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Korea Legal.org 2011 Trends and Expectations—An Executive-level Commentary

Monday, January 3rd, 2011
Korea Legal.org 2011 Trends and Expectations—An Executive level Commentary

By Don Southerton, Editor Korea Legal.org

Annually in an executive-level commentary, I share thoughts for the upcoming year. Looking back at 2010, North Korean saber rattling took on new meaning with several overt military confrontations against South Korea. Meanwhile, South Korea’s economy saw little sign of a double dip recession, which had worried some experts going into 2010, instead we saw continued growth in Korea’s global brands. This was further strengthened by the G-20 Summit that showcased, among others, Korean technology leaders Samsung, Hyundai-Kia Motors, and LG.

Related to U.S. and South Korea relations and following an amended agreement for the Korea-U.S. Free Trade Agreement, we should soon see the treaty ratified by Congress. Advocates see the FTA boosting annual commerce between the two nations into the billions of Dollars.

Looking forward to 2011, North Korea will continue to be a concern. Issues include the Kim regime’s succession plans, threats of more border clashes, and an unchecked nuclear arms program. Hoping to address these concerns, we’ll see strong outside diplomatic and political pressure for renewed 6 Way Talks, and to quell future border confrontations. I’ll continue to monitor and share news as it unfolds. Even in a worst-case scenario, Korean global business and local economy would bounce back and move forward, especially since much manufacturing is now done overseas.

Next, building on the momentum of the past 2 years, expect Korea’s export-driven firms to push their organizations to carve out even greater market shares. Look for bold announcements and sales targets such as #1 in global sales or production vs. the older “Top 10” or “Top 5” quest. In this effort, expect top Korean firms to expand their organization through M&A. For some, this breaks from a tradition of building and growing from within vs. acquisitions.

Additionally, as I noted last year, expect more foreign firms to aggressively target South Korea as a top emerging market. In other words, with Korea performing well many global firms and brands once focused on North American or European business partnerships will now seek out Korean opportunities. This will unfold with global businesses looking to launch new product lines (and brands) in Korea, as well as leading international firms offering their services to Korea’s top companies.

For foreign businesses entering the Korean market or partnering with Korean firms, I suggest they take efforts to understand not only the culture, but also business norms and expectations. For example, your key management needs access to coaching and someone to answer their questions on topics ranging from strategy to the impact of routine management changes within their Korean partner’s organization. It’s a small upfront investment and less costly than the consequences, which can include lawsuits, local and expat employee turnover, and months of missed goals and low productivity–not to mention tensions between you and the client over expectations.

Finally, expect further growth in Green technology (wind power, solar, and eCars) and government-led initiatives like “Work Smart.” With regard to Green, most of Korea’s major Groups have boldly entered the renewable and sustainable market and plan to expand sales globally. This includes state of the art manufacturing facilities for wind turbines, solar cells, next generation batteries, and electric power trains.

In the shift to these new technologies, forward-thinking firms are moving towards a creativity-centered organizational and workplace culture. On one level, “Work smart” was introduced in Korea to address the quality of life issues raised by its traditional long working hours. According to a Samsung Economic Research Institute report, “Work smart” will spread in 2011, and has a goal to increase productivity and creativity. Work smart includes not only eliminating unnecessary busy work, but grants autonomy in choosing working hours and gives teams the “work from home” option.

To conclude, understanding the dynamics of Korea’s economy, markets, and major business groups is vital. It is critical to take into consideration Korea’s past and current trends. Culture, global influences, cyber-communication, and a 24-hour workday add to this complexity. Bridging Culture Worldwide is dedicated to providing much needed research, analysis, and critical thinking to provide you with answers and insights 24-7-365.

Korea Legal.org 2011 Trends and Expectations—An Executive level Commentary

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Special Report KORUS FTA–An Auto Sector Update

Friday, December 10th, 2010
Special Report KORUS FTA An Auto Sector Update

By Don Southerton, Editor

Since 2006, BCW has been following the KORUS FTA discussions. As strong supporters of free trade, globalization, and the Hyundai Kia Motor Group and its US operations, we have provided research, numerous updates, and insights to US and Korean leadership. We have maintained an active role in supporting the treaty and US-Korea relations along with maintaining close ties with Koreans and Americans officials and scholars highly involved in KORUS.

Last week, after months of talks, an agreement was reached ( it still needs to be ratified by the U.S.). We provide the following key points. Part 1 includes general terms of the agreement. Part 2 is related to the auto sector, with Part 3 focuses on auto parts.

Part 1.  Pending Congressional Approval

The United States and the Republic of Korea signed the United States-Korea Free Trade Agreement (KORUS FTA) on June 30, 2007. If approved, the Agreement would be the United States’ most commercially significant free trade agreement in more than 16 years.

The U.S. International Trade Commission estimates that the reduction of Korean tariffs and tariff-rate quotas on goods alone would add $10 billion to $12 billion to annual U.S. Gross Domestic Product and around $10 billion to annual merchandise exports to Korea.

Under the FTA, nearly 95 percent of bilateral trade in consumer and industrial products would become duty free within three years of the date the FTA enters into force, and most remaining tariffs would be eliminated within 10 years.

For agricultural products, the FTA would immediately eliminate or phase out tariffs and quotas on a broad range of products, with almost two-thirds (by value) of Korea’s agriculture imports from the United States becoming duty free upon entry into force.

For services, the FTA would provide meaningful market access commitments that extend across virtually all major service sectors, including greater and more secure access for international delivery services and the opening up of the Korean market for foreign legal consulting services.

In the area of financial services, the FTA would increase access to the Korean market and ensure greater transparency and fair treatment for U.S. suppliers of financial services.

The FTA would address non-tariff barriers in a wide range of sectors and includes strong provisions on competition policy, labor and environment, and transparency and regulatory due process.

The KORUS FTA would also provide U.S. suppliers with greater access to the Korean government procurement market. In addition to strengthening our economic partnership, the KORUS FTA would help to solidify the two countries’ long-standing geo-strategic alliance.

As the first U.S. FTA with a North Asian partner, the KORUS FTA could be a model for trade agreements for the rest of the region, and underscore the U.S. commitment to, and engagement in, the Asia-Pacific region.

The Obama Administration will seek to promptly and effectively address the issues surrounding the KORUS FTA, including concerns that have been expressed regarding automotive trade.

Part 2 Auto Sector

The following are the major aspects of the supplementary alterations on auto trade and other issues in the South Korea-U.S. free trade agreement.

1. Automotive safety standards South Korea agreed to soften its auto safety standards for U.S.-made cars. In the previous deal, there was an automatic two-year grace period before U.S. auto manufacturers had to meet any new Korean regulations related to self-certification for safety standards. 

The supplemental agreement allows for 25,000 cars per U.S. automaker – or almost four times the number allowed in the 2007 agreement — to be imported into Korea if they meet U.S. safety standards.

2. Automotive emission standards South Korea will exempt low-volume importers from its ultra low emissions vehicle (ULEV) standard that is scheduled to take effect from 2015. Under the new standard, South Korea will apply tougher efficiency criteria for vehicles, requiring vehicles to reduce their greenhouse gas emissions to 140 grams per kilometer. Under the supplemental agreement, all U.S. autos will be considered compliant with new Korean environmental standards on fuel economy and greenhouse gas emissions, developed since the 2007 agreement, if they achieve 119 percent of the targets in these regulations.

3. Automotive tariffs elimination Under the 2007 agreement, all tariffs on automotives would have been immediately eliminated gradually within three years after the implementation of the accord. The new agreement allows the U.S. to keep its 2.5 percent tariff on autos in place until the fifth year. At the same time, South Korea will immediately cut its tariff on U.S. auto imports in half (from 8 percent to 4 percent), and fully eliminate the tariff in the fifth year.

4. Tariffs on pick-up trucks In 2007, the U.S. agreed to phase out its 25 percent tariff on South Korean trucks in 10 years. But the new agreement allows the U.S. to maintain its tariff until the eighth year and then phase it out by the tenth year.

5. Tariffs on electric cars Under the 2007 agreement, the U.S. and South Korea would have eliminated tariffs on electric cars and plug-in hybrids by 10 years after the implementation of the accord. The new agreement calls for South Korea to immediately reduce its electric car tariffs from 8 percent to 4 percent, and both countries will then phase out their respective tariffs by the fifth year.

6. Special safeguard for automotive industry The previous agreement had no provision on safeguard measures specific to the auto industry. Under the 2010 supplemental agreement, both sides agreed to introduce safeguard measures for motor vehicles.

Part 3, Regarding Auto Parts

BCW sees no changes from the 2007 agreement, “Tariffs would be immediately reduced to zero in each country for auto parts imported from the other.” That said, there are however a few exceptions regarding tires and some plastics.  As soon, as a final agreement is ratified, BCW will provide an itemized list of those items still with tariff restrictions and a timeline for their reduction.

For additional questions, please contact Don Southerton,  dsoutherton@bridgingculture.com 1-310-866-3777

Special Report KORUS FTA An Auto Sector Update

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Lone Star’s Korea Struggles

Saturday, November 27th, 2010
Lone Stars Korea Struggles

By Don Southerton, KoreaLegal.org Editor

In the wake of the devastating 1997 IMF Crisis, international investment organizations looked to South Korea for opportunity. Some have fared extremely well—paying pennies on the dollar for Korean firms crippled by the IMF Crisis.

Dallas-based Lone Star has long been the subject of controversy and targeted for its huge gains. On one hand when Lone Star and others invested in South Korea firms risk was high. Like most investment firms, the model is to provide support and help re-build the firm, then sell their holdings when the business is strong. What has irked many Koreans is that Lone Star has reaped huge profits—some feel on the backs of hard working Koreans.

Lone Stars woes are not over, as noted in this Korea Times article….   As I often share in Korea Legal.org, I have some thoughts on what Lone Star should do to mend its tattered relationship in Korea. Of course, that what my firm BCW and I do ! So if someone at Lone Star is listening…. give me a call Lone Stars Korea Struggles

Tax may knock Lone Star’s exit plan from Korea

By Kim Jae-kyoung

Lone Star Funds Chairman John Grayken may be popping champagne over the sale of its stake of Korea Exchange Bank (KEB) to Hana Financial Group as it has paved the way for the fund to exit the Korean market. The sale is also expected to relieve mounting pressure from investors on Grayken to step down.

Hana Financial said Tuesday that it will hold a board meeting to finalize the takeover of the nation’s fifth-largest lender Wednesday morning and Chairman Kim Seung-yu will call a press conference in the afternoon ahead of public disclosure.

Even if the two parties sign an official sales agreement, Lone Star is facing a bumpy road ahead as there are a number of issues that could stand in the way of the Dallas-based fund’s exit plan.

The biggest hurdle is taxation. There is a wide perspective gap between Lone Star and the National Tax Service (NTS) on the taxation of capital gains from the sale of KEB. Unless either of the two steps back, chances are that the fund will face another legal battle.

The nation’s tax agency has claimed that Lone Star should pay taxes on capital gains from the sale of its controlling stake in KEB, while the fund sees no reason why it has to pay taxes.

“It is too early to talk about taxation as Lone Star has yet to realize the capital gains and to report the transaction,” a ranking NTS official said on condition of anonymity.

“Once the fund reports the deal, we will levy taxes on the capital gains. If the fund does not report the case and leaves, we will seek ways to impose taxes,” he added.

In June 2007, the NTS levied taxes on the fund’s capital gains of 1.2 trillion won from selling its 13.6 percent stake, or 87.7 million stocks. At the time, the NTS imposed 119 billion won in corporate tax on Lone Star Advisors Korea, saying the local subsidiary of the U.S. fund is a permanent establishment.

Lone Star then filed complaints with the tax tribunal against the taxation. It argued that since LSF-KEB Holdings is based in Belgium, it is not subject to taxation under the Korea-Belgium tax treaty, demanding returns of the full amount being withheld for taxes.

But the tribunal rejected the claim, saying that LSF-KEB Holdings is a “paper company” established by Lone Star primarily for tax evasion. The KEB stake is held by LSF-KEB Holdings, a Belgian subsidiary of Lone Star. The fund took the case to court, and the case is still under review.

“We don’t think that we have to pay taxes on gains from the sale of KEB because we made the investment through a tax haven under the Korea-Belgium tax treaty,” said a source close to the U.S. fund, asking not to be named, hinting that the firm will not report the transaction to the tax authorities

“You have to remember that many Korean companies are also taking advantage of such tax benefits by making investments overseas through tax havens,” he added.

Was Lone Star a legitimate buyer?

Separate from the taxation issue, the financial regulator’s review of Lone Star’s legitimacy as a major stakeholder could emerge as a major obstacle. The FSC has yet to make a final decision on whether the company was “fit and proper” as the major shareholder of KEB.

Under the current banking law, those who invest over 25 percent of their capital in non-financial firms or those whose assets in such firms exceed 2 trillion won are not allowed to own up to 10 percent of a bank as they are classified as a non-financially focused company.

Civic groups have claimed that given Lone Star’s investment portfolio across the globe, the fund should be seen as a non-financially focused company.

If the FSC rules that Lone Star is a non-financially focused firm, the fund will be restricted to exercising its voting right to less than 9 percent of its 51.02 percent stake. The regulator can also force the fund to unload its holdings. The FSC refused to comment on the review process.

In addition, with the sale of KEB finalized, attention is also being paid to whether Grayken will keep his pledge to donate 100 billion won to Korean society.

At a press conference in April 2006, he said that the fund is willing to donate 100 billion won for the development of Korean society once it realizes capital gains from the sale of KEB.

Lone Star is expected to enjoy capital gains worth up to 4.7 to 4.8 trillion won from the sale of KEB as it has already recouped 2.12 trillion.

Source: Korea Times

Lone Stars Korea Struggles

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G20, KORUS FTA, and Looted Books

Sunday, November 14th, 2010
G20, KORUS FTA, and Looted Books

By Don Southerton, Editor

I’m still pondering on results of the G-20 Summit in Korea. At some level, it showcases South Korea’s economic successes. No doubt many were be pleased at Seoul’s trendy and sophisticated global business, retail, and Green urban centers.

That said, we see few fruits from the side meetings. Most important, despite strong expectations little moved forward on the KORUS FTA. I do not see this as a lack of commitment by both nations and their leaders—but some powerful forces ( i.e. pressure from Ford and US Labor Unions) at work.

Some issues were resolved… like a longstanding demand by Korea for books looted by the French in the 1860s.

G20, KORUS FTA, and Looted Books
One of the Uigwe books that was stored at Gwanghwa Island’s royal library before the French invasion. (Yonhap)

Koreans welcome French decision to return looted books, some with bitterness

By Kim Hyun
SEOUL, Nov. 12 (Yonhap) — France’s agreement on Friday to essentially return looted Korean royal books was received as one of the highest diplomatic feats host South Korea achieved during the G-20 summit, although the deal fell short of satisfying everyone here.

Reactions varied as French President Nicolas Sarkozy announced a five-year renewable lease scheme for the 297 Uigwe books, taken during the 19th-century French invasion of Korea and now preserved at the National Library of France.

Coming after a long tug of war, the agreement means much to Korea. It clears the shameful historic legacy the waning Joseon Dynasty left in its first armed encounter with a western power in 1866, and above all, the decision by France sets a shining precedent to other countries holding hundreds of thousands of stolen Korean artifacts.

“It (the lease) means the virtual return of the books, of course we have to receive them,” Yi Tae-jin, head of the National Institute of Korean History, a state body that sets guidelines for Korean history education, said.

Yi, a long-time activist who made efforts to have the books returned, recalled a disappointing 1993 visit by then French President Francois Mitterrand. The French leader gave back one of the books when France was bidding to sell its high-speed train technology to South Korea. France won the bid, but there was no follow-up on the artifact.

“When President Mitterrand said the books would be returned, I was impressed and thought France was really a cultural powerhouse, but it was a real disappointment,” Yi said. “Now France deserves to be called a cultural powerhouse.”

Uigwe books are unique Korean heritage documents now listed on the UNESCO Memory of the World Register. The royal manuscripts recorded and illustrated all of the rituals, formalities and daily routines of the royal court during the Joseon Dynasty. Historians say that such thorough royal recordings do not exist in China, Japan, or any other Asian countries.

After decades-long wrangling, the Korean and French leaders settled on rather neutral terms. Bound by the domestic law against any permanent transfer of national properties, Sarkozy committed to the handover in the form of a “lease” and promised it will be rolled over every five years.

South Korean President Lee Myung-bak took the French decision as the permanent, “virtual return” of the books.

But the term “lease” was disappointing for those who have fought for an official, permanent return.

“It’s really sad,” Park Byeong-sen, a respected librarian, said.

It was Park who discovered the books that were mistakenly classified as Chinese at a Versailles annex of the French library in 1975. The 85-year-old scholar, now in Paris, believes Seoul should have insisted on its proprietorship of the manuscripts, although that could have further delayed their actual return.

“Does it make any sense to borrow properties from those who have stolen them?” she asked.

For a civic group, the deal dashed hopes for a legal solution. The Seoul-based Cultural Action was waiting for a ruling from a Paris appellate court on the Uigwe handover. In a December ruling last year, a French administrative court acknowledged for the first time that the Korean books were stolen but said they could not be returned as they were now French property.

“The lease deal throws cold water on many campaigns to get Korean artifacts back,” Hwang Pyung-woo, a representative of the civic group, said. “We will nevertheless go ahead with our lawsuit.”

Still, many believe the French decision could help set off more returns of stolen artifacts. The Japanese government already pledged to return 1,205 Uigwe books it has been holding at the Imperial Household Agency in Tokyo. The commitment came in August on the 100th anniversary of Japanese annexation of Korea.

The Cultural Heritage Administration of Korea believes more than 61,400 Korean cultural artifacts were taken away during Japanese invasions or colonial rule. The figure may exceed 300,000, it says, if those that are privately owned are counted.

For most artifacts taken to countries other than Japan, there is no way of even locating them.

Park Sang-guk, a noted art historian and head of the non-governmental Korea Heritage Institute in Seoul, welcomed the French decision as a step toward more repatriation of Korean heritage.

“Regardless of the method of the return, we have to take it positively and receive them,” Park said. “It’s a long-awaited piece of news, a grateful one.”

G20, KORUS FTA, and Looted Books

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Franchising in Korea: An Overview

Sunday, November 7th, 2010
Franchising in Korea: An Overview

By Don Southerton, Editor

Korea Legal.org looks at Korea-facing legal issues and shares insights into a wide variety of topics. Franchising comes with its own set of rules, regulations, and compliance. With regard to Korea, franchising is popular. Korea Times‘ reporter Cathy Rose A. Garcia provides a great overview of the industry.

Franchise businesses booming in Korea

By Cathy Rose A. Garcia

What do BBQ Chicken, McDonald’s, Caffe Bene and Starbucks have in common? Aside from being popular food and drink businesses, all are franchises of international and Korean brands. Plus all of them have a ubiquitous presence in Korea.

The franchise industry has been growing significantly in the past few years in Korea. The trend was jumpstarted by fast food restaurants, which was followed by family restaurants, clothing chains, cleaning services, educational institutions and discount stores.

In 1999, the number of franchise businesses in Korea was only around 1,500 with 120,000 outlets. Now, the number has doubled.

According to the Ministry of Knowledge Economy’s distribution and logistics division, the franchise industry in Korea is worth an estimated $70.2 billion. Franchises for food services, including fast food chains and family restaurants, account for around 52 percent or $36.5 billion.

The retail sector, such as convenience stores and consumer goods, accounts for 36.2 percent or $25.4 billion of the total. The remaining 11.8 percent or $8.2 billion includes education, real estate, cleaning and mailing services.

And judging by the good turnout at the Franchise Seoul 2010 at the COEX last week, there is still a growing demand for these business opportunities. The fair featured mostly food service franchises, with familiar names such as Home Chicken, Papa John’s and Subway. There were also representatives from retail, children’s products, education, computers, health aids, cosmetics and rental services.

Experts believe the potential for the franchise industry are bright, especially in the service sector. Among the areas with good prospects are: senior care, party planning and catering, fitness, personal services, frozen yogurt, green growth, pet products and children’s items.

Capital costs

Lee Seong-kyu, a 35-year-old office worker, said he was looking for business ideas at the Franchise Seoul fair. He was considering opening a foreign food outlet but the popular franchises require a lot of capital, not to mention finding the right location.

“A franchise might seem easier because the business has already been tried and tested. The only obstacle would be raising the capital, some require big franchise and royalty fees, plus the equipment and rental expenses,’’ Lee said.

Data compiled by the Seoul Global Business Center showed that the average capital necessary to open a store is over 100 million won. Opening a restaurant or a bakery would need around 200 million won, while a service-related franchise would entail around 170 million won.

A report by the U.S. Commercial Service Market Report 2010 indicated that U.S. franchises are sought-after in Korea. “Korean franchisees are seeking and prefer to do business with U.S. franchisers that can offer established brand names to Korean consumers and value the transfer of American management skills provided by U.S. headquarters,’’ the report said.

But potential Korean franchisees are turned off by the high fees and royalties required by the American headquarters.

Subway, the American sandwich chain, charges a franchise fee of $10,000, but the total investment, including equipment, lease, and supplies, would reach between 100 million to 130 million won.

Another American pizza chain Papa John’s demands a 20 million won franchise fee, and an ongoing royalty of 5 percent of net sales every month, with a total cost of roughly 150 million won.

“Other common franchising requirements, such as a minimum facility size and the expected number of store openings within a certain period are often very challenging for Korean franchisers to meet,’’ the report said.

Boom in local franchises

There’s no doubt international franchises remain prominent, but domestic chains are also becoming popular among local businessmen. Korean franchises do not require much capital or large royalties. Also unlike foreign franchises, the local ones are already attuned to Korean tastes and targeting Korean consumers.

Consider the fried chicken craze in recent years. The Korea Franchise Association reported there are about 35,000 fried chicken franchises in the Korean market, as of last year, led by popular brands such as Kyochon Chicken, BBQ Chicken and Two Two Fried Chicken.

Another fried chicken chain, Chicken Mania, requires a 5 million won franchise fee and no royalties. The estimated total cost in opening a Chicken Mania franchise is around 46.5 million won.

To open a Cafe Kai ice cream & coffee shop branch, one needs to have 66 million won, which includes the 5 million won franchise fee and 3 million won in royalties.

Jun Hyung-joon, a franchising consultant, said the hottest property in Korea right now is local brand Caffe Bene. The coffee shop chain has set the record for the highest number of stores opened in the shortest amount of time, as it aims to challenge American giant Starbucks in Korea. It opened in 2008, but in just two years, the company has expanded to 240 stores.

As a purely local franchise brand, Caffe Bene serves special blend coffee, Belgian waffles and Italian gelato. Its menu might not seem that different from Starbucks, Coffee Bean, Angel-in-Us and Holly’s, but it has appealed to many customers because of its lower prices, comfortable atmosphere and the fact that it donates a portion of its profits to charity.

To open a Caffe Bene store, one needs to invest at least 215.8 million won, according to the company website. This includes the 10 million won franchise fee, 100 million won for the interior and 78 million won for the supplies.

Caffe Bene’s growth has been attributed to the use of Korean celebrities to promote the brand. “The growth has been so fast. Their rapid growth also has something to do with “star marketing.” They use popular stars to promote the cafe. Star marketing is always effective in Korea,’’ Jun said.

However, its effectiveness has only been proven in Korea. As Caffe Bene looks to the overseas market for future growth, there are doubts whether it can replicate its success. Hallyu or Korean wave remains strong in Asia, but Jun expressed doubts whether Korean celebrity endorsements could help Caffe Bene with its plans to expand into Asian countries.

Tips for franchisees

Before deciding on whether to sign a contract with a franchiser, Jun suggests doing a lot of research and making inquiries about the company first.

“There’s a franchise information disclosure law, so they are required to provide the information. You can check all the information online, to see how many outlets they have and their sales. Also check the credibility and credit standing of the franchisor to make sure it is stable,’’ Jun said.

The franchisors should provide all prospective franchisees with a disclosure document at least 14 days before signing an agreement or payment of the fees. If the disclosure is not made, the franchisee can demand a refund of its payment. Franchisors are also required to register the disclosure statements with the Korea Fair Trade Commission.

“It is also best to consult with a franchise consultant, since it is our job to guide the franchisee through the entire process,’’ Jun added.

Franchising in Korea: An Overview

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Franchise Korea

Monday, November 1st, 2010
Franchise Korea

By Don Southerton, Editor

I wear many hats. I see myself as an author, global cross-cultural expert, historian, and legal consultant / expert witness. That said, my core work centers on providing strategy, consulting, coaching, and insights into Korea-facing global business.

Most recently, my company Bridging Culture Worldwide is supporting the launch of a number of franchises in Korea and Asia-Pacific. We also represent some top American and UK retail brands, which we seek to license in Korea.

Regarding our franchise efforts… International franchising typically involves the mother company working with a local “master franchisee”–often called a “regional developer.” This master franchisee/ regional developer can either be a 100% subsidiary of the mother company or a joint venture company with a local partner.

In turn, the local company  can either operate company owned locations or may also rely on “sub-franchisees” for running franchise outlets, which are owned and operated by an independent person or entity – a pure sub-franchisee.

In working with its clients, BCW’s key role is bridging cross-cultural issues, providing sound market entry strategy, finding qualified partners, and securing solid licensing and franchise agreements.  We understand Korea and what it takes to succeed.

For a great summary of Korean Franchise Laws    CLICK HERE

For more information, contact  Dsoutherton@bridgingculture.com

Franchise Korea

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Korea, Music, and Copyright Fights

Saturday, October 16th, 2010
Korea, Music, and Copyright Fights

By Don Southerton, Editor
This site is part commentary, part sharing by legal experts based in Korea, and part interesting articles that surface on the web. This story is the later..

Techdirt.com shared a story regarding music copyright issues in the US and in Korea. In fact, they cite http://korealaw.wordpress.com/, a blog by Chung & Partners– a full service law firm in Seoul, Korea.

Korea Gets Its Own Dancing Baby Copyright Fight; Says Free Expression Trumps Copyright Concern

If you follow copyright issues online, by now you’ve undoubtedly heard of the famous Lenz case, involving Universal Music issuing a takedown to YouTube on a 29-second home video a mother took of her toddler son dancing to a Prince song. While Universal didn’t protest the counternotice, the EFF sued, pointing out that it should have taken fair use into account.

Wonil Chung, an intellectual property lawyer in South Korea alerted us to a blog post he wrote about a case that is almost identical to the Lenz case in the US. It involved a father filming his toddler daughter dancing and singing to a Korean pop star. Again, a takedown notice was issued, and the guy sued in response. Of course, it’s worth noting that South Korean copyright law can be much stricter than US copyright law (in part due to lobbying pressure from — you guessed it — US entertainment industry lobbyists as part of a “free trade agreement” the US signed with South Korea). It’s also worth noting that South Korea’s concept of fair use is extremely narrow.

However, thankfully, the court sided with the father, pointing out that the video itself was not a substitute for the song, it had a non-commercial purpose, and only 15-seconds of the song were used. Perhaps most importantly, it noted:
“If this kind of UCC [User Created Content] is barred from uploading online, it results in a unnecessarily excessive restraint on the free expression.”

Even beyond that, unlike the court in the Lenz case, the Korean court ordered the copyright holder to pay the father for “mental damages suffered from the takedown.” This is nice to see, and Chung’s summary of the ruling pretty much wraps it up:

Another interesting part of this ruling is that the court clearly found that the free expression under the constitution of South Korea must be considered fully and fairly in determining whether there exists a copyright infringement or not. Although the Korean Copyright Act has a fair-use-like clause, the clause is stated relatively narrowly so there has been a certain criticism that Korean court is not active in holding up a fair use defense. But this ruling held that the constitutional right of free expression has the equal value as a copyright stated in the Copyright Act which is a subordinate law to the constitution. That’s why I welcome this ruling and expect to see the balance between the free expression and copyright with more fair use defences accepted in the Korean court in the future.

The full Korean post has more details and quotes from the ruling. LINK

Korea, Music, and Copyright Fights

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South Korea’s Franchising Laws: An Overview

Monday, September 6th, 2010
South Koreas Franchising Laws: An Overview

By Kent Wong, Senior Foreign Attorney (Partner) at APEX LLC

Korea’s franchising industry has rapidly developed in recent years, led primarily by fast food restaurant chains. This growth has expanded to include family restaurants, retailing and retail stores, hotels, clothing, mailing services, cleaning services, as well as educational institutions.

There are no specific legal requirements for overseas franchises to operate in the Korean market, nor is there a requirement for government approval with respect to international franchise agreements. However, franchisees need to comply with various Korean laws, including the Korean Civil Act and Korean Commercial Code, the Fairness in Franchise Transactions in Franchise Business Act (Franchise Act) and the Sub-franchisee’s Fair Trade Act (which closely parallels the rules that exist for sub-franchisees in the US). Below is an overview of some of the questions commonly faced by international franchisors and foreign investors looking to enter the Korean market.

Legal definition of a franchise
Under the Fairness in Franchise Transactions in Franchise Business Act (Franchise Act), a ‘franchise’ is defined as:
... a continuous business relationship in which the franchisor allows the franchisee to sell goods (including raw and auxiliary materials) or services under certain quality standards and business methods using its trademarks, service marks, trade name, signs and other business marks (collectively, “Business Marks”), and supports, educates and controls the franchisee with regard to relevant management and operating activities, and in which the franchisee pays franchise fees to the franchisor in return for the use of the Business Marks and the support and education concerning the management and operating activities.

Laws governing the offer and sale of franchises
The Franchise Act, which was enacted on 1 November 2002 and most recently amended on 3 August 2007, and its accompanying Presidential Decree, taking effect on 6 November 2002 is the primary statute applicable to the franchisor-franchisee relationship. Additionally, the Monopoly Regulation and Fair Trade Act (MRFTA) and regulations promulgated by the Korea Fair Trade Commission (KFTC) are generally applicable to the relationship. Notable are the KFTC’s 1997 Guidelines on International Contracts which remain in effect and could potentially impact the franchisor-franchisee relationship where one of the parties is not a Korean resident.The KFTC regulates franchises in Korea. The KFTC has a franchise-related department and has the authority to impose administrative measures against those who engage in unfair activities.

Forms of business entities
A chusik hoesa (stock company) and a yuhan hoesa (limited liability company) are the business forms in Korea that would be relevant to the typical franchisor. About 90% of all Korean companies are chusik hoesa, which are similar to American stock companies. Only this legal entity, plus occasionally yuhan hoesa, is recommended for foreign investors and businesses.

Laws and agencies which govern the formation of business entities
Primarily, the Korean Civil Act and Korean Commercial Code govern the formation of business entities. In addition, the Foreign Investment Promotion Act relates to the formation of business entities from foreign investment.
The Korean Court Commercial Registrar, National Tax Service and Ministry of Strategy and Finance are the main agencies that have authority relating to the formation of business entities.

Methods of establishing a franchise
A foreign franchisor intending to expand their franchise in Korea may consider a variety of methods. While a single unit franchise or area development franchise is occasionally used, the more popular method is to use a master franchise arrangement. In Korea, international franchising typically entails a foreign ‘master franchisor’ working with a domestic ‘master franchisee’. Master franchisees can either be a 100% subsidiary of the master franchisor or a joint venture company with a local partner; a pure Korean company may also become a master franchisee. The master franchisee then relies on “sub-franchisees” for running the franchise outlets, which are either directly owned and operated by a master franchisee or owned and operated by an independent person or entity – ‘a pure sub-franchisee’.

Tax for foreign business and individuals
The principal taxes affecting businesses in Korea include corporate tax, individual income tax, value added tax, customs duties and inhabitant and education tax levied on corporate tax, income tax and other taxes.
The franchisor has a duty to pay taxes (corporate tax or individual income tax) on royalty incomes. However, the tax rates are limited to the rate stipulated in the tax treaty between Korea and the state in which the franchisor resides. In this regard, the franchisee has a duty to withhold such taxes from the royalties it pays to the franchisor.

Relevant labor and employment considerations
Under the Korean Civil Code, an employer is liable for a tort committed against a third party by an employee who is under the employee’s actual direction or supervision, in relation to the performance of a work that is directed or supervised by the employer. Therefore, if a franchisee or an employee of a franchisee is deemed an employee of the franchisor, the franchisor may be held liable for damages to a third party caused by the franchisor or the employee of the franchisee during performance of his or her work.

About the author Kent Wong is a senior foreign attorney and partner at Apex Law LLC, based in its Seoul office. Kent handles a range of corporate and commercial matters, with a particular emphasis on investment and doing business in Korea. Kent undertakes domestic and international private equity work in addition to general M&A, corporate and corporate finance transactions and advisory mandates. He has published articles and given lectures on foreign investment, project financing and international tax regimes.

Email: kwong@apexlaw.co.kr

South Koreas Franchising Laws: An Overview

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Practical Korean Labor Law: Some Insights

Sunday, August 29th, 2010
Practical Korean Labor Law: Some Insights

This article in Korea Times shares some great insights into Korean labor law and practices. The author, Nick Bibby, is a doctoral student in labor law at Dong-A university in Busan.

Being late isn’t just rude

Practical Korean Labor Law: Some InsightsBy Nick Bibby

Almost every day, the phone rings, or the email pings and, after the niceties, the conversation starts something like this: “My boss says he can’t afford to pay me, is that legal?”

After a few minutes figuring out the details I give the answer I could easily have given to the first question. Essentially, it’s illegal but it’s important to be practical.

Korean law is quite clear that any worker (with the exception of certain people engaged on a specific project) must be paid at least once a month ― it doesn’t matter whether the payment rate is by the hour, the day, the week, the month, or the millisecond.

That’s the important bit, here’s the practical one. Unlike the West, it’s standard in Korea for people to be paid late if the payday falls on a weekend or a national holiday. It’s also fairly routine for the first month’s salary to take its own sweet time.

Legally a salary must be paid once a month, in cash ― which means no payment in kind ― and on an agreed date. However, it’s important to keep a sense of perspective, if your pay’s delayed by 24 hours, it’s annoying but scarcely a crisis. Alternatively if, as with some cases I’ve dealt with, it’s a month, two months, or three months, then clearly it’s a different issue.

Let’s take two examples just from last week. I’ve changed the names so as to not impact any future legal proceedings. Wednesday’s case ― let’s call her Amy ― was straightforward. She was paid late and when the cash finally turned up it was the wrong amount.

Amy’s employer said that he would hold over the first 14 days worth of pay and pay it at the end of the contract. Having talked to her co-workers, Amy quickly realized that her employer had a reputation for non-payment, employment without a visa, dismissal in the 11th month and so forth.

Essentially the boss is either a crook, an idiot or both. The objective here is securing a letter of release and the outstanding money. Amy wants to stay in the country but not in the job.

Although it’s illegal for an employer to discriminate against a worker who has taken legal action against them to protect their rights, it’s usually worth trying to play nice first. The first focus is the letter of release and getting as much of the cash as possible. With both of those life gets easier. If that doesn’t work there are still options.

Critically, whether you resign or are fired (unless it’s for gross-negligence, misconduct or a criminal offense) you must be either given or paid 30 days notice. The idea that if you’re shown the door you have to race to the airport is also a myth.

Your first stop should be your nearest immigration office to extend your visa, usually a simple process. Next is to the Labor Board or, more usually, a foreign workers’ rights center or a migrant workers support organization whose staff have the language skills to handle the case for you. Legally, you must be paid, that’s the bottom line.

Let’s take case number two, let’s call him Ben. He’s due to leave the country at the start of the following week, today is Thursday. His boss has paid him but it’s short by a little over 1.5 million won. In addition, his employer wants to compel him to stay in the country. Let’s deal with the law first, Ben must be paid ― the full amount owed and on time. In addition, an employer cannot oblige a worker to extend their contract.

The question he had is can he withhold his labor until payment is made. It’s a common question and a debatable point. Technically the employer has breached the contract, so Ben would be within his rights ― payment has not been made for work that has been given.

However, whether it’s practical when you’re leaving the country in two days and would need to remain, in practice, to argue the point is another matter.

First there’s the solution mentioned above, extend the visa and fight or hand it over to a human rights organization. When you have a couple of month’s labor as a bargaining chip, it’s got leverage. When it’s a couple of days, less so. As a result the second option is probably better ― especially with his trip around Asia already planned and paid for.

In some ways the important thing is to ensure that issues like this don’t happen to other people. Forty-eight hours before you leave may be too late and a month after you arrive too early to argue a point. With a bit of planning these problems need never emerge.

There are plenty of community organizations out there, some voluntary, others commercial ― some are a bit of both. Late payment and non-payment are fraud and theft respectively. In the same way that anyone knows where their passport, wallet or bankcard is, it’s important to know where you rights are too.

Nick Bibby is deputy CEO of RightsWatch rightswatch.co.kr ― to be launched in early September) and a doctoral student in labor law at Dong-A university in Busan. He can be reached at Nick.bibby@gmail.com
Practical Korean Labor Law: Some Insights

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KORUS FTA Auto Hurdles

Saturday, August 7th, 2010
KORUS FTA Auto Hurdles

Korea Legal has been following the  Korea-U.S. (KORUS) Free Trade Agreement since its inception. In this Korea Economic Institute report, Troy Stangarone shares some recent insights. Troy is KEI’s specialist on the U.S.-Korea FTA.

Solving the Auto Riddle May be Key to KORUS FTA

by Troy Stangarone (ts@keia.org)

With an ambitious deadline of the Seoul G-20 Summit to resolve any remaining concerns regarding the KORUS FTA, the key to moving the agreement to a vote in early 2011 may be finding a way to solve the riddle of autos. While many of the concerns of the auto industry and its supporters predate the KORUS FTA, it has been largely unclear what measures would be needed to resolve this concern.

In recent remarks, Steve Biegun, Ford’s vice president for international governmental affairs, was quoted as saying that “We want to see complete elimination of Korean barriers to the market. We want to see a rapid increase in imports. We want to see it done in an enforceable way.” He also emphasized that a quota is not needed and that “It’s really going to be up to the Koreans, if they’re willing to make the steps necessary to open up the market.”

While Biegun’s remarks are designed to lay out expectations, they also raise a series of questions about his argument given the provisions already in the FTA and recent trends in car sales in Korea.

  • What are the barriers to the Korean market that are not addressed by the FTA and how can they be fixed in an enforceable manner? Members of Congress and the auto industry have previously expressed concerns that the provisions of the FTA do not go far enough to address the discriminatory nature of Korea’s engine displacement tax and issues related to Korea’s automotive safety and environmental regulations and certifications. However, most discussion of barriers in Korea has focused on a general concern about non-tariff barriers without specifics.
  • What would qualify as a “rapid” increase in imports in Korea. Since 2000, the sale of imports in Korea have risen from 4,414 vehicles, or 0.42 percent of the Korean auto market, to a high water mark of 61,648 in 2008 and 6.04 percent of the Korean auto market. Early 2010 date indicates these sales figures will easily be passed this year. Through June, 41,947 imports, representing 6.64 percent of the Korean auto market, have been sold in Korea. Since 2002, sales of BMWs, the leading foreign seller in Korea, have grown from 2,232 to 9,652 in 2009.

The greatest hurdle, however, may be the issue of trust. In the 1990s, the United States and Korea negotiated two memoranda of understanding in the hopes of opening the Korean market to U.S. autos to little success. Shortly before the KORUS FTA negotiations were concluded, members of the auto industry and its supporters in Congress put forward a proposal that would have utilized a non-traditional approach to this issue. It called for Korea to only gain additional access to the U.S. market after U.S. producers had gained meaningful and sustained access to the Korean market and placed the burden of proof on Korea to demonstrate that it does not have barriers to the sale of U.S. autos in its market. The industry and its supporters felt this non-traditional approach was justified because of the U.S. government’s long history of unsuccessful attempts to open Korea’s market to U.S. autos.

KORUS FTA Auto Hurdles

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