Due to worldwide inflation, a global rise in interest rates and other geopolitical instabilities, there was a general downturn in joint venture (JV) activities in 2022. Such downturn carried over to 2023 to a certain degree; in particular, financial investors facing less favourable debt financing conditions than before appear to be affected more than strategic investors. However, with the market expectation of stabilised interest rates and economic recovery, the M&A markets (both globally and in South Korea) are exhibiting a meaningful turnaround from the downturn of 2022.

Especially from the JV perspective, there has been a widespread trend of market utilisation and leveraging of the global initiatives for economic recovery (including the Inflation Reduction Act in the USA).

Based on the authors’ experience, JV activities have been more active than others in those “growing industries” that have been the focus of South Korean companies and investors (such as the EV battery, mobility, hydrogen and ammonia value chain, entertainment, AI and healthcare industries).

The authors believe that such trends are primarily driven by the rapid growth of these markets and by the implementation of new legislation, which created demands for local presence in certain states and/or compliance with certain governance structures (eg, ownership structures) for government subsidies, etc. Additionally, the desire for hedging and managing risks regarding investing in markets still in development has been a factor.

A traditional joint venture company (JVC) in the form of a stock company (chusik hoesa in Korean, similar to a corporation in the USA) is the most commonly used form of JV in South Korea. A JVC in the form of a limited liability company (yuhan hoesa) is also often used.

Some of the key advantages and disadvantages of using chusik hoesa are as follows.

• Advantages:
1. public offering of shares is permitted;
2. issuance of debentures is permitted; and
3. the corporate laws (and cases) around chusik hoesa are well established, as it is the most commonly used form of corporate entity in South Korea.
• Disadvantages:
1. rules around management structure are generally more restrictive than for other forms of corporate entities (eg, minimum three directors and one statutory auditor required for companies with paid-in capital of KRW1 billion or more, maximum three-year term for directors, etc); and
2. it is generally subject to more stringent public disclosure requirements.

Some of the key advantages and disadvantages of using yuhan hoesa are as follows.

• Advantages:
1. a more flexible management structure is permitted (eg, no minimum number of directors required, no board of directors required, no maximum term of directors applicable, etc); and
2. it is generally subject to less stringent public disclosure requirements.
• Disadvantages:
1. public offering of shares is not permitted;
2. issuance of debentures is not permitted; and
3. the corporate laws (and cases) around yuhan hoesa are not as well established as for chusik hoesa.

In the authors’ view, the primary drivers for choosing the form of a JVC are:

• whether public offering of shares is contemplated;
• funding options (eg, whether issuance of debentures will be necessary);
• flexibility in management structures; and
• tax considerations.

The primary source of law relating to corporate governance is the Korean Commercial Code (KCC), which applies to both listed and unlisted companies.

For listed companies, additional regulations are contemplated in the Financial Investment Services and Capital Markets Act (the “Capital Markets Act”) and relate to (among others):

• public disclosures;
• establishment of audit committees and election of outside directors;
• insider trading; and
• prohibition of unfair trade practices.

It is mandatory for listed companies to comply with listing rules, including the Rules on Issuance of Securities and Disclosure (which are derived from the Capital Markets Act) as well as with the applicable listing rules of the Korea Exchange, including:

• the KOSPI Market Listing Rules;
• the KOSDAQ Market Listing Rules;
• the KOSPI Market Disclosure Rules; and
• the KOSDAQ Market Disclosure Rules.

The Monopoly Regulation and Fair Trade Act (MRFTA) regulates:

• merger filings;
• certain intra-group transactions such as cross-shareholding and provision of guarantees;
• separation of commerce and financial business; and
• conduct of qualifying/large holding companies.

The Foreign Investment Promotion Act and Foreign Exchange Transactions Act apply to any foreign direct investment or overseas direct investment satisfying certain conditions.

The primary regulators pursuant to the main statutory provisions described above are:

• the Ministry of Justice (under the KCC);
• the Financial Services Commission (under the Capital Markets Act);
• the Korea Exchange (under the Rules on Issuance of Securities and Disclosure and applicable listing rules of the Korea Exchange);
• the Korea Fair Trade Commission (under the MRFTA);
• the Ministry of Finance or the Bank of Korea (under the Foreign Exchange Transactions Act); and
• the Ministry of Trade, Industry and Energy (under the Foreign Investment Promotion Act).

The following AML regulations apply in South Korea.

• The Act on Reporting and Using Specified Financial Transaction Information – this act governs the anti-money laundering (AML) obligations of financial institutions in South Korea, such as the obligations regarding suspicious transaction reports, currency transaction reports, Know Your Customer (KYC) and other matters relating to internal control.
• The Act on Regulation and Punishment of Criminal Proceeds Concealment – this act governs matters regarding:
1. concealment of criminal proceeds related to particular crimes; and
2. confiscation of such criminal proceeds.
• The Act on Prohibition Against the Financing of Terrorism and Proliferation of Weapons of Mass Destruction – this act governs matters relating to:
1. the financing of terrorism against the public; and
2. the financing of proliferation of weapons of mass destruction.
• The Act on Special Cases Concerning the Prevention of Illegal Trafficking in Narcotics – this act governs matters relating to narcotics-related activities and the confiscation of proceeds from such activities.

Industries restricted to foreign investment include the following:

• prohibited industries – nuclear power generation, radio broadcasting, terrestrial television broadcasting and postal service;
• less than 50% foreign ownership permitted – farming of beef cattle, wholesale of meat products, domestic and international passenger and cargo transportation by sea and air, newspaper publication, magazine and periodical publication, etc;
• less than 50% foreign ownership (where a South Korean national is the largest shareholder) permitted – power generation, power grid and electricity sales business;
• 49% or less foreign ownership permitted – program distribution, cable television network, satellite and other broadcasting, wired/wireless telecommunications and other telecommunications business; and
• less than 25% foreign ownership permitted – news agency business.

Furthermore, any investment that may pose a threat to the national security of South Korea (in particular, any investment that might hinder the manufacture/production of defence materials, might pose a risk of leakage of state secrets and/or National Core Technology, etc) may be prohibited or restricted by the Ministry of Trade, Industry and Energy (MOTIE) upon review of the foreign investment committee. Any foreign investor wishing to make an investment that has the potential of being a threat to the national security of South Korea may submit a voluntary filing for review prior to making such investment.

National Core Technology

In the event any technology owned by an investee company is deemed a “National Core Technology” as defined in the Act on Prevention of Leakage and Protection of Industrial Technology, the following applies:

• if the investment target has received any government subsidies for R&D, a prior approval by MOTIE will be required; and
• if the investment target has not received any such government subsidies, a prior report to MOTIE will be required.

Sanctions

South Korea has implemented international economic, financial and trade sanctions as required by the United Nations Security Council Resolutions (UNSCR) and other international treaties to which it is a party. South Korea has also incorporated into its domestic regime (as it deemed necessary) certain sanctions regimes of its main allies such as the USA and the European Union (EU) with the legislative intent of contributing to the international effort to maintain global peace and security.

A great deal of domestic legislation exists regarding international sanctions applicable to several economic sectors – including the following.

• The Foreign Trade Act is mainly applicable to trade sanctions.
• Economic and financial sanctions are governed mostly by the Foreign Exchange Transactions Act and the Act on Prohibition against the Financing of Terrorism and Proliferation of Weapons of Mass Destruction (the “CFT/WMD Act”).
• Other types of sanctions such as travel bans, aviation bans and maritime sanctions are governed by:
1. the Immigration Act;
2. the Customs Act;
3. the Coast Guard Affairs Act;
4. the Act on Arrival and Departure of Ships; and
5. the Aviation Safety Act.

Under the Monopoly Regulation and Fair Trade Act of Korea (MRFTA), if a company with total assets or revenues of KRW300 billion or more as of the end of the immediately preceding fiscal year merges with a company with total assets or revenues of KRW30 billion or more as of the end of the immediately preceding fiscal year, the surviving company is obligated to make a merger filing with the Korea Fair Trade Commission (KFTC). The total assets or revenues for the purpose of the foregoing are calculated on a consolidated basis, including assets or revenues of companies worldwide maintaining affiliate status with the constituent companies both before and after the merger. If the above thresholds are met, the notification to the KFTC must be made within 30 calendar days after the closing date.

If either party of a merger is a large company with worldwide assets or annual revenue of KRW2 trillion or more (on a consolidated basis), the transaction is subject to a pre-closing filing, and a notification to the KFTC is required after the date of signing but before the closing date (ie, the registration of the merger with the court registry). The parties cannot implement the transaction without clearance from the KFTC in the case of a pre-closing filing.

In addition, the amendment to the MRFTA in 2021 introduced new thresholds for transactions involving small-sized targets. According to the amended MRFTA, even for a transaction which does not satisfy the thresholds stated above, a filing can be required when:

• the transaction value is KRW600 billion or more; and
• the non-surviving company has had significant business activities in Korean domestic markets.

“Significant business activities” as noted in the latter point mean:

• where the non-surviving company has sold or provided products or services to at least one million people per month in the Korean market during the immediately preceding three years; or
• where the non-surviving company has either leased R&D facilities or used R&D personnel in South Korea and had an annual R&D budget of at least KRW30 billion for the Korean market during the immediately preceding three years.

Disclosure Requirements (Korea Exchange Disclosure Regulations)

According to the KRX Disclosure Rules, an investment must be disclosed on the date of the decision to participate in the JV when:

• a KOSPI listed company, as a participant in a JV, invests an amount exceeding 5% of its equity (or 2.5% for large corporations with total assets of KRW2 trillion or more (“Large Corporations”)); or
• a KOSDAQ listed company invests an amount exceeding 10% of its equity (5% for Large Corporations).

Additionally, if certain significant events occur in the subsidiary of the listed company (such as suspension of business operation, commencement of rehabilitation/bankruptcy proceeding, merger, division, significant transfer of business, change in capital, etc), the listed company – which is the parent company of the subsidiary – must also disclose the information about the subsidiary. Therefore, where a JV is a subsidiary of a listed company, any significant event occurring at the level of the JV may also need to be disclosed as part of the listed company’s disclosure.

Transactions With Specially Related Parties

According to the KCC, a listed company is generally prohibited from engaging in lending, providing guarantees or extending credit to or for the benefit of its “specially related parties”. Furthermore, if a listed company intends to carry out any transaction with its specially related party with a transaction value of 5% or more of the listed company’s total assets/sales, the board of directors’ approval is required.

For a member of a company group subject to disclosure requirements (ie, with total assets of KRW5 trillion or more), the shareholding of the member by the other members of the company group must be disclosed. Where a member of such company group participates in a JV, and the JV becomes a member of the company group, the PSC/UBO of the JV may also need to be disclosed.

Furthermore, although not a public disclosure, the PSC/UBO may be submitted to a foreign investment authority in South Korea as part of the application for foreign investment filings (under the Foreign Exchange Transactions Act or Foreign Investment Promotion Act, as the case may be).

In a recent Supreme Court decision, the principle of shareholder equality was considered (Supreme Court, 13 July 2023, 2021DA293213). 

In 2021, the Seoul High Court ruled that certain provisions in an investment agreement constituted “discriminatory treatment of shareholders” and were therefore invalid, where:

• only a subset of shareholders was given consent rights to certain corporate decisions; and
• any breach thereof was subject to penalties and triggered put rights of such shareholders.

This caused great controversy among practitioners in South Korea as similar arrangements were commonly used in the country prior to the decision.

However, the Supreme Court overturned the Seoul High Court’s decision and affirmed that, subject to certain conditions, an arrangement where a subset of shareholders is given priority/additional rights over other shareholders is valid.

To elaborate, the Supreme Court ruled that granting preferential rights to certain shareholders over others is permitted in special circumstances, such as:

• where a shareholder’s capital investment was necessary for the company’s survival and growth;
• where it was imperative that certain preferential rights were given to such shareholder in order to solicit such investment; and
• where such preferential rights do not directly impair the other shareholders (and, on the contrary, confer benefits to the other shareholders by granting the opportunity to monitor the company’s conduct).

As the Supreme Court decision is relatively recent, its practical implications have not been fully established. However, from the JV perspective, it should be noted that granting of preferential rights to a subset of shareholders over others may be challenged in the absence of “special circumstances” similar to those that formed the basis of the Supreme Court decision.

The following documents are used during the negotiating stage of a JV.

• DDQ – although seldom used, DDQs are used when due diligence is required in respect of any particular assets to be contributed by the JV partner and/or the JV partner itself.
• Term sheet – this is customarily used in the pre-negotiating stage of a JV.
• Mutual NDA – this is customarily used in the pre-negotiating stage of a JV. It is often combined with the term sheet, where the term sheet sets out the parties’ confidentiality obligations.
• Exclusivity agreement – this is customarily used in the pre-negotiating stage of a JV. It is often combined with the term sheet, where the term sheet sets out the exclusivity arrangement between the parties as a binding obligation.

The term sheet is often the only – and key – document used during the negotiating stage of a JV. The term sheet typically sets out:

• the key commercial terms;
• exclusivity (if any) and/or confidentiality obligations; and
• key corporate matters such as ownership, governance/management, transfer restrictions, etc.

According to the KRX Disclosure Rule, when a KOSPI listed company, as a participant in a JV, invests an amount exceeding 5% of its equity (or 2.5% for Large Corporations), or when a KOSDAQ listed company invests an amount exceeding 10% of its equity (or 5% for Large Corporations), the company must disclose this investment on the date of the decision to participate in the JV  (ie, the board of director’s approval).

Furthermore, when an unlisted company which is a member of a company group subject to disclosure requirements (with total assets of KRW5 trillion or more), as a participant in a JV, invests an amount exceeding 5% of its equity, it must disclose this investment within seven days from the date of the decision to participate in the JV.

Lastly, where a member of such company group participates in a JV, and the JV becomes a member of the company group, the member of the company group participating in the JV must:

• file an application for inclusion of the JV as its affiliate; and
• make a disclosure of its shareholding in the JV.

As previously noted, chusik hoesa is the most commonly used form of JV vehicle in South Korea; as such, the issues relating to the setting up of a JV vehicle as a chusik hoesa are detailed here.

A JV vehicle can be:

• incorporated by one of the JV participants (usually the Korean participant), with the other JV participants(s) joining the JV vehicle as shareholder(s) subsequently, and where the other JV participant(s) – to the extent that they acquire 20% or more of shares in the JV vehicle - will be responsible for the merger filing; or
• incorporated jointly by the JV participants, where the largest shareholder of the JV vehicle will be responsible for the merger filing.

It should also be noted that, if any JV participant is a large company with worldwide assets or annual revenue of KRW2 trillion or more, the merger filing clearance will be required prior to:

• acquisition of shares in the JV vehicle by that JV participant (in the case of the first point above); or
• incorporation of the JV vehicle (in the case of the second point above).

For a foreign JV participant to acquire shares in the JV vehicle, it must make a foreign investment filing before it can make payment of the capital contribution.

Upon receipt of the approval for the foreign investment and certain basic procedures for company incorporation (including adoption of articles of incorporation, designation of directors and representative director), the JV may be established, and the approved amount of foreign investment can be paid into the JV.

After completion of the foregoing, the JV and its officers (ie, the directors, statutory auditor – if any – and representative director) will be registered with the local district court in the jurisdiction where the head office is located. Upon completion of the court registration, the new company will legally come into existence.

JV vehicle is, in most cases, incorporated as a joint stock company (chusik hoesa, in Korean), although the authors have also seen small number of cases where limited liability company (yuhan hoesa, in Korean) is used as the form for JV vehicle.

The terms of the JV for both chusik hoesa and yuhan hoesa are documented in more or less the same way. The JV agreement will include the customary terms regarding the management and operation of the JV (eg, ownership structure, management structure, consent/veto rights), transfer restrictions of shares (eg, right of first refusal/offer, drag/tag-along, etc) and other commercial arrangements between the parties, among others.

Some of the terms of the JV are also reflected in the articles of incorporation of the JV vehicle. Such terms include (among others):

• certain matters relating to management structure (eg, number of directors, term of the directors, etc);
• quorum and voting requirements (including board of directors’ and shareholders’ reserved matters);
• transfer restrictions of shares;
• matters relating to stock options and preferred shares; and
• establishment of sub-committees.

Decision-making is typically split between:

• representative directors’ decision-making;
• board of directors’ decision-making; and
• shareholders’ decision-making.

The JV agreement will typically set out the matters that can be decided by executive officers, directors and shareholders.

Furthermore, different quorum/voting requirements are typically stipulated in the JV agreement and/or the articles of incorporation of the JV.

Representative Directors’ Decision-Making

The representative director is the legal representative of the company, and is given the broad authority to represent and legally bind the company in its day-to-day operations.

Board of Directors’ Decision-Making

The board of directors is given the authority to decide any material matter pertaining to the company (except for those matters that are, by law or by the articles of incorporation, required to be approved by the shareholders).

The board of directors’ decision-making is, in principle, subject to the simple majority vote (ie, the majority of the directors attending the board of directors’ meeting plusthe majority of the attending directors’ affirmative vote). Higher quorum/voting requirements can be required by law or set forth in the articles of incorporation.

“Casting votes” are not permitted under the KCC.

Shareholders’ Decision-Making

The KCC sets out applicable voting requirements for certain matters (subject to either “ordinary resolution”, “special resolution” or “unanimous resolution” by the shareholders). Although it is generally acknowledged that the JV participants can agree to higher voting requirements than as set out in the KCC, as a matter of law the requirements cannot be lowered.

“Ordinary resolution” means an affirmative vote (whether in person or by proxy) of a majority of the voting shares represented at such meeting, where the vote shall also account for at least one quarter of the total issued and outstanding voting shares of the company.

“Special resolution” means an affirmative vote (whether in person or by proxy) of at least two thirds of the voting shares represented at such meeting, where the vote shall also account for at least one third of the total issued and outstanding voting shares of the company.

The matter of decision-making in the context of a JV depends largely on the ownership structure (eg, 50:50 or majority:minority shareholders) and other commercial considerations. Within the statutory requirements as described above, the JV participants may freely negotiate and agree on the decision-making mechanisms for a JV.

Funding arrangements for a JV are primarily a matter for the JV participants’ commercial needs and understanding. The typical arrangements in South Korea are as follows.

Equity Contribution

This is probably the most standard funding arrangement. The JV participants will make equity contributions to the JV at the onset, with the understanding/agreement that if further funding is necessary, the JV participants will make equity contributions on a pro rata basis. Such future contributions can be made an obligation of the JV participants, or an option (in which case, if a JV participant elects not to make additional capital contributions, its shareholding ratio will be reduced accordingly).

Because of the potential change of shareholding ratios, matters relating to obligations/options for future equity contributions are usually heavily negotiated, including how it will be decided that further funding is in fact necessary.

Mix of Debt and Equity

This arrangement is also quite common. The debt can be shareholders’ loans (including by one or some of the JV participants or by all of the JV participants on a pro rata basis) or third-party financing (which may also involve a guarantee by the shareholders, usually on a pro rata basis).

Deadlocks in South Korea are dealt in a way that is in line with how they are typically dealt with in global practice – ie, in a way that:

• maintains the JV; or
• terminates the JV.

If the JV is to be maintained in a deadlock situation, the typical process will involve first attempting to amicably resolve the deadlock (eg, escalation to higher governing body/shareholders). If not resolved:

• such deadlock matter would be presumed disapproved;
• a casting vote would be granted to either JV partner; or
• the deadlock matter would be referred to a third-party mediator.

However, it should be noted that because a “casting vote” is not permitted as a matter of corporate law, such procedure would have to be implemented as a contractual arrangement where a JV partner is contractually obligated to vote in line with the JV partner that is given such “casting vote”. The authors note that use of third-party mediators is extremely rare in South Korea.

If the JV is to be terminated, the typical mechanism will involve use of put/call options. The details of such an arrangement (eg, whether either/both JV partner(s) will be granted put/call options, how the put/call price will be determined, etc) will be a matter of commercial negotiation between the JV partners. It is also not uncommon for a continuing deadlock to constitute a ground for dissolution and liquidation of the JV (where there is no call/put arrangement in place, or where there is a deadlock regarding which of the JV partners will sell to – or purchase from – the shares of the other JV partner).

In addition to the JV agreement, a wide array of documents may be required in connection with a JV.

For typical manufacturing JVs, agreements for providing the necessary resources for manufacturing activities of the JV (such as a licence agreement, technical assistance agreement, supply agreement and secondment agreement) are executed in addition to the JV agreement.

Intellectual property (IP) licence/assignment agreements are often entered into between one or more of the JV partners and the JV, particularly when IPs of either or both JV partners are necessary or desirable for the purpose of the JV. Trade mark licence agreements are also common, as it is often the case that the JV will use the trade mark of either or both of the JV partners as part of its own trade mark or in connection with its business operations.

For JVs other than manufacturing JVs (eg, financial, IT platform, entertainment, etc), more industry-specific agreements are typically considered. For non-manufacturing JVs, no particular agreement is “generally” required in South Korea.

Board of directors’ decision-making is, in principle, subject to the simple majority vote (ie, majority of the directors attending the board of directors’ meeting plus majority of the attending directors’ affirmative vote). Higher quorum/voting requirements may be set out in the articles of incorporation.

Depending on the shareholding structure, a majority shareholder will often seek the right to designate the majority of the board of directors; whereas a minority shareholder will often seek to include the key decision-making to be subject to higher quorum/voting requirements in the articles of incorporation (ie, veto right).

Weighted voting is not recognised in South Korea.

Directors may neither participate nor vote at a board of directors’ meeting through proxy. However, participation through audio/video conference is allowed if permitted by the articles of incorporation (which is now the common practice in South Korea).

Under the KCC, a director of a company is considered to be an agent of the company with two primary categories of duties:

• the duties of a good faith caretaker towards the company (“duty of care”); and
• the duties to act in good faith for the interest of the company in compliance with the relevant laws and the company’s articles of incorporation (“duty of loyalty”)

The duty of care and duty of loyalty shall hereinafter be collectively referred to as the “Fiduciary Duties”). The duties of directors also include following:

• duty of confidentiality;
• duty of non-competition;
• duty against usurpation of corporate opportunities and assets;
• duty against self-dealing;
• duty to prepare financial statements, etc; and
• duty to report (to statutory auditor, regarding any fact that may have a material adverse effect on the company).

A director owes duties only towards the company and does not owe any duties towards the JV partner that designated them as a director of the company.

Furthermore, Korean court precedents have adopted the “Business Judgement Rule” where a director is deemed to have discharged their duty of care even if such decision results in loss or damage to the company, if:

• the director has sufficiently, to the extent reasonably available, collected, investigated and examined the necessary and appropriate information;
• the director reasonably believed that such decision was in the best interest of the company;
• the director reached such decision in good faith following due process; and
• the decision itself or the decision-making process was not significantly unreasonable.

Other than in specific industries (eg, financial industry) where a dual role (as an officer of the parent/subsidiary) is prohibited, a person is generally permitted to take a seat on a JV company board while also taking a position in the JV participant.

Notably, where a director/officer of a large company with worldwide assets or annual revenue of KRW2 trillion or more takes a seat on another company’s board, a merger filing may be required between the two companies.

From a conflict-of-interests perspective, directors have a duty against self-dealing – ie, a director may not enter into a transaction with the company on their own account or on account of a third party, without the super-majority approval of the board (two thirds or more of all incumbent directors). Under the KCC, the prohibition on self-dealing has been expanded to cover major shareholders (with 10% or more ownership) and related parties of a director or major shareholder. As a result, the covered parties are required to notify the board of such transaction and must obtain the super-majority approval of the incumbent directors. In addition, the transaction and its process must be fair and at arm’s length.

If a director has a personal conflict of interest in respect of any matter subject to the board of directors’ approval (eg, approval of remunerations payable to such director), the director will not be entitled to exercise their voting right in respect of such matter.

Some of the key IP issues that should be considered when setting up a JV or in relation to a contractual collaboration are as follows:

• scope of IPs to be assigned, licensed or disclosed to the JV;
• scope of IPs to be disclosed to the other JV partner;
• whether the scope of IPs to be assigned or licensed must be expanded as the relevant JV partner (who assigned or licensed the relevant IPs) develops similar or better IPs;
• who will own the derivative IPs (improvements, etc);
• whether the JV and/or the relevant JV partner (if not given the ownership of the derivative IPs) will be given a licence to use such IPs;
• whether any warranty will be given in respect of the IPs being licensed/assigned;
• whether the JV partners will be subject to any non-solicitation obligations in respect the employees of the JV; and
• whether the employees of the JV will be subject to any non-compete obligations.

How IP Issues Are Usually Dealt With in the JV Agreement

There is no “market” practice in relation to how IP issues are dealt in the JV agreement. Regarding ownership of the derivative IPs, it is common for the JV and the relevant JV partner to have co-ownership of such IPs. It should be noted that either the JV or the JV partner will be able to freely use the relevant IPs under the co-ownership, but the other co-owner’s consent is required for the relevant IPs to be assigned or licensed to any third party.

The JV partner that has assigned/licensed any IP to the JV may wish to seek a provision that requires, to the extent possible, that the JVC sell or make in-kind distribution of the assigned IPs, derivative IPs and other assets containing the relevant IPs to the JV partner that assigned/licensed the relevant IPs if it wishes to ensure that the IPs are not transferred to any third party.

From the perspective of IP protection, licensing is typically better than assigning for the JV partner that holds the relevant IPs. Assignment of IPs is effected by registration of such assignment; and even if there is an agreement for purchase-back of the IPs between the JV and the relevant JV partner, it may be difficult to recover ownership of the IPs if assigned.

Partial assignment is not recommended, as co-ownership of IPs may restrict certain uses of the relevant IPs (consent required for any transfer or licensing of the IPs from the assignee).

However, from the perspective of the JV, assigning is typically better than licensing. The licence to use the relevant IPs may be unenforceable in the event the underlying IPs are assigned/transferred to a third party (unless the third party agrees to and acknowledge the validity of the licence); and the JV should register such licence for the relevant IPs.

ESG has become a salient issue in South Korea as the country continues to make efforts in conforming to global standards and improving its presence and influence in global discussions. Furthermore, certain global ESG requirements such as RE100 have rapidly become a real issue for Korean companies’ overseas business operation (in particular, in the USA and EU).

In early 2023, the Ministry of Environment issued a correction order to a Korean company regarding an allegedly false advertisement, where one of its products was advertised as being carbon-neutral when, in reality, only some of the product’s carbon footprints had been neutralised by the carbon emission rights purchased by the company in the market. This was among the first administrative sanctions imposed on advertising of petrol products as carbon-neutral products.

In 2021, the Supreme Court ruled that the representative director of a company is liable for damages in connection with their lack of knowledge about the company’s concerted behaviour. This is recognised by the market as the Korean judiciary’s steps towards better ESG practice.

Furthermore, the Financial Services Commission has announced its plans to require a company group with assets over KRW2 trillion to issue sustainability reports.

The South Korean Congress is also contemplating introduction of various ESG-related laws (eg, requirements for human rights and environment/supply chain due diligence, etc). However, such discussions are still at an early stage.

JV arrangements typically start with an indefinite term, and termination of a JV occurs when:

• there is a material breach of the JV agreement(s); or
• a JV partner sells its shares to the other JV partner or to a third-party purchaser.

JV arrangements usually come to an end in one of the following manners:

• the JV entity is dissolved and liquidated, with the residual assets being distributed to the JV partners; or
• a JV partner acquires the shares in the JV held by the other JV partner (either through exercise of a put/call option, or by mutual agreement).

The following matters should be carefully considered for termination of a JV.

• The scope and duration of the non-compete/non-solicitation obligations.
• Where a put/call arrangement is contemplated in connection with termination of the JV:
1. the applicable exercise price; and
2. if fair market value (FMV) will be used, whether FMV will be determined by a third-party appraiser or by mutual agreement, etc.
• Where the JV is being liquidated and if there is any IP assigned to the JV by one of the JV partners, whether the JV partner will be able to acquire back such IP (including any derivative IPs). The same applies if there is any important asset that was loaned/transferred to the JV by one of the JV partners.
• Where one JV partner acquires the shares in the JV held by the other JV partner, and if there is any IP assigned/licensed or key assets loaned/transferred to the JV by the exiting JV partner, whether the JV will continue to be able to use such IP or key assets in its business operations; and if so, under what terms.
• Furthermore, where the JV will continue with a JV partner as the sole shareholder, allocation of risks regarding liabilities that have or will accrue as a result of the JV’s actions prior to its termination.

If a JV participant will contribute assets to the JV by way of in-kind contribution, an appraisal by an independent appraiser (typically an accounting firm) must be obtained, and such appraisal will be subject to the court’s approval.

If the JV will transfer its assets (regardless of whether they are contributed to the JV or originate from the JV), no such appraisal/court approval (as described above) is necessary. However, because such transfer constitutes “self-dealing” under the KCC, it will be subject to two-thirds approval of the board of directors.

It should be ensured that transfer of assets between a JV and JV partners is made under arm’s length terms and conditions. Where such transfer is carried out at a price (or under the terms and conditions) that is not arm’s length, this may result in tax implications for both the JV and the JV partner.