to negotiate with each union separately, to secure the integrity of working conditions for union members,

TULRAA stipulates that workers can freely establish one or more trade unions in a business, and join trade unions of their own choosing

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Your Partner for Success Investing and doing business in Korea involves a myriad of issues relating to Korean laws, regulations, filings, governmental approvals, deal structure, risk analysis, tax benefits and consequences, corporate governance, enforceability, indemnification, and exit strategy. The professionals of Shin & Kim have the experience to sort through the various issues to effectively guide and advise our clients to make prudent decisions.

Founded in 1981, Shin & Kim has become one of Korea’s largest law firms with over 300 professionals and a support staff exceeding 250 members. Shin & Kim is also the recipient of various accolades and recognition for its legal services.

When venturing into new territories, a trusted partner is your best asset. Fortune 100 companies, Korean conglomerates and numerous other international and domestic clients place their trust in Shin & Kim. We invite you to learn more about our firm and our professionals: www.shinkim.com

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Seoul Office 8th Floor, State Tower Namsan, 100 Toegye-ro, Jung-gu, Seoul 100-052, Korea . Tel: +82 2 316 4114 . shinkim@shinkim.com . www.shinkim.com Beijing Office Tel: +86 10 8447 5343 . E-mail: china@shinkim.com Shanghai Office Tel: +86 21 6235 0411 . E-mail: china@shinkim.com Munich Office Tel: +49 89 24 21 85 27 . E-mail: ason@shinkim.com

market Analysis

and to preclude excessive competition between the labour unions.

Bargaining channels are required to be unified regardless of the type of organisation of the unions or whether the members of the unions overlap. Therefore, industrial unions and local unions are also subject to the unification of bargaining channels in a single company if another union, industrial level or enterprise-level, is established in the company. The unification of bargaining channels will lead to a so-called “one-enterprise, one-bargaining system”.

The process to determine the representative bargaining union is as follows: First Step: Unions select a representative bargaining union among themselves within a certain period of time.

Second Step: If the trade unions fail to determine the representative union among themselves within such time, the trade union comprised of a majority of all involved trade union members becomes the representative bargaining union.

Third Step: If there is no trade union comprised of a majority, trade unions participating in the process of unifying the bargaining channel can create a joint bargaining team to serve as the bargaining representative by agreement among themselves. If the participating trade unions fail to reach an agreement on the formation of a joint bargaining team, the Labor Relations Commission may organise a joint bargaining team by considering the percentage of union members participating in the unifying process, at the request of the involved trade union. In this case, only trade unions with at least 10% of the total members of trade unions participating in the unifying process are eligible for a seat in the joint bargaining team. Nevertheless, a union with membership of less than 10% of the total is subject to the collective agreement executed by the joint bargaining team.

Industrial action is led by the representative bargaining union upon the majority vote of all members of trade unions that participated

About the author Young-Seok Ki Partner T: +82 2 316 4021 E: ysgi@shinkim.com Young-Seok Ki is a partner at Shin & Kim. He has been admitted to the Korean Bar Association since 2001 and received an LL.M. degree from the University of Washington, School of Law. He worked as a foreign associate in the Ho Chi Minh City office of Allens Arthur Robinson (2008). Ki is head of the firm’s labour practice group and engaged in all aspects of labour and employment-related matters including litigation (for example, dismissals, employment contracts, handbooks, severance pay, incentive plans, industrial relations, layoffs and workforce restructuring).

Labour & Employment INDIA

By allowing multiple unions at the enterprise level, workers are expected to have more freedom to establish and choose trade unions, and competition among trade unions will be promoted

in the bargaining channel unification process. A single trade union cannot independently carry out an industrial action by its own vote.

The representative bargaining union has the power of attorney for all participating trade unions and their members and bears the duty of fair representation. Restated, the representative bargaining union should fairly and impartially engage in collective bargaining and execute a collective agreement. Unreasonable discrimination in handling grievances of trade unions or carrying out union activities would be a violation of the duty of fair representation. If the duty of fair representation is breached, the affected trade union is entitled to seek remedy through the Labor Relations Commission.

There are a few exceptions to the mandatory unification of bargaining channels. If the employer gives consent to individual bargaining in accordance with the TULRAA, the bargaining channels are not required to be unified. Each union can individually bargain with the employer without selecting a representative bargaining union. Furthermore, if bargaining units are separated by the decision of the Labor Relations Commission at the request of a concerned trade union or the employer, one representative bargaining union will be selected in each bargaining unit respectively. The Labor Relations Commission will take into consideration various facts, including material disparity in working conditions, employment status and bargaining practices.

Workers are still concerned that minority unions will not be fairly represented in the bargaining process under the mandated unification of bargaining channels even if multiple unions are permitted. In addition, if a labour union is established or becomes a majority union after the representative bargaining union is determined, the labour union cannot engage in collective bargaining with the employer for a certain period because the existing representative bargaining union’s exclusive right to collective bargaining is secured for two years.

According to ‘Industrial Relations Outlook Survey for 2011’, which was conducted on 230 companies by the Korea Employers Federation, 51% of companies expected the establishment of new trade unions after the multiple union system came into effect. It is reported that 676 new unions were established during the period from July 1 2011 to January 31 2012. By allowing multiple unions at the enterprise level, workers are expected to have more freedom to establish and choose trade unions, and competition among trade unions will be promoted.

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Mergers & Acquisitions

news Analysis

KCC amendments call for diversification and flexibility The M&A market in Korea has made an impressive recovery during the global downturn. Extensive revisions to the Korean Commercial Code should facilitate innovation and further boost growth

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News Analysis

Mergers & Acquisitions

Thinking creatively Peter Kang, division director at Macquarie Securities Korea, explains how the latest round of regulatory amendments have affected his role and explains what new deal structures may become possible What are the key responsibilities of your role at Macquarie Securities Korea Limited (MSKL)?

My role as in-house legal counsel is to assist the businesses to manage legal risk by providing strategic advice and a framework for assessing legal risk. As part of Group Legal, we work closely with other control functions such as compliance with a view to ensuring effective control of the legal and compliance risk in Macquarie’s overall operational risk framework.

K

orean M&A activity has been tremendously high in recent years, especially offshore. The bulk of outbound transactions have been related to the need to secure ownership of energy and natural resources, but the number of deals outside these sectors has also been high. A large number of not only conglomerate-level but also small and medium-sized deals are also regularly occurring, and the rapidly-evolving technology sector is developing innovative transactions. Various amendments to the Korean Commercial Code (KCC) made effective in April 2012 are designed to facilitate the growing diversity of the M&A market.

Korean businesses go outbound The outburst of Korean companies engaging in M&A deals worldwide has ocurred despite what the rest of the international community is going through. “Korean companies are trying to enlarge their operations out of

How big is your legal team and what are your main areas of focus?

There are four lawyers in total within Macquarie in Korea. Two of us work in Macquarie Securities covering the derivatives, cash equities and investment banking businesses of MSKL. As an overseas qualified lawyer, the challenge is bridging the differences in approach between Common Law principles and Korean law.

What key business trends in Korea over the last year were of most interest to you?

The various recent amendments to the laws governing South Korea’s equity-linked warrants market are notable. The latest round of amendments to regulations, the third in little over a year, constrains liquidity providers from providing natural pricing and competitive bid-offer spreads to retail investors. In other well-established foreign jurisdictions such as Hong Kong, liquidity providers are mandated to provide deep liquidity and competitive pricing to protect investors. Arguably, this demonstrates that regulatory risk should be considered by foreign investors in South Korea as there may be circumstances where assumptions on long term business conditions are not sustained.

Does the increased merger control scrutiny by the Korea Fair Trade Commission (KFTC) potentially affect M&A transactions? If so, how?

When reviewing whether to approve a merger or acquisition, the KFTC implements a full review of the potential anti-competitive effects of the

merger in circumstances where the acquiring company will have control over the target company. Previously the standard for determining control was a controlling stake of the target company. This has now been broadened to include actual influence over the management of the target company, such as the power to appoint board members or veto powers. A major factor in assessing potential mergers will be what constitutes sufficient influence under the KFTC standards. Theoretically, this assessment will have to occur early in the transaction process as the level of scrutiny of the KFTC review will have an impact on the timing and structure of a proposed merger.

How do the amendments to the Korean Commercial Code (KCC) allow for more creative and diversified deal structures?

The new KCC expressly provides for cash-outmergers, allowing cash or other assets, such as bonds or shares, to be used as consideration in mergers. It has been widely noted that this will allow triangular merger structures to be possible.

Moreover, due to the amendments that enable the issuance of a wide variety of types of bonds and the elimination of the amount limit on bond issuances, there may be new deal structures using various different types of bonds.

Are there any other amendments that you believe will change the Korean M&A market?

Where new shares are issued by the surviving company of a merger to the shareholders of the target company, and such new share issuance is within 10% of the total outstanding shares of the surviving company, this M&A shall be deemed a small-scale merger under the amended KCC. The threshold has been increased to 10% from 5%.

Small-scale mergers are exempt from shareholder resolution and only require board resolution.

This is expected to lead to a more active M&A market for smaller companies as it makes mergers a more viable and attractive option.

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Mergers & Acquisitions

news Analysis

The Fila Korea-Mirae consortium recently completed a large-scale cross-border acquisition in the US

Korea, since the domestic economy wasn’t that affected by the 2008 financial crisis.

We expect more European and American companies to be on sale and the general trend has been that Korean companies had no trouble tapping all corners of the world for ones they’re interested in acquiring,” says Kyu Wha Lee, head of M&A at Lee & Ko. Korea has few natural resources, which has pushed many companies overseas to secure investment opportunities in these areas.

“Because of the importance of energy and resources, Korean companies are scoping the world to acquire assets or shares of operating rights in relevant natural resources, and are trying to expand their businesses in solar and wind energy,” Lee explains. In line with the booming tech industry: “They’re also trying to acquire companies that have technological specialities, especially hi-tech businesses like semiconductors.”

The head of legal at a multinational bank in Hong Kong who did not want to be named highlights a shift to hi-tech acquisitions. “Technology is becoming increasingly important so M&A’s are essential. The Korean companies have humongous piles of cash just sitting there, so they’re absolutely able to go out and buy foreign companies. The acquisition of foreign natural resources companies has been driven by the government itself, but now companies are looking into buying technology companies.”

“Deal structures and types during this year and last were more diversified than before.

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expect “moreWeEuropean and American companies to be on sale and the general trend has been that Korean companies had no trouble tapping all corners of the world for ones they’re interested in acquiring

”

Kyu Hwa Lee, Lee & Ko

This is actually a global trend and trends in M&A will be heavily dependent on global competition,” he adds.

KCC opens the market The strict regulatory environment of the corporate sector was becoming incompatible with fast-paced markets. The principle of these amendments is to allow corporations in Korea more flexibility in structure. Key updates include the introduction of new forms of business entities (limited liability

companies) and the freedom of instruments companies can use to capitalise, such as the new series of voting and non-voting shares.

On the M&A front, cash-out mergers are now allowed and 95% majority shareholders are able to squeeze out the minority shareholders. Other amendments involve the introduction of hedge funds and prime brokerage houses as well as the relaxation of merger rules so payments can be made in equity or debt.

Sang Hyuk Park, foreign attorney at Kim & Chang, notes that: “The reason why the Korean M&A market has fully opened to foreigners in terms of regulations is because after the financial crisis in ‘97 the government both wanted and needed to introduce foreign capital in Korea. There was liberalisation in all respects, especially in M&A transactions.” The most recent amendments mark the increasing liberalisation of the market, and further open up opportunities for foreign investment.

“There were some foreign ownership restrictions but most have been lifted already,” he adds.

Market participants all recognise the importance of private equity funds for the further growth of Korean M&A. “M&A activity in Korea is robust and will continue to be so. Korean private equity funds are coming up with their own structuring and buying opportunities in Korea,” Park says.

The government is also said to be pushing to increase the role of private equity and develop hedge funds. “Many banking experts who have visited Korea agree that it has many good SME’s,” says the Hong Kong based banker. Since small and medium-sized enterprises and deals are key targets of private equity funds: “If hedge funds can be developed so foreign investors can go into them, they can invest in these SME’s and make good profits in the long haul.”

The relaxation of commercial regulations is designed to promote greater investment as well as diversification and flexibility in structuring transactions. It seems that the regulators are well aware that, in a world of increasingly intense competition and rapid advancement, creative structures are fundamental for companies to successfully achieve their commercial objectives.

News Analysis

Leading M&A lawyers Mergers & Acquisitions Young Sun Cho Yoon & Yang Hee-Chul Kang Yulchon Beomsu Kim Shin & Kim Doo Sik Kim Shin & Kim Hyeong Gun Lee Lee & Ko Kyu Wha Lee Lee & Ko Jong Koo Park Kim & Chang Dong Woo Seo Bae Kim & Lee Young Jae Shin Yoon &Yang Jiyul Yoo Yoon & Yang Hoil Yoon Yoon &Yang

Private Equity Wonkyu Han Lee & Ko Je Won Lee Lee & Ko

General Corporate Practice Sean Hayes IPG Legal Doo Sik Kim Shin & Kim Jae Young Kim Yoon & Yang Jiyul Yoo Yoon & Yang Hoil Yoon Yoon & Yang Source: Asialaw Leading Lawyers 2012

Mergers & Acquisitions

Key M&A deals Hyundai Capital Services – GE Capital Korea LAW FIRMS

Kim & Chang Hyundai Capital Services Shin & Kim Seller Why: In October 2011, Hyundai Capital Services (HCS) and GE Affiliate entered into a share sale and purchase agreement (SPA), pursuant to which HCS acquired 100% equity interest in GE Capital Korea (GECK). HCS merged with GECK directly after closing of the acquisition.

Since the acquirer and the target company are financial institutions conducting the same kind of business (i.e., specialised credit financial business), the transaction entailed complex legal and regulatory issues, including approval of the share acquisition and merger, clearance from the Fair Trade Commission, non-competition after the share sale, and a business arrangement between the acquirer and the acquirer’s other affiliate conducting the same kind of business and the target company’s refinancing by loan from the acquirer. In addition, the SPA entailed a complex purchase price adjustment mechanism.

Korea-Japan consortium investment in CBMM LAW FIRMS

Lee & Ko Korean consortium Simpson Thacher & Bartlett Japanese consortium Barbosa Mussnich & Aragao Sellers on Brazilian law Pinheiro Neto Advogados Korean/ Japanese consortium on Brazilian law Why: A Japanese / Korean consortium was formed to acquire approximately 15% stake of Companhia Brasileira de Metalurgia e Mineraco (CBMM). CBMM is one of the largest producers of niobium in the world. The Korean consortium consisted of POSCO, EQ Partners and the National Pension Service of Korea. The Korean consortium members formed an LLC in the State of Delaware which eventually invested in CBMM alongside a special purpose company formed by the Japanese consortium. The Japanese consortium consisted of companies such as Japan Oil, Gas and Metals National Corporation, JFE Steel Corporation, Nippon Steel Corporation and Sojitz Corporation.

Fila Korea – Acushnet Company LAW FIRMS

Yulchon Fila McDermott Will & Emery Fila Shin & Kim Mirae Asset Chadbourne & Parke Fortune Brands Kim & Chang Woori Blackstone Korea Opportunity Private Equity Fund I Simpson Thacher & Bartlett US counsel to a co-general partner of WBKOF Bae Kim & Lee Neoplux as financial investor acquiring mezzanine securities issued by the acquisition vehicle Why: A consortium of Fila Korea and Mirae Asset Financial Group acquired Acushnet Company from Fortune Brands. In connection with the equity financing for the acquisition, the consortium formed acquisition vehicles in the US with the top-tier entity (a US HoldCo) issuing various types of mezzanine securities to certain financial investors from Korea. Fila also purchased common stock from the US HoldCo. The aggregate amount of the investment in the US HoldCo by the above entities amounted to approximately US$800 million.

This transaction was noteworthy in that it represented one of the most recent cases where a consortium of strategic and financial buyers based in Korea had successfully completed a large-scale cross-border acquisition in the US, with equity financing by financial investors, a bridge loan by a syndicate led by the Korea Development Bank with a follow-on highyield note offering and a revolving credit facility.

The number of the financial investors engaged as mezzanine investors in an acquisition holdco formed by the Fila-Mirae Asset consortium required extensive and challenging negotiation of a complex shareholders agreement, set against the background of an aggressive transaction timeline negotiated by the Fila-Mirae consortium with Fortune Brands in a heavily contested auction context.

The corporate governance regime and various investor protection provisions from an investment return perspective in the transaction documents intersected with a number of regulatory issues in multiple jurisdictions, including in the US, requiring the legal advisers to provide creative solutions to their respective clients.

This deal was unique in that it was the first time Korean investors made a substantial investment in Brazil. It was unique in that the Korean investors invested by forming a consortium through an LLC in the State of Delaware and the investment was made along side Japanese investors who formed a separate consortium. It was a strategic initiative by Japanese and Korean steel producers to secure a long term supply of niobium, a key material in the manufacture of highend steel products.

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Mergers & Acquisitions

Market Data Asia-Pacific M&A Overview: top deals Activity table of Asia-Pacific (ex Japan) M&A for Y/E 2011 Announced Bidder company Bidder financial date adviser

Target company

Target/ seller financial adviser

17-Aug-11

SABMiller

Foster’s Group

Goldman Sachs; Grant Samuel; Gresham Advisory Partners

29-Aug-11

Temasek Holdings; GIC; CITIC Securities

China Construction Bank (5.44% stake)

Bank of America Merrill Lynch

Bank of America

8,288

21-Feb-11

BP

Reliance Industries (23 oil and gas production sharing contracts) (30% stake)

Goldman Sachs

Reliance Industries

7,200

14-Nov-11

Temasek Holdings; China Investment Corporation

China Construction Bank (4.14% stake)

Bank of America Merrill Lynch

Bank of America

6,600

15-Feb-11

Shinsegae Co (shareholders)

Citigroup

E-Mart

Samsung Securities

Shinsegae Co

6,222

25-Feb-11

PTT Chemical

Kasikorn Securities; Kim Eng Securities; UBS

PTT Aromatics and Refining

Trinity Securities Group

01-Jul-11

Vodafone Group Goldman Sachs; UBS

Vodafone Essar (33% stake)

Citigroup; JP Morgan; Morgan Stanley

Essar Group

5,460

08-Mar-11

Hyundai Motor; Hyundai Mobils; Kia Motors

Goldman Sachs; HMC Hyundai Engineering & Investment Securities Construction (34.88% stake)

Bank of America Merrill Lynch; Korea Development Bank; Woori Investment & Securities

Hyundai Securities; Hana Bank; Korea Exchange Bank; Kookmin Bank; Citibank Korea; Woori Bank; National Agricultural Cooperative Federation; Shinhan Bank; Korea Finance Corporation

4,443

06-Apr-11

SAIC Motor

Guotai Junan Securities

Shanghai Automotive Industry Corporation (Group)

4,365

21-Feb-11

West Australian Ernst & Young; Newspapers O’Sullivan Partners Holdings

JP Morgan; Moelis & Company; Morgan Stanley; RBS Group

Morgan Stanley

SAIC Group (independent auto components assets); SAIC Group (auto service and trading business); SAIC Group (new energy auto business) Seven Media Group

Seller company

Deal value (US$m) 12,925

5,704

Goldman Sachs; JP Morgan KKR; Seven Group Holdings

4,123

Asia-Pacific M&A Overview: league tables of financial advisers Financial advisers to South Korean M&A: Value Ranking

2011

Y/E 2010

Y/E 2011

House

Value (US$m)

Deal count

Value (US$m)

% value change

17

1

Korea Development Bank

11,145

10

1,874

494.7%

4

2

Woori Investment & Securities Co

10,999

14

5,562

97.8%

2

3

Bank of America Merrill Lynch

9,030

4

7,597

18.9%

23

4

Samsung Securities Co

7,227

6

1,402

415.5%

26

5

Citigroup

6,222

1

1,176

429.1%

1

6

Morgan Stanley

6,066

5

8,634

-29.7%

10

7

Goldman Sachs

5,506

3

3,529

56.0%

3

8

Credit Suisse

5,240

5

5,743

-8.8%

-

9

HMC Investment Securities Co

4,443

1

-

-

6

10

Macquarie Group

3,306

4

4,807

-31.2%

8

11

Nomura Holdings

3,285

3

3,743

-12.2%

9

12

Shinhan Investment Corp

3,074

3

3,547

-13.3%

53

13

Daewoo Securities Co

1,948

4

11

17,609.1%

24

14

Deutsche Bank

1,830

4

1,337

36.9%

-

15

Jefferies & Company

1,550

1

-

-

Source: mergermarket M&A round-up for year end 2011

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ASIALAW Korea Annual Review 2012

market Analysis

Mergers & Acquisitions INDIA

Co-published feature

Overview and recent trends in Korean M&A

By Jong Koo Park, senior attorney and Shin Kwon Lim, senior attorney, Kim & Chang

W

e have witnessed a robust recovery of the Korean M&A market, which has shown a rapid return to pre-crisis levels in terms of number and volume of deals. Armed with sufficient cash and faced with the mature domestic market, a lot of Korean companies are now pursuing M&A for future growth opportunities, which, with ever-increasing capital commitments for private equity funds, supports many experts’ forecast for strong growth of the Korean M&A market. Some interesting trends are being observed in the Korean M&A market, including the following: (1) the importance of private equity funds has increased significantly, and such increase, together with large conglomerates’ enhanced interest in M&A transactions, has resulted in increased competition in pursuit of limited targets available for sales; (2) post restructuring sales of companies by creditor banks or the government continues to produce high profile deals, such as the sale of Hyundai Engineering & Construction; (3) the number of small to medium-sized deals, which are key targets of private equity funds, has increased significantly; and (4) the total number and deal volume of outbound M&A transactions by Korean conglomerates have also increased significantly.

In 2011, the number and volume of deals remained almost the same compared to the previous year. According to Mergers & Acquisitions Ranking 2011 published by Bloomberg, (1) the aggregate volume of M&A transactions in Korea remained essentially flat at US$52.03 billion in 2011 compared to US$53.59 billion in 2010, (2) the total number of transactions also remained flat at 957 compared to 961 in 2010, (3) the total amount of capital inflows increased considerably to US$6.47 billion in 2011 from US$3.77 billion in 2010 and accounted for 40.2% of the total amount of capital flows, while the total amount of capital outflows decreased to US$9.59 billion in 2011 from US$13.92 billion in 2010, and (4) the largest transaction in 2011 was the spin-off of E-Mart from Shinsegae (US$5.9 billion) and the largest transaction involving a change in management was Hyundai Motor Company’s acquisition of Hyundai Engineering & Construction (US$2.7 billion).

The total number and deal volume of outbound M&A transactions by Korean conglomerates have also increased significantly

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market Analysis

The amendments are expected to promote M&A activities by allowing parties to M&A transactions to use more creative and diverse structures that meet their respective needs

controlling shareholder (with a stake of 95% or more) of shares held by minority shareholders at fair value. In exchange, minority shareholders will be granted appraisal rights that they can exercise by demanding fair compensation from the controlling shareholder as consideration for their shares. n

More flexible dividend policies: Pursuant to the amendments, dividend payments can be approved by the board of directors of a company under certain circumstances (instead of each time having to undergo approval at a general meeting of shareholders).

The amendments also allow the payment of non-cash dividends in addition to cash dividends.

n

Use of legal reserves: The disposition of legal reserves has been strictly restricted under the current KCC. Following the amendments, however, the shareholders of a company can resolve to use the legal reserves exceeding 150% of the company’s paid-in-capital to pay dividends or for other purposes.

n

Acquisition of treasury shares: The current KCC has strict limitations on the acquisition of treasury shares, but the amendments will allow companies to acquire treasury shares in an amount up to their distributable profits.

n

Offsetting payments of share capital: The provisions in the current KCC that prohibit the offsetting of share capital payments will be eliminated, making it possible for companies to effect debt/ equity swaps.

n

Relaxed rules governing merger consideration: Under the amendments, the surviving company in a merger may pay merger consideration in cash or bonds to the shareholders of the company being merged, without having to deliver to such shareholders only shares of the surviving company.

n

Liberalisation of bonds issued by private companies: Ceilings on the total issuance amount of bonds will be abandoned. Further, the amendments will make it clear that a non-listed company may issue various bonds like participating bonds and exchange bonds, which were thought available only for listed companies.

Legal environment developments impact M&A deals Legal rules set the parameters within which M&A activities are conducted and therefore have a significant impact on them. Korean corporate, capital market and criminal laws have had relatively strict rules restraining certain structures that are permissible in other jurisdictions. However, many of such restraints have been relaxed considerably with the recent changes brought by amended rules, proposed amendments, and court decisions, as further discussed below.

Amendments to the Korean Commercial Code The Korean Commercial Code (the KCC) provides for the general business and corporate laws governing Korean companies. The amendments to the KCC, representing the most extensive revisions to the KCC since its enactment, became effective on April 15 2012.

Among other things, the amendments ease strict regulations under the current KCC in relation to debt and equity financings and recapitalisation by companies, merger structures and consideration and squeeze-outs of minority shareholders. Set forth below are some of the key changes introduced by these amendments. n

n

n

New forms of business entities: The amendments introduce limited partnerships modelled after US limited partnerships, which consist of general partner(s) and limited partner(s). The amendments also provide for limited liability companies modelled after US limited liability companies, which acknowledge the limited liability of members while granting them autonomy to establish, manage and structure a company.

Diverse stock types: Following the amendments, companies will be able to issue shares with no voting rights or with restricted voting rights, as well as shares that have different rights in relation to the distribution of profits, liquidation, stock conversion or redemption. The added flexibility resulting from this change will make it easier for companies and investors to design the investment structure tailored to their needs. In addition, the amendments will allow companies to issue no-par value stock, which is currently prohibited.

Squeeze outs: The amendments also permit squeeze outs of minority shareholders i.e., compulsory acquisitions by a

Mergers & Acquisitions INDIA

The amendments are expected to promote M&A activities by allowing parties to M&A transactions to use more creative and diverse structures that meet their respective needs. For example, under the current KCC, because merger consideration can be paid only in the form of shares of the surviving company and cannot be paid in cash, mergers have rarely been used as a method of business combination and used more commonly as a method of restructuring among affiliates. Under the amended KCC, with increased flexibility in the choice of consideration for mergers, it is expected that mergers will be used more frequently as a method of business combination.

The flexible rules governing debt and equity financings and recap-

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market Analysis

About the authors Jong Koo Park T: +82 2 3703 1041 E: jkpark@kimchang.com Jong Koo Park is recognised as one of the preeminent M&A and private equity lawyers in Korea. He serves as a partner in the firm’s mergers and acquisitions, private equity and corporate governance practice groups.

Park has focused his practice on public and private acquisition transactions. He has an exceptional track record in advising on high profile transactions since the Korean M&A market began to flourish in the late 1990s. Many of these transactions were the first of their kind in Korea.

His recognitions include being named one of the leading M&A lawyers in Korea by Chambers Global, Chambers Asia and IFLR’s Guide to the World’s Leading Mergers and Acquisitions Lawyers.

He received his LL.B. from Seoul National University and his LL.M. from Michigan Law School. He is admitted to practice in Korea and New York.

Shin Kwon Lim T: +82 2 3703 1481 E: sklim@kimchang.com Shin Kwon Lim is a senior attorney in the corporate department of Kim & Chang. His primary areas of focus include mergers and acquisitions, private equity transactions and corporate governance. Lim also worked as a foreign attorney at Paul Weiss Rifkind Wharton & Garrison LLP New York office from 2010 to 2011.

Throughout his career, Lim has advised corporations, financial institutions and private equity funds on mergers and acquisitions in various contexts including sale, buyout, minority investment, recapitalisation and joint ventures, both domestic and cross-border. He worked on some of the largest and most high profile mergers and acquisitions of the day.

Before joining Kim & Chang in 2004, he served in the Korean air force as a judge advocate officer. Lim received his LL.B. degree from Seoul National University in 1999 (Summa cum laude) and LL.M. degree from New York University School of Law in 2010 (Vanderbilt scholar). He is admitted to practice in Korea and the state of New York.

italisation of companies introduced by the amendments will make it possible to design and implement transaction structures that were not possible under the existing KCC. This can be especially true in the area of acquisition financing transactions and minority investments. For example, an investment can now be made in the form of non-common stock with various rights, privileges or restrictions not allowed under the current KCC. These include preferred stock with non-cash dividends preference, limited voting stock, non-cash redeemable stock and stock convertible at the option of the issuing company. It is also expected that newly permitted stock buyback and relaxation of rules on dividends will provide a more favourable environment for M&A activities.

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Amendment to the Financial Investment Services and Capital Markets Act If an M&A involves a company listed on the Korea Exchange, the Financial Investment Services and Capital Markets Act (the FSCMA) and other related rules and regulations also apply. Recently, the government announced a proposed amendment to the enforcement decree of the FSCMA. The key features of the proposed amendment are summarised below. n

In case of a merger between a private company and a special purpose acquisition company (a SPAC), the value of the private company and the price to be paid for the shares of such private company can be freely agreed upon by the SPAC and the private company.

n

The borrowing limit of a private equity fund through the relevant SPC will be increased from the current 200% of the SPC’s total equity to 300%. Private equity funds are permitted to purchase derivative products to hedge foreign exchange risk when they make investments in foreign companies.

Also, a recent proposed amendment to the FSCMA introduces the concept of comprehensive financial investment service providers.

This is to promote the growth of local investment banks, modify rules relating to the offering of credit to corporate clients, the internal execution of orders for non-listed stock, and the operation of prime brokerage services. This will allow such comprehensive financial investment services providers to provide comprehensive corporate financings to client companies through investments, lending and M&A transactions.

Although the concept of a SPAC was introduced in 2009, because of strict rules under the FSCMA – which requires the merger price in a merger between a listed company and a non-listed company to be determined in accordance with certain formula set forth therein – there have been few mergers consummated by SPACs. Since the statutory formula has been criticised as one of the main reasons for reluctance in using SPACs in M&A transactions, the elimination of the statutory formula in the proposed amendment is expected to bring more merger activities by listed SPACs. Private equity funds have become major players in the M&A market since their introduction in 2004, with the total committed capital increasing to KRW26.63 trillion (US$23.35 billion) in 2010 compared to KRW8.98 trillion (US$7.87 billion) in 2007. The proposed amendment will contribute to more active participation in M&A transactions by private equity funds.

Recent court decisions in cases involving leverage buyouts The Korean Supreme Court previously held that a director of a target who had approved the target’s provision of its assets as collateral in connection with the acquirer’s financing had breached his fiduciary duty and was subject to criminal and civil liabilities.

market Analysis

This decision raised concerns among investors and M&A lawyers that, in principle, leverage buy-out (the LBO) transactions may not be permissible in Korea. However, a couple of other court decisions have since suggested that the legality of an LBO transaction depends on the structure and other circumstances of the transaction.

In 2010, the Korean Supreme Court affirmed the appellate court’s decision finding the directors of a target company not guilty of a breach of fiduciary duty stating that the mere fact a LBO has occurred does not, in and of itself, give rise to criminal liability for a breach of fiduciary duty. Rather, the Supreme Court held that courts should examine the specific actions taken by the directors during the LBO process, on a case by case basis, to determine whether there was, indeed, a breach of fiduciary duty. In this case, a special purpose vehicle (the SPV) incurred debt to finance its acquisition of a target company. This debt was ultimately pushed down to the target through a merger of the SPV into its parent company followed by a merger of the target into the parent company, and the target company’s cash reserves were used to repay a substantial portion of the debt it assumed through the mergers. In finding the directors not guilty, the Supreme Court emphasised the fact that the target company and the directors had complied with the statutory requirements of a merger (including procedural requirements) to protect the interests of its shareholders and creditors (including obtaining a supermajority approval, respecting appraisal rights of dissenting shareholders, and taking measures to protect creditors).

Mergers & Acquisitions INDIA

The elimination of the statutory formula in the proposed amendment is expected to bring more merger activities by listed SPACs

Also, in 2010, the Busan Appellate Court found the directors of a target company not guilty on the charge of a breach of fiduciary duty.

This was a case where a private equity fund had used proceeds of a capital reduction of a target company and dividends to repay the debt incurred to finance its acquisition of the target company. In reaching its decision, the Appellate Court concluded that (i) the private equity fund’s recouping of its investment in the company through a capital reduction and dividends, in and of itself, did not constitute an illegal activity, (ii) the capital reduction at issue was not excessive, and (iii) while minor procedural violations did exist in the course of the capital reduction and payment of dividends, such violations did not actually harm the shareholders or the creditors of the target company – and did not reach an excessive level that can justify the nullification of such capital reduction and dividend payment.

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News Analysis

Substance over form aims to address loose regulations Korean courts hold that economic substance now overrules legal substance when addressing foreign companies’ use of holding companies in third countries for Korean acquisitions.

Lone Star marks the first precedent in this ruling, but other cases will determine how Korea’s National Tax Service will treat such holding companies in the future

A

mbiguities remain in many areas of Korean law, but most companies are concerned about those that affect tax as it is directly related to money. In an effort to stay on top of an ever-evolving economy, with new products and new technology, Korea’s tax authorities are keen to make the appropriate revisions to the country’s laws and chase down those exploiting regulatory gaps.

Korea’s National Tax Service is set on tackling vague provisions in tax regulations, such as the use of intermediate holding companies in more tax-favourable jurisdictions by foreign investors entering Korea. The substance over form principle is now the basis for ruling whether such entities are valid.

Kim & Chang foreign attorney Daniel Joe says: “We have a good set of tax rules in Korea but some of them are harder to interpret than others. Because some of those rules are new,

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there aren’t enough precedents interpreting some of the provisions in those rules, so there you can have some uncertainty.”

Uncertainty with the laws is exacerbated by new financial products and new industries such as the e-commerce industry, which involves companies without a taxable presence in Korea. “Industries are evolving and there are new forms of doing business which in and of itself brings more uncertainty. We’ll see this going forward and face more novel issues,” says Joe. “Tax is an area that foreign investors are highly concerned about. The tax rules may be viewed by people who are familiar with the tax rules as not being clear, and because of this lack of clarity the Korean authorities may be viewed as being more aggressive than the tax authorities in their home jurisdictions,” Joe continues.

Yulchon foreign attorney Soo-Jeong Ahn

“goodWesethaveof taxa rules in Korea but some of them are harder to interpret than others

”

Daniel Joe, Kim & Chang

News Analysis

Taxation

A man of many hats Samil PricewaterhouseCoopers tax partner Henry An tells Katherine Jo about some of the uncertainties and tax issues that have arisen as a result of Korea adopting International Financial Reporting Standards What are the key responsibilities of your role and your main areas of focus?

I actually wear several different hats at Samil PricewaterhouseCoopers (PwC Korea). As deputy leader of the tax practice, I am primarily responsible for managing client relationships with some of our key multinational clients and providing support to our line partners. I also serve as co-leader of the transfer pricing group, which is my core area of technical expertise. Carrying out these responsibilities tends to keep me fairly busy.

input and recommendations from the business community as well as from external advisers including tax professionals and academics.

Recently, the MOSF established a task force team to review the overall structure and contents of the various Korean tax laws, with the objective of revising the laws in a manner to facilitate understanding while maintaining consistency in interpretation.

There are still many areas of Korean tax law that lack clarity. What are some of these key areas?

There are certainly a number of areas in Korean taxation that could benefit from additional clarity.

I would say that one key area is in relation to the issue of beneficial ownership. The Korean tax authorities have increasingly demonstrated a willingness to challenge the beneficial ownership status of holding companies owning domestic corporations, typically by citing lack of substance.

While establishing ‘bright line’ requirements may not be practical, the lack of guidelines has resulted in subjective interpretations. The new withholding tax procedure for reduced rates, effective from July 1 2012, is a step in the right direction, but further inroads need to be made to reduce taxpayer uncertainty.

Korean accounting standards are moving from the K-GAAP system to adopting the global IFRS system. What have been some of the challenges in this shift?

The adoption of the Korean International Financial Reporting Standards (K-IFRS) has been mandatory for listed companies and financial institutions from 2011. Korean regulators have been well aware of the uncertainties and tax issues potentially arising from the change. These include the disproportionate increase in tax costs with the adoption of K-IFRS, and the higher tax burden resulting from the increased gap between accounting and tax. Tax revisions were introduced to help ensure consistency in tax burden post K-IFRS implementation, and the minimisation of tax adjustments. Key changes were made in asset valuation, asset securitisation, functional currency, foreign exchange translation, depreciation of tangible assets, and bad debt allowance.

What are some of the recent efforts made by authorities, such as the NTS and Department of Tax at the Ministry of Finance, to strengthen tax regulations?

Korean tax regulations are continuously reviewed and revised on an annual basis. During this process, the Korean tax authorities – such as the Ministry of Strategy and Finance (MOSF) and the National Tax Service (NTS) – regularly request

The ‘substance over form’ principle is one that the courts now hold in deep regard, as can be seen in their rulings in the Lone Star cases.

What are some of the important implications of this principle?

There were basically two significant implications.

First, it has validated the Korean tax office’s practice of applying the domestic ‘substance over form’ rule such as the beneficial ownership test in

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the context of international tax treaties. Second, treaty platform structures used simply to access treaty benefits without substance will not be considered beneficial in applying the tax treaties.

How are tax authorities treating foreign businesses without a physical presence in Korea, such as those in the e-commerce industry?

This is pretty straightforward. As long as the services for operating an e-commerce business are located outside of Korea, it is not regarded as having a Korean PE in connection with the e-commerce activity. Having said this, the VAT aspects of e-commerce business conducted by a foreign entity without a physical presence in Korea is somewhat unclear.

What are some other significant developments in tax regulations that affect businesses in Korea, both domestic and foreign?

One of the most significant tax developments in Korea relates to efforts to harmonise transfer pricing and customs. Simultaneously managing transfer pricing and customs risk has been a challenge for companies doing business in Korea due to fundamental differences between the compliance frameworks contained in the transfer pricing regulations versus customs law. In order to promote harmonisation, provisions have been introduced to provide taxpayers with an opportunity to request correlative adjustments in the event of a transfer pricing adjustment or imposition of customs duties.

These provisions should help mitigate the risk of domestic double taxation and will be effective on adjustments or duties imposed on or after July 1 2012. Another noteworthy development is the requirement for foreign entities to provide the various documents to substantiate beneficial ownership status. This is in order to enjoy the reduced withholding tax rate provided under an applicable tax treaty for payments received from a local taxpayer that has a withholding obligation. This requirement is also effective on payments made on or after July 1 2012.

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agrees that taxation in Korea requires greater clarity. Ahn represented Seagate in its purchase of Samsung’s hard disk drive business, and encountered several tax issues on the deal such as stamp duty tax and tackling tangible assets.

“Since the Korean law doesn’t provide certain answers, we had to refer to OECD countries and other precedents,” she says.

Transaction substance The ‘substance over form’ principle is one where, regardless of how a transaction is structured from a legal perspective, authorities will look at the substance of the transaction if the legal form is produced differently.

Joe says: “The focus on this principle really started back less than 10 years ago when private equity funds were exiting their investments made in Korea during the Asian financial crisis in the late 1990’s. As they were exiting these investments, the Korean tax authorities claimed that taxes that should have been paid weren’t paid in Korea. Some of those investments were held through holding companies located in favorable tax jurisdic-

tions. The Korean tax authorities claimed that those holding companies had no substance, and should therefore not be respected as the beneficial owner of the relevant Korean source income.”

This attack on private equity funds marked the beginning of the principle’s evolution, and the NTS continues to focus heavily on tax audits. “The trend now seems to be that the NTS is becoming a little more aggressive than before in respect of this issue,” says Joe. “Even cases which are viewed as being robust under current international tax standards, such as in cases where holding companies have the requisite substance, are being denied as the beneficial owner of the relevant Korean source income. We believe that in these cases, such holding companies should be respected as the beneficial owner.”

The case example that garnered the attention of foreign investors was the Lone Star Fund case. This involved an investment being made in Korean real estate through an intermediate paper holding company (Star Holdings) in Belgium, following the discovery

News Analysis

This kind “of confirms that ‘substance over form’ applies to the treaty benefit context, so companies should not stay with paper holding companies anymore

”

Soo-Jeong Ahn, Yulchon

that the Korea-Belgium Tax Treaty was more favourable on real property investment than the US-Korea treaty.

Ahn says: “A few years ago, the NTS did not question it and practitioners took the position that as long as the legal substance was respected, the treaty benefit should be given.

In other words, as long as legal obligations were fulfilled in Belgium and all formalities complied with, the holding company should be treated as a real company.”

The NTS began to challenge that this was an abusive transaction a few years ago.

The Supreme Court announced its Lone Star Fund decision in January this year, stating that the holding company did not engage in any business activities in Belgium and was set up solely to avoid tax related to its investments in Korea. As Star Holdings was not the original investor, it was not eligible for the KoreaBelgium Tax Treaty benefits.

“This kind of confirms that ‘substance over form’ applies to the treaty benefit context, so companies should not stay with paper holding companies anymore. The NTS is no longer accepting paper companies,” says Ahn. “The NTS is very aggressive,” she adds.

“The court seems to generally accept that some kind of economic substance is required, and that some substance must be there with a respectable amount of tax paid in that local jurisdiction and a physical office with employees. But the NTS argued that there is no guidance in the form of law on how much substance is enough.”

There is a clear difference between a paper holding company, which has no substantial activities or real reason to be in a jurisdiction, and a holding company, which has some activity in corporate governance functions.

However, the NTS argues that the latter is not a legitimate big business either, and is challenging holding companies even with staff since these companies don’t seem to require a large capacity and act more as a control centre.

Ahn says: “When the NTS says ‘big business’, it’s picturing a factory or some other active revenue generator. A lot of uncertainty still lies here.” Emphasising the lack of clarity in how much substance is actually required, Ahn adds: “We should be able to define holding companies and other companies with

Taxation

Leading Taxation lawyers Henry An Samil PricewaterhouseCoopers Woo Hyun Baik Kim & Chang Woo Taik Kim Kim & Chang Dong Soo Kim Yulchon Mee-Hyon Lee Lee & Ko David Jin-Young Lee Samil PricewaterhouseCoopers Seung Soon Lim Yoon & Yang Il-Hwan Samil PricewaterhouseCoopers Soon Moo Soh Yulchon Sai Ree Yun Yulchon

Leading Transfer Pricing lawyers Henry An Samil PricewaterhouseCoopers Dong-Jun Yeo Kim & Chang Source: Asialaw Leading Lawyers 2012

some level of substance, but there is no direct guidance or precedent acknowledging that this is real substance for them. This is a grey area.”

As the NTS charged Lone Star Fund with personal income tax but lost, lawyers speculate that the case may soon be retried in the form of a corporate income tax matter - in which the economic substance over legal form principle will apply to the treaty context.

Other cases related to holding companies are pending and, with this boost in the number of precedents, the exact meaning of ‘substance’ will be able to be determined.

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Taxation

Co-published feature

Recent tax developments in Korea

By Mee-Hyon Lee and Miri Lim, Lee & Ko Income tax The income tax rate was originally planned to be reduced from 35% to 33% for the highest tax bracket (income above KRW88 million (US$77,345)) from January 1 2012. However, the contemplated tax reduction was repealed and instead the National Assembly created an additional income bracket to apply a tax rate of 38% for income above KRW300 million (US$263,700).

The creation of an additional income bracket reflects a wider, global social trend towards imposing higher taxes for higher income earning individuals. Therefore, the income tax rate for the lowest bracket (income up to KRW12 million) remains at 6%, the second bracket (income between KRW12 million up to KRW46 million) is at 15%, the third bracket (income between KRW46 million up to KRW88 million) is at 24%, the fourth bracket (income between KRW88 million up to KRW300 million) remains at 35%, and the newly created highest bracket (income above KRW300 million) is 38%.

The table below is a summary of the 2012 income tax rate.

January 1 2011 to December 31 2011

As of January 1 2012

Income

Income

Tax Rate

Tax Rate

Up to KRW12 million

6%

Up to KRW12 million

6%

Above KRW12 million – up to KRW46 million

15%

Above KRW12 million – up to KRW46 million

15%

Above KRW46 million – up to KRW88 million

24%

Above KRW46 million – up to KRW88 million

24%

Above KRW88 million

35%

Above KRW88 million

35%

Above KRW300 million

38%

Furthermore, to limit tax avoidance via the payment of excessive retirement income (retirement income paid to directors is subject to a lower tax rate than salary income), a formula is implemented to limit the payment of retirement income, to which the lower income tax rate applies beginning January 1 2012 as follows: [three-year average salary income before retirement multiplied by 10% of the years of employment] any excess is to be treated as salary income. Directors’ retirement income accrued up to December 31 2011 is not subject to the new limitation.

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The creation of an additional income bracket reflects a wider, global social trend towards imposing higher taxes for higher income earning individuals

market Analysis

Taxation INDIA

Corporate income tax For 2012, it was planned that the corporate income rate for companies with taxable income above KRW200 million was going to be reduced from 22% to 20%. However, this plan was changed by the National Assembly as of December 31 2011. The tax rate was reduced from 22% to 20%, but a new bracket was created for corporate entities with income above KRW20 billion (US$17.58 million) at 22%. Thus, the rate for income between KRW200 million and KRW20 billion was set to 20%. The table below is a summary of the corporate income tax for 2012.

January 1 2011 to December 31 2011

As of January 1 2012

Up to KRW200 million

10%

Up to KRW200 million

10%

Above KRW200 million

22%

Above KRW200 million – up to KRW20 billion

20%

Above KRW20 billion

22%

In addition, beginning in the fiscal year 2011, the 50% limitation on unilateral indirect tax credit – for foreign taxes paid by a subsidiary – claimed by a Korean company receiving dividends from a qualifying foreign subsidiary, can now claim for 100% indirect tax credit.

Effective on or after April 15 2012, triangular mergers are introduced, where shares of a parent company of a surviving company are distributed as merger consideration to shareholders of the merged company.

For mergers, the tax-free treatment for qualified mergers is extended to downstream mergers, where a parent company merges with or into its fully-owned subsidiary. Also, a loss on the disposal of assets held by a surviving company is not allowed to offset taxable income generated by the business of a merged company, or vice versa.

Gift tax (a) Imposition of gift tax for increased share value where a person or a company specially related to the shareholder attributed to such increase Due to the completely expansive notions of ‘comprehensive gift’ introduced in the Inheritance and Gift Tax Act of 2004, the tax authorities have argued that theoretical grounds exist for imposing a ‘gift tax’ upon indirect economic benefits received by a person – if such indirect economic benefits are attributed by a specially related person.

Based on such a theory, the tax authorities recently started imposing a gift tax on the controlling shareholder of a company for increased share value. This is where the value of such company’s share was increased due to a gift made to such company by a person or a company who is specially related to the relevant controlling shareholder.

An example of where a gift tax would be imposed for the increase value of the shares is below:

n n n n n

Father owns a certain number of shares issued by Company A. Son owns 100% shares in Company B. Father donated the shares of Company A to Company B. For the increased assets, Company B pays corporate income tax.

The tax authorities still impose a gift tax to Son for the increase in value of the shares of Company B.

There are number of similar cases that involve a similar pattern, and tax litigation is currently progressing for some of these cases. The taxpayers’ position essentially highlights that the current Inheritance and Gift Tax Act lacks the specific details required to actually impose a gift tax. These include specific provisions drawing a borderline for indirect economic interest that is subject to a gift tax, and outlining the timing of a gift and calculation method for such gift. Unless such provisions are provided, a gift tax should not be imposed despite the notion of ‘comprehensive gift’.

(b) Establishment of a new article 45(3) in the Inheritance and Gift Tax Act for imposition of gift tax for exclusive work contracts between affiliated companies in same business group There have been discussions that it is necessary to impose a gift tax on an increase in stock value originating from exclusive work contract agreements between corporations within an affiliated business group and corporations controlled by a controlling shareholder’s family.

This is in order to prevent a controlling shareholder’s family actually passing over the family wealth to the next generation without any tax liability being imposed on the transaction.

As the tax authorities’ attempt to impose a gift tax on increased stock value – without resorting to the notion of ‘comprehensive gift’ under the Inheritance and Gift Tax Act – is being seriously challenged by taxpayers as explained above, the tax authorities have added Article 45(3) to the Inheritance and Gift Tax Act in order to justify and validate grounds for levying such taxes.

Under Article 45(3), exclusive work contracts are deemed to exist where: a ratio of transactions (contracts) entered into by a corporation with other corporations with a special relationship (affiliates in the same business group) is greater than 30% of the entire number of contracts; and, the individual shareholder’s possession of the beneficiary corporation’s stock is greater than 3%.

In such an event, a gift tax is imposed on the major shareholders (individuals) of the beneficiary corporation.

For mergers, the tax-free treatment for qualified mergers is extended to downstream mergers, where a parent company merges with or into its fully-owned subsidiary

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About the authors Mee-Hyon Lee Lee & Ko Hanjin Main Building, 18th Floor, 118, Namdaemunno 2-Ga, Seoul 100-770, Korea T: +82 2 772 4381 F: +82 2 772 4001 E: mhl@leeko.com W: www.leeko.com Mee-Hyon Lee is a partner at Lee & Ko with more than 20 years of practice experience in the area of finance and tax, with qualifications to practice both in Korea and New York. She has been the principal transaction lawyer on many of Korea’s largest and most innovative structured finance transactions.

Lee graduated from Seoul National University (1983 LL.B and 1985 LL.M) and Harvard Law School (1995 LL.M.). She writes and lectures frequently on structured finance and tax, and is a member of several government committees related to tax and financial regulations in Korea. Currently, she is serving as a vice president of the Korean Bar Association.

Taxation INDIA

simultaneously be applied for investments made up to December 31 2011 along with a temporary investment tax credit (this was available to provide support investments made outside the Seoul metropolitan area, but it has been scaled down in phases starting in 2011). Under the revised TILL, however, the temporary investment tax credit is repealed, and the existing tax credit for job-creating investment is maintained at an increased rate.

In addition to the basic credit granted for companies maintaining status quo employment from the previous year, an additional 2% to 3% tax credit will be available for new job-creating investment made in business-purpose assets outside the Seoul metropolitan area. A ceiling for tax credit is set between KRW10 million and KRW20 million, multiplied by the number of new employment in net (the tax credit ceiling is generally set at KRW10 million or KRW15 million per employee between the ages of 15 and 29, or KRW20 million per specified occupational (meister) high school graduate employee).

The table below is a summary of the revised tax credit rates for job-creating investment.

Miri Lim Lee & Ko Hanjin Main Building, 18th Floor, 118, Namdaemunno 2-Ga, Seoul 100-770, Korea T: +82 2 772 4924 F: +82 2 772 4001 E: mrl@leeko.com W: www.leeko.com Miri Lim is a member of the corporate practice group at Lee & Ko concentrating in the areas of corporate taxation (domestic and international), tax planning and tax strategy. Prior to joining Lee & Ko, Lim was a senior consultant at the New York office of Deloitte Tax LLP where she performed strategic tax reviews and advised multinational corporations on tax planning strategies and future tax positions. Lim received her B.S. in international business from New York University and received her J.D. from Quinnipiac University School of Law.

The below calculation is to determine the appropriate tax base: [post-tax profit of the beneficiary corporation] multiplied by [ratio of transactions with corporations in the same business group – 30%] multiplied by [ratio of the individual’s possession of the beneficiary corporation’s stock – 3%].

Once the tax base is calculated, the gift tax rate ranges between 10% and 50% depending on the amount of the gift tax base.

Nevertheless, in order to actually apply the above explained gift tax rules and impose applicable tax, specific details need to be provided in the presidential decree of the Gift and Inheritance Tax Act. Such presidential decree has not yet been promulgated.

Tax Incentive Limitation Law (a) Changes in employment creation investment tax credit Prior to the revision of the Tax Incentive Limitation Law (TILL) on December 31 2011, a tax credit for job-creating investment could

Type of credit

Small-andmedium sized enterprise

Large corporation Within the Seoul Outside the Seoul metropolitan area metropolitan area

Basic credit

3%

4%

4%

Additional credit

2%

2%

3%

Total

5%

6%

7%

(b) Scope of qualifying Research & Development tax credits extended The scope of qualifying Research & Development (R&D) tax credits is extended to cover the expenses incurred in the development of new services and delivery systems, but is limited to in-house R&D activities in the service industry. Furthermore, the taxpayer is allowed to calculate and claim for R&D deduction on expenditures incurred either on a yearly basis or incremental basis, whichever is higher. The incremental expenditure method is not available if no R&D expenditure has occurred in the last four years. For large corporations, qualifying salary costs for researchers with a masters or doctorate degree is subject to the minimum tax.

(c) Abolishment of tax exemption for interest income accrued on foreign currency denominated bonds issued in Korea Prior to revision, the TILL allowed exemption of withholding tax for interest income on foreign currency denominated bonds issued by a government or domestic corporation, earned by a foreign corporation. However, the revised TILL has abolished such tax exemption for interest income on foreign currency denominated bonds issued in Korea. The interest income on foreign currency denominated bonds issued in a foreign country will remain exempt

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from withholding tax in Korea. This revised provision will apply to any such interest income received on foreign currency denominated bonds issued on or after January 1 2012.

(d) A new unincorporated entity, Hapja Johap, is introduced expanding the application of partnership taxation rules Hapja Johap, an entity similar to a limited partnership in the US, is newly introduced pursuant to the revised Commercial Code in Korea. Under the revised TILL, Hapja Johap is eligible to apply partnership taxation rules. The enforcement date of the revised Commercial Code provision is April 15 2012.

International taxation 1. Prior to the introduction of the International Tax Coordination Law amendments, a qualified foreign holding company was not subject to Controlled Foreign Company (CFC) rules if a foreign holding company satisfied the condition that its subsidiaries were located in the same region or country as the foreign holding company. Under the amendment, however, a foreign holding company may still qualify for the exception even if one of its subsidiaries is located in a different country or region. This is provided that the passive income (interest and dividend income) derived from subsidiaries located in the same country or region as the foreign holding company is 90% or more of the foreign holding company’s total income (exclusive of active business income).

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Under the amendment, however, a foreign holding company may still qualify for the exception even if one of its subsidiaries is located in a different country or region

2. Prior to the International Tax Coordination Law amendments, a domestic company was subject to CFC rules if it owned 20% or more of shares (direct or indirect) of the foreign subsidiaries’ stock in a foreign company located in a country or region that has an effective tax rate of 15% or less. Under the amendment, the percentage of shares owned by the domestic company subject to the CFC rules has been reduced to 10%.

3. Prior to the amendments, there were discrepancies between the taxable import price for customs duty purposes and the transfer pricing for income tax purposes. Under the amendments, when taxpayers receive an assessment either from the Korea Custom Services (KCS) or the National Tax Services on their import transactions with overseas related parties, taxpayers are allowed to file a refund request to the other authority. The other authority must make correlative adjustments if the adjusted price is deemed appropriate under the Customs Law or Income Tax Law.

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