Foreign Investment in Korea: The Door Opens WideSpring 1999
Foreign investment has played an important role in revitalizing Korea’s infrastructure and raising its stature as a leading developed county. As foreign investment gradually replaced the Korean economy’s dependence on foreign aid, foreign investors first focused on basic commodities such as energy, tobacco processing and agro-chemical products (1960s), then focused on labor-intensive sectors such as textiles and footwear (1970s), followed by technology-centered industries such as chemicals, electronics and pharmaceuticals (1980s). Recently, foreign investors have followed the international trends and become active in Korea’s service sectors as well as in trading, distribution, financing and software development.
The shift of foreign investors’ primary interest over the past half century reflects the evolutionary stages of the Korean economy’s development and has been strongly linked to the Korean Government’s foreign investment policies. Historically, the Korean Government has encouraged or induced foreign investment by offering tax holidays to foreign investors. At the same time, the Korean Government prohibited and restricted (both officially and unofficially) foreign capital inflow to certain Korean industries. Although the general trend during this period was gradually to open up and liberalize the Korean market, the pace and magnitude of liberalization was primarily determined by the Government rather than by foreign investors.
With the emergence of the economic crisis that began last year, the Korean Government re-evaluated its restrictions on foreign investment and decided to open up “almost” every business sector, ranging from computer chip manufacturing to running a college. Both the Korean Government and private industry anticipate that a significant portion of foreign investment in Korea will now take place via merger and acquisition of Korean companies.
This article will explain the regulatory structure of foreign investment in Korea, examine the mechanisms provided by the Government to induce foreign investment, and review the Korean Government’s efforts to improve foreign investment.
Tax Exemptions and Reductions.
Tax holidays were recently expanded for the benefit of foreign investors. The 1998 Foreign Investment Promotion Act increases significantly the tax holiday available for a successful Korean business based on foreign investment.
Mechanics of Investment in Korea.
The foreign investment system has been streamlined extensively as compared to the old system. Further, the Korean Government has established the Korea Investment Service Center to provide expeditious and knowledgeable services for foreign investors. This Center will provide a one-stop system for advising foreign investors, including assisting in resolution of grievances in connection with foreign investment in Korea.
Under the current foreign investment regime, foreigners are restricted from making investments in certain businesses. However, the Korean Government is in the process of reducing significantly the number of businesses enumerated in the list, thereby permitting foreigners to engage in a wider variety of Korean businesses.
In May 1998, the Korean Government removed the requirement that foreigners taking control of a Korean company obtain a written acquiescence from the target’s board of directors. The acquiescence requirement was introduced in order to protect management control by Korean shareholders and had been considered a barrier to foreign investment. In addition, the Korean Government also removed the equity ceiling for foreign investors in listed companies. Now there are no legal restrictions for a foreign entity to engage in a hostile take-over of both listed and unlisted Korean companies.
Amendment to the Commercial Code.
The Korean National Assembly recently has passed an amendment to the Commercial Code as part of the economic restructuring of industries. The goals of the amendment include improving the monitoring system over the management of enterprises, reinforcing the responsibility of those who manage enterprises, and assuring candor in the management of enterprises. The amendment made the following changes.
- Stock splits are now permitted. Epilogue.
- The minimum par amount of a share has been reduced from the current KRW5,000 to KRW100 (“KRW” is the Republic of Korea currency, known as the “won”).
- The merger process has been simplified where the size of the target company is small compared to the surviving company (i.e., the value of shares being issued by the surviving company represents less than five percent of the paid-in-capital of the surviving company): a) a shareholders’ meeting of the surviving company can be substituted by a board of directors meeting and b) the period during which the target’s creditors may file an objection was shortened from two months to one month.
- “Spin-offs” have also become much easier. A Chusikhoesa (Korean limited liability company) can divide its assets and invest them in one or more existing or newly established corporations. A shareholder resolution is required for spin-offs and a mechanism to protect creditors must be developed and followed.
- In the event that a company has paid-in-capital of less than KRW500 million, the minimum number of directors required has been reduced from three to one.
- A declaratory provision has been added stating that directors must perform their duties faithfully according to law and the articles of incorporation.
- Controlling shareholders or de facto controlling parties who have participated in the business of a company or directed the director’s business through the controlling party’s influence over the corporation shall be deemed to be de facto director(s) and held jointly and severally responsible for damages to the company and third parties.
- The threshold for exercising minority shareholders’ rights to initiate derivative actions has been lowered from a minimum of five percent to one percent.
- Shareholders with no less than three percent equity will be allowed to propose an agenda at the shareholders’ meeting to a director of the company.
- Shareholders with no less than three percent equity will be allowed to request that the company adopt cumulative voting when the company elects two or more directors.
- Interim cash dividends will be allowed once during a company’s fiscal year.
It remains a hotly debated issue whether the current Korean economic crisis is the result of over-regulation of the social and economic system that has fostered and tolerated inefficiency and obfuscation by government and business. As a reaction to this debate, the Korean Government now is implementing policies on the assumption that there are too many regulations and that many of them are incompatible with a capitalistic society. Up until now the choices made by the Korean Government have been lauded by foreign investors, and the road to a full recovery seems to be underway. It is hoped that the recent measures adopted by the Korean Government and others to follow in the future will give further assurances to potential foreign investors that Korea is an attractive place to invest.
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