SOUTH KOREA Law and Practice Contributed by: Ho Joon Moon, Sung Min Kim, Allen Hyungi Ryu and Joon Sung Hong, Lee & Ko
“Special resolution” means an affirmative vote (wheth - er 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 commer - cial considerations. Within the statutory requirements described in the foregoing, the JV participants may freely negotiate and agree on the decision-making mechanisms for a JV. 6.3 Funding Funding arrangements for a JV are primarily depend on the JV participants’ commercial needs and under - standing. The typical arrangements in South Korea are as follows. Equity Contribution This is the most common 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 nego - tiated, including how it will be decided that further funding is in fact necessary. Without a detailed clause on this topic, a JV partner could later find it difficult to force an unwilling JV partner to contribute its pro rata portion, particularly when such unwilling JV partner is wishing to exit the JV and the company needs addi - tional capital injection for future operations. Mix of Debt and Equity This arrangement is also quite common. The debt can be shareholders’ loans (including ones made by one or some of the JV participants or by all of the JV par - ticipants on a pro rata basis) or third-party financing
(which may also involve a guarantee by the sharehold - ers, usually on a pro rata basis). 6.4 Deadlocks Deadlocks in South Korea are dealt with 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 ami - cably resolve the deadlock (eg, escalation to a higher governing body/shareholders). If not resolved: • such deadlock matter would be presumed disap - proved; • a casting vote would be granted to either JV part - ner; or • the deadlock matter would be referred to a third- party mediator. As 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 the “casting vote”. The authors note that the 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 (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 put/call arrangement in place, or where there is a deadlock regarding which JV partner will sell – or purchase – the shares of the other JV partner). From a regulatory perspective, put/call options held by foreign investors will require foreign exchange fil - ing with the Bank of Korea unless the agreed put/call price is at or within a certain range of fair market value, and this filing requirement is subject to Bank of Korea practice, which needs to be checked before filing.
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