Joint ventures in South Korea: overview

A Q&A guide to joint ventures law in South Korea.

The Q&A gives a high level overview of joint ventures law, including regulation of joint ventures, types of joint ventures permitted in the jurisdiction, whether corporate joint ventures are subject to the corporate law, formalities for formation and registration of joint ventures, statutory limits on duration, anti-trust rules, termination, rules relating to joint ventures with foreign members, and incentives.

This Q&A is part of the Joint Ventures Law Global Guide.

Contents

Domestic company joint ventures (JVs)

Regulation

1. Are JVs expressly regulated?

JVs are not defined in Korean law.

Types

2. Which types of JV are allowed?

Both corporate JV and contractual JV are allowed in Korea. A corporate JV is established through a registration of corporation which is controlled and run by the JV members and/or their appointed directors. A contractual JV is a business contract made between the JV members without incorporation of a company.

An example of contractual JV would be anonymous association where an anonymous member pays in capital for the business of the proprietor and shares the profits and loss arising out of the business through a contract. The anonymous member does not have any rights or liability in relation to the proprietor's activities towards any third party.

Another example of contractual JV is a joint business where two or more persons may pay in capital for the business which generates revenue and register as joint business. Each member of the joint business will be taxed separately pursuant to his or her income.

 
3. Are corporate JVs subject to the corporate law?

Corporate JVs are subject to the Commercial Code.

Formation and registration

4. Is the use of foreign language in a JV's founding documents (both corporate and contractual) restricted?

Foreign languages can be used in a JV's founding documents. The Korean translated versions of the documents are necessary for the purpose of registration.

 
5. Are public officers (for example, public notaries) involved in a JV's formation procedure?

Certain JV incorporation documents relating to acceptance of election (directors and statutory auditors) and registration of JV's corporate seal must be notarised by notary public in order to be registered.

 
6. Are JVs registered with any local registries? Are public sector bodies' authorisations required for a JV's establishment?

Local registries

Joint venture incorporation should be registered with the commercial registry.

Public sector bodies

A JV establishment must be registered with the tax authority which issues a business registration certificate of the JV.

 
7. What other formal requirements must be complied with to validly constitute a JV?

A business combination report must be filed with the Fair Trade Commission if the following conditions are met:

  • The total amount of assets or sales of a JV member (including its subsidiaries and affiliates) is KRW20 billion or more.

  • The total amount of assets or sales of the other JV member (including its subsidiaries and affiliates) is KRW200 billion or more.

Permitted markets

8. Can the JV instrument be used in every market? Are there any restrictions to be considered and carefully assessed before investing?

JVs can be used in every market. However, there are certain restrictions for business sectors in case a foreigner (or foreign entity) is a JV member (see Question 25).

Purpose

9. Can a JV be established with any purpose?

As long as the purpose of a JV is legal, a JV can be established with any purpose (see Question 25 for certain business purposes that are not permitted if a JV member is a foreigner or a foreign entity).

Share capital and participation

10. What possible forms of participation are there in a JV's share capital? How can a JV member contribute and are there statutory limits on the possibility to make contributions in kind?

Forms of participation

A JV member can participate in a JV's share capital by acquiring the stock or share.

Contributions

A JV member can contribute cash, capital assets (for example, machinery, equipment, facilities, livestock, trees, and so on), intellectual property, real estate, and so on.

 
11. Can a corporate JV's share capital be indicated by making reference to a foreign currency?

A corporate JV's share capital is indicated in the commercial registry where the capital amount is indicated only in KRW. For any other unofficial reference documents, the law does not exclude the possibility of JV's share capital indicated in a foreign currency.

Duration and limits on membership

12. Are there statutory limits on a JV's duration?

There is no statutory limit on a JV's duration. Therefore, JV members can freely agree on JV's duration.

 
13. Are there statutory limits on the number of members participating in a JV?

There is no statutory limit on the number of members participating in a JV.

Public sector bodies

14. Can a public sector body enter into a JV agreement? Subject to what conditions? In particular, do public private partnerships (PPP) laws and regulations apply?

A public sector body can enter into a JV agreement. Such JV can be subject to the Act on the Management of Public Institutions depending on the proportion of public sector body's contribution. Further, in case the JV invests in infrastructure, the Act on Public-Private Partnership in Infrastructure applies.

Non-competition and anti-trust clauses

15. Are there statutory constraints on the use of non-competition or anti-trust clauses in a JV agreement?

During period of effectiveness

A non-competition clause in a JV agreement is valid and effective during the period of effectiveness of the agreement.

Following termination

Although a non-competition clause is generally valid and effective after the termination of the JV agreement, the Fair Trade Commission can invalidate the clause or impose a fine if the non-competition term is unreasonably long. Generally, the Korean courts hold that a non-competition term of one year following termination is valid and effective, subject to specific facts of the case.

De facto company/partnership

16. Must the contractual JV satisfy any conditions to avoid falling within the definition of de facto company/partnership?

In order to avoid falling within de facto company/partnership definition, the contractual JV must avoid any formalities of company/partnership (for example, not register as a company or get a business registration certificate of partnership) and also avoid anything that can be viewed as de facto company/partnership in actual management of JV.

Limiting member liability

17. Can a JV agreement provide that a JV member can participate without incurring any risk, loss or reward?

A JV agreement can provide that a JV member can participate without any risk, loss or reward. However, in order to become a shareholder of a corporate JV, a JV member must pay in certain amount of capital.

Anti-trust

18. Do any anti-trust rules, guidelines or policies apply to a JV agreement?

The Monopoly Regulation and Fair Trade Act applies to a JV agreement.

Governance and limits on directors

19. Can the parties to a JV freely regulate the JV or are they subject to certain restrictions?

JVs are subject to the restrictions provided by the Commercial Code. For example, a JV member that is a controlling shareholder cannot enter into any financial transactions with the JV if the JV is a listed company. Further, if a JV member is a director of the JV, the transaction between the director JV member and the JV (for example, a loan agreement) must be approved by the board of directors.

 
20. Are there limits or restrictions on the eligibility of an individual as a member of the board of directors/statutory auditor?

There are no general restrictions or requirements on the appointment of inside directors/statutory auditors, but the articles of incorporation of JV can provide certain restrictions. There is no nationality restriction on directors/statutory auditors.

However, for outside directors, there are certain restrictions under local law. For example, the following persons cannot be an outside director:

  • Minors or a ward of the court.

  • A person who was declared bankrupt and is not reinstated.

  • A person who has been convicted and sentenced for committing crimes and has served the sentence, or has been exempted from the sentence in the previous two years.

  • A person who was dismissed due to violation of law in the previous two years.

  • An inside director or a person who was an inside director in the previous two years.

  • The largest shareholder, his or her spouse and family members.

  • If the largest shareholder is a corporate body, its directors, auditors, and executive members.

  • A spouse or family members of the directors, auditors, and executive members of the company.

  • Directors, auditors, or executive members of a holding company or a subsidiary company.

  • Directors, auditors, or executive members of a corporate body which has an important interest in the company.

Termination

21. What legal regime applies to a JV's termination? Can a JV be terminated for just cause on request of one party?

JV members can freely agree on the JV's termination. Further, in case of a JV member's default in JV agreement, the other JV members can exercise their right to rescind the JV agreement under the Civil Code or Commercial Code.

 
22. Is the termination of a JV agreement subject to any public sector body's approval?

A termination of JV agreement is not subject to any public sector body's approval. However, once the business is closed, the closure of business should be reported to the tax office in order to avoid any tax liabilities.

Choice of law and jurisdiction

23. Are there constraints on the choice of the law and the jurisdiction applicable to a JV?

JV members can freely choose the governing law and jurisdiction applicable to the JV. However, the Korean court can invalidate any choice of law or jurisdiction clause if such law or jurisdiction does not have any connection with either JV member. Further, compulsory provision of Korean law can be applied regardless of the JV members' agreement.

 

JVs with foreign members

Validity and authorisation

24. What are the rules relating to validity and authorisation of JVs with foreign parties?

Validity

JVs with foreign parties are allowed in Korea.

Limits

There is no requirement of local member participation.

Authorisation

No specific authorisation is required for JVs with foreign parties.

Effect of foreign membership

 
25. Are any of the rules relating to domestic company JVs (see Questions 1 to 23) different for JVs with members incorporated under, or governed by, the laws of a foreign country?

Regulation

A foreign investment joint venture is regulated under the Foreign Investment Promotion Act and Foreign Exchange Transactions Act in addition to the Commercial Code, Restriction on Special Taxation Act, and other relevant laws and regulations.

Public sector bodies

A foreign investment report must be filed with the foreign exchange bank in order to receive the benefits provided under the Foreign Investment Promotion Act.

For the joint ventures between foreign JV members, a business combination report must be filed with the Fair Trade Commission if the following conditions are met:

  • The total amount of assets or sales of a JV member (including its subsidiaries and affiliates) is KRW20 billion or more and the total amount of assets or sales of the other JV member (including its subsidiaries and affiliates) is KRW200 billion or more.

  • Each JV members Korea sales amount is KRW20 billion or more.

If one of the JV members is a foreign entity and the other is a Korean entity, the second sales amount requirement of the foreign entity for the business combination report applies only if the foreign JV member's total amount of assets or sales is KRW20 billion or more but less than KRW200 billion. In other words, if the foreign JV member's total amount of sales or assets is KRW200 billion or more and the Korean JV member's total amount of sales or assets is KRW20 billion or more, a business combination report must be filed regardless of the foreign JV member's Korea sales amount.

Permitted markets

Foreign investment is not permitted in certain business sectors including public administration, diplomacy, and national defence. Other business sectors in which foreign investment is not permitted have public features, for example:

  • Postal services, central banking, individual mutual aid organisations, pension funds, administration of financial markets, activities auxiliary to financial service activities.

  • Legislative, judiciary, administrative bodies, foreign embassies, extra-territorial organisations and bodies.

  • Education (pre-primary, primary, secondary, higher education, universities, graduate schools, schools for the handicapped, and so on).

  • Artists, religious, business, professional, environmental advocacy, political, and labour organisations.

Further, foreign investment is restricted in certain sectors of business. Foreign investment is not permitted in restricted sectors of business in principle, but, when certain standards are met and permission is obtained, foreign investment is partially permitted. Below are a few examples of such restricted businesses:

  • Power generation (hydroelectric power generation, fire power generation, and so on). The sum of power plant facilities purchased by foreigners from Korea Electric Power Corporation (KEPCO) must not surpass 30% of the total domestic power plant facilities.

  • Disposal of radioactive waste. Radioactive waste management business is prohibited.

  • International air transport/domestic air transport/small air transport. Permitted where the foreign investment ratio is less than 50%.

  • Domestic commercial bank. Permission is limited to commercial banks and local banks (specialised banks, and agricultural/fisheries/livestock co-operatives are prohibited).

See KOTRA website (www.investkorea.org/ikwork/iko/eng/main/index.jsp) for more information.

Contributions

A JV member can contribute cash, capital assets (machinery, equipment, facilities, livestock, trees, and so on), proceeds from the stock or share acquired by foreign investment, intellectual property, stocks of a foreign company listed in foreign exchange market, stocks owned by a foreigner pursuant to the Foreign Investment Promotion Act, real estate located in Korea, and so on. To receive the benefits provided under the Foreign Investment Promotion Act, the paid-in capital should be at least KRW100 million and each foreigner must own at least 10% of the total issued stocks with voting rights of a Korean company.

Economic or financial incentives

26. Are there economic or financial incentives for foreign direct investments in a JV?

Unless otherwise provided in any laws, a foreigner (or foreign entity) making direct investments in Korea is treated equally as a Korean person or Korean entity.

If the foreign direct investment satisfies the condition provided in the Foreign Direct Investment Promotion Act, a corporate tax reduction will be given. Further, if the foreign investment is made in a company of high technology designated by the Ministry of Strategy and Finance, registration tax, acquisition tax, estate tax, and land tax reduction can be given as well. A foreign investment company can also get a favourable treatment in entering a lease agreement at certain government property and in bidding for certain government projects.

Minimum investments/contributions

27. Are there mandatory minimum equity investments or contributions in kind thresholds for a foreign JV member?

Although there is no minimum investment requirement, a foreign JV member must invest KRW100 million or more and own at least 10% of the total issued shares with voting rights in a Korean company to receive the benefits provided under the Foreign Investment Promotion Act.

 

The regulatory authorities

Ministry of Justice

Main activities. Enforces laws of Korea including the Commercial Code.

W www.moj.go.kr/HP/ENG/index.do?renewal=Y

Korea Fair Trade Commission

Main activities. Promotes fair trade in Korea and is in charge of business combination report filing.

W http://eng.ftc.go.kr/

KOTRA

Main activities. Provides up-to-date information such as investment feasibility studies and consultations on foreign investment procedures, laws, taxes and accounting.

W www.investkorea.org/ikwork/iko/eng/main/index.jsp



Online resources

National Legal Information Centre

W http://law.go.kr/main.html

Description. This is the official website run by the Ministry of Government Legislation that provides up-to-date statutes and case law.

Korean Law In English

W http://elaw.klri.re.kr/eng_service/main.do

Description. The website is run by the Korea Legislation Research Institute that provides up-to-date statutes and decrees in English. The English version is for guidance only and whenever there is an inconsistency between the English version on the website and the Korean version on www.law.go.kr, the Korean version prevails.



Contributor profiles

Thomas Pinansky, Partner

Barun Law LLC

T +82 2 3479 7517
F +82 2 538 3533
E tom.pinansky@barunlaw.com
W www.barunlaw.com

Professional qualifications. Washington DC, US, 1988; Texas, US, 1985, Attorney at Law

Areas of practice. Foreign/overseas investment; M&A/joint venture (over 200 M&A and joint venture transactions); insurance; international litigation; international arbitration; labour and employment.

Non-professional qualifications. AB Magna Cum Laude, Harvard College, 1981; JD University of Pennsylvania Law School

Languages. English, French, Korean

Professional associations/memberships

  • Vice Chairman, American Chamber of Commerce in Korea.
  • Board member, Canadian Chamber of Commerce in Korea.
  • Special adviser to the Kiwi Chamber of Commerce in Korea.
  • Served as Chairman of the Asia-Pacific Council of the American Chambers of Commerce, an organisation comprised of over 25 American Chambers of Commerce throughout the Asia-Pacific Region.

Publications. Numerous speeches and articles on South Korea-related legal and business issues in various publications and at a broad variety of venues throughout the world.

Ki Tai Park, Partner

Barun Law LLC

T +82 2 3479 7515
F +82 2 3478 6222
E kitai.park@barunlaw.com
W www.barunlaw.com

Professional qualifications. South Korea, Attorney at Law, 1982; Public Administration Examination, 1980

Areas of practice. M&A; corporate advisory; real estate; customs; intellectual property rights.

Non-professional qualifications. Bachelor of Law, Seoul National University, 1980; LLM, Columbia Law School

Languages. Korean and English

Professional associations/memberships

  • Administrative Appeals Commission of the Secretariat of the National Assembly, 2012.
  • Auditor of Korea Culture and Tourism Institute, 2012.
  • Policy consultant at Ministry of Foreign Affairs, 2006 to 2010.
  • Consultant of SIFC at Seoul City Hall.
  • Consultant of trade relation department of Ministry of Justice, 1999 to 2002.

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