Setting up and operating a joint venture

Structure

Are there any particular drivers in your jurisdiction that will determine how a joint venture is structured?

The incorporated joint venture structure provides limited liability to the joint venture parties and this benefit drives most joint venture parties towards an incorporated structure. The details of the joint venture structure in any particular case vary widely depending on the parties’ commercial objectives, relative bargaining power, whether they are domestic or foreign, and many other factors.

Tax considerations

When establishing a joint venture, what tax considerations arise for the joint venture parties and the joint venture entity? How can tax charges be lawfully mitigated?

Incorporated joint ventures are subject to a 0.48 per cent registration tax on capital contributions (1.44 per cent if the head office of the joint venture entity is located in Seoul Metropolitan Area). In addition, a joint venture entity acquiring real estate, motor vehicles, heavy equipment and certain other items is required to pay acquisition tax.

If the joint venture is established in the form of a company (not a branch or liaison office) by foreign entities by way of an investment that meets the FIPA criteria and the Tax Incentive Limitation Law (TILL), registration tax and acquisition tax reduction will be granted. TILL grants tax incentives to foreign investors who run certain businesses through companies in Korea, such as high-tech businesses, businesses designated as foreign investment zones, occupants of free trade zones and developers of free economic zones.

Asset contribution restriction

Are there any restrictions on the contribution of assets to a joint venture entity?

Under Korean law, contribution in kind to a joint venture entity is allowed. As for a JSC, implementation of an in-kind contribution requires valuation by an independent appraiser and review by a court. An in-kind contribution relating to an LLC does not require valuation or court review.

Interaction between constitution and agreement

What is the interaction between the constitution of the joint venture entity and the agreement between the joint venture parties?

In terms of governing the legal relationship of the joint venture entity, in case there is any discrepancy between the constitution of the joint venture entity and the agreement between the joint venture parties, the constitution of the joint venture entity, which is an official by-law of the entity, takes precedence over the joint venture agreement, which is a private agreement between the joint venture parties. This principle applies in the same manner even if the joint venture entity becomes a party to the joint venture agreement. In this case, the joint venture entity will assume contractual liabilities to follow the joint venture agreement, but any legal relationship thereof will still be governed by the constitution of the joint venture entity.

Considering this precedence, the joint venture parties often include a provision stating that, between the parties themselves, the joint venture agreement takes precedence over the constitution of the joint venture entity, and that the parties must ensure that the constitution of the joint venture entity is consistent with the joint venture agreement and, in the event of any inconsistency between the constitution and the joint venture agreement, the parties must promptly amend the constitution so as to conform in all respects with the joint venture agreement.

Under Korean law, there is no requirement to register the joint venture agreement with any government agency.

Party interaction

How may the joint venture parties interact with the joint venture entity? Are there any restrictions?

In Korea, interactions between joint venture parties and the joint venture entity vary, including in the following:

  • joint venture parties conduct business transactions, including sale of goods and provision of services;
  • joint venture parties license intellectual properties to the joint venture entity; and
  • joint venture parties second their employees to the joint venture entity (see question 15).

In general, interactions between the joint venture entity and joint venture parties are regulated by the joint venture agreement. This will typically deal with matters such as information-sharing, preparation of business plans, financial statements and other matters.

Interactions between the joint venture entity and the joint venture parties must also comply with the following restrictions:

  • any transaction between a joint venture party and the joint venture company must be conducted at arm’s length (see question 14);
  • any transaction between the joint venture entity and a joint venture party that holds 10 per cent or more of the shares, which falls within the scope of a ‘self-dealing’ transaction under Korean law, must be approved by an affirmative vote of two-thirds of the all-incumbent board members of the joint venture entity after the party seeking to engage in the self-dealing transaction discloses to the board of the joint venture entity:
    • the fact that such transaction falls within the scope of a self-dealing transaction; and
    • all material facts relating to such transaction (otherwise, the transaction could be nullified if challenged); and
    • insider trading issues will apply where the joint venture entity is a listed company.
Exercising control

How may the joint venture parties exercise control over the joint venture entity’s decision-making?

In order for minority investors to exercise control over the joint venture entity’s decision-making, minority investors usually insist on (i) having the right to appoint one or more directors or high-ranking executives of the joint venture entity; and (ii) provisions specifying one or more of the following items in the joint venture agreement and constitution of the joint venture entity:

  • majority investors must obtain minority investors’ prior written consent; this prompts the joint venture entity into taking or not taking certain material corporate actions so that minority investors have veto rights on such items;
  • certain material corporate actions must be approved at the shareholders’ meeting and the voting or quorum requirement of the shareholders’ meeting approving such items must be further restricted or confined so that minority investors have veto rights on such items; and
  • certain material corporate actions must be approved at the board meeting, provided that:
    • the voting or quorum requirement of the board meeting approving such items are further restricted or confined; or
    • an affirmative vote by the director appointed by minority investors to approve such items is obtained so that minority investors have veto rights on such items.

Material corporate actions covered by the above provisions typically include, among other things:

  • finalisation of the joint venture’s annual budget and business plan;
  • mergers and promotion of any new business;
  • amendment to corporate governance regulations, such as the constitution;
  • transactions with any related company;
  • determination of remuneration of directors or statutory auditors;
  • matters concerning dividends;
  • matters concerning capital increases or decreases, borrowings or other obligations in an amount exceeding a certain threshold; and
  • expenditure in an amount exceeding a certain threshold.

Minority investors are recommended to include provisions regarding the above-mentioned certain items in the constitution of the joint venture entity as well as the joint venture agreement to invalidate corporate actions conducted by the majority shareholders in breach of the joint venture agreement. In other words, if such provisions are only included in the joint venture agreement, minority investors may have contractual recourse and claim for damages but it may be difficult to invalidate the specific corporate actions that have already been taken.

See question 27 for an explanation of minority investors’ statutory rights under Korean law.

Governance issues

What are the most common governance issues that arise in connection with joint ventures? How are these dealt with?

The categories below deal with common types of governance issues.

General shareholders’ meeting

Issues that may arise in a general shareholders’ meeting include:

  • whether to include matters requiring the consent of minority shareholders (consent rights);
  • whether to reinforce the requirements for a resolution of a general meeting of shareholders or the board of directors in order to substantially have a right to veto; and
  • whether to include matters requiring resolution of a general shareholders’ meeting.

If a joint venture party owns a significant minority stake, that party often desires to influence the corporate governance of the joint venture entity to a certain degree and requires, as a means to do so, a right to nominate directors and a veto (or consent right) with respect to any matters requiring a resolution of a general meeting of shareholders or the board of directors.

Board of directors

Under the Korean Commercial Code (KCC), a JSC is required to have at least three directors unless such company has total paid-in capital of less than 1 billion won, in which case one or two directors are allowed. Therefore, certain issues include:

  • the total number of directors and each shareholder’s right of nomination;
  • the distribution of authority among shareholders, or a board of directors or a representative director; and
  • quorum for shareholders’ or board of directors’ resolutions (ie, simple majority, supermajority or a director nominated by the investor required to be present).

Representative director

Under the KCC, the representative director has comprehensive power to represent the company internally and externally, and thus to carry out all judicial or non-judicial acts relating to the business of the company, including executing contracts for and on behalf of the company. Thus, any acts of the representative director falling within his or her corporate authority will bind the company, and agreements executed by the representative director on behalf of the company will constitute valid, legal and binding obligations of the joint venture company.

If a joint venture party owns a significant minority stake, that party may wish to have a right to appoint a CFO of the joint venture entity to balance the representative director’s power.

It is important to consider (i) the number of representative directors, if applicable, or the director (or directors) and shareholders’ powers of representation; and (ii) a restriction on the representative director or directors’ power of representation and executive authority.

Appointment of statutory auditors or independent auditors

Under the KCC, a JSC is required to have at least one statutory auditor unless it has total paid-in capital of less than 1 billion won, in which case the appointment of the statutory auditor is not mandatory.

The statutory auditor’s function is to supervise and ensure that the performance of duties of officers and directors is in compliance with relevant laws and internal corporate regulations, including the articles of incorporation, and to review and present its opinion on the financial statements to be submitted to the shareholders’ meeting. The statutory auditor is an internal corporate governance organ of the company distinct from an independent auditor, such as an accounting firm, responsible for the preparation and audit of financial statements.

It is thus important to consider the number of statutory auditors or each shareholder’s right of nomination.

Nominee directors

With an incorporated joint venture, what controls exist in your jurisdiction in relation to nominee directors? How should a nominee director balance the potentially conflicting interests of the joint venture company and the appointing shareholder?

Under the KCC and the Korean Civil Code, the director of a company owes fiduciary duty to the company. In case there is any conflict of interest between the joint venture company and the joint venture party who nominated him or her as director, the nominee director must act in the best interests of the joint venture company in compliance with his or her fiduciary duty to the joint venture company. If a director breaches his or her duties to the company, he or she may be subject not only to civil liabilities to the company - as well as to third parties for damages arising from the breach - but also to criminal liabilities.

Competition law

What competition law considerations are engaged by the formation and operation of the joint venture? Is approval needed?

Under the Monopoly Regulation and Fair Trade Act (MRFTA) - the main merger-control statute in Korea - upon the formation of a joint venture company, a merger clearance process with the Korea Fair Trade Commission may be required depending on the size (assets or turnover) of the joint venture parties or the joint venture company (i) by establishment of a new company by the joint venture parties; or (ii) by acquisition of shares in an existing company, which was originally owned by a joint venture party, by another joint venture party. Merger clearance is requested from the Korea Fair Trade Commission by way of filing a business combination report.

For transfer pricing issues under the MRFTA relating to the operation of the joint venture company, see question 14.

Provision of services

What are the key considerations in your jurisdiction in structuring the provision of services to the joint venture entity by joint venture parties?

The MRFTA requires transactions between affiliated parties to be made at arm’s length. Also, it may be helpful to understand the transfer pricing provisions under Korean tax law when structuring the provision of services to the joint venture company by joint venture parties.

Under the MRFTA, if a transaction between a company and its affiliate (which may include joint venture parties) is not entered into on an arm’s-length basis, and subsequently results in an anticompetitive effect on the relevant market in Korea, the transaction may be deemed an unfair trade practice. In such case, both the company providing the unfair benefit (eg, advantageous pricing) and the company receiving the unfair benefit may be subject to an administrative penalty and other corrective actions. The company providing the unfair benefit may additionally be subject to criminal penalties. In addition, under the Corporate Income Tax Act (in the case of transactions between domestic affiliates) and the Adjustment of International Taxes Act (in the case of transactions between Korean companies and overseas affiliates), additional taxes may be imposed on a company or its affiliates involved if the consideration paid is deemed unreasonably lower or higher than fair market value. In the case of a loan agreement between affiliates, additional taxes may be imposed on the lender if the interest rate is lower than the fair market interest rate or the borrower if higher than the fair market interest rate.

Employment rights

What impact do statutory employment rights have in joint ventures?

Under Korean law, there is no specific impact on the statutory employment right triggered by the formation of joint ventures; the statutory employment right will remain intact even thereafter.

If the joint venture parties have obtained the consent of the respective seconded or transferred employees in respect of their secondment or transfer to the joint venture company, the joint venture parties may temporarily dispatch their employees to the joint venture company to support the joint venture company’s operation (eg, by providing technical support for IT systems of the joint venture company) or permanently transfer their employees to the joint venture company.

Intellectual property rights

How are intellectual property rights generally dealt with on the creation, operation and termination of a joint venture in your jurisdiction?

For the operation of a joint venture in Korea, the joint venture parties usually grant licences to the joint venture company to use the intellectual property rights owned by the joint venture parties.

Also, during the course of creation, operation or termination of a joint venture in Korea, certain intellectual property rights may be invented in and transferred from or to the joint venture. In relation to the invention of intellectual property rights, it is not uncommon for the joint venture parties to address in the joint venture agreement to which party the title to the intellectual property rights will belong and to what extent the other party is entitled to use these intellectual property rights. In relation to the transfer of intellectual property rights, except for certain technologies related to national security or those with high technological and economic value (in which case, the transfer is subject to approval from a relevant governmental authority), the title to the intellectual property rights is transferable without restrictions.