SOUTH KOREA Law and Practice Contributed by: Ohryung Lee, Joceline Park, Maria Chang and Hakrae Cho, Bae, Kim & Lee LLC
Recourse for Breach/Violation If the target company breaches any of its repre - sentations, warranties or covenants, in the case of an investment in RCPS, the company may be obliged to effect an early redemption of the RCPS as a result of the breach. In such cas - es, the penalty rate will apply in addition to the default interest rate until the redemption amount is fully paid. In addition, the company may be required to pay penalties to the venture capital investor in addition to compensation for dam - ages resulting from the breach. In some cases, the investor may become entitled to exercise a default put option against the largest sharehold - er in the event of a breach. There is no meaningful incentive programme for investors who make equity investments in SMEs and start-ups in Korea; instead, the Korean government provides support through provid - ing funds for (i) investments in funds of funds and (ii) the expansion of investment in SMEs and start-ups. A fund of funds is a fund funded by the Korean government that is mainly intended for invest - ment in certain sectors. Specifically, a fund of funds is managed by Korea Venture Investment Corp., an institution established by the Korean government in accordance with VIPA. Korea Venture Investment Corp. selects a general partner, causes the general partner to form a fund with funding received from a fund of funds and capital received by the general partner from other investors, and the fund then makes invest- ments in a certain sector. The investment targets of a fund of funds will vary depending on the fund in question, but they mainly include early- 4. Government Inducements 4.1 Subsidy Programmes
stage start-up companies, privately held SMEs and venture companies, and there are cases in which concentrated support is given to invest - ment in a particular sector as needed. 4.2 Tax Treatment Key characteristics of tax treatment relevant to venture capital investments are as follows: • Tax Benefits at the Investment Stage: If a resident or a domestic corporation (other than venture investment companies) invests in start-up companies, venture companies, private equity funds specialising in start-ups and venture companies, or a start-up invest - ment association, a certain percentage of the investment amount is eligible for a tax deduc - tion (for residents) or tax credits (for domes - tic corporations). However, tax benefits are given only for investment in new stock within a certain period of time, and no special tax benefits are allowed for investment resulting from the sale of existing shares. • Tax Benefits at the Exit Stage: In principle, capital gains tax is levied when a resident transfers shares, but a tax benefit is granted to exempt capital gains tax on investment in certain venture companies and venture investment companies. • Others: Special measures exist for the exemption from corporate income tax if a venture investment company invests in stock of certain venture companies. 4.3 Government Endorsement As discussed above, the Korean government uses the fund of funds structure to create an environment favourable to venture investment in the private sector and to promote investment linked to innovation, especially in SMEs and ven - ture companies. Although there are no restric - tions on the investment methods of a fund of
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