Korea Annual Review by Andrew Alcock

A dedicated jurisdictional REVIEW

Review Published in conjunction with:

2013

Korea Annual

Introduction INDIA

Introduction asialaw

Managing editor Peter Ollier peter.ollier@euromoneyasia.com +852 2842 6944

A DEDICATED JURISDICTIONAL REVIEW

Review Published in conjunction with:

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Korea ANNUAL

2013

Annual Review 2013

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

Korea

Staff writer Hon Ting Lau honting.lau@euromoneyasia.com +852 2842 6927

The publication of the 2013 edition of the Korea Annual Review could not come at a better time. Incoming president Park Geun-Hye of the ruling Saenuri Party became the country’s first female-elected president in February this year with the country’s export-driven economy starting to be affected by the global economic downturn, and escalating tensions with North Korea posing security risks. Nevertheless, in 2012 the economy performed strongly and 2013 GDP growth is forecast at 2.8%.

The United States-Korea Free Trade Agreement (KORUS FTA) has started to take effect, resulting in the opening of the legal market to foreign law firms. Foreign direct investment (FDI) reached a record amount with a total inflow of $16.6 billion for 2012, up 18.9% from 2011. Concerns remain over the country’s currency, the won, which has appreciated against the currencies of its major trading partners. In 2012 the won rose 6.4% against the US dollar, 5.5% against the euro, 6% against the Chinese yuan and 13% against the Japanese yen. On the one hand, the strengthening of the won bodes well for overseas acquisitions, but it is threatening Korea’s export market. It will be interesting to see how the Korean government addresses the currency issue, having already intervened in the currency market last November. There is talk of tighter restrictions on trading currency derivatives to curb the won’s volatility in the currency market. Radical amendments to the Korean Commercial Code (KCC), effective April 15 2012, aim to provide greater flexibility in relation to corporate financing and enhance transparency of corporate governance. The country’s chaebol remain dominant, but government and regulators are paying more attention to small- and medium-sized companies in an effort to promote competition and innovation. Having to tackle financial irregularities carried out by senior executives of the seemingly untouchable chaebols may be a thing of the past, with the Park administration keen to adopt a more hard-line approach so those found guilty will be accountable for their actions. The Asialaw Korea Annual Review, published in association with IFLR and the Legal Media Group, aims to provide investors with an overview of the legal and regulatory developments in Korea over the last 12 months. Interviews and meetings with leading lawyers, in-house counsel and government agencies provide a legal and corporate perspective on the current business environment. This review will assist foreign investors by providing them with the information they need to realise their investment goals.

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ASIALAW Korea Annual Review 2013

coNteNtS

Contents 4

BANKING, FINANCE AND CAPITAL MARKETS

Korea’s debt problem ANALYSIS: ELECTRONIC BOND TRADING – COPING WITH NEW TECHNOLOGY PROFILE INTERVIEW: YOUNG-SOO CHANG, SENIOR COUNSEL OF LEGAL AFFAIRS, KOREA SECURITIES DEPOSITORY

COMPETITION

KFTC opens up ANALYSIS: FOREIGN LAW FIRMS MOVE IN CO-PUBLISHED: ENFORCEMENT GETS STRONGER – BY YULCHON

CORPORATE GOVERNANCE

The jury is out MARKET DATA: LATEST SCORES FROM THE ASIAN CORPORATE GOVERNANCE ASSOCIATION CO-PUBLISHED: DATA PROTECTION AND MONEY LAUNDERING EXPLAINED – BY SHIN & KIM

INTELLECTUAL PROPERTY & TMT

Patent wars come to Korea PROFILE INTERVIEW: MANAGING EBAY’S LEGAL DEPARTMENT CO-PUBLISHED: SECURING THE CLOUD – BY YOON & YANG

MERGERS & ACQUISITIONS

Looking outbound ANALYSIS: SQUEEZE OUT PROVISIONS EXPLAINED CO-PUBLISHED: GROUNDS FOR OPTIMISM – BY KIM & CHANG

TAXATION

A misguided move ANALYSIS: USING TAX TO ENCOURAGE FDI CO-PUBLISHED: A YEAR OF REFORM – BY LEE & CO

ASIALAW Korea annual review 2013

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Banking, FInance & Capital markets

News Analysis

Koreaâ&#x20AC;&#x2122;s debt problem Like many countries, Korea is struggling to deal with banks that are under closer scrutiny than ever before and a high level of household indebtedness, which is one of the main challenges for the new Park administration

ASIALAW Korea Annual Review 2013

NeWS ANALySIS

“thereEvenarethough still distressed mutual savings banks which are closing their operations right now, we do not see any further material impact from the sector anymore. The critical stage has passed already

”

Hyun Hee Park, Moody’s Investors Service

or many households and individuals 2012 was a particularly tough year, with the threat of losing savings deposited in one of the country’s many mutual savings banks (MSB). In May 2012, the Financial Services Commission (FSC) ordered four MSBs – Solomon, Korea, Mirae and Hanju – to suspend operations for six months to improve their finances having determined them in financial distress. Three of the four savings banks had a BIS capital adequacy ratio below 1%, while the fourth had debts exceeding assets. This was following a bout of suspensions and clean-ups of up to 13 distressed MSBs in 2011. Since the suspension of Korea’s largest MSB, Busan Savings Bank, in February 2011, Korean savings banks have been under close scrutiny with officials at Busan subsequently convicted of unlawful practices, including illegal loans totalling KRW4.6 trillion ($4 billion). Korean officials have tried to play down the risks of wider economic damage by stressing that savings banks only account for approximately 5% of the banking sector and that risky lending has not been limited to savings banks, but also the major commercial lenders.

Corruption, defaults and lost savings Corruption, embezzlement and bribery have emerged with prosecutors raiding homes and offices of senior executives. In early May, Mirae Savings Bank chairman Kim ChanKyong was arrested while trying to flee to China by boat and on the day an executive of Mirae was due to appear before prosecutors, she committed suicide by hanging herself with a scarf in a Seoul motel. This is the latest of several suicides in which executives of savings banks under investigation were due to be summoned by prosecutors. Jeil 2 bank CEO Jeong Gu-Haeng and Ace Mutual

BANkINg, FINANce & cApItAL mArketS INDIA

chairman Kim Hak-Heon both died from apparent suicide. Low interest rates in 2005 triggered a real estate lending boom that ultimately became the savings banks downfall as defaults increased following the 2008 financial crisis. Numerous bailouts resulted, but many savings banks closed, wiping out the savings of many ordinary Koreans, as many as 88,000 of whom are retirees. And although state-run Korea Deposit Insurance Corp (KDIC) offers savings protection up to KRW50 million won ($45,000) per person, per bank, this does little to soften the blow for large savers. Attention has now turned to the record level of household debt as workers turned to savings banks for loans to supplement declining wages. The dependence on debt-driven household expenditure is not sustainable and puts further pressure on the country’s banking system.

Debt-driven crisis Korea’s alarming level of household debt is raising concern over the possibility of another crisis just as the MSB problem appears to be under control. Korea’s household credit rose to a new record high in the fourth quarter last year after the government’s temporary housing tax benefit raised demand for mortgage loans. The government now faces a dilemma whereby measures designed to stimulate the lacklustre property market have placed a heavier financial burden on ordinary households. The economic slowdown and falling house prices spark risks of mortgage delinquency and not only does this put pressure on the banking system, but the high indebtedness is curbing domestic demand and economic growth. Incoming president Park Geun Hye has pledged a KRW18 trillion so-called “Happi-

ASIALAW Korea annual review 2013

BANkINg, FINANce & cApItAL mArketS

NeWS ANALySIS

Leading Banking and Finance lawyers Banking Yong-Jae Chang Lee & Ko Kye Sung Chung Kim & Chang Young Hee Jo Shin & Kim Woo Young Jung Lee & Ko Yully Kang Jipyong Jisung

ness Fund” to help low income individuals avoid defaults. This will be financed through spending cuts. According to some analysts the household debt is the biggest risk to Korea’s financial system and the Park administration should implement policies to create a soft landing, including limits to bank lending and tax breaks for homeowners.

Survival of the fittest MSBs are likely to experience shrinking business volume for the foreseeable future as they struggle to operate in a difficult environment. Despite the continuing deterioration of asset quality, analysts believe the MSBs are unlikely to pose a systemic risk to the banking sector. “Even though there are still distressed mutual savings banks which

are closing their operations right now, we do not see any further material impact from the sector anymore. The critical stage has passed already,” says Hyun Hee Park, analyst at Moody’s Investors Service. In addition to bailouts, large commercial banks have also assisted in reducing the impact of the crisis by acquiring some of the larger MSBs. “Mutual savings banks provide commercial banks with supplementary customer bases in the secondary financial institutions markets and this is good for commercial banks,” says Park, although she is sceptical about the possible impact: “Given the small asset size of mutual savings banks compared to the asset size of the acquiring commercial banks, it will not have a material impact on the commercial banks credit rating.”

Hyoung Don Kim Bae Kim & Lee Samuel Kim Bae Kim & Lee Soo Man Park Kim & Chang

Entering a new age

Zoltan Simon IPG Legal Woong Soon Song Shin & Kim

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 2013

ASIALAW Korea annual review 2013

Securities dematerialisation has brought in a new era of trading platforms and financial regulation in the Asia-Pacific region. Although markets in the Asia-Pacific region were early adopters of these platforms, they have since been overtaken by systems developed in Europe and the US

s a latecomer to electronic bond trading, Asia is now catching up with the rest of the world as new issues reach record highs. In the space of a few years trading platforms offered by major banks and other market participants have emerged and deepened to the point where nearly half of Asian dollardenominated corporate bonds are traded electronically. Stricter regulations in the form of Basel III and proprietary trading have made market-making more costly, which means that participants will need to trade more efficiently. Electronic trading in Asian fixed income markets is set to grow with the largely untapped government debt sector likely to lead the way. Korea and Japan have the greater

market share of electronic trading with Singapore and Hong Kong next in line for growth.

Electronic short term bonds On January 15 2013, Korea introduced a new act on the issuance and trading of electronic short term bonds as a new financial instrument to replace the commercial paper (CP). The aim is to improve on the inefficiencies of the physical issuance and transparency associated with CP issuance. Electronic short term bonds will be denominated in minimum units of KRW100 million and are expected to revitalise capital markets. They will have a maturity no longer than one year and must be unsecured. Essentially, being a simplified form of a bond

NeWS ANALySIS

BANkINg, FINANce & cApItAL mArketS INDIA

Limited progress Despite the failure of the National Assemply to pass key amendments last year, Young-Soo Chang, senior counsel of legal affairs at Korea Securities Depositary, believes that some important steps have been made that will increase transparency in the money market What legislative developments have taken place in the last 12 months? Disappointingly enough and contrary to expectations, the proposed amendment to the Financial Investment Services and Capital Markets Act (Capital Markets Act) initiated in 2010 by the Financial Services Commission (FSC), Korea’s financial market regulator, was not passed by the National Assembly of Korea last year. As a result, the government’s ambitious plan to reform Korea’s capital markets system by fostering home-grown investment banks, facilitating corporate finance through capital markets, and introducing new capital market infrastructure such as alternative trading systems and central counterparty

One of the notable “measures taken by the regulator was the completion of the legal framework for the implementation of the electronic short-term bond system

”

was also indefinitely postponed. Instead, some progress was made last year, although the impact on the market was not as comprehensive as the impact the proposed amendment to the Capital Markets Act would have had. One of the notable measures taken by the regulator was the completion of the legal framework for the implementation of the electronic short-term bond system. In Korea, commercial papers (CPs) are the most popular financial instruments for corpora-

tions seeking short-term financing in money markets. Since CPs are issued based only on corporate credit without being backed by collateral and do not need to be registered with the FSC, they are widely sold by firms for their funding needs. Although such benefits boost the papers’ position as a very cost-effective and reliable means of corporate financing, loose regulations and lack of transparency in the CP market have raised constant concerns over risk management and investor protection. As part of efforts to resolve such vulnerabilities in the CP market, the Act on Issuance and Transfer of Electronic Short-Term Bonds and its Enforcement Decree (collectively, Act) were enacted in 2011 and 2012 respectively. The Act, which became effective January 15 2013, prescribes a move to an electronic short-term bond regime in which current risk-entailing CPs will be substituted with electronic short-term bonds (ESTBs).

CP is that it is issued, transferred, and redeemed in the book-entry or uncertificated form. As a result, there are no costs of issuance and no risks of loss in the whole ESTB cycle. How can the ESTB model be a regulatory solution to long-lasting problems arising from the current CP programme in Korea? Current regulatory loopholes in the CP market originate from the fact that there are no mandatory disclosure obligations, which results in lack of market transparency, and consequently, often causes damages to investors. Once ESTBs, instead of CPs, are issued, all the necessary information for

What are the main characteristics distinguishing ESTBs from traditional CPs? The ESTB is a functional alternative to a CP maturing in one year or less with a minimum face value of KRW100 million ($92 million), payable and redeemable in lump sum, and registered under the Act. The main difference between CPs and ESTBs is that the legal nature of CPs is a promissory note while that of the ESTBs is a corporate bond. This means that CPs cannot be split while ESTBs can. Unlike many other jurisdictions where CPs mature within one year, CPs with maturities of over a year are allowed in Korea if the issuers register the them with the FSC. However, only maturities of one year or less are allowed for ESTBs. Another noteworthy distinction of the ESTB compared with the

ASIALAW Korea annual review 2013

BANkINg, FINANce & cApItAL mArketS

NeWS ANALySIS

in the “moneyTransparency market will be dramatically upgraded through the centralised monitoring system of KSD

”

general investors to make investment decisions will be disclosed through the ESTB registration system by the Korea Securities Depository (KSD). This means that KSD, as registration authority of the ESTBs, will collect and disclose the details on issuance, transfer, and redemption en bloc right from the issuance phase, which will enable the public to make informed investment decisions. What are the main roles of KSD in the ESTB system? KSD plays a key role as central registrar for the ESTB system by electronically processing all ESTB transactions. In that capacity, KSD manages ESTB accounts for issuers and account operators that manage the ESTB accounts for end investors. KSD also processes, in cooperation with issuers and account operators, all the right exercises for ESTBs such as receipt of principle and interest, exercise of voting rights, etc. In addition, KSD, as the securities settlement organisation, provides settlement of ESTB transactions including issuance, redemption, and transfer of ESTBs to market participants. The implementation of the ESTB system will not merely eliminate physical certification of CPs in the money market. Transparency in the money market will be dramatically upgraded through the centralised monitoring system of KSD as central registrar of ESTBs. Moreover, significance can be laid on the fact that the launch of the ESTB system is the first step toward full securities dematerialisation, which will rebuild the Korean capital market in a paperless environment by eliminating physical certificates. Market participants as well as KSD expect that the ESTB system will play a role as the pilot infrastructure for complete securities dematerialisation in Korea.

ASIALAW Korea annual review 2013

with rights and obligations similar to CP, they are exempt from the Commercial Code requirement for maintenance of a bond register and bondholders meetings. The bonds must be registered with the Korea Securities Depository (KSD) and, as they are electronic, no paper certificate will be issued. All issues, transfers and other dealings in the bonds will only be conducted by way of book-entry method, with all registrations cancelled upon redemption of principal and interest. The KSD will take on the role of registrar and is required to publish information on all matters relating to electronic short term bonds on the KSD website. The Financial Services Commission (FSC) is considering other measures to promote trading the new electronic short term bond system including exemption of securities registration for maturities less than three months and exemption of withholding tax on interest income.

Although Asia-Paciﬁc markets were early adopters of high frequency trading platforms, they have since been overtaken by systems developed in Europe and the US

A first step The popularity of the CP as a short term financing instrument does have its drawbacks. Despite it being a cost effective and seemingly reliable means of corporate financing, loose regulations and lack of transparency in the CP market has led to concerns over risk management and investor protection. Young-Soo Chang, senior counsel of Legal Affairs at KSD, welcomes the new initiative: “Current regulatory loopholes in the CP market basically originate from the fact that there are no mandatory disclosure obligations, which result in lack of market transparency, and consequently often cause damage to investors. Once ESTBs are issued, all the necessary information for general investors to make investment decisions will be disclosed through the ESTB registration system by the KSD”. Chang expects more changes in the Korean capital markets. “The launch of the ESTB system is the first step toward full securities dematerialisation, which will rebuild the Korean capital market in a paperless environment by eliminating physical certificates. Market participants as well as KSD expect the ESTB system will play a role as the pilot

infrastructure for complete securities dematerialisation in Korea,” says Chang.

Overreliance on Western systems While regulators in the region try to keep up with the changes, they are also monitoring regulatory developments in Europe and the US. This raises the question of whether Asia-Pacific markets should follow suit. Are Western trading systems more technically advanced and superior to those in the East? Should Asia look West for solutions to avoid electronic market catastrophes? Market participants have their doubts. The US market was still trading physically on the trading floors at a time when some Asian markets in Hong Kong, Singapore and Japan were trading electronically in the 1990s. But one can argue that the region has not innovated enough. Rather than waiting for new regulations either from the west or neighbouring Asian countries, each country should consider the needs of its markets and share their experience and knowledge with the international community with a view to developing global standards for electronic trading. This will help create safer and more liquid markets.

NeWS ANALySIS

Key Finance Deals

Key ECM and DCM Deals

Project Finance

Debt and Equity-Linked

Wampu Hydro Electric Power Project

Doosan Infracore hybrid bond

PHOTO: © DEUTSCHE BANK

LAW FIRMS

Leading Capital Markets lawyers Heejae Ahn Yoon & Yang Won Sik Choo Lee & Ko Eui Jong Chung Bae Kim & Lee Ko Chang Hyeon Kim & Chang Haeng Gyu Lee Jipyong Jisung Kim Sang Man Shin & Kim Huh Young Man Kim & Chang Hyunjoo Oh Lee & Ko Sang Il Park Hwang Mok Park Han Wonkyu Lee & Ko Yoon Hee Woong Yulchon Source: Asialaw Leading Lawyers 2013

BANkINg, FINANce & cApItAL mArketS INDIA

Ali Budiardjo, Nugroho, Reksodiputro Indonesian counsel to KEXIM, Sumitomo Mitsui Banking Corporation Kim & Chang Export-Import Bank of Korea Milbank, Tweed, Hadley & McCloy English counsel to KEXIM, Sumitomo Mitsui Banking Corporation Norton Rose Korea Midland Power, POSCO Engineering, PT Mega Power Mandiri Susandarini & Partners Indonesian counsel Korea Midland Power, POSCO Engineering, PT Mega Power Mandiri Why: The $130m Wampu project is the first project to receive a government business viability guarantee letter (BVGL) that reached financial close, proving the scheme is attracting financing for power projects. It is also the first project based in a protected forest that will house a hydroelectric plant producing 45MW. PT Wampu Electric Power will construct and operate the plant.

Patrind Hydropower Project

LAW FIRMS

Allen & Overy Doosan Infracore Kim & Chang Doosan Infracore Linklaters Hana Bank, Korea Development Bank, Woori Bank Norton Rose Trustee Shin & Kim Hana Bank, Korea Development Bank, Woori Bank Simpson Thatcher & Bartlett Doosan Infracore Walkers Cayman Islands put seller Why: This deal sparked controversy between Korean regulators over the handling of Doosan Infracore’s equity treatment, and is likely to set off a string of similar deals. Doosan Infracore’s $500m 3.25% senior capital securities included a complex two-part structure because the instrument was registered as equity. Doosan Infracore itself is unrated by international credit agencies, but received credit support from Hana Bank, Korea Development Bank and Woori Bank, resulting in an A- rating by Fitch Ratings.

LAW FIRMS

Allen & Gledhill STAR Hydropower Kabraji & Talibuddin Asian Development Bank, KEXIM, International Finance Corporation, Islamic Development Bank, Law Debenture Trust Corporation Rajah & Tann Asian Development Bank, KEXIM, International Finance Corporation, Islamic Development Bank, Law Debenture Trust Corporation Rizvi Isa Afridi & Angell STAR Hydropower Shearman & Sterling Asian Development Bank, KEXIM, International Finance Corporation, Islamic Development Bank, Law Debenture Trust Corporation Shin & Kim Global Infrastructure Fund, Shinhan BNP Paribas Asset Management, Shinhan Bank Why: The Patrind hydropower financing was especially complex because it involved operations across several states, including Khyber Pakhtunkhwa and Azad Jammu and Kashmir. It is being constructed on the Kunhar River and has a capacity of 147MW. The financing was provided by three multilateral development banks as well as the Korean export credit agency KEXIM. The transactions involved negotiations on complex intercreditor agreements, in particular the inclusion of an Islamic lease structure.

Lotte Shopping’s zero coupon exchangeable bond offering LAW FIRMS

Cleary Gottlieb Steen & Hamilton International legal counsel to Lotte Shopping Paul Hastings LLP International legal counsel to the underwriters: BofA Merrill Lynch, Citigroup, Goldman Sachs International, HSBC, Nomura, UBS Yulchon Lotte Shopping Why: This is the first Korean won-denominated exchangeable bond issue to be settled in US dollars and was one of the first deals in Asia ex-Japan following a relatively quiet fourth-quarter of 2012. Lotte Shopping launched a $303m zero-coupon bond exchangeable into the shares of consumer electronics retailer Lotte Himart. Lotte Shopping acquired a 65.25% stake in Himart back in July 2012 and will retain a majority stake in Himart even if all the bonds are exchanged.

ASIALAW Korea annual review 2013

Competition

NEWS Analysis

KFTC opens up The Korean Fair Trade Commission has cracked down on unfair trade practices in recent years. Some have criticised the lack of transparency at the Commission, but new guidelines should open up the decision-making process

n increase in the number of fines handed out by Koreaâ&#x20AC;&#x2122;s Supreme Court for so called anti-competitive behaviour has led to the Korean Fair Trade Commission (KFTC) revising its guidelines for reviewing abuse of market dominant position and unfair collusive acts. The amendments, which came into effect on August 21 2012, are intended to increase transparency and predictability of antitrust proceedings. A landmark ruling by the Supreme Court in 2007 against Posco for alleged dominance

ASIALAW Korea Annual Review 2013

abuse provided a precedent for subsequent cases. The Supreme Court held that a competitor suffering disadvantage is insufficient to prove an abuse of market dominance â&#x20AC;&#x201C; it must also be shown that a market dominant company intended to deliberately influence the market through restricting competition through such acts. Since the Posco ruling, other companies outside Korea have also been fined, including US businesses Intel and Qualcomm. In 2009, Qualcomm was fined approximately KRW260 billion for its alleged discriminatory royalties and condi-

NeWS ANALySIS

tional rebates. To date, this is the highest fine imposed on a single company in the history of the KFTC.

The Posco precedent The Posco ruling was important for two reasons. Firstly, it set the standard on exclusionary abuses, and secondly, on exploitative abuses. The latter abuse specifically deals with consumer welfare. Posco was deemed to have refused to supply a raw material needed to produce steel sheets to one of its competitors, which came under the hindrance to innovation and business enterprises, one of the prohibited abuse categories under the Monopoly Regulation and Fair Trade Act (MRFTA). In delivering its judgment the Supreme Court ruled that the dominant company’s conduct constituted an abuse by hindering innovation and business enterprises because there was an anti-competitive intent and an anti-competitive effect. Most of the major abuse cases since the Posco ruling, especially those at the Supreme Court, have relied on the standards set in this case.

Amendments to abuse of dominance The Abuse of Dominance Review guidelines now contain a new section titled “Standards for Determining Anticompetitive Effects” that lists five indicators of anticompetitive behaviour: (1) increase in price or decrease in output; (2) reduction of product/service diversity; (3) hindrance to innovation (4) barriers to entry; and (5) increase in competitors’ costs. The new guidelines include identifying anticompetitive effects by analysing market conditions that would have existed had it not been for the abusive conduct. These amendments emphasise the importance of reviewing and determining anticompetitive effects at the Supreme Court in light of recent high profile cases. Currently, a violation of any one of the five offences will incur corrective measures and include a surcharge of up to 3% of revenue. However, in light of the recent abuse of market dominance cases – Tbroad GSD Channel, Nonghyup Agricultural Cooperative Federation and Gmarket – it is probable the KFTC may widen its net to include additional forms

of abuse and once again increase the surcharge percentage. However, according to Cecil Saehoon Chung and Kyoung Yeon Kim of Yulchon’s antitrust practice, simply increasing the fines may not necessarily be a sufficient deterrent or a wise choice. “If you simply look at the numbers, then the maximum 3% fine for abuse of dominance may be smaller compared with the maximum 10% for cartel cases. Abuse of dominance cases warrant closer scrutiny as the problem with false positives and over-enforcement could be more harmful than otherwise. Therefore, you need to look at it in the proper context,” says Chung. “The KFTC utilises its merger review program to prevent mergers and acquisitions that may create a monopoly or may tend to substantially lessen competition in any given market,” Kim adds.

competItIoN

Abuse of “dominance cases warrant closer scrutiny as the problem with false positives and overenforcement could be more harmful than otherwise

”

Cecil Saehoon Chung, Yulchon

Getting tough with cartels The KFTC has also laid down stricter guidleines for reviewing cartel arrangements. Most notable are additional instances where collusion can be found and identifying standards for determining the number and duration of collusive acts. Furthermore, there is no longer the distinction between hardcore and softcore cartels, so a detailed

In 2009, the KFTC handed out a record KRW260 billion ﬁne to Qualcomm for abusing its dominant position in the Korean market for CDMA mobile phone chips

ASIALAW Korea annual review 2013

competItIoN

NeWS ANALySIS

analysis of the relevant market is not necessary for hardcore cartels, but a general market analysis should still be performed. This analysis should examine the market structure, type of transaction and the nature of the competition. The KFTC guidelines help businesses and the KFTC to investigate and detect potential violations, but as with the US and EU, building up an abuse of dominance case takes time and can sometimes be in vain. “Given the difficulty in building an abuse of dominance case and the need for a full-blown rule of reason analysis, enforcers need to make sure they do not inadvertently punish successful companies that have not engaged in any abusive or exclusionary practices,” says Chung. In addition to the guidelines, the KFTC regularly monitors various markets that are susceptible to abuse and closely follows the leading conglomerates for abuse of their superior position. “Korea does have aggressive or vigilant enforcement of abuse of dominance cases. Moreover, the KFTC enforces a separate provision in the law that prohibits abuse of superior trading position,” adds Kim.

Leading Competition lawyers Yong Seok Ahn Lee & Ko Lee Donghoon Apex Law Kyung Taek Jung Kim & Chang Youngjin Jung Kim & Chang Paul S Rhee Yoon & Yang Hoil Yoon Yoon & Yang Sung Joo Yoon Kim & Chang Seong Un Yun Bae Kim & Lee Sai Ree Yun Yulchon Sinsung Yun Yoon & Yang Source: Asialaw Leading Lawyers 2013

ASIALAW Korea annual review 2013

Moving in Foreign law firms have taken advantage of the recent FTAs to move into South Korea. But will there be enough work to go round?

ith a legal market worth billions of dollars, foreign law firms can now legally open for business in South Korea thanks to the recent establishment of the Korea-EU free trade agreement (FTA) and the Korea-US FTA, commonly known as KORUS. Under both FTAs, foreign companies are allowed to tap into a range of sectors from telecommunications to healthcare, which includes Korea’s legal market. The Korean service sector is estimated to be worth $580 billion. This move comes at the same time as Korea’s companies are expanding internationally and becoming increasingly globalised. One of the main contributing factors for American

and European law firms entering Korea is the chance to secure big corporate clients in Korea, by forging better networks with their Korean counterparts. However, with the Korean legal market dominated by Kim & Chang, Yulchon, Shin & Kim, Bae Kim & Lee, Yoon & Yang, and Lee & Ko, will there be enough clients to support this influx of foreign law firms?

US and UK entrants Proof of the importance of South Korea as a market is shown by the fact that close to 20 US and UK law firms have been approved or are pending approval by the Ministry of Justice since the restriction was lifted in March

NeWS ANALySIS

From now until 2016 Korea is not expected to see immediate fundamental changes following the legal market liberalisation, and it is arguable whether the restricted advisory roles of the foreign law firms will be of a truly competitive nature. Korean law practitioners expect the real competition to begin from 2016 when foreign law firms will be able to hire Korean lawyers and practice Korean law. Indeed, some Korean law firms do not yet see their foreign counterparts as too much of a threat, with some even suggesting that a few of the entrants may leave after a few years.

Too many players

2012. Clifford Chance, Ropes & Gray, and Sheppard Mullin Richter & Hampton became the first three firms to obtain permission to open in Seoul. They were shortly followed by Cohen & Gresser, Simpson Thacher & Bartlett, Cleary Gottlieb Steen & Hamilton, Paul Hastings, and O’Melveny & Myers. The latest names to enter are DLA Piper, K&L Gates, Baker & McKenzie, Herbert Smith Freehills, and McKenna Long & Aldridge.

Restrictions Establishing an office in Korea is just the first step and lawyers designated to lead a foreign law firm’s office must apply to the Ministry of Justice and then the Korean Bar Association to become registered foreign legal consultants. Once approved, a lawyer can then apply for a licence on his or her firm’s behalf. Initially, foreign law firms will be restricted to advisory roles that will see them practising the law of their own country and international law. For European law firms the Korean legal market will be fully open to them in 2016 and one year later in 2017 for US law firms, when they will be able to hire Korean lawyers and merge with local firms.

It is not clear whether the Korean market can support this influx of foreign firms. Korea’s demand for legal services comes from a small band of large companies – the chaebols – that are serviced by the big law firms, and if you disregard the likes of Samsung, LG and Hyundai then there is a dramatic difference in size between the top tier and second tier companies. Given their much smaller size, are these smaller companies going to hire international law firms that command higher fees? A large pool of lawyers will be competing for a limited number of companies. Jong Han Kim, recently relocated head of Paul Hastings’ newly opened Seoul office, is optimistic and feels initially international law firms in Korea will not be directly competing with local firms, but instead will stick to cross border, outbound work for Korean companies.“Having an office in Seoul means we are closer to our Korean clients. The work in the Seoul office is similar to what we were providing in our Hong Kong office and now it is much easier and more efficient having an office here”. He was surprised by the number of international law firms either approved or pending approval by the Ministry of Justice. When asked if the competition will intensify after the fifth year, he said “Paul Hastings Seoul office is not interested in having a domestic practice. We will concentrate on cross border (outbound), M&A and litigation work in the US and Europe for major Korean companies. Consequently, we do not see a real need to recruit Korean attorneys”. Many of Paul Hastings Korean clients have visited the Seoul office and their response

competItIoN INDIA

has been very positive. Domestic law firms have also been very welcoming and see many opportunities to work together in multijurisdictional cases. “Law firms in different jurisdictions often have to work together in many cases and from a competition /antitrust perspective, we expect foreign law firms in Korea would allow us to work more efficiently together in many cases,” says John Choi, competition partner at Shin & Kim.

Learning from Japan The Japanese legal market went through a similar transition beginning in the late 1980s and ending in 2005. Foreign law firms can form joint ventures with Japanese firms and hire Japanese lawyers. The Japanese experience may serve as a guide to what to expect in Korea. During the past 20 years, Japan has seen a gradual expansion of Japanese law firms in part due to mergers and the creation of large, full-service law firms. Other firms were established from joint ventures with foreign firms, thereby creating full service law firms with a mixture of Japanese and foreign lawyers. The result was the cost of obtaining a counsel for sophisticated legal issues or complex litigation cases increased, but the fees for standardised services decreased. Many expect to see the same changes in Korea, albeit in a much shorter period of time.

Hastings “SeoulPauloffice is not interested in having a domestic practice. We will concentrate on cross border (outbound), M&A and litigation work in the US and Europe

”

Jong Han Kim, Paul Hastings

ASIALAW Korea annual review 2013

competItIoN

mArket ANALySIS

Co-published feature

Enforcement gets stronger By Cecil Saehoon Chung and Kyoung Yeon Kim, Yulchon

n 2012, the Korea Fair Trade Commission (KFTC) continued to play a critical role in enforcing the nation’s antitrust laws and shaping the antitrust policy as part of a broader national economic policy. Unlike the US Justice Department, the KFTC does not have the power to prosecute criminal cartel cases and obtain large criminal fines. Yet in 2012, the KFTC reportedly managed to impose administrative fines well in excess of KRW1 trillion (close to $1 billion), which certainly compares well even against the US Justice Department’s record-breaking $1.13 billion in criminal fines in 2012.

Regulating conglomerates In Korea, one of the most important and unique features of its antitrust and consumer protection regime is the special regulation of large conglomerates whose total assets exceed KRW5 trillion. Despite their contributions to Korea’s phenomenal economic growth, large conglomerates have also raised antitrust issues, especially with respect to their vertical relationships with small and medium sized businesses. In particular, their allegedly less-than-arms’ length dealings with affiliates and discriminatory practices against non-affiliates have become not just an antitrust issue but also an acute social and political hot potato. In 2012, true to its Annual Plan for 2012, the KFTC made a big effort to monitor and regulate the activities of large conglomerate groups. The most oft-cited abuse has been the practice of unfair affiliate subsidisation or unfair inter-affiliate trading. The KFTC vigorously regulated this practice in several ways. It included efforts to amend the guidelines for unfair subsidisation by interpreting the so-called “remarkability” requirement to mean not just a remarkable degree of a favourable unit price difference but also a remarkable size of the total contract or business given to an affiliate, thereby making it easier for the KFTC to satisfy the requirement. It also recommended that a conglomerate group adopt a transparent decision making process by establishing an independent “affiliate transaction review committee,” at least two thirds of whose membership must be outside directors.

ASIALAW Korea annual review 2013

Despite their contributions to Korea’s phenomenal economic growth, large conglomerates have also raised antitrust issues

competItIoN

mArket ANALySIS

The KFTC aggressively disciplined unfair internal trading practices. For example, in the SKC&C case, seven SK affiliates have entered into long-term, private IT outsourcing contracts with SKC&C regarding IT management. After finding that the terms and conditions of these contracts were extremely favourable to SKC&C, the KFTC determined that those contracts had been executed to guarantee SKC&C’s profits and this unfair internal trading practice harmed competition. Similarly, in the Lotte PSNET case, the KFTC imposed a corrective order and administrative fine on the Lotte PSNET for placing an affiliate in the middle of a transaction between an ATM manufacturer and Lotte PSNET so that the affiliate placed in the middle of the transaction could generate an easy profit although it did not have any relevant business experience nor added any real value to the transaction. The KFTC found no mitigating factors for this unfairness.

Merger Control Lotte/Hi-mart Merger Lotte Shopping (first and third largest company, in terms of market share, in the department store and major supermarket sector, respectively) acquired Hi-mart (number one retailer of consumer electronics and home appliances in Korea). Market definition and competitive effect were the main issues. Considering the characteristics of each distribution channel and results of an economic analysis based on a consumer questionnaire survey, the KFTC determined the home appliance distribution market as the relevant product market, which included large retail home appliance stores, direct branch retail stores of appliance manufacturers, speciality home appliance shopping mall, and home appliance sections in major supermarkets. The KFTC defined the geographical market as the area within a five mile radius of each store based on the present state of businesses and customers, status of competition, and result of a consumer questionnaire survey. Upon reviewing 38 separate geographic markets, the KFTC concluded that the proposed merger was not anticompetitive.

Amendment to the Guidelines The KFTC amended the Guidelines for Notification on Combination of Enterprises and simplified merger notification forms to ease the burden on merging parties. It also clarified certain ambiguities regarding the merger control rules. For instance, it clarified that: only the final acquirer of stocks needs to notify upon continual acquisition of shares; when multiple combinations of enterprises arise from one contract, only the major part of the combination is subject to merger notification; and when computing domestic sales of a foreign company, the sales between the affiliates are excluded to prevent double counting.

Cooperation with China As the number of foreign-to-foreign mergers that should be notified to both the KFTC and other foreign jurisdictions has increased, in May 2012 the KFTC executed MOUs with China’s Ministry

ASIALAW Korea annual review 2013

The MOUs also recognise the need for a cooperative framework for international investigations of Commerce (MOFCOM), National Development and Reform Commission (NDRC) and State Administration for Industry and Commerce (SAIC). These MOUs are a recognition that as the economic exchange between Korea and China has increased the regulatory uncertainty faced by companies in both countries has also increased. The MOUs also recognise that the need for a cooperative framework for international investigations based on mutual assistance has increased. Specifically regarding merger control, the MOUs envision strengthening mutual assistance between the KFTC and MOFCOM by means of certain information exchange regarding proposed mergers and consultation on consistent corrective measures.

Cartel enforcement The KFTC’s cartel enforcement in 2012 also focused on the industries closely related to public welfare, including consumer electronics and home appliances such as washing machines, flat screen TVs, and laptop PCs; instant noodles (price-fixing among four Korean ramen companies); and airlines (collusive agreement between Korean Airlines and Mongolian Airlines to exert undue influence on the Mongolian government to prevent competitors from flying the Incheon–Ulan Bator route). Especially, the KFTC’s sanction against securities companies that fixed earnings rate regarding bonds denominated in small amounts (issued by state or local governments that are necessary for house or vehicle purchases) potentially represents a sea change. Previously, the KFTC’s probe of the financial industry was largely limited to collusion involving insurance products or bank charges. Now, it is gradually but surely broadening its antitrust probe into more complex and specialised financial product markets.

Other vertical restriction enforcement In 2012, there were two notable resale price maintenance (RPM) cases involving foreign manufacturers. First, the KFTC found that Goldwin Korea, an importer and seller of North Face outdoor wears, illegally enforced a written resale price maintenance policy against retail stores by reducing supply to offending stores and even terminating them. Moreover, the KFTC found that Goldwin Korea’s prohibition against resellers’ online discounting also constituted a separate violation as an unfair restrictive trade practice. Similarly, Philips Korea, a subsidiary of Royal Philips Electronics, set the minimum price of small appliances sold on internet open markets (where sellers register their products on the site and consumers choose what they like) in advance and prohibited retailers

market Analysis

About the authors Cecil Saehoon Chung T: +82-2-528-5923 E: cschung@yulchon.com Cecil Saehoon Chung is a senior foreign counsel at Yulchon. As co-vice chair of the Antitrust Practice Group and Head of the International Antitrust Team, Chung handles all aspects of antitrust, consumer protection and trade regulation matters, with a particular emphasis on international antitrust. He was previously a staff attorney at the US Federal Trade Commission, and antitrust partner at Pillsbury Winthrop and Greenberg Traurig in Washington DC. He has handled numerous criminal grand jury investigations, civil class actions, merger and non-merger investigation/litigation matters, and consumer protection matters. Chung also has extensive experience in handling patent infringement litigation and licensing matters and issues in the context of the antitrust and IP interface. Chung has written and lectured extensively on antitrust and consumer protection issues. His recent articles include Recent Korean Supreme Court Decisions on Per Se Illegality and Noerr-Pennington in Korea ( ABA Section of Antitrust Law, Cartel & Criminal Practice Committee Newsletter, Autumn 2012 (co-authored)); Revamped Korean Leniency Regime: No More Cheap Way Out for Repeat Cartelists and Second-in-Line Confessors (ABA Section of Antitrust Law, International Antitrust Bulletin, October 2012, Vol. 3 (co-authored)); The Merger Control Law (3rd Edition, Law Business Research (2012) (co-authored)).

Kyoung Yeon Kim T: +82-2-528-5503 E: akykim@yulchon.com Kyoung Yeon Kim is a partner at Yulchon who practises 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 (2010-2012, co-authored in English)).

from selling the products below the minimum price by employing the same or similar coercive measures found in the Goldwin Korea case. Furthermore, the KFTC undertook various initiatives to establish a level playing field in the distribution and franchise industries. For example, the KFTC established model fair trading standards for

Competition INDIA

various business categories such as bakeries, pizza parlours, coffee shops, and convenience stores, thereby clarifying its objectives of protecting franchisees from franchisors’ unfair trade practices and also fostering franchise start-ups that were growing during the economic recession.

Supreme Court rules on cartels On April 26 2012, the Supreme Court decided two related cases that clarified the proper analytical mode and sequence for concerted conduct. The Court ruled that the rule of reason applies to all concerted conduct cases in Korea, including even those commonly recognised as per se illegal horizontal price fixing cases in the US. In Kolon Glotech et al v KFTC (Supreme Court judgment no 2010Du18703 delivered on April 26 2012) (the BMW decision), the Court clarified that in determining the legality of concerted conduct, first and foremost, a relevant antitrust market must be defined based on a correct set of relevant factors before competitive effects can be ascertained. In D & T Motors et al v KFTC (Supreme Court judgment no 2010Du11757 delivered on April 26 2012) (the Lexus decision), the Court reconfirmed that concerted conduct offenses are not per se illegal but rule of reason offences and that the KFTC has the burden of proof in establishing a properly defined relevant antitrust market and anticompetitive effects within the properly defined market. At least partially in response to this opinion, in August 2012, in the course of its regularly scheduled updating of its internal Concerted Conduct Analysis Guidelines, the KFTC deleted references to the so-called “hardcore v softcore concerted conduct” distinction found in the 2007 version of the Guidelines.

No Passing-On Defence On November 29 2012, the Supreme Court ruled on the so-called “passing-on defence.” In Samlip v Cheil Jedang et al (Supreme Court judgment no 2010Da93790 delivered on November 29 2012), a bread manufacturer and direct purchaser of an input material brought a private damages action against the price-fixing flour manufacturers. The Court rejected the flour manufacturers’ passing-on defence, i.e., the direct purchaser plaintiff passed on the alleged price-fixing overcharge to its own customers and thus did not suffer harm. The Court held that, because a direct purchaser considers various factors in raising the price of its own downstream product, a significant causal connection could not be presumed between the price increase of the input material (flour) by the upstream price-fixing agreement and the price increase of the downstream finished product (bread). Thus, the Court held that, without special circumstances such as a pre-existing agreement under which a price increase of the input material automatically or directly results in a corresponding price increase of the downstream product, the direct purchaser may recover damages even if it passed on all or part of the input material price increase to its own downstream customers. The Court further noted that the direct purchaser’s increased downstream product price could make the downstream product less popular and lead to lower sales.

ASIALAW Korea Annual Review 2013

competItIoN

mArket ANALySIS

The KFTC’s cartel enforcement in 2012 also focused on the industries closely related to public welfare Increasing reach Consistent with the incoming administration’s presidential campaign promises on “economic democratisation” and “shared growth between conglomerates and small/medium businesses,” the KFTC’s enforcement priority is likely to continue to be deterring conglomerates’ abuse of their size and superior trading position, and providing as level a playing field as possible for small/medium-sized businesses to compete. Aside from the conglomerate or chaebol regulation, there are several legislative initiatives and proposals to strengthen the reach and scope of the antitrust laws in Korea. First, there has been a steady and increasing call for weakening the KFTC’s exclusive power to refer matters to the Prosecutors’ Office for criminal prosecution based on

ASIALAW Korea annual review 2013

the perception that the KFTC has used its power too sparingly. It is not clear whether other government agencies will be vested with the direct or indirect criminal referral power or whether the KFTC’s discretionary power will be curtailed, or even both. Second, a class action system may be adopted to allow a few representative plaintiffs with small individual claims to pool their claims and bring private actions for the entire class. There is no indication as to whether the proponents of the proposal mean a full US-style class action system that has many complex procedural rules or whether they mean something else. Third, punitive damages (whether it be treble damages or some other variations) may be adopted for certain types of antitrust violations, especially in the subcontracting law area that tends to affect small and medium-sized businesses more acutely. Fourth, there has been a discussion to adopt an injunctive relief system under which a private party may ask the court for an injunction to order an antitrust violator to cease certain practices. These are certainly important initiatives that, if adopted, could fundamentally change the private antitrust enforcement landscape in Korea. It remains to be seen which of the proposals will become new laws, and if so, in what form or shape.

News Analysis

Corporate Governance INDIA

The jury is out Korea has long had a problem dealing with white-collar crime, particularly from the country’s business conglomerates or chaebols, but there are signs that the government is starting to get serious about improving the country’s reputation for corporate governance

orean conglomerates or chaebols have played a vital role in Korea’s economic growth, with the likes of Samsung, LG and Hyundai going on to become global household names. But at the same time as this success, the fraudulent and reckless acts of some senior executives have created unfortunate headlines. After a series of high profile cases involving white collar crimes, the consensus on Korea’s measures to enforce good corporate governance is: good so far, but try harder. Sentences have been handed out to those found guilty of fraud, embezzlement and reckless actions. While

there may be a few isolated cases where harsher penalties have been handed down by the courts, there is a general perception the courts have shown leniency towards chaebol leaders in light of their contribution to the economy. Given Korea’s relatively weak corporate governance culture, it could well strengthen it significantly if those convicted of serious financial crimes were prohibited from exercising any influence over the company’s affairs. Crucially, executives convicted of accounting fraud and other financial irregularities are not barred from returning to senior management roles in other companies.

ASIALAW Korea Annual Review 2013

corporAte goverNANce

NeWS ANALySIS

Influence and presidential pardons Korea has made progress in adopting good corporate governance practices since the concept was first introduced in the late 1990s after the Asian financial crisis. However, the corporate structure and continuing influence of chaebols is proving to be a challenge in the fight to sustain good practices. This stems from the fact that chaebols are essentially family-controlled conglomerates whose boardrooms are filled with management allies who collectively do not have a strong incentive to adopt sustainable practices due to lack of accountability. Historically, the courts have been soft on white collar crime, particularly when it involves high-level politicians, government officials or chaebols. Many business leaders found guilty of crimes ranging from tax evasion to embezzlement were given suspended sentences. Government intervention is not helping

the cause with convicted business leaders escaping imprisonment through presidential pardon. President Lee Myung Bak granted a presidential pardon to Samsung Group chairman Lee Kun-Hee for financial crimes, and Hanwha chairman Kim Seung-Youn for embezzlement. There is the sense that the powerful can escape justice and the use of presidential pardon is used for political purposes. Incoming president Park Geun-Hye has stated that presidential pardons for business leaders guilty of embezzlement will be limited.

Time to stop the soft touch Regarded as heroes since the global financial crisis, chaebols have now turned villains stifling entrepreneurship, limiting the growth of smaller companies and assisting in wealth creation for a small, privileged elite. Critics are quick to note if a subcontractor does well, the chaebol will slash prices or set up its own subsidiary that makes the same product. Whilst there is no doubt that the chaebols were pivotal in leading Korea to its current level of prosperity, many argue the fact that the founding families are now in their second and third generations and have survived long enough, which means that government nurturing is no longer necessary. They have proved themselves to be highly successful and it is time to let them care for themselves.

A sign of things to come

SK Group chairman Chey Tae Won – convicted twice for accounting fraud

ASIALAW Korea annual review 2013

It came as a surprise when SK Group chairman Chey Tae Won was sentenced to four years imprisonment for embezzlement earlier this year. It is the second time he has been sentenced, having been convicted of accounting fraud in 2003, only to be granted a presidential pardon in 2008. He has appealed this latest decision. As Korea digests the decision, questions have emerged whether it was a one-off or a sign of the end of chaebol leniency. Lawyers feel that tougher sentences will encourage prosecutors to go after the big companies and their executives, which will in turn generate work for those who defend them.

Leading Corporate Governance lawyers Dan Bibb IPG Legal Sang Gon Kim Lee & Ko Young-Moo Shin Shin & Kim

Leading Government & Regulatory lawyers Dan Bibb IPG Legal Jiyul Yoo Yoon & Yang LLC Hyeong Gun Lee Lee & Ko Source: Asialaw Leading Lawyers 2013

corporate structure “andThecontinuing influence of chaebols is proving to be a challenge in the fight to sustain good corporate governance practices

”

However, the legal defence will need to deliver convincing extenuating circumstances rather than simply relying on the client’s contribution to economic development. Given the intense media coverage and public opinion surrounding chaebol crimes, judges face the risk of being influenced so much that the sentence may be a little harsh compared to the past. But, no one can now say that Korea is not tackling white collar crime.

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News Analysis

Corporate Governance INDIA

Market Data Corporate Governance Watch market scores (%): 2007 â&#x20AC;&#x201C; 2012 Pos.

Country

2007

2010

2012

Change

Trend of CG reform

Singapore

(+2)

Improving, but culture needs to open more

Hong Kong

(+1)

Static, but reinvigorated regulator positive

Thailand

(+3)

Improving, but corruption a major issue

Japan

(-2)

Government stalling, companies opening

Malaysia

(+3)

Culture at last showing signs of openness

Taiwan

(-2)

Rules improving, but still behind the curve

India

(+3)

Enforcement up, Delhi an obstacle

Korea

(+4)

Government more open, chaebols closed

China

(-4)

Rules improve, but culture still weak

Philippines

(+4)

Improving, but will it be sustained?

Indonesia

(-3)

Regressing, but new regulator may help

Market category scores (%) Pos.

Country

Total

CG rules & practices

Enforcement

Political & regulatory

IGAAP

CG culture

Singapore

Hong Kong

Thailand

Japan

Malaysia

Taiwan

India

Korea

China

Philippines

Indonesia

Source: Asian Corporate Governance Association

ASIALAW Korea Annual Review 2013

corporAte goverNANce

mArket ANALySIS

Co-published feature

Data protection and money laundering explained By Taek Rim (Terry) Oh, Shin & Kim

ith the aim of bolstering social welfare programmes without increasing taxes, the new president of Korea has pledged to focus on expanding tax revenue by policing and normalising black markets. This increase in tax revenue is expected to pour KRW2.7 trillion into the social welfare annually. Jumping on the bandwagon of the new government’s effort to regulate the underground economy, various government agencies have begun to ask for broader access to financial data held by the Korea Financial Intelligence Unit (KoFIU). The agencies argue that increased access to financial data will enable them to expand the tax base and prevent tax evasion. For instance, the National Tax Service (NTS) reported to the presidential transition committee on January 13 2013 that tax evasion in black markets could be cut down drastically if they are allowed broader access to the data provided by financial institutions to the KoFIU. The NTS analysed that using such financial data would allow the government to bring in at least KRW450 billion more in taxes. According to the NTS, the volume of financial data it obtains through the KoFIU is far from sufficient to detect the sources of funds flowing into black markets. To address the problem, a member of Congress proposed last year that the NTS be allowed to use for taxation purposes information on transactions exceeding KRW20 million that are reported to the KoFIU. Furthermore, the Korea Customs Service, in its policy briefing to the presidential transition committee on January 16 2013, vowed to clamp down on foreign currency-related crimes as part of its efforts to find hidden assets with the help of the KoFIU’s aggressive and comprehensive data collection process. These proposals and requests have sparked controversy over, among other things, privacy concerns. According to a civic group, for example, providing the NTS with more access to financial data kept by the KoFIU would not only infringe on people’s privacy but also effectively grant too much authority to the NTS. The civic group also predicted that, although increased access to and more expansive monitoring by the KoFIU may initially increase the government’s tax revenue, it would eventually drive more economic

ASIALAW Korea annual review 2013

These proposals and requests have sparked controversy over privacy concerns

Corporate Governance

market Analysis

activities to go underground off the radar of the tax authority. The Financial Services Commission, which oversees the KoFIU, also voiced its concern that it would not be appropriate for the KoFIU, which was initially founded to regulate financial crimes, such as money laundering, to provide information for taxation. Against the foregoing backdrop, we discuss below how the KoFIU, which has recently become a political hot potato, is operated to enforce anti-money-laundering law in Korea. In addition, we discuss what legal issues would arise in connection with allowing broader access to the KoFIU’s financial data.

KoFIU – the data hub The KoFIU collects financial data from financial institutions for crime control purposes. The KoFIU was established in 2001 following the Act on Reporting and Use of Certain Financial Transaction Information to regulate money laundering and terrorism financing. The Act requires financial institutions to report to the KoFIU suspicious transactions relating to money laundering and terrorism financing (STRs) and currency transactions exceeding a monetary threshold set by the implementing regulations of the Act (CTRs). The KoFIU is responsible for collecting and analysing STR and CTR information and then forwarding information deemed related to illegal transactions to domestic investigative agencies for further investigation. Under the Act, financial institutions are required to report STRs to the KoFIU if funds of a financial transaction equal to or exceeding KRW10 million (or $5,000 or an equivalent amount in any other foreign currency) and there is a reasonable ground to suspect that the funds are “illegal assets or that the customer is involved in a “money–laundering” or “terrorism financing” activity. The reporting requirement is also triggered when a financial institution has reported to a domestic investigative agency about criminal proceeds or moneylaundering. A financial institution and/or its officers and employees violating the Act may be subject to imprisonment or a fine. The CTR is a reporting requirement imposed on a financial institution where a person deposits or withdraws KRW20 million or more in cash within one day. Moreover, the CTR requirement also applies when there is a reasonable ground to believe that a series of transactions are conducted in smaller amounts to circumvent the KRW20 million threshold. In a CTR, a financial institution is required to report to the KoFIU the identity of the person who made such transaction(s), as well as the date, time and amount of each such transaction. The CTR requirement was put in place in light of the limitation of the STR that primarily relies on financial institutions’ subjective assessment. In addition to the STR and CTR, financial institutions are required to conduct customer due diligence. Among other things, for a customer opening a new account or conducting a transaction in an amount equal to or exceeding KRW20 million (or $10,000 or an equivalent amount in any other foreign currency), a financial institution should verify not only the name and real name of the customer, but also his address, other contact information, etc.

ASIALAW Korea Annual Review 2013

Further, if a customer is suspected of money laundering, a financial institution should verify the beneficial owner of the funds at issue and the purpose of the transaction. These reporting requirements will be enhanced with amendments to the Act to come into effect as of March 22 2013. To comply with the amended Act, financial institutions will have to establish anti-money laundering compliance programmes, and the KoFIU will be granted the authority to supervise and take appropriate measures in cases where a financial institution does not comply with the KoFIU’s orders. The KoFIU can even request relevant authorities to issue an order to suspend the business operation of non-compliant financial institutions.

Legal concerns Considering the wide spectrum of financial data the KoFIU collects, it is understandable that government agencies like the NTS feel tempted to obtain access to and use the data for their own purposes. Even under the current system, the KoFIU may provide to the NTS certain financial data for investigating tax crimes. However, what the NTS is asking for now is to use KoFIU data for pure taxation purposes. Such expansion of access is not without legal issues. First, as mentioned above, allowing the NTS broader access to KoFIU financial data may violate privacy laws in Korea. The Act was enacted as a narrow exception to privacy laws in order to combat financial crimes. However, if KoFIU data were to be used not only for crime control but also for taxation, it may open the floodgates to a variety

About the author Taek Rim (Terry) Oh Partner T: +82 2 316 4020 E: troh@shinkim.com Taek Rim (Terry) Oh is a partner at Shin & Kim and his main areas of practice include white collar defence and FCPA/internal investigations. He has served as a public prosecutor for 14 years and has worked in the Special Investigation Department of the Prosecutors’ Office and the Central Investigation Department of the Supreme Public Prosecutors’ Office which handle investigations and indictments of white collar crimes. During his term in office as a prosecutor, he has conducted multiple investigations and was involved in various criminal trials for white collar crimes, particularly bribery, corporate crime, securities fraud, and accounting fraud. His representative cases include: various bribery cases involving relatives of the former Presidents, mayors, congressmen, CEOs of state-owned companies and port trade union members; an accounting fraud case involving conglomerate companies in conspiracy with accounting firms and; a securities fraud case relating to M&A transactions. He has expertise in anti-bribery and accounting regulations and broad experience in investigating and prosecuting cases in the field. He joined Shin & Kim in October 2011 and has been actively involved in the white collar defence team. In addition as the head of the FCPA/internal investigation practice group, he assists clients with internal investigations, FCPA due diligence and anti-corruption training.

mArket ANALySIS

The general public sentiment is that the NTS already wields (almost) uncontrolled power and authority and that it does not need more

of personal privacy infringements. Also at risk is the legal principle requiring a valid warrant for any search or seizure. This principle is stipulated in the Constitution as a means to protect right to privacy and freedom from arbitrary invasions. Allowing the NTS unrestricted access to KoFIU financial data would be a violation of the legal principle. Furthermore, a report by the National Assembly Research Service anticipates that unfettered access given to the NTS would effectively allow the agency to monopolise personal information. The report also points out that out of the seven countries that have the CTR requirement, only two (the US and Australia) allow their tax agencies

corporAte goverNANce INDIA

to use information on a very limited basis. The general public sentiment is that the NTS already wields (almost) uncontrolled power and authority and that it does not need more. In fact, in accordance with the National Taxes Act, the NTS rarely releases information regarding tax audits, citing confidentiality concerns, even when Congress makes an information request. With the black markets able to avoid taxes, it is true that legalising and levying taxes on private businesses in the underground market would expand the governmentâ&#x20AC;&#x2122;s tax base. In order to get a grasp on the underground market, the size of which is estimated to be approximately KRW400 trillion to KRW500 trillion, strengthening the financial information system and boosting transparency in transactions would surely be the key. However, as seen from above, it would not be an easy task balancing the need to combat financial crimes against the legal mandate to protect privacy. It remains to be seen how various issues would be resolved. Nevertheless, now with momentum building up for the new administration to increase the tax base and restrict tax evasion, it is certain that the voice emphasising the need for more financial information would continue to grow.

ASIALAW Korea annual review 2013

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Managing eBayâ&#x20AC;&#x2122;s legal department Seung-Key Lee (Stephen), the head of the legal department for eBay in Korea, talks about how the online auction platform structures its legal department, who should be liable for the sale of counterfeit goods and what books have most inspired him What do you think are the major legislative challenges that your IP department faces? As an online marketplace operator, eBay Korea is facing a potentially critical legislative challenge in the trade mark law area. Currently, under court precedents, online marketplace operators in Korea are not liable to trade mark rights owners for display or sale of counterfeit goods listed by sellers on their sites unless they knew or

ASIALAW Korea annual review 2013

had reason to know of such fact and failed to act expeditiously to remove the infringing listings from their sites. However, there is a growing movement in government towards regulating online marketplace operators for the sale of counterfeit products on their sites. For example, in July 2011, Korea Intellectual Property Office (KIPO) published a treatise written by expert professors which called for imposing a stricter duty on online

NeWS ANALySIS

marketplace operators, such as deeming provision of service to infringing sellers as the site operators’ own infringing activity. eBay Korea is paying keen attention to KIPO’s legislative efforts in that area.

What measures has eBay implemented to prevent the sale of counterfeit goods on the internet? Have you noticed an increase or decrease in recent years? eBay is implementing notice and take-down measures and the VeRO (Verified Rights Owner) Programme to prevent the sale of counterfeit goods on our sites. The former refers to eBay’s taking down of a listing if eBay has notice, either by rights owners’ notification or by self-monitoring, that it infringes the IP rights of third parties. The latter allows IP rights owners who are registered to the Programme to easily report listings that infringe their rights to eBay. We have not seen any noticeable increase or decrease in sale of counterfeit products on our sites in recent years.

Where do you think the burden should lie when it comes to reducing the sale of counterfeit goods online? Should the brand owner or the auction platform be responsible? Or is it more a case of educating consumers? I am of the opinion that the brand owners should assume the burden of reducing the sale of counterfeit goods online. First, as a general principle, it would be fair and reasonable for rights owners to bear the time and resources to enforce their own rights against third parties. Second, if the burden falls on the auction platforms, it would decrease social benefits which can be derived from active online transactions of goods by increasing transaction costs and deterring free trade of genuine goods.

Online payment has always been a public concern in terms of data security. What kinds of mechanisms are present within your company to prevent loss of data? Do you think the law on this in Korea is strong enough at present? In order to protect personal information of users, eBay Korea is implementing all technical and administrative measures that

There is “a growing movement in government towards regulating online marketplace operators for the sale of counterfeit products on their sites

”

Jae Hoon Kim, Lee & Ko

are required under the relevant laws and regulations, such as implementation of the internal administration plan, restriction of access to information, prevention of falsification or alteration of access records, encoding of personal information, prevention of vicious programmes, protection of records in printing or duplication. In Korea, protection of personal information of citizens is considered as one of the top priorities by the government, the legislature and the courts alike. Thus, it is widely viewed that Korea’s law on data protection is as strong as that of any other country.

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What is your role at the company and what are your main responsibilities? I am the head of legal department and my main responsibility is to ensure the company complies with all the regulatory guidelines. Including myself there are 10 members in the legal department consisting of three divisions, each with 3 members. The divisions are regulatory and privacy team, commercial and corporate, and litigation/ IP. I was promoted to head last year and am responsible for overseeing all three divisions on a daily basis.

Can you describe your typical working day? My daily routine revolves around meetings with all three divisions and, first and foremost, with compliance. Then I ensure all members of the legal department are working in harmony – one of my greatest challenges is personnel management.

What are the main challenges in your job? Aside from the personnel management, I think the main challenge is trying to cope and comply with the ever increasingly stringent KFTC rules, which is heavily geared to protesting the consumer. It is not just our sector, but also others with greater emphasis on consumer protection. I think the KFTC is biased towards consumer protection and is squeezing companies by keeping a tight rein on them.

Adapting to the Korean market In 2001, eBay Inc acquired South Korea’s second largest web-based auction company, Internet Auction Company (IAC) in an attempt to crack into South Korea’s lucrative market. IAC became a subsidiary of eBay until 2006. In 2006, South Korea’s largest online auction company Gmarket acquired IAC and in 2009 they operated as eBay Korea under the new structure. Finally, in 2011 Gmarket and IAC merged. In 2011 the combined Gmarket/IAC revenue was $7.8 billion with an average transaction price of $30. The majority of the products include electronics, clothing and food and unlike eBay sites in other countries, 90% of the products have fixed prices (there is no bidding process). According to Lee, Koreans do not really like bidding for goods. Gmarket caters for young females with an age range of 20 to 30, while IAC is more appealing to older males, ranging from 40 to 50. Lee is surprised by the increasing number of transactions for food, whether tinned or fresh. “Even fresh food can be delivered within a day or two,” he says. The business is trying to expand into overseas markets and Lee points to mobile shopping as an important trend to watch out for. More people are using smartphones and people use them to make online purchases. In fact, eBay Korea has developed an app specifically for mobile shopping. However, the main challenge here is to develop a simple and quick online payment for smartphones.

ASIALAW Korea annual review 2013

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the burden falls on â&#x20AC;&#x153;the Ifauction platforms, it would decrease social benefits which can be derived from active online transactions of goods by increasing transaction costs and deterring free trade of genuine goods

â&#x20AC;?

Jae Hoon Kim, Lee & Ko

How did you get into this industry? It happened by chance. I worked for a shipping company for many years and probably would have stayed there had I not been asked to relocate to another location. I was specifically looking for this type of job and industry, but when I saw it advertised it was very appealing and something I would very much like to try. I come from a legal background and this position posed a good opportunity for me.

How do you see yourself from the eyes of a colleague? I would like to see myself as an open and fair person and someone who is easily approachable. Strict, but fair is the way I like to be seen.

Are you a fan of autobiographies of leading CEOs? Is there anything you have learnt from them? Yes, I like reading them. Steve Jobs of Apple and Jack Welch of General Electric are two very successful CEOs. They have many years experience and tremendous success in running successful companies. I would not go so far as to say I have learnt something from them, but it is interesting to see how they run such large corporations very successfully.

ASIALAW Korea annual review 2013

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Leading the way in cloud computing Cloud computing is set to revamp the IT industry in the coming years as governments and companies increase their investment. South Korea is aiming to be at the forefront of this wave, but serious data protection issues remain

n a few years, cloud computing has become an important part of the knowledge economy and is set to become one of the biggest drivers of economic growth over the next decade. The global market for cloud computing has been growing since its inception in 2010 and is likely to be worth over $100 billion within the next few years. South Korea’s Communications Commission (KCC) proposed the Act on Development of Cloud Computing and User Protection at a public hearing in August 2012, which resulted in a draft bill put forward in October. At the hearing, Jae-Moon Park, DirectorGeneral of the Network Policy Bureau of the KCC said: “If the Act on Development of Cloud Computing and User Protection is enacted, it will not only lay the foundation for the development of the domestic cloud industry, but also create a safe environment, thereby invigorating the cloud market”. The South Korean government has identified cloud computing as a growth sector, one that could revolutionise the IT industry. Just like investments in other high tech markets such as telecommunications and electronics, where they have become world leaders, it would be hard to bet against them.

PHOTO: © GOOGLE

The beneﬁts Cloud services have become available thanks to the widespread use of fixed and mobile broadband networks and the mass of smartphone and tablet users. By using cloud

services, governments, businesses and other organisations can deliver content, databases and applications in a more cost-effective and flexible manner. For example, instead of buying computer software and a licence every time a company hires a new employee, cloud services provide for a one-off installation of software and applications onto a web-based service which hosts all the programs for all users to access. Local computers will no longer have to bear the workload when running applications, instead it will be done by the network of computers that make up the cloud service and it only requires the user to install the software interface on their computer. This can be as simple as a web browser.

Data protection, ownership and liability The obvious concern on cloud computing is that of data protection. With cloud computing the data is stored on servers housed in data storage centres in multiple locations. This raises several questions: How secure is the data? Who owns the data? Where is the server location? Different jurisdictions may have their own laws and regulations on cloud computing, so the location of the server in which the data is stored is important. The EU Data Protection Directive prohibits storing of data outside the boundaries of the EU, while in the US the data is governed by the Patriot Act. Michael S Lee from Kim & ASIALAW Korea annual review 2013

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Cloud computing is an evolutionary technology which is “constantly changing, and which is broadly defined in the law to help to accommodate technological changes as well ”

Michael Lee, Kim & Chang

Chang’s Broadcasting & Telecommunications practice says: “In addition to data protection issues, we understand that the global, multinational and multi-jurisdiction nature of cloud computing may raise interoperability and standardisation concerns as certain jurisdictions may not have laws and regulations which are fully developed in order to address security concerns.” There remains a dispute between enterprises and cloud service providers (CSPs) on who is responsible for data protection and compliance. Enterprises feel responsibility rests with the provider while the providers feel that the onus should be on enterprises to keep data safe, even though it has passed over to them. “The KCC initially considered mandating certain requirements on cloud service providers, but after comments from

businesses and the industry the KCC instead is considering modifying certain provisions to recommended or guideline measures,” notes Lee. More worrying is the ability to retrieve data upon contract termination and on what grounds the service can be terminated. What is the data format, will the providers assist and what is the retention period? Some providers may delete all the data immediately or after a short period, while others may have longer grace periods. Non-payment is the leading reason providers terminate services, but there may be others such as breach of policies.

Price war CSPs understand that once the fundamental issues are resolved, the next challenge is to try to convince enterprises to come onboard

Patent wars come to Korea Although patent owners have focused on the global patent battle between Apple and Samsung, which has a Korean leg, Samsung has also got involved in a dispute with LG, showing that the era of high-stakes patent litigation is here to stay 32

ASIALAW Korea annual review 2013

and use public providers. Some business IT groups initially choose private or internal cloud systems, which can be slower and less flexible than their public counterparts. When business IT groups realise that their private cloud no longer serves their needs they will turn to re-engineering, but this will be much more difficult than buying a new product that has the necessary infrastructure in place. Convincing businesses to opt for public CSPs is the key. Second, expect a bitter price war between the public CSPs with only a small number of businesses ending up on top. Cloud pricing is a marginal cost service in that the costs associated in providing a cloud service to clients is very low as it simply requires maximum utilisation of existing software and hardware. Put simply, the costs are minimal when installing another client database or application onto an existing server, providing there is sufficient space on the server. Third, IT organisations and CSPs hope that a single most-common technology will be standardised for cloud technology. As Lee says: “Cloud computing is an evolutionary technology which is constantly changing, and which is broadly defined in the law to help to accommodate technological changes as well.”

he global patent battle between smartphone and tablet manufacturers has moved on to display screen technology. Aside from the multiple Apple versus Samsung patent infringement cases, the latest is taking place on Korea’s own doorstep with LG and Samsung locked in a legal battle. In a move to gain more market share, Apple and Samsung have sought to ban specific products being sold in their respective countries on allegations of patent and design infringement. As technological innovation advances, the competition is getting more intense and the stakes are getting higher. In the latest case, LG Display, which is the display panel arm of LG, has filed a patent lawsuit against Samsung and its display division. LG filed an injunction application

News Analysis

at the Seoul Central District Court asking the court to stop Samsung from making the Galaxy Note 10.1, which uses LG Display technology. LG alleges Samsung’s Galaxy Note 10.1 tablet infringes several of its patents on liquid crystal display (LCD) technology, and wants the court to stop further production of the Galaxy Note 10.1 or award them damages. In a counterclaim, Samsung filed a separate case at the same court in December 2012 claiming LG had infringed several of its own LCD patents used by the LG Optimus G smartphone. Industry analysts believe both companies are trying to take to lead in the lucrative panel business, where both have a strong presence in television production.

Patent infringement or corporate greed When the Apple and Samsung patent infringement case began over a year ago, the term patent war was not well known and they were rare events. Yet, the reality is that more and more companies are fighting to get the top spot and engaging in what can be seen as tit-for-tat litigation. There is a danger that both businesses will start to focus more on patent litigation than on innovation. Korea has one of the world’s most active telecommunications and information technology markets and spending on information and communication technology (ICT) and high technology equipment has helped transform the economy. Its mobile phone market is booming and with the increasing coverage of 4G networks, also known as Long Term

INtellectual Property & TMT

Evolution (LTE), high speed wireless data communication capable of reaching speeds 10 times faster than 3G, has enabled smartphone and tablet manufacturers to take new products to the market.

Patent validity This is not the first time LG and Samsung have been at odds, but this latest battle is being fought on the validity of LG’s OLED (organic light-emitting diode) displays. Samsung claims that seven of LG’s OLED patents lack an inventive step and should be invalidated. More seriously, earlier in 2012 several current and former employees of Samsung Mobile were arrested for allegedly stealing and leaking details to LG about Samsung’s OLED technology.

ASIALAW Korea Annual Review 2013

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Leading IP & TMT lawyers Tae Yeon Cho Cho & Partners Hyunseok Choi You Me Patent & Law Firm Jay Young-June Kim & Chang Myung-Koo Kang Kim and Cho Young-Chol Kim Kim Choi & Lim Jae Hoon Kim Lee & Ko David JHJ Kim You Me Patent & Law Firm Seong-Ki Kim Lee International IP & Law Group Yeon Song Kim Kim & Chang Jong-Yoon Kim Shinsegi Patent Law Firm Wonil Kim Yoon & Yang Eric Kee Wan Koo Muhann Patent & Law Firm Young-Mo Kwon Lee & Ko Sukheum Kwon You Me Patent & Law Firm Chad Chang Hoon Lee Muhann Patent & Law Firm Youngpil Lee Y P Lee Mock & Partners Young-Hill Liew Yulchon Ho-Hyun Nahm Barun Law Man-Gi Paik Kim & Chang Seung-Moon Park Darae Law & Patent Ghyo-Sun Park Shin & Kim Thomas Pinansky Barun Law Ik Hyun Seo Cho & Partners Manho Song You Me Patent & Law Firm Jang Won Park Kim & Partner Chun Y Yang Kim & Chang Suk-Jae Yim Wonjon Source: Asialaw Leading Lawyers 2013

ASIALAW Korea annual review 2013

Six LG employees were also charged with stealing Samsung Mobile display technology. Samsung is sticking to its allegations on the validity of LG’s OLED patents because any victory for LG could keep OLED technology off future Samsung handsets.

A new trend The bruising Apple-Samsung battle presents an IP challenge that Korea and other Asian countries are generally ill prepared for. More than ever, patents are being used as a tool to shut down competition and gain market share. In the mobile phone sector, it is a numbers game, with a focus on the quantity of patents owned rather than the quality. This dynamic could lead companies in Asia to focus on buying portfolios of patents as well as filing their own. This has already started to happen in the US, and there is now a move to create a more liquid market for IP rights in Asia. Neither Apple nor Samsung can claim a conclusive victory in their global patent war, with some wins and some losses. The ultimate losers may in fact turn out to be

The bruising Apple-Samsung battle presents an IP challenge that Korea and other Asian countries are generally ill prepared for

the consumers who could see their choice of products restricted as courts take infringing devices off the shelf. A final point to note in the global patent wars is the question of home team bias. Is it a coincidence that Apple won emphatically in the US, while Samsung got a better result in Korea? A leading IP lawyer says that the Korean court was aware that there might be such perception and added “I think the judges here were under a lot of pressure, and they wanted to be very fair. I think that they understand that the decision is closely watched by many people, especially in the US.”

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Co-published feature

Securing the cloud By Wonil Kim and Kwang Wook Lee, Yoon & Yang LLC

he market for cloud computing in Korea is growing at a rapid rate and, based on the global trend where governments are promoting policies to promote cloud computing, the Korean government continues to make efforts to actively introduce and expand the use of cloud computing for the purpose of effectively managing and using IT resources. In December 2009, the relevant authorities in Korea that are in charge of the policies regarding cloud computing, the Ministry of Public Administration and Security, the Ministry of Knowledge Economy (MKE) and the Korea Communications Commission (KCC), collaboratively established the Comprehensive Plan for Government-Wide Cloud Computing Vitalisation. Additionally, in connection with the above plan, in May 2011, the Plan for Expanding Cloud Computing and Strengthening of Competitiveness was introduced. The above plans are intended to strengthen Korea’s global competitiveness in the cloud computing sector and the key strategies for achieving this purpose consist of establishing a legal environment that is conducive to cloud computing, early introduction of cloud for the purpose of advancement of IT infrastructure in the public sector, strengthening the global competitiveness of the cloud industry and services, developing a cloud data centre in order to become the global IT hub and creating a solid consumer base for market vitalisation. In particular, on July 10 2012, the KCC prepared the Proposed Bill for the Development of Cloud Computing and Protection of Users (the Proposed Cloud Act) with the goal of advancing cloud computing, promoting its use and creating an environment where cloud services can be safely used and the KCC is seeking opinions from various fields. However, as cloud computing services become more common, severe concerns over information protection issues are being raised. Based on its concept, the term “information protection” can be classified into personal data protection, data sovereignty and information security. The applicable legal regulations in Korea with respect to the above will be examined below.

Cloud computing and personal data Under Korean law, in the case of infringement of personal data under cloud computing services, while the application of a variety of laws that are directly/indirectly related to information and communications may be considered, the Act on Promotion of the Use of Information and Communication Network and Information Protection (the ICNA) is actually the basic law. The ICNA is the applicable law which regulates personal data issues between the information and communication service provider and the user of such

As cloud computing services become more common, severe concerns over information protection issues are being raised

ASIALAW Korea annual review 2013

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service and, if the cloud service provider (the CSP) is a cloud service business that constitutes an information and communication service provider (i.e., public cloud), the ICNA would apply. However, in a case where the CSP is the cloud service user (i.e., private cloud), the ICNA would not apply.

CSP. Such rules took into account that the servers of the CSP could be physically dispersed in various countries and that the personal data protection laws, which could apply, could be different from Korean laws, stipulating that the CSP should clearly inform the user of the location where the data is stored and that the user may designate a location for storage. Also, by taking into account that different personal data protection laws than Korean laws may apply depending on the location where data is stored or the location where the CSP is registered, the CSP should clearly inform the user of the applicable personal data-related laws it must follow. The key contents of the above rules are summarised under Table 1 below.

Providing personal data to third parties

Data sovereignty

In the case of providing personal data to third parties, entrusting the handling of personal data and transferring personal data abroad, all items require the consent of the data subject (Articles 24-2, 25 and 63 of the ICNA). In particular, in the case of transferring personal data abroad, the information and communication service provider such as the CSP must take technological/managerial measures to protect the personal data, measures to handle grievances regarding infringement of personal data and dispute resolution matters as well as other necessary measures to protect the data subject’s personal data.

Under Korean law, there are no regulations that directly deal with data sovereignty. Article 27 of the Proposed Cloud Act stipulates that the source of the information should be guaranteed their rights in the event that the information is stored abroad. Since this Article relates to guarantee of a certain level of information protection and procedures, it may be viewed that this is related to data sovereignty. While the burdens to the CSP regarding the provision of information regarding the status of information stored abroad and security measures regarding the information stored abroad may be minor, the effects that this will have in promoting user rights is expected to be significant.

Under Korean law, there are no regulations that directly deal with data sovereignty

Personal data protection rules Based on the expansion of cloud services, in order to take pre-emptive measures against infringement of personal data, the KCC has issued the Personal Data Protection Rules for Cloud Services in 2011, which contains rules for corporate users, individual users and the

Security The issue of information security for cloud services relates to a variety of areas in various forms, such as, among others, leakage of personal

Table 1: Personal data protection rules for cloud services

(1) Rules for Corporate Users

n Prior analysis of risk factors based on the introduction of cloud; n Indication of restrictions for data access at the time of the service agreement; and n Indication of matters which the company may consider in a step-by-step manner from the point of introducing the cloud service until the time of termination, such as issues regarding return or deletion of data upon termination of the service.

(2) Rules for Individual Users

n The risk factors for the individual user from the time of subscription, use and termination of services should be determined; n At the subscription stage, the CSP’s methods for handling data and terms and conditions should be confirmed by the user; n At the use stage, caution should be taken so that files which contain personal data are not shared and personal data files should be encoded; and n At the termination stage, the individual user should terminate the service after all his/her data is deleted.

(3) Rules for CSPs

n CSPs should follow the international standard for protection of personal data which is the OECD’s “8 principles of personal data protection,” such as principles regarding information disclosure, safety, restrictions on use and user protection; n Clearly notify each of the locations where data is stored; n Obtain periodic inspections from a third party; and n Completely delete the customer data upon termination of the service.

ASIALAW Korea annual review 2013

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mArket ANALySIS

About the authors Wonil Kim T: +82 2 6003 7511 E: wonilkim@yoonyang.com Wonil Kim is a managing partner at Yoon & Yang LLC. His main practice areas include intellectual property, technology, media and telecommunications, trade regulations, antitrust and privacy protection. He represents major broadcasting companies in Korea and has extensive experience in protection of trade secrets and prevention of unfair competition. He has lectured as a professor at the Patent Training Institute of the Seoul Bar Association and has served as a member of the Competition Policy Advisory Board for the Korea Fair Trade Commission. He received his LLB from Seoul National University in 1988, and LLM from University of Washington School of Law in 2002. He is a member of the Korean Bar. Kwang Wook Lee T: +82 2 6003 7535 E: kwlee@yoonyang.com Kwang Wook Lee is a partner at Yoon & Yang LLC. His main areas of practice include intellectual property, antitrust, technology, media and telecommunications, energy and privacy law. He represents a broad range of companies in the telecommunications and media sectors, specialising in telecommunication 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 protection of personal information. He received his LLB from Seoul National University in 1995, his MBA from Ajou University Graduate School of Business Administration in 2002 and his LLM From University of Pennsylvania in 2007. He is a member of the Korean Bar.

In Korea, while there are significant levels of discussions from a business perspective regarding issues such as security technology, the regulations regarding security for cloud services are rather weak Personal Information Protection Act, the notification obligation is not stipulated under law). However, the MKE has criticised the above and noted that this could serve as a barrier to entry for small/medium size software companies that lack resources and/or a workforce. Furthermore, in cases where violations of the law are uncovered, the submissions of relevant materials or documents may be ordered and, if the CSP does not comply, government investigators may directly enter the premises of the CSP’s business to conduct an administrative investigation where materials and documents may be examined. With respect to this provision, the MKE noted that this may serve as grounds for reverse discrimination towards Korean CSPs since an administrative investigation cannot be conducted for CSPs where the servers are located abroad. In addition to the above, the MKE is of the position that, as opposed to regulating mechanisms to protect users through the law, it would be more beneficial to address this issue through marketfriendly methods such as through an agreement between the user and the CSP.

Private cloud service certification system

data or trade secrets, surveillance of an individual, processing personal data for business purposes, termination of service and measures regarding e-discovery. However, in Korea, while there are significant levels of discussions from a business perspective regarding issues such as security technology, the regulations regarding security for cloud services are rather weak. The measures noted below are being discussed or have been implemented.

The cloud service certification system was a system that was based on the Plan for Expanding Cloud Computing and Strengthening of Competitiveness that was jointly announced by the relevant authorities in May 2011. Under this system, various areas of cloud services, such as quality, information protection, and continued service are evaluated and, if a certain structure and procedures are followed, a certificate will be issued. On June 18 2012, the KCC issued Korea’s first private cloud service certificate to KT’s companyoriented cloud service, which is called ucloud biz.

Notification obligation under proposed cloud act

Cloud service level agreement guide

According to the Proposed Cloud Act, all CSPs must provide notification to the KCC for the purpose of, among others, information security or data retention. Also, in the case that a business is abolished or a portion of the business is transferred or merged, a notification must also be made (provided that in the case of leakage of general information, unlike the measures for notification for leakage of personal data stipulated under the

The KCC has prepared the Service Level Agreement Guide (the SLA Guide) which clearly and objectively stipulates matters such as the cloud service’s quality, backup and customer service requirements and plans to provide the SLA Guide to CSPs. It appears that the SLA Guide may be used as a guide when CSPs execute service agreements or stipulate the level of service in its terms and conditions.

ASIALAW Korea annual review 2013

market Analysis

Intellectual PropertyINDIA & TMT

Table 2: The SLA Guide for cloud service (1) Service availability

In order to minimise concerns over stoppage of cloud services due to sudden defects such as power failure or internal server malfunction, the SLA Guide stipulates that the amount of time during which the CSP’s service may be interrupted due to various defects should be maintained under a cumulative time of 3.6 hours. However, interruption caused by external obstacles which are difficult for the CSP to control and force majeure events, such as natural disasters and failures caused due to the deliberate or negligent acts of the user, are exempt.

(2) Backup data, restoration and security

Since the cloud service stores user’s data in an external data centre, in order to prepare for damage or leakage of such data, a backup rate of 99% is presented in the SLA Guide and, in order to restore the data within a certain timeframe in the event that such data is actually damaged, a category of items required for such restoration is stipulated. Also, since security concerns such as hacking and malware infections are growing for cloud services, the SLA Guide stipulates that, before executing a service agreement with a user, the CSP should provide its security policy or the contents of its certificate (e.g., ISMS) in order to enhance the trust of the user.

(3) Customer support

With respect to customer support, since cloud service is a service that “borrows” IT resources such as hardware and software, regular customer support is important. Accordingly, the SLA Guide notes that, if there is a customer request related to services, these requests should be handled as promptly as possible.

(4) Penalties

In case the targets for the categories designated under the SLA Guide, such as availability, backup and restoration and customer support are not properly met, a penalty must be paid. As regards availability, a specific level has not been determined yet as the Korean cloud market is still in its early stage.

(5) Termination of the service agreement

In principle, the cloud user may freely terminate their agreement and following termination, the data will be handled based on discussions with the user about storing the data for a certain period and returning/destroying the data etc.

ASIALAW Korea Annual Review 2013

mergerS & AcquISItIoNS

NeWS ANALySIS

Looking outbound South Korean companies, buoyed by the drop in asset prices and the strengthening of the Korean won, are slowly regaining their appetite for European acquisitions. But they are keen to learn from previous mistakes, especially in the area of post-merger integration

t is not only the European Central Bank and central banks of European Union members that are keeping a close eye on the European debt crisis. Large Korean companies emerged relatively unscathed from the 2008 financial crisis and have benefited from the boom in exports in recent years on the back of a cheaper won, generating large cash reserves. While this may be a good opportunity to buy European assets, cultural

ASIALAW Korea annual review 2013

differences and their limited experience in running foreign companies have led to a cautious approach. Domestic M&A activity is likely to pick up in 2013 after the new so-called “squeeze-out” law on compulsory acquisitions of minority shareholders was enacted in the second half of last year, and the conclusion of the country’s general election, where billions of dollars worth of privatisation deals were put on hold

NeWS ANALySIS

in the run-up to the election. The government is expected to renew its efforts to unload stakes it holds in numerous enterprises.

Value of outbound deals on the rise Cross border M&A deals are becoming an attractive option for either quickly acquiring core technologies or enabling Korean companies to enter foreign domestic markets. According to the South Korea M&A round-up report for the first three quarters in 2012 compiled by Mergermarket, both inbound and outbound deals increased by 34.8% and 17.5% by value respectively, compared to the same period the year before. Industrials and chemicals was the most influential sector accounting for 19.4% of total deal value, with the consumer sector close behind with 18.4%. Korean foreign investment traditionally focused on natural resources, but has now diversified with acquisitions in electronics, real estate and luxury brands. Spurred on by the limited investment opportunities in their small domestic market and attractive returns, overseas acquisitions represent a good alternative investment.

In recent years London’s property sector has attracted a lot of attention as Korea’s cash-rich pension funds and insurers search for bargains, where the investment returns are much more favourable than traditional instruments like government bonds. The state-run National Pension Service is leading the field in overseas properties with stakes in London’s Gatwick airport, HSBC’s Canary Wharf headquarters in London and a shopping centre in Paris. It has been reported that real estate returns in these markets are between 6% and 7%. Other pension funds such as The Public Officials Benefit Association and Korea Investment Corp have either bought or are in final talks to purchase property in and around London. While there may be bargains in Europe and beyond, it must be noted that Korean overseas acquisitions are dwarfed the spending of its neighbours China and Japan.

Learning from the past Besides cultural differences, one other major reason for the weak track record of Korean companies in overseas acquisitions is that they were buying companies that were not a good match. “Based on our experience of

mergerS & AcquISItIoNS

the unsuccessful cases, Korean companies could not find synergy for such overseas investment,” says Joonki Yi from leading law firm Bae, Kim & Lee. “The targets were engaged in declining business or were almost insolvent. Thus, if there is no synergy after acquisition of the target, the target itself is not likely to create profits for a short term period,” he adds. Yi also highlights the problems in negotiating price: “Deal price is another factor. We saw many cases where failure to agree with the deal price among the transaction parties became a deal breaker.” Korean companies must tread carefully when venturing overseas to avoid pitfalls, especially so for the pension funds who have been active in recent years. Pressured to create profits for their large cash reserves, investment opportunities have been limited by the small domestic economy. Even in the absence of a European debt crisis, Yi’s colleague, Han Kang feels overseas investments would still have been active. “Of course the debt crisis in Europe would be a good opportunity for Korean companies and pension funds to invest in. Notwithstanding, I believe Korean companies would still have invested in Europe

ASIALAW Korea annual review 2013

mergerS & AcquISItIoNS

NeWS ANALySIS

if there was no debt crisis because they need to create a continuous and stable profit from overseas investments” he says.

Pharmaceuticals and healthcare South Korean pharmaceutical companies are expected to actively embark on domestic and overseas M&A, with the support of the government, which wants to encourage Korean companies to enter the global market. The Ministry of Health and Welfare and the government is working with Korean pharmaceutical companies to establish M&A funds for expansion and new drug development, hoping to attract investors and private equity funds. They are hoping that M&A deals, joint ventures and licensing will generate momentum and revenue to stimulate new growth, while at the same time offset the

high cost of drug development. European drug makers AstraZeneca and GlaxoSmithKline have both managed to maintain growth through M&A. The signs are looking promising with recent joint venture agreements between Korean and overseas pharmaceutical and health care companies. In December 2012, Israeli-based Teva Pharmaceuticals entered into a joint venture with Korea’s Handok Pharmaceuticals, and in January 2013 Canadian generics maker Pharmascience and Korea’s Kolmar Holdings announced a joint venture, Pharmascience Korea, to market the Canadian firm’s medicines. Also in January, Korean drug maker Shin Poong Pharmaceutical entered a joint venture with France’s laboratoire francais du Fractionnement et des Biotechnologies (LFB) for the production and supply of biotechnology medicinal products.

Deal price is “another factor. We saw many cases where failure to agree with the deal price among the transaction parties became a deal breaker

”

Joonki Yi, Bae Kim & Lee

Putting the squeeze on shareholders Extensive revisions to the Korean Commercial Code last year increased the rights of majority shareholders. But concerns have been raised about whether enough has been done to protect the rights of the minority. Market observers are waiting for the courts to interpret key terms

ince the Korean Commercial Code (KCC) was enacted in 1962, amendments have been made at a steady pace. But in April 2012 some of the most extensive revisions introduced large scale changes with significant implications for corporate governance, corporate finance, M&A and joint ventures in Korea. The changes are widely expected to have most effect on the financial structures of chusik hoesa (joint-stock companies) and on M&A transactions, making it easier to do business in Korea. One interesting amendment is to allow the so-called “squeeze-out” of minority shareholders through a compulsory acquisition. The

ASIALAW Korea annual review 2013

controlling shareholders holding 95% or more of the shares in a Korean company can require the minority shareholders to sell their shares to the controlling shareholders at an agreed price or fair price that will be determined by the court if no agreeable price is attained. The amendment also provides for a right of minority shareholders to demand a sell-out, yet this provision also means it is possible for a sell-out to take place at the same time as a squeeze-out, exposing potential conflicts.

Concerns for minority shareholders Korea has no case precedent applicable to compulsory acquisitions, so this right

for compulsory acquisitions has created uncertainty. More importantly, the law governing compulsory acquisitions should protect minority shareholders from exploitation and guarantee fair competition for minority shareholders. The Korean government also needs to bear in mind the different classes of squeeze-outs and how they will affect Korean business practices, because Korea’s corporate governance culture is still developing. Korean companies are still characterised by dominant and controlling shareholders and the level of protection for minority shareholders is limited. Furthermore, squeeze-outs can incur an additional tax burden and reinvestment costs to the minority shareholders, while some may be sentimentally attached towards a particular company that cannot be compensated by money alone.

Promoting efficiency The justifications for allowing squeeze-outs are to reduce costs eliminate troublesome minority shareholders. From a corporate

News Analysis

Leading M&A lawyers Mergers & Acquisitions Jae Seong Choi Barun Law Kyung Joon Choi Kim Chang & Lee Won-Hyun Choi Kim Choi & Lim Young Sun Cho Yoon & Yang Myung Jae Chung Kim & Chang Eui Jong Chung Bae Kim & Lee Joo Hyoung Jang Barun Law Kyung Taek Jung Kim & Chang Hee Chul Kang Yulchon Seong Kang Jipyong Jisung Doo Sik Kim Shin & Kim

Key M&A deals Acquisition of Kyobo Life Insurance Co Ltd

Lone Star Fund IV asset disposal

LAW FIRMS

Bae Kim & Lee Hana Financial Group Kim & Chang Lone Star Funds Linklaters Financial advisors to Lone Star Funds

Kim & Chang Affinity Equity Partners, Baring Asia Private Equity, GIC Special Investments, IMM Private Equity Lee & Ko Lenders in the acquisition financing Linklaters Affinity Equity Partners Weil Gotshal & Manges Baring Asia Private Equity Yoon & Yang Daewoo International Corporation Why: This transaction was one of the high-profile private equity club deals in the Korean M&A market, involving the sale and purchase of a significant stake in the highly regulated insurance industry. The transaction represents a growing trend of international private equity firms executing large-scale M&A transactions in the form of club deals. An international consortium of private equity firms including Affinity Equity Partners, Baring Asia Private Equity, GIC Special Investments, and IMM Private Equity acquired a 24% equity stake in Kyobo Life Insurance Co Ltd, one of Korea’s leading life insurance companies. The transaction was valued at 1.2 trillion won ($1 billion). Daewoo International Corporation was the seller in the transaction.

Kwon Hoe Kim Yoon & Yang Soo Chang Kim Kim Chang & Lee Hyeong Gun Lee Lee & Ko Kyu Wha Lee Lee & Ko

Leading M&A lawyers

Keum Seok Oh Bae Kim & Lee

Private Equity

Jong Koo Park Kim & Chang

Je Won Lee Lee & Ko

Sang Il Park Hwang Mok Park Soo Man Park Kim & Chang

General Corporate Practice

Dong Woo Seo Bae Kim & Lee

Sean Hayes IPG Legal

Woong Soon Song Shin & Kim

Jae Young Kim Yoon & Yang LLC

Jiyul Yoo Yoon & Yang

Jiyul Yoo Yoon & Yang LLC

Yoon Hee Woong Yulchon Source: Asialaw Leading Lawyers 2013

Mergers & Acquisitions

Hoil Yoon Yoon & Yang LLC

LAW FIRMS

Why: Lone Star Fund is the major shareholder in the Korea Exchange Bank. In February 2012, LSF-KEB Holdings SCS successfully transferred its 51.02% stake in Korea Exchange Bank to Hana Financial Group for 3.91 trillion won ($3.5 billion). This transaction represents the largest cash M&A deal in Korea to date, as well as being the largest private equity deal in Korea. Hana Financial Group’s acquisition makes them one of the four largest bank holding companies in Korea. This deal presented many regulatory, tax and political hurdles in Korea and overseas where Lone Star and Hana Financial operate. It therefore required intensive planning and execution requiring close to 15 months to conclude. Lone Star Fund’s exit comes after eight years of investment in Korea Exchange Bank.

Acquisition of El Paso Corporation oil and gas exploration and production LAW FIRMS

Debevoise & Plimpton Access Industries Kim & Chang Korea National Oil Corporation Locke, Lord, Bissell & Liddell El Paso Corporation Paul Weiss Rifkind Wharton & Garrison Apollo Global Management Vinson & Elkins Apollo Global Management, Riverstone Holdings Weil Gotshal & Manges Kinder Morgan Willkie Farr & Gallagher Riverstone Holdings Why: An investment consortium led by Apollo Global Management and Riverstone Holdings, including Access Industries and Korea National Oil Corporation acquiring EP Energy Corporation from El Paso Corporation for $7.15 billion. This deal represents one of the most significant private equity transactions in the energy industry and one of the largest of any private equity takeovers in energy production based on deal size. In addition to the complexities arising from the legal and regulatory challenges brought about by the international consortium, the transaction involved $5.5 billion of debt financing. This added to the deal complexity.

Source: Asialaw Leading Lawyers 2013

ASIALAW Korea Annual Review 2013

NeWS ANALySIS

mergerS & AcquISItIoNS

is not “clearIt what the term “business purpose” means and how it will be interpreted by the Korean courts

”

Myong-Hyon (Brandon) Ryu, Shin & Kim

the overall cost, which is shared among all minority shareholders. Tong-Gun Lee from Shin & Kim sees the benefits of the new ruling: “The squeeze-out rule is intended to promote greater organisational efficiency. Nevertheless, it would also have the effect of promoting M&A transactions, since acquirers would be encouraged to pursue more M&As, relying on the benefit of owning 100% shares in target companies”. “Investors who are concerned about possible procedural burdens and other difficulties relating to minority shareholders will welcome the squeeze-out mechanism,” he adds.

The German model control perspective, squeeze-outs boost M&A efficiency by allowing the majority shareholder (offeror) to squeeze-out the remaining minority shareholders following a successful tender offer. In the absence of a compulsory acquisition, the isolated groups of minority shareholders would hold out expecting a rise in share price, so that each minority shareholder (offeree) has an incentive to sell-up and hope that others will tender higher prices. This behaviour presents an obstacle to efficient M&A since it prolongs the tender process and increases

ASIALAW Korea annual review 2013

Korea, like other countries that have squeeze-out laws, requires compulsory acquisitions to have a business purpose, but what differentiates one country from another is the type of squeeze-out adopted. While the KCC provides for a business purpose as a requirement for squeeze-out, senior foreign attorney at Shin & Kim Myong-Hyon (Brandon) Ryu believes this is somewhat open to debate: “It is not clear what the term “business purpose” means and how it will be interpreted by the Korean courts”. The tender offer type adopted by the UK uses a two-step transaction; first, is the tender

stage where the offeror makes a public offer to the shareholders of the target company, and second, having acquired the minimum number of shares required for the squeeze-out, the offeror is allowed to acquire the remaining shares held by the minority shareholders. The cash-out merger type adopted by the US allows the majority shareholders to force out the minority shareholders via a stockfor-cash merger. Under this arrangement the minority shareholders in the target company will receive cash in exchange for their shares of the target company. The supermajority type adopted by Germany enables a majority shareholder who has obtained supermajority ownership in the target company to squeeze-out the minority. Once a dominant shareholder reaches the necessary threshold, by law a demand can be made to the remaining shareholders to sell their shares. According to Ryu, Korea’s squeeze-out mechanism is modelled after, or is similar to, Germany, in that a squeeze-out is not required to be carried out in the context of or following a tender offer as is the case in the UK. Yet, Korea’s model is different from the US in that a controlling shareholder is granted the right to make a compulsory purchase of the minority shareholders shares without resorting to a cash merger.

News Analysis

Mergers & Acquisitions INDIA

Market Data Korea M&A Overview: Industry analysis 2012 Sector

2011

Change

Value (US$m)

Market Share

Deal Count

Value (US$m)

Market Share

Deal Count

Value (%)

Deal Count

Industrials & Chemicals

10,193

36.6%

5,462

13.6%

86.6%

-25

Consumer

4,268

15.3%

12,112

30.2%

-64.8%

-16

Financial Services

2,807

10.1%

3,268

8.1%

-14.1%

-1

Construction

2,017

7.2%

5,106

12.7%

-60.5%

Energy, Mining & Utilities

1,914

6.9%

553

1.4%

246.1%

Technology

1,825

6.5%

6,470

16.1%

-71.8%

-21

Business Services

1,180

4.2%

946

2.4%

24.7%

Real Estate

980

3.5%

0.0%

Transport

891

3.2%

3,255

8.1%

-72.6%

Leisure

723

2.6%

1,205

3.0%

-40.0%

Media

682

2.4%

542

1.4%

25.8%

Pharma, Medical & Biotech

326

1.2%

1,175

2.9%

-72.3%

-2

Agriculture

0.2%

0.0%

Telecommunications

0.0%

Defence Total

0.0%

-1

27,867

100.0%

237

40,117

100.0%

276

-30.5%

-39

Korea Financial Adviser League Tables Financial Advisers by Value â&#x20AC;&#x201C; 2012 Rank 2011

2012

House

Value (US$m)

Deal Count

% Value Change

Woori Investment & Securities

8,710

-14.0

Morgan Stanley

8,513

40.3

KPMG

5,050

179.0

Goldman Sachs

3,911

-28.7

Rothschild

3,800

621.1

PwC

2,717

243.5

Citi

2,258

-74.2

Daewoo Securities

1,663

-22.5

Deutsche Bank

1,597

-12.7

Samsung Securities

1,301

-87.8

Macquarie Group

1,067

-67.7

Deloitte

652

27.8

Greenhill & Co

629

JPMorgan

563

-61.4

Nomura Holdings

502

-84.7

Source: mergermarket South Korea M&A Round-up 2012

ASIALAW Korea Annual Review 2013

mergerS & AcquISItIoNS

mArket ANALySIS

Co-published feature

Grounds for optimism Jong Koo Park and Shin Kwon Lim, Kim & Chang

s we discussed last year, a number of macroeconomic factors are fuelling optimism about the growth of the Korean M&A market. Many Korean companies are still sitting on arsenals of deployable cash and are pursuing M&A for various reasons, including diversification, technology and growth. Historically low interest rates and a bearish stock market have caused institutional investors to look to alternative investments for higher yields, allowing private equity funds to attract more capital. Despite this potential, other factors have made M&A less attractive, including uncertainties in the economic and regulatory environment. In fact, the number and total volume of M&A deals are not increasing as quickly as expected. In 2012, the aggregate volume of M&A transactions in Korea increased by only 4.3% to $55.65 billion compared with $53.34 billion in 2011 while the total number of transactions decreased slightly to 869 compared with 968 in 2011 (source: Mergers & Acquisitions Ranking 2012 published by Bloomberg). As we enter 2013, we are witnessing some new trends creating potential M&A opportunities in Korea. President-elect Park is putting forward Chaebol reform plans in the name of “economic democratisation” and this may cause many Chaebols in Korea to consider the sale of their subsidiaries perceived to unfairly compete with small or medium sized companies or that depend primarily upon intra-group customers. Samsung Group has already sold iMarketKorea (an MRO company that served mostly Samsung affiliates) in 2011 when the Korean Fair Trade Commission started an investigation of MRO companies owned by Chaebols, and also sold Artisée (a bakery café chain) in 2012 when faced with criticism that Chaebols are driving out small mom-andpop bakery stores operated by individual owners. If other Chaebols follow the example of Samsung, this may provide some attractive targets in the M&A market, especially for private equity funds. From 2012, some debt-laden Chaebols particularly hit by a downturn in their main industries (such as construction, shipbuilding, shipping and solar power) began to sell their healthy subsidiaries to pay down some of their debts, providing M&A opportunities in Korea. MBK Partners’ $1.05 billion deal to acquire Coway, which was the largest private equity buyout deal in 2012, would not have occurred if Woongjin Group had not been suffering from financial distress. STX Group’s announced plan to sell STX Pan Ocean and Tongyang Group’s announced plan to sell its textile and electronics business also represent efforts by Chaebols to overcome financial difficulties by selling their healthy subsidiaries. As it is generally forecast that the current sluggish economy will continue, more Chaebols with high leverage may have to make similar painful decisions to sell valuable assets.

ASIALAW Korea annual review 2013

In 2012, private equity funds were able to attract the highest level to date of new capital commitments amounting to KRW9.7 trillion

Koreaâ&#x20AC;&#x2122;s Premier Law Firm Global standard, local strengths at work in Korea Founded in 1973 Over 850 professionals Highly specialized practice areas

www.kimchang.com

mergerS & AcquISItIoNS

mArket ANALySIS

The trends we discussed last year with respect to the Korean M&A market continue: the higher visibility of private equity funds, the increased number of small to medium-sized deals and the importance of outbound M&A transactions. In 2012, private equity funds were able to attract the highest level to date of new capital commitments amounting to KRW9.7 trillion ($8.9 billion), with aggregate capital commitments reaching KRW40 trillion. About half of the new commitments (KRW4.7 trillion) came from public sector investors, including the National Pension Service and Korea Finance Corporation. Since many local private equity funds are focusing on small to medium-sized deals, there is now more competition for suitable targets among private equity funds. The importance of outbound M&A has also increased significantly. The aggregate volume of outbound M&A grew by 51.9% to $5.8 billion compared with $10.4 billion in 2011 (in contrast, the aggregate volume of inbound M&A shrank by 17.4% to $5.7 billion compared to $6.9 billion in 2011). The largest deals were made in the energy and natural resources sector with transactions like Korea National Oil Corporation’s $7.15 billion deal to acquire EP Energy Global and Posco’s $1.55 billion acquisition of Roy Hill Holdings. As outbound M&A becomes more popular, many Chaebols are forming corporate partnership funds with the National Pension Service. Corporate partnership funds are private equity funds formed under the Financial Investment Services and Capital Markets Act (the FSCMA) to participate in outbound M&A as financial investors with capital provided by the National Pension Service. Appreciation of the Won’s value may further boost outbound M&A in 2013. In 2012, there were two failed attempts by the Korean government to sell stakes in key companies, Woori Finance Holdings and Korea Aerospace Industries (KAI). Although the government pushed for a sale, the political parties, including their respective presidential candidates, objected to the sale being made by the outgoing president and the resulting political controversy is believed to be one of the main reasons for a failure of the sale. Now that the new president has taken office in February, there is a possibility that the government will re-start the sale process at any time. Daewoo Shipbuilding and Marine Engineering is also a large company the Korean government has to sell in due course.

Although it is too early to evaluate the impact that the amended KCC will have on M&A transactions, notable changes are being observed with respect to small scale mergers and treasury stock department which led the KCC amendment) published its official textbook on the amended KCC and numerous scholarly articles are being published discussing issues involving the amended KCC. All of these efforts are expected to reduce the uncertainties and interpretational issues that inevitably arise with such an extensive amendment, and will help parties to design and use more flexible and creative deal structures. Although it is too early to evaluate the impact that the amended KCC will have on M&A transactions, notable changes are being observed with respect to small scale mergers and treasury stock. The amended KCC relaxed the requirements for small scale mergers by allowing the merged company’s shareholders approval requirements to be waived in a merger where the surviving company issues new shares that are less than 10% of its total shares (the ceiling was 5% before the amendment). This has resulted in an increased number of small scale mergers, including the merger of Honam Petrochemical and KP Chemical and the merger of Lotte Shopping and Lotte Midopa. Liberalisation on the acquisition of treasury stock using distributable earnings also led to a dramatic increase in companies purchasing treasury stock. We believe that we will see more M&A transactions using new structures which became possible due to the changes brought by the amended KCC.

FSCMA enforcement decree An amendment to the Enforcement Decree of the FSCMA became effective as of June 29 2012. The key features of the amendment are summarised below. If the net short selling position of an investor reaches a level prescribed by the Financial Services Commission (FSC), such investor must report its net short selling position to the FSC and the Korea Exchange (the KRX) within a certain period (before the amendment, only securities companies engaging in the brokerage business were required to inform the KRX of their short selling positions). This new reporting requirement is intended to allow the regulators to monitor the overall short selling positions in the securities market. This requirement became effective as of August 30 2012. n The maximum amount of funds that a private equity fund could borrow through a special purpose company was increased from 200% to 300% of such a company’s equity. This change took effect as of January 1 2013 n

Legal developments In 2012, the Korean Commercial Code (the KCC) was extensively amended as discussed last year. Compared with the broad and in-depth changes brought by this amendment, the subsequent developments during the last year may seem relatively less significant. Below, we review some of the major developments that occurred over the last year.

Follow-up to the KCC Amendment In connection with the amendment to the KCC as of April 15 2012, the Enforcement Decree of the KCC was also fully amended to provide detailed rules for the implementation and application of the amended KCC. The Ministry of Justice (the government

ASIALAW Korea annual review 2013

market Analysis

Private equity funds and their special purpose companies are allowed to invest in derivative products to hedge foreign exchange risks from investing in securities denominated in foreign currencies.

There is also a bill to amend the FSCMA pending at the National Assembly. The key features of the bill are to reflect the recent amendments to the KCC into the FSCMA (thereby making the same rule apply to both non-listed and listed companies) and to establish central counterparties (CPP) to settle over the counter derivative transactions. In 2012, the strict formula which set the merger ratio between a listed company and a non-listed company was somewhat liberalised. Under the previous rule, when a listed company and a non-listed company merged, the merger ratio was set by a statutory formula which did not allow much discretion in its application. Although this regulation was introduced to prevent back-door listings hurting individual investors, it made mergers between non-affiliates very difficult because the parties could not freely agree upon the merger price but instead had to follow the formula. The amended rule under the FSCMA did not renounce the formula itself but allowed parties to evaluate the intrinsic value of a non-listed company pursuant to a generally accepted valuation model and also relaxed rules on comparable analysis. This is expected to increase the use of mergers as a means of acquisition.

Recent Court Decisions On July 5 2012, the Seoul High Court vacated the judgment of a lower court which had ruled that the representative director of Onse Telecom (a target company) was guilty of a breach of fiduciary duty in connection with a leveraged buy-out (LBO) transaction in 2006. The Korean courts recognise a breach of fiduciary duty by directors of a target who had approved the collateralisation of the target’s assets in LBO-type transactions unless a corresponding fair benefit is offered to the target in return. In its decision, the Seoul High Court acknowledged this basic framework, but somewhat diverged from existing case law by ruling that even though there was no direct payment to the target for the collateralisation of its assets, the target obtained certain benefits in return, such as lowering its leverage ratio from 435% to 54% and becoming a listed company through a back-end merger. Further, the Seoul High Court held that the buyer and target had in substance become a single economic entity through the acquisition of 100% of the target – which departs from prior cases which regarded the corporation and its shareholders as separate and independent corporate entities regardless of their economic unity. The decision has been appealed by the Prosecutor’s Office and is pending before the Supreme Court. This decision is one of the examples showing the court’s changed view to LBO transactions, which focuses more on economic substance instead of taking a formalistic approach. Another notable recent decision by the Seoul High Court

Mergers & Acquisitions INDIA

involved an indemnification claim for damages suffered as a result of a breach of representation and warranties when the buyer had prior knowledge of the breach and the relevant stock purchase agreement did not contain any provision regarding the impact of the buyer’s knowledge on indemnification claims. Hyundai Oilbank, which acquired shares in Hanwha Energy from certain sellers in 1999, sought indemnification for damages for a breach of a representation and warranty relating to compliance with government regulations after the Korea Fair Trade Commission imposed penalty surcharges on Hanwha Energy after the closing of the acquisition on the ground that Hanwha Energy’s engagement in cartel activities with certain parties, including Hyundai Oilbank,

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 the Legal Media Group’s Guide to the World’s Leading Mergers and Acquisitions Lawyers. He received his LLB from Seoul National University and his LLM from Michigan Law School. He is admitted to practise in Korea and New York.

Shin Kwon Lim T: +82 2 3703 1481 E: sklim@kimchang.com Shin Kwon Lim is a senior lawyer 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 LLB degree from Seoul National University in 1999 (Summa cum laude) and LLM degree from New York University School of Law in 2010 (Vanderbilt scholar). He is admitted to practise in Korea and the state of New York.

ASIALAW Korea Annual Review 2013

Mergers & Acquisitions

market Analysis

prior to closing, had violated the Monopoly Regulation and Fair Trade Act. The Seoul High Court held that Hyundai Oilbank, which had executed the stock purchase agreement and was deemed to have prior knowledge of the Sellers’ breach of the relevant representation because it was also a party to the alleged cartel activities, could not seek indemnification for such misrepresentations, noting the principle under the Korean Civil Code that a purchaser with knowledge

ASIALAW Korea Annual Review 2013

of defects in purchased goods cannot raise warranty claims with respect to such goods based upon warranty provisions of the Korean Civil Code. In its ruling, the Seoul High Court also indicated its awareness of the broad use of the so-called “sandbagging” clause in acquisition agreements for similar transactions, but did not make clear whether it would recognise the validity of such sandbagging clauses in acquisition agreements. Hyundai Oilbank has filed an appeal and the case is pending before the Supreme Court.

TAxATIoN

NeWS ANALySIS

A misguided move Korea’s Ministry of Strategy and Finance has proposed a tax on derivative transactions that has attracted strong criticism from market practitioners, who claim it will not increase revenues and will affect liquidity

plunge in derivatives trading volume of 17.7% in 2012 was not enough to knock South Korea’s derivative market off top spot for world’s largest in terms of trading volume – it accounts for roughly 20% of global trade. Figures compiled by Korea Exchange (KRX) showed daily average trading volume of derivatives on the KOSPI 200 fell to KRW54.6 trillion ($51.2 billion), compared with KRW66.3 trillion a year earlier. By instrument, futures trading fell by 17.3% while options trades fell by 30.2%. The decline came as investors waited to see if there was any clearer indication on the eurozone debt crisis and the US fiscal cliff issue. While analysts agree the South Korean derivatives market is likely to remain sluggish, it will not be helped by the Ministry of Strategy and Finance’s proposed introduction of a tax on derivative transactions. A new tax on options and futures on the KOSPI 200 will be imposed at a rate of 0.001% of the futures transaction value, and 0.01% of the premium for options transactions. Initially earmarked for January 1 2016, this highly controversial tax attracted heavy opposition and is pending

ASIALAW Korea annual review 2013

approval by the National Assembly, having been put forward at the end of December 2012. If passed, it is expected in bring in KRW100 billion in extra revenue for the government every year. According to Woo Hyun Baik, a tax attorney and CPA at Kim & Chang, it could be towards the end of 2013 before the revisions are put forward to the National Assembly. “Korean tax amendments are usually enacted at the end of the year, and since the National Assembly’s decision is still pending as of early January, it may be yearend if and when it will be passed,” he said.

“highlyIt islikely

Justification for taxation Imposing a tax on derivative transactions would bring them in line with the taxation of other securities, quell speculative trading activity and reduce high frequency trading (HFT). South Korea suffered from the 1997 and 2008 financial crises, so controlling the capital flow would help lessen the impact in the event of a similar financial crisis. Given the likely impact on liquidity, one would assume that the proposal was driven by lawmakers instead of regulators, an

the financial institutions will come up with other structures to bypass this tax

”

Woo Hyun Baik, Kim & Chang

News Analysis

Taxation

ASIALAW Korea Annual Review 2013

NeWS ANALySIS

tAxAtIoN

think “thereI don’t is any winner through Derivatives Taxation as Korea may lose its status as boasting the world’s most liquid option contract, affecting its reputation and flying in the face of its long stated regional hub aspirations

”

Ross Gregory, Macquarie Securities Korea

assumption that Baik agreed with: “Maybe the government wants to better control the flow of money into and out of Korea”. Market participants note that the proposal was motivated by the desire to raise additional government revenue and in part by some of the difficulties in the Korean equity-linked warrants market arising from a compulsory deposit requirement of KRW15 million ($14,000) before trading. This move has led to the decline in the popularity of equitylinked warrants in Korea since an estimated three-quarter of equity-linked warrant investors do not have KRW15 million in their trading accounts.

The likely losers Regardless of who is the intended target of the new tax, a reduction in derivative trading volume remains likely, with some commentators and analysts estimating a

Encouraging FDI Korea’s government is looking to encourage more foreign direct investment with tax incentives and an ambitious programme to develop a series of special economic zones. But will investors follow the infrastructure?

ecember 2012 marked a new chapter in South Korea’s history as Park Geun-hye became the country’s first female elected president. During the same month Korea’s National Assembly passed a number of tax amendments for 2013 that had originally been announced by the Korean Ministry of Strategy and Finance in August 2012. Sweeping changes ranging from taxation of off-shore partnerships, tax treatment of payment for the use of equipment, tax incentives for job creation, right through to pension income tax rates and gross income and deductions, were effective from January 1 2013. A surprise fall in South Korea’s exports in December renewed government concerns about the country’s economic outlook and

ASIALAW Korea annual review 2013

its overreliance on exports, which make up approximately half of the nation’s economy. The stronger won, lingering uncertainty over the global economy and the prolonged debt crisis in Europe is likely to dent the country’s export competitiveness abroad. This is at a time when domestic consumption and investment remain sluggish. Given that the road ahead may be rather bumpy for this exportdriven economy, December’s tax amendments will aim to shield the impact from external risks. One area the government is looking to promote is foreign direct investment in the high-tech industry.

Investment incentives Despite South Korea’s small population of 50 million, the country has been a major

drop by as much as 50%. Ultimately, the biggest losers will be the financial institutions such as banks and securities companies and within these it will be the HFT who will be hardest hit. If the aim of the tax is to curb HFT then it will be very effective and it is also likely to reduce speculative trading. Other markets in Asia may become more attractive with Hong Kong and Japan being alternative destinations. Although it is too early to predict the real impact, Baik remains optimistic. “They have been talking about this tax for several years and if it is imposed it will definitely have a negative impact on the derivatives market by way of reduction in transactions. But it is highly likely the financial institutions will come up with other structures to bypass this tax,” he said. More importantly, a reduction in trading volume will no doubt affect liquidity and liquidity is a key for any financial market. No

producer of chemicals, automobiles, ships and is now one of the leaders in electronics and IT equipment. South Korean electronics giants Samsung and LG have become household names worldwide, benefiting from the explosion of the mobile phone, television and hand-held device market. In an effort to keep South Korea at the forefront of the high-tech industry, from January 2013 newly revised tax incentives will be offered to foreign firms who invest in the high-tech industry. Foreign investment in high-tech businesses and related services has been granted corporate income tax exemption for the first five years and a 50% reduction for the next two years. Other tax incentives are also available. According to the Ministry of Strategy and Finance, the revision offers tax incentives for investment in an additional 33 new technologies, such as medical robots, large scale data processing, mobile game technology and cloud computing, while removing the incentives offered for existing technologies which are no longer regarded as high-tech. It is hoped that the revisions will help introduce state-of-the-art technologies and attract foreign capital.

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liquidity means a more volatile market, so trading becomes more risky, resulting in an increase in overall costs.

Striking the right balance There is real concern from various interest groups that the losses caused by the imposed tax could outweigh the benefits. Adding a tax to transaction costs risks reducing arbitrage opportunities, which derivatives trading thrives upon, leading to profit reduction and an eventual exit for the Korean derivatives market. “I don’t think there is any winner through Derivatives Taxation as Korea may lose its status as boasting the world’s most liquid option contract, affecting its reputation and flying in the face of its long stated regional hub aspirations,” says Ross Gregory, representative director of Macquarie Securities Korea. “If the tax comes in then volumes

Special Economic Zones To be eligible for tax incentives the business must operate in one of the advanced technology sectors and/or technology supporting services, as stipulated in the Regulations on Tax Reduction and Exemption for Foreign Investment. Technology will need to have a substantial economic and technological effect on the national economy and develop and strengthen the industrial structures, leading to cutting-edge technologies in foreign investment zones or free economic zones. Under the current regulation, businesses eligible for the incentives are: manufacturing with a minimum investment of $30 million; tourism with $20 million; R&D $2 million and logistics with $30 million. The government has made available industrial sites within specially designated zones to all foreign-invested firms who meet the minimum investment criteria, and the land within these zones is available at low cost. Four types of zones are available for investment, each with its own tenancy agreement, tax incentive and business activities. One type of zone, the Free Economic Zone (FEZ) differs from the other zones as its focus is on creating a comprehensive living and working

will decrease and revenue raised from securities transaction tax may fall indirectly due to a reduction in related share trading and hedging activities. So, it is not even certain that by levying the tax, government revenue will increase,” he adds. When asked if Korea is alone in imposing taxes on derivative transactions he says: “No, but the trend is to remove not levy transaction taxes on listed instruments including derivatives”. To counter this claim, commentators point out that speculative short term trading, while boosting liquidity in the short term, could heighten market volatility and thus measures are necessary to promote market stability. Until the National Assembly passes its judgment there will be continuing debate and comparisons with other countries. If the South Korean derivatives market wants to remain the number one derivatives market, it needs to strike the right balance.

environment with biotechnology, aviation, logistics, manufacturing, service as well as schools, recreational facilities and hospitals. There are six free economic zones: Incheon, Busan, Gwangyang Bay, Yellow Sea, Gyeongbuk and Saemangeum.

A slow start Even for South Korean standards, trying to build FEZs from scratch is ambitious. Analysts voice concern over the global financial crisis making funding for FEZs more vulnerable. Yet officials remain confident over the future of the flagship zone at Incheon. The Ministry of Knowledge Economy admits that the amount of pledged foreign investment is far lower than they had hoped for and the costs associated with building the necessary infrastructure for these zones is far larger than the investment pledged. FEZ location is also an important consideration. Woo Hyun Baik from Kim & Chang’s tax practice says: “It is difficult to find factory sites in good locations and the success of FDI hinges upon how well the Korean economy is doing as compared to adjacent countries such as China”. Baik notes that although there are tax incentives for investment in FEZs, the current

Taxation

Leading Taxation lawyers Woo Hyun Baik Kim & Chang Dong Soo Kim Yulchon LLC Woo Taik Kim Kim & Chang Mee-Hyon Lee Lee & Ko David Jin-Young Lee Samil PricewaterhouseCoopers Seung Soon Lim Yoon & Yang LLC Il-Hwan Oh 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 2013

regulatory environment may be a factor in the low level of interest. “If foreign investors are investing outside of FEZs, subject to certain conditions, they can still enjoy other types of investment incentives such as free rent for a number of years”. However, there is reason to be optimistic as 2012 saw a record amount of foreign direct investment inflow. Despite a fall in the fourth quarter, total inflow for 2012 was $16.26 billion up from $13.67 billion in 2011, an increase of 18.9%, according to figures from the Ministry of Knowledge Economy. This is an indication that foreign investors are becoming more confident in South Korea and its free trade agreement with the US is bearing fruit.

ASIALAW Korea Annual Review 2013

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Co-published feature

A year of reform By Jay Shim and Ted Tae-Gyung Kim, Lee & Ko

n January 1 2013, the Korean National Assembly ratified the tax law. Most of the amendments took effect as of the same date, except for certain amendments for which different effective dates have been specified. On January 18 2013, the proposed amendments of the Presidential Decree (PD) relating to the tax law amendments were also announced. The 2013 amendments focus mainly on targeting high income bracket individuals and conglomerates, and reducing or eliminating tax benefits to increase tax revenues. Among the tax law amendments and the proposed amendments of the PD for 2013, the major amendments relating to the taxation on international transactions are summarised as follows:

Increase in flat tax rate and extension of sunset period Foreigners working in Korea may elect to be taxed under a special regime which provides for a 16.5% flat tax rate (including 10% local surtax) on their salary instead of the normal, graduated tax rate regime with limited benefits such as deductions, exemptions and credits. The flat tax rate regime was originally set to expire on December 31 2012 and caused great concern within the Korean expatriate community. However, under the 2013 amendments (Special Tax Treatment Control Law (STTCL) ยง18-2), the sunset period has been extended for another two years (until December 31 2014) although the rate has been increased to 18.7% (including 10% local surtax). The flat tax rate, despite the 2.2% increase, is still beneficial to foreigners in the high-income brackets (those who earn more than KRW200 million (US$184,000)). This amendment is applicable for salary received on or after January 1 2013.

Derivative transactions The introduction of transaction tax on derivative transactions (Securities Transaction Tax Act ยง1) is now pending at the National Assembly. Derivatives transactions, unlike share transfers, are not subject to the Securities Transaction Tax (STT). In 2012, in order to ensure equitable tax treatment to similar financial products, the government proposed to the National Assembly a new law to impose transaction tax on certain designated derivatives products indexed to stock prices (KOSPI 200 futures and options), for derivatives transactions occurring on or after January 1 2016 (after a 3-year grace period). The proposed tax rates are 0.001% of the notional amount for KOSPI 200 futures and 0.01% of the transaction price for KOSPI 200 options. While this proposed amendment is yet to be ratified by the National Assembly, it serves as an advance notice that derivative transactions may be subject to tax in the future.

ASIALAW Korea annual review 2013

While this proposed amendment is yet to be ratified by the National Assembly, it serves as an advance notice that derivative transactions may be subject to tax in the future

Lee & Ko is pleased to announce the joining of two leading tax specialists to its growing tax practice: Dr. JY Lee and Jay Shim. Prior to joining Lee & Ko, Dr. Lee played a key role in developing and leading the international tax practice at Kim & Chang for over 20 years. A Korean and U.S. CPA who also holds a PhD in Business Administration, Dr. Lee is one of the most respected tax advisors in Korea with more than 30 years of experience in the tax profession. Working closely with Dr. Lee is Jay Shim, a U.S. qualified tax attorney who has also played a leading role as a tax partner at Kim & Chang and widely recognized as a leading international tax advisor in Korea. Jay has more than 25 years of experience on tax planning, structuring and controversies and worked in various locations around the world, including the U.S., Europe and Asia. Dr. Lee can be contacted at: jongyul.lee@leeko.com and Jay can be contacted at: jay.shim@leeko.com.

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Foreign entities

Private equity

Before the enactment of the entity characterisation rule (Rule for Characterisation of Foreign Entities as Corporations (Corporate Income Tax Law (CITL) §1 and CITL PD §1), there was no specific rule for characterising foreign corporations or entities for Korean tax purposes. According to the 2013 amendments, a foreign entity is to be characterised as foreign corporation if it satisfies any of the following qualifications: (a) having a juridical personality; (b) solely consisting of members (or partners) with limited liability; (c) having separable rights and/or liabilities in terms of property ownership apart from its members or being able to file for a lawsuit; or (d) either being considered the same type of, or bearing high similarity with a domestic entity being classified as corporation under the relevant Korean law. The NTS will be releasing a list of common foreign entity types and detailed rules on entity characterisation based on the above criteria. This amendment is effective from the tax year beginning on or after January 1 2013. A foreign entity not characterised as foreign corporation under the entity characterisation rule will now be treated for tax purposes as either a disregarded (conduit) or taxable entity depending on the availability of the information of its individual members. According to the 2013 amendments, any foreign entity not characterised as a foreign corporation is taxed in the following manner:

The Korean partnership taxation regime treats the income earned by non-resident limited partners from their investments in domestic private equity funds (PEFs) as dividend income regardless of the nature of underlying income. According to the 2013 amendments (STTCL §100-18, STTCL PD §100-18 ⑨), certain foreign pensions and funds investing in domestic PEFs as limited partners would be subject to tax based on the nature of underlying income when the following requirements are met:

(i) The foreign entity for which there exists a predetermined profit allocation method or ratio, or whose income is distributed in substance to its members is treated as a partnership for tax purposes (that is, taxed at the level of individual partners). (ii) The foreign entity for which there exists no predetermined profit allocation method or ratio, or for which such cannot be confirmed, is treated as an individual (resident or non-resident) (Individual Income Tax Law (IITL) PD §3-2). This amendment is effective from the tax year beginning on or after January 1 2013.

Partnership taxation regime The Korean partnership taxation regime was applicable only for certain types of domestic entities (for example, Johap). However, according to the 2013 amendments (STTCL §100-15), a foreign entity satisfying all of the following criteria can make an election to be treated as a partnership for Korean tax purposes: It is similar to the domestic entities that are eligible for the application of the partnership taxation rule; n It has a PE in Korea; and n It is treated as a partnership or subject to similar tax regime in its country of residence (country of establishment). n

The amendment is applicable for the application filed on or after January 1 2014.

ASIALAW Korea annual review 2013

a. Established in a country having a tax treaty with Korea; b. Categorised as one of the following agencies or pension funds: n Governments, local governments, central banks or investing institutions established under the laws equivalent to the Korea Investment Corporation Act who act as an investment trust and management company with respect to the assets of governments, local governments, central banks, public institutions, etc; n Pensions established under laws such as the National Pensions Act, Public Officials Pension Act, Veterans’ Pension Act, Private School Teachers’ Pension Act, Employee Retirement Income Security Act, etc.; or n Funds whose income is not distributed to their participants in line with their nonprofit status obtained by the law c. It is currently enjoying zero tax liability in the country of residence due to non-taxation or tax exemption regimes for incomes distributed from private equity funds. The amendment is effective from the tax year beginning on or after January 1 2013.

Head office and the Korean branch Before its enactment, whether the transfer pricing rules which are applicable for related party transactions may be applied to the transactions between the foreign enterprise and its Korean branch were unclear. According to the 2013 amendments(CITL PD §130, IITL PD §181-2), the transfer pricing rules applicable to related party transactions will be equally applicable to the transactions between the foreign enterprise and its domestic branch so that it is consistent with Article 7 of the latest revised (July 2010) version of the OECD Model Tax Convention. According to the amended Presidential Decree, the head office expenses shall be deductible only if those expenses were actually paid in accordance with the pre-existing arrangement(s) and the amounts are within the arm’s length range. Certain other expenses

The Korean partnership taxation regime was applicable only for certain types of domestic entities

market Analysis

such as those separately prescribed under the Ministerial Decree (e.g., interest payments made by the branch to its head office in the context of intra-company financing transactions) shall not be deductible. This amendment is effective from the tax year beginning on or after January 1 2014.

About the authors Jay Shim T: +82 2 2191 3235 E: jay.shim@leeko.com Jay Shim, who leads the firm’s international tax planning and transactions practice, is a leading expert in the areas of tax planning and disputes, appeals and litigation, including using dispute resolution provisions available under tax treaties and bilateral investment agreements. Jay is also involved in assisting the Korean tax authorities draft rules and regulations designed to promote inbound investments, including serving as an international tax expert on panels and forums established by the National Tax Service and the Ministry of Strategy and Finance on matters dealing with procedures and policies affecting foreign companies doing business in Korea and foreign owned Korean companies. In addition, he has assisted the Ministry of Strategy and Finance draft tax laws and regulations relating to controlled foreign corporation, advance tax treaty clearance, partnership taxation and transfer pricing. Jay’s practice also involves working closely with the firm’s corporate practice and its outbound team and advising clients on overseas investment, offshore fund formation, energy and natural resources projects. In recent years, he has assisted Korean companies and Korean government owned companies invest in large infrastructure and oil & gas projects in Russia and CIS. Jay is a member of the Massachusetts Bar, the American Bar Association, the International Fiscal Association and the Inter-Pacific Bar Association. He is also a co-chair, Taxation Committee, the American Chamber of Commerce Korea and advisor to the taxation sub-committee of the European Chamber of Commerce Korea. Ted Tae-Gyung Kim T: +82 2 2191 3246 E: ted.kim@leeko.com Ted Tae-Gyung Kim is a tax partner in the tax practice group of Lee & Ko. He is a Certified Public Accountant (Korea and US) and international tax specialist. Before joining Lee & Ko in 2012, he worked for Deloitte Korea and PricewaterhouseCoopers (PwC) Korea for more than 20 years including two years of practice with the international tax service group at the New York office of PwC. Kim has extensive experience in the international and financial service tax area and has advised various multinational companies on tax compliance, due diligence, tax planning and pre-tax audit review, tax audit defence, tax appeal, tax ruling and transfer pricing/APA. He has also provided assistance on various tax consulting and tax audit matters for major multinational financial institutions doing business in Korea. Kim received his BA in business administration from the Sogang University. He is a member of the Korean Institute of Certified Public Accountants and the Korean Association of Certified Tax Accountants. He is an author of Understanding US Tax Law published by Samil Informine in 2011 and US Tax Law – Transfer Pricing Regulation published by Josetongram in 2012.

Taxation INDIA

Income from rental of equipment Until 2012, the characterisation of, and the withholding tax rate on the income (rental income) from the rental of industrial, commercial and academic equipment were ambiguous. Under the current tax laws, the income from such activities was characterised as business income for tax purposes just like the income from the rental of a ship or airplane. In this case, 2.2% withholding tax rate was applied. On the other hand, according to most tax treaties concluded by Korea with other nations (63 treaties), the income from the rental of industrial, commercial and scientific equipment was treated as royalty income and the reduced rates under the relevant tax treaties were applied. According to the 2013 amendment (International Tax Coordination Law (ITCL) §29), however, the reduced rates apply where the income is classified as royalty under the pertinent tax treaties. This change has been made to harmonise the treatment of the same items of income between tax treaties and domestic tax laws. This amendment is applicable for any such income paid on or after January 1 2013.

Gift tax for non-residents Previously, in case of donation by a resident donor to a non-resident donee, only the assets located in Korea were subject to gift tax regulations. Under the 2013 amendments of the Inheritance and Gift Tax Law (IGTL) §2, IGTL PD §2), with respect to the assets donated to a non-resident, certain types of assets located outside Korea are now subject to the Korean gift tax regulations, including foreign financial accounts and shares in foreign companies with 50% or more of its total assets located in Korea. This amendment is applicable for the gifts received on or after the effective date of the Presidential Decree.

Transfer pricing methodology Due to the absence of specific transfer pricing guidelines on intercompany guarantee fees, general transfer pricing rules and principles were applied. The NTS frequently challenged guarantee fee arrangements between domestic companies and their overseas subsidiaries but without strong transfer pricing methodology or rationale. In order to address this issue, certain elaborations have been made to the ITCL with respect to applying the arm’s length principle to intercompany guarantee fee arrangements. According to the proposed amendments to the ITCL PD§6-2, three calculation bases (or transfer pricing methodologies) have been proposed for determination of arm’s length guarantee fees: a. Economic benefits expected to be conferred to the debtor by virtue of the guarantee; b. Level of risks and costs expected to be borne by the guarantor; or c. Both a and b. If any of the following figures is being used as the guarantee fee amount paid by the debtor to its related party guarantor, it shall be considered to satisfy the arm’s length standard:

ASIALAW Korea Annual Review 2013

Taxation

market Analysis

a. Fee determined by the financing party of the loan based on the differential between the interest rates applicable for loans originated with and without the involvement of the guarantor (to the extent that such calculation as documented by the aforementioned financing party can be substantiated); or b. Fee determined using the method as will be prescribed by the Commissioner of the NTS. This amendment is applicable to the guarantee fee arrangements concluded on or after the effective date of the Presidential Decree.

Debt financed inbound investments Previously, inbound investments made by non-resident investors eligible for certain tax benefits were denied tax exemption benefits if 10% or more of the voting shares of the non-resident investor is directly or indirectly held by a Korean national(s) or corporation(s) so as to prevent benefits flowing to domestic investors who are viewed as indirectly making such investments. According to the 2013 amendments (STTCL §121-2, STTCL PD §116-2), in addition to the existing provision, rules will extend to loans extended by such foreign investor. This amendment is applicable to the loans made on or after January 1 2013.

Target business areas for inbound investment Eligible for Tax Exemption Benefits (STTCL PD §116-2) According to the current law, the eligible inbound investments for the seven-year tax exemption programme relating to so-called Foreign Investment Zones (FIZ – wae-guk-in-too-ja-ji-youk) are in the following business areas subject to minimum investment value (in US$): manufacturing ($30 million or above), travel and tourism ($20 million or above), distribution and SOC ($10 million or above) and R&D ($2 million or above). According to the proposed amendment, the scope of eligible investments will be broadened to include investments worth $30 million or above in the fields of computer programming, system integration and management, information processing/hosting or related services. This amendment is designed to induce more inbound investments by foreign-based IT enterprises. These proposed benefits will be available to any inbound investments reported after the effective date of the amended Presidential Decree.

Returns on foreign financial accounts Previously, both Korean residents and domestic corporations were required to submit information returns on their financial accounts held at any financial institutions abroad, providing such details as name and address of the account holder, account number, names of financial institutions, if the total balance in those accounts exceeded KRW1 billion on any day during the year. Only certain types of

ASIALAW Korea Annual Review 2013

financial accounts such as banking and securities trading accounts were required to be reported. According to the 2013 amendments (ITCL §34, ITCL PD §49 and §50), if the total balance in these accounts exceeds KRW1 billion at the end of any month during the tax year, all types of foreign financial accounts, regardless of their individual purposes i.e., banking, trading of securities, derivatives and funds, etc shall be reported. Apart from this amendment, the National Assembly has also ratified new regulations that will result in public disclosure and criminal prosecution (imprisonment for a maximum of two years or a fine not exceeding 10% of unfiled and/or understated amounts) when the non-reported or under-reported balance amount of foreign financial accounts exceeds KRW5 billion. Previously, the penalty rate was only 4% to 10% depending on the size of non-reported balance with no risk of criminal prosecution. This particular amendment will be applicable for foreign banking account holders filing 2014 information returns on these accounts held in 2013.

Capital gains from share transfers Previously, if a non-resident individual or a foreign corporation transfers shares in a domestic company either listed or registered with a foreign securities market and the transfer itself was rendered within the foreign securities market, this transfer was exempt from the Korean capital gains tax under the STTCL. However, if the shares were not acquired in the foreign securities market, capital gains from the share transfer undertaken in the foreign securities market was taxable. According to the 2013 amendments (§21), if a non-resident individual or a foreign corporation acquires and transfers shares in a domestic company which had been sold, or subscribed its shares to satisfy a series of distribution requirements under the local regulations concerning the listing of shares, the gain from such a share transfer is not subject to Korean capital gains tax, even if they were not acquired from the foreign securities market. This new proposed amendment is designed to provide domestic companies’ competitive advantage in terms of procuring funds from foreign securities markets. The amendment is applicable for share transfers made on or after the effective date of the Presidential Decree.

Foreign currency time deposits According to the 2013 amendments (STTCL §21-2, STTCL PD §18-2), the interest income earned by a non-resident individual or corporate taxpayer (not applicable for permanent establishments) is exempt from tax if the income is earned from a time deposit of foreign currency with maturity of one year or longer. The new exemption is effective on deposits made on or after January 1 2013 and applicable for deposits made until December 31 2015.

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