Jurisdiction - Korea
Reports and Analysis
Korea – Introduction to Amendments to the Korean Commercial Code.

February, 2012

 

On March 11, 2011, the Korean National Assembly passed a long-awaited bill to amend the Corporation Chapter of the Korean Commercial Code (the "KCC"). The amendments are both significant and far-ranging. Among other changes, they introduce new entity forms, expand shareholding options, restrict usurpation of corporate opportunities, and ease restrictions on dividend distributions. The amendments will take effect on April 15, 2012. Lawmakers hope that these amendments to the KCC will stimulate domestic and foreign investments and help companies cope with a variety of business challenges and adapt to the evolving global business environment. 

 
Below is a summary of some of the key amendments. Most amendments described below apply to a jushikhoesa (joint stock company), which is the predominant entity form in Korea. 
 
1. Introduction of the Limited Partnership and Limited Liability Company 
 
The amendments introduce two additional entity forms – the limited partnership and the limited liability company. Both the limited partnership, which consist of general partners with unlimited liability and limited partners with limited liability, and the limited liability company, which is very similar to the limited liability company form in the United States, will provide investors with a wider selection of investment vehicles. 
 
Existing Korean entity forms, such as the jushikhoesa and yuhanhoesa (limited company), already provide investors with limited liability protection. The limited partnership and limited liability company, however, are easier to establish and have fewer corporate governance requirements. These new entity forms are aimed at facilitating investments by, among others, private equity funds and venture capitalists. 
 
In addition, there will also be fewer restrictions applicable to the yuhanhoesa, as the amendments remove the maximum limit on the number of unitholders  and the minimum amount of paid-in capital , which currently are 50 unitholders and 10 million Won, respectively.  
 
Below is a brief description of the newly introduced entity forms under the amended KCC:
 
Limited Partnership1 : A limited partnership shall have at least one general partner and one limited partner .  Unless stated otherwise in the partnership agreement, a general partner will have the power to represent and bind the limited partnership . If there is more than one general partner, the other general partner(s) may object to a general partner’s actions and cause such general partner to abide by resolutions adopted by a majority of the general partners . Limited partners, on the other hand, will not engage in the management of the limited partnership, but will have the right to audit the books and records of the limited partnership . Without the unanimous consent of all general partners and limited partners, a general partner may not in principle transfer its partnership interests to a third party . 
 
Limited Liability Company2 : Unless stated otherwise in the articles of association, no member of a limited liability company may transfer any of its interests to a third party without the unanimous consent of the other members; provided that a member which is not involved in the management of the company may transfer its interest to a third party with the unanimous consent of the managing member(s) . A limited liability company shall appoint member(s) or third part(ies) (including a company ) to manage the company  (the “managing persons”). Each of the managing persons may separately manage and represent the company, unless a joint management is stipulated in the articles of association. If there is more than one managing person, other managing person(s) may object to a managing person’s actions and cause such managing person to abide by the resolutions adopted by a majority of the managing persons . A limited liability company may accept new members by amending the articles of association, which requires the unanimous consent of all members .  
 
2. Elimination of Par Value Requirement3  
 
The requirement for a jushikhoesa to issue only shares with a par value of at least 100 Won per share under the current KCC will be eliminated under the amended KCC. In other words, a jushikhoesa will be able to issue shares with any par value or no par value freely. Because the current par value requirement has placed considerable restrictions on share issuances and stock splits, the amendment is expected to make it easier for companies to raise capital. However, a jushikhoesa will not be able to issue both shares with a par value and shares without a par value.  If a jushikhoesa that has issued shares without a par value under the amended KCC later desires to issue shares with a par value, the amended KCC requires that the jushikhoesa  will have to convert all previously issued shares to have a par value, and vice versa. A jushikhoesa that issues shares without a par value shall allocate at least half of the proceeds from the share issuance to capital and the remaining to a capital surplus reserve under the amended KCC .
 
3. Introduction of Freeze-Outs 
 
The amended KCC will allow a controlling shareholder holding at least 95% of the total issued and outstanding common shares of a jushikhoesa to require the jushikhoesa's minority shareholders to sell their shares at a fair price to be agreed between the parties or determined by a court4 . If the controlling shareholder is an entity, its subsidiaries’ shareholding in the jushikhoesa will also be counted to determine the 95% shareholding threshold5. If the controlling shareholder is an individual, the shareholding of an entity in which such individual holds 50% or more of the equity interest will also be counted to determine the 95% shareholding threshold . Such transaction, however, shall be approved by ordinary resolution at a meeting of the shareholders in advance and satisfy the requirement that the transaction is necessary to advance a legitimate business purpose of the jushikhoesa6
 
This measure is originally intended to enable a controlling shareholder to manage the jushikhoesa that it controls more efficiently. However, what will constitute a legitimate business purpose to justify the freeze-out of minority shareholders, and whether the controlling shareholder will be permitted to exercise its voting right at the shareholders’ meeting held to approve the contemplated freeze-out is yet to be determined. If the controlling shareholder is permitted to exercise its voting right at the shareholders’ meeting, then a shareholders meeting to approve the freeze-out will be reduced to nothing more than a formality. On the other hand, if the controlling shareholder is not permitted to exercise its voting right at the shareholders’ meeting, then the legislative intent behind the proposed system to enable the controlling shareholder to unilaterally impose the sale of shares held by minority shareholders would likely become unachievable. Therefore, we will have to wait and see how the freeze-out right will be effectively utilized once the amended KCC comes into effect.  
 
The amended KCC, however, attempts to balance the equities by providing minority shareholders with the right to exercise a put option at any time to require the controlling shareholder to purchase their shares at a fair price to be agreed between the parties or determined by a court 7. There are no conditions or procedural restrictions on the exercise of this put option right by minority shareholders.
 
4. Eased Restrictions on Dividend Distributions 
 
The amended KCC provides that the board of directors of a jushikhoesa may be conferred with the authority to approve the jushikhoesa's annual financial statements and declare dividends8. Currently, a jushikhoesa may only approve its annual financial statements and declare dividends by passing a resolution at a general meeting of the shareholders. 
 
Another significant aspect of the amended KCC is that jushikhoesas will be permitted to declare and distribute in-kind dividends in addition to cash or stock dividends9. As a result, a jushikhoesa may be able to distribute to the parent company the shares of its subsidiary as dividends. 
 
5. More Flexible Legal Reserve Requirements 
 
The amended KCC allows a jushikhoesa to use its legal reserves in excess of 150% of its paid-in capital for making dividend distributions and for other business purposes, subject to approval by ordinary resolution at a meeting of the shareholders10
 
6. Introduction of Non-Voting Common Shares and Other Special Shares 
 
The amended KCC allows a jushikhoesa to issue various types of special shares11 , including common shares with no voting rights or restricted voting rights that become effective only upon the occurrence of a prescribed event; provided that the total number of such special shares may not exceed one-fourth of the total issued and outstanding shares of the jushikhoesa12 . Currently, a jushikhoesa may only issue non-voting shares in the form of preferred shares. Under the amended KCC, a jushikhoesa may issue special shares with voting rights that may be exercised for only certain matters but not others, such as the election or removal of directors. As a result, major or controlling shareholders will be able to easily raise capital by having the jushikhoesa issue special shares to third parties without losing control over the management of the jushikhoesa.
 
In addition, the amended KCC permits a jushikhoesa to require the holders of its convertible or redeemable shares to convert or redeem the shares, while under the current KCC only the holders have the right to require conversion. There are two types of redeemable shares that can be issued pursuant to the amended KCC, which redeemable shares may be redeemed with cash or assets of the jushikhoesa13 : (i) conditional redeemable shares which can be redeemed by the jushikhoesa with the jushikhoesa’s profits upon the occurrence of certain events described in the articles of incorporation14  and (ii) shares attached with redemption rights that can be exercised by the holders of such shares15 . Similarly, there are two types of convertible shares that can be issued pursuant to the amended KCC: (i) conditional convertible shares which can be converted into other types of shares by the jushikhoesa upon the occurrence of certain events described in the articles of incorporation16  and (ii) shares attached with conversion rights that can be exercised by the holders of such shares17
 
The amended KCC as currently promulgated, however, is not clear on whether the issuance of redeemable convertible shares will be permitted despite their popular usage by companies to raise capital and attract investments under the current KCC18. However, because there is high demand for redeemable convertible shares in the market, it is likely that the KCC will be further amended to specifically allow for their issuance.
 
7. Payment of Shares by Set-Off
 
The amended KCC allows subscribers of shares to set off their subscription payment obligation with any monetary claims they hold against the issuing jushikhoesa; provided that the jushikhoesa agrees to such set-off19. This will eliminate the inconvenience of cash rounding caused by the provisions under the current KCC, which requires the payment of cash in full for any share issuance.
 
8. Eased Restrictions on Bond Issuance 
 
The amended KCC removes certain restrictions on the issuance of bonds by a jushikhoesa, such as (i) the restriction that the total value of a jushikhoesa's bonds issued and outstanding cannot be more than four times the value of its net assets20 and (ii) the restriction that certain types of bonds, such as exchangeable bonds (i.e., bonds which may be exchanged with the securities held by the issuer) or dividend bonds (i.e., bonds which give the holder the right to participate in the issuer's dividends) may only be issued by a jushikhoesa listed on the Korea Exchange21. In addition, the amended KCC allows for the issuance of derivative-linked bonds, effectively establishing the foundation for the introduction of various new structured assets in the market. Accordingly, the amended KCC provides private companies with more options to raise funds. 
 
9. Introduction of Electronic Registration System for Shares and Bonds 
 
The current KCC requires the possession of physical certificates to prove ownership of shares and bonds. The amended KCC, however, allows for electronic registration of shares and bonds. This is a long-awaited change in Korea and will allow jushikhoesas and shareholders to transfer or assign shares and bonds without the burden of having to exchange physical certificates22
 
10. Introduction of Corporate Opportunity Doctrine 
 
The amended KCC expressly prohibits a director from usurping corporate opportunities without board approval23. According to the amended KCC, the approval by at least two-thirds of the members of the board of directors will be required for a director to take, or allow a third party to take, any present or future corporate opportunity of the jushikhoesa.  The amended KCC defines a “corporate opportunity” to be (i) an opportunity that is derived from the jushikhoesa’s information discovered during the performance of one’s duties in the workplace or (ii) an opportunity relating to the current or future business of the jushikhoesa. The directors who have approved the illegal use of corporate opportunities will also be held jointly liable with the director which usurped the opportunities for the benefit of himself or a third party
 
Korean conglomerates often rely on intercompany transactions among affiliates to conduct business and it is likely that a substantial portion of such intercompany transactions will be subject to the provisions restricting the use of corporate opportunities under the amended KCC. Upon the amended KCC becoming effective, legal issues arising from the obligation to comply with these provisions is expected to affect the way Korean companies transact business in Korea going forward.
 
11. Tightened Restrictions on Self-dealing 
 
Currently, the restrictions on self-dealing only apply to directors. Under the amended KCC, these restrictions will apply to: (i) directors and major shareholders (who have at least 10% of the issued and outstanding shares of the jushikhoesa or have substantial influence over the jushikhoesa's management); (ii) the spouse and relatives of a director or major shareholder; (iii) relatives of the spouse of a director or major shareholder; (iv) companies with 50% or more of their voting shares held, jointly or severally, by such individuals listed in (i) through (iii) or their subsidiaries; and (v) companies with 50% or more of their voting shares held by such individuals listed in (i) through (iii) together with the companies described in (iv) above. The approval by two-thirds of the members of the board of directors will be required before a company may engage in a transaction with an individual or entity described in (i) through (v) above24. The amended KCC has expanded the scope of self-dealing, and consequentially it is likely that many intercompany transactions between affiliates of Korean conglomerates will constitute self-dealings. Upon the amended KCC becoming effective, legal issues arising from the obligation to comply with the self-dealing provisions under the amended KCC is expected to affect the way Korean companies transact business.
 
12. Limitation of Directors' Liability 
 
Currently, any exculpation of a director's liability requires the unanimous consent of the shareholders. The amended KCC allows for a jushikhoesa to limit a director's liability to the jushikhoesa to an amount equal to six times the director's annual remuneration (three times for outside directors) by so providing in the articles of incorporation. This limitation does not apply, however, if the jushikhoesa has suffered a loss due to the director's willful misconduct or gross negligence25, and the liability of a director to third parties cannot be limited. Lawmakers hope that this limitation on liability will make it easier for jushikhoesas to recruit talented directors and for such directors to perform their managerial duties in a less-restricted and more entrepreneurial environment. 
 
13. Introduction of the Concept of Executive Officers 
 
Although most Korean companies are managed and run by executive officers, such as a CEO, the current KCC is silent on the establishment of such executive officers and their rights and obligations. The amended KCC recognizes executive officers and gives a jushikhoesa the option to appoint one or more executive officers to represent and/or execute the affairs of the jushikhoesa with the approval of the board of directors and by registering such appointment with the court. The amended KCC also provides for the term and the rights and obligations of the court-registered executive officers. Once a jushikhoesa appoints a court-registered executive officer, it may no longer have a representative director, which is the only person authorized to represent a jushikhoesa under the current KCC26
 
However, because Korean companies have maintained a corporate governance structure that is different from the officer/director structure commonly adopted by U.S. companies, it is not clear whether Korean companies that are accustomed to having a representative director would actively adopt this alternative corporate governance structure provided under the amended KCC. 
 
14. Compliance Officer Requirements 
 
Under the amended KCC, certain listed jushikhoesa(s) (to be determined by presidential decree) are required to appoint at least one full time compliance officer and establish compliance control standards27, and only licensed lawyers and other persons with competent legal knowledge and experience will be qualified to serve as a compliance officer. Currently, only banks and other financial institutions are required to have a compliance officer. 
 
15. Removal of Non-GAAP Accounting Standards 
 
Some outdated sections of the KCC require Korean companies to use accounting standards that are inconsistent with the generally accepted accounting principles of Korea ("GAAP") in certain contexts, including in connection with the calculation of dividends. The amended KCC no longer requires companies to use accounting standards that are inconsistent with GAAP. This is expected to eliminate various accounting and dividend-related issues that frequently arise due to differences between GAAP and the accounting standards set forth under the current KCC28.
 
 

For further information, please contact:

 

Ki-Young Kim, Partner, Yulchon

[email protected]

 
Raymond M. Kang, Senior Foreign Counsel, Yulchon

 

 

 

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