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

Being late isn’t just rude

By 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

The Apple supplier scandal now has a Korean connection. Apple Insider and numerous media sources report a Korean supplier has revealed it was involved in the Apple kickback scheme. It will be interesting to see how things unfold. I’m wondering if the Asian suppliers will be subject to civil lawsuits by Apple, along with accused ex-Apple supply manager, Paul Shin Devine.

A South Korean earphone and headset maker this week admitted it entered into what it believes was a legal consulting contract with an Apple supply manager.

South Korea’s Cresyn said on Tuesday that it first met Paul Devine, an Apple global supply manager, in early 2006. The company was in negotiations to supply Apple, and Devine offered consulting services according to Reuters.

An unnamed official said the company made a “legal contract” with the supply manager in 2007, through which it paid him a “small consulting fee” in exchange for “general information about U.S. markets.” Cresyn supplies the ear buds that ship with Apple’s line of iPods.

In addition, JLJ Holdings, owner of Jin Li Mould Manufacturing, said it was looking into the accusations of kickbacks made by Apple. The company said that a former Jin Li employee was named in the indictment, along with Devine.

On Monday, Pegatron, the parent company of Kaedar Electronics, admitted it did pay a brokerage fee to an intermediate trading company between 2005 and 2008. The incident occurred before Pegatron acquired Kaedar, which has supplied iPod packing boxes to Apple since 2005. A company spokesperson said that no money was ever paid to an individual.

Three more companies have been named in the case but have not commented: Glocom/Lateral Solutions and Fatestning Technologies of Singapore, and Nishoku Technology in Taiwan.

Devine appeared in a San Jose, Calif., court on Monday and pleaded not guilty to accusations that he shared confidential information with Apple’s suppliers to give them an advantage in negotiations. He was arrested Friday and charged with 23 counts, including wire fraud, kickbacks and money laundering.

Devine also faces a civil suit from Apple, alleging that he accepted more than a million dollars in kickbacks from Asian suppliers.

Source: Apple Insider

Culminating in a recent raid on Google’s South Korean office, issues continue to surface regarding data mining, data collection (intentional and unintentional), and privacy. We’ll have to see how things unfold.  BTW I like the service under scrutiny–  Google’s Street View, which gives viewers street level view of a map location.

SEOUL—Police raided Google Inc.’s South Korean offices Tuesday to probe potential violations of the country’s telecommunication-privacy law, in the latest move by authorities around the world to ratchet up scrutiny of the Internet search giant’s privacy practices.

The National Police Agency said it is investigating whether the U.S. company collected and stored private information illegally while it prepared for the South Korean launch of its Street View mapping service, which provides panoramic views of streets for Internet search users.

The agency said Google collected information on unspecified users from Wi-Fi wireless network for about six months until May while sweeping through the streets in special vehicles used to assemble street photos for the service.

“We began the probe after having confirmed that the company seized and kept open data as well as unauthorized private communication data collected by its special data-collecting vehicles,” the police said in a statement. Open data refers to data such as businesses’ street addresses that can be kept and stored legally under Korean law.

“We can confirm that the police have visited Google Korea in conjunction with their investigation around data collection by Street View cars. We will cooperate with the investigation and answer any questions they have,” said Lois Kim, a Google spokeswoman.
The raid doesn’t necessarily mean the Internet search giant will face charges. Such raids are common in South Korea as part of initial investigations that often fail to go much further.

Still, the raid will likely keep a spotlight on Street View. A number of U.S. states have joined in on an investigation of whether privacy laws were broken when Google’s Street View vehicles collected personal data of unsuspecting Internet users. Authorities in the Italy, Spain, Germany and Australia are investigating the service.

Also Tuesday, Google said it plans to introduce its Street View feature for 20 of Germany’s largest cities, including Berlin, Munich and Frankfurt, before the end of the year.

At the insistence of authorities, the faces of individuals and licenses plates will be blurred. People can also ask to have images of their homes removed from the database starting next week, a move aimed at dispelling privacy fears, the Associated Press reported.

“This tool available before the launch of the service is unique to Germany,” Google spokeswoman Lena Wagner said Tuesday, according to the AP.

Google said in May that the roving vehicles it uses to create its Street View program had for years inadvertently collected data over public, unsecured Wi-Fi networks. Google has said the collection was a “mistake” but that the company “did nothing illegal.”

Google has a weak presence in the South Korean market, where local search portal sites such as NHN’s Naver, Daum Communications and others enjoy a comfortable dominance near 90% of the market.

Privacy concerns have been also emerged around Daum’s Road View, which is similar to the Street View and started January 2009. The company has taken several steps to protect privacy such as blurring people’s faces on photos.

Read more: http://online.wsj.com/article/SB10001424052748704164904575421033257417518.html#ixzz0wWd0pXDR

Source: The Wall Street Journal

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.

Jurors in the case found that NCsoft breached its stock option agreement with Mr. Garriott by falsely stating that he left the company voluntarily in order to force him to exercise his stock options during a down market.

Mr. Garriott is a legend in the video game industry, and was among the first to develop and market role-playing video games. In 2001, NCsoft acquired Mr. Garriott’s company, Destination Games.

In 2008, Mr. Garriott took a pre-approved temporary leave of absence from NCsoft to pursue his lifelong dream of space flight. The son of a NASA astronaut who spent time aboard the Skylab space station and Space Shuttle, Mr. Garriott traveled aboard a Russian Soyuz spacecraft to the International Space Station.

During his post-flight quarantine, Mr. Garriott was informed by NCsoft that his time with the company was over.

As part of NCsoft’s purchase of Destination Games, Mr. Garriott was issued stock options valid through May 30, 2011. These options were to remain in place in the event of his termination by the company, but would expire within 90 days in the case of his voluntary departure.

When Mr. Garriott was let go during NCsoft’s reorganization of its North American operations, the company claimed his termination was a voluntary resignation, his attorneys argued during the trial.

Because NCsoft mischaracterized his termination as voluntary, Mr. Garriott was forced to sell his stock options 2 1/2 years early, costing him millions of dollars. Jurors found NCsoft liable for breaching the stock option agreement with Mr. Garriott, and awarded him $28 million in damages.

“In Texas, a deal is a deal, no matter how a company might try to spin the events after the fact,” says Fish & Richardson principal Stephen E. Fox, lead counsel for Mr. Garriott. “We’re pleased that the jury listened to the facts in this case, and decided it is ‘game over’ for NCsoft’s attempt to deny Richard what he is rightfully owed.”

The July 29, 2010, verdict in Richard Garriott v. NCsoft Corp., No. A09 CA 357 SS, was handed down following a three-and-a-half-day trial and three hours of deliberations by a jury appearing before the Hon. Sam Sparks of the U.S. District Court for the Western District of Texas in Austin.

PR Newswire Source LiNK

Korea media notes that the Ministry of Justice  has published an English-language journal on major foreign investment-related articles, court rulings, immigration rules and other information foreign investors need to know.

The ministry will initially publish 500 copies and distribute them to embassies, law schools and justice ministries in countries with an interest in Korea. It plans to publish more if deemed necessary.

The magazine, titled “Recent Trends of Law and Regulation in Korea: Focusing on Business and Investment,” will be published on a quarterly basis, it said.

This is a response to chronic complaints from foreign investors who have struggled with a lack of credible sources of information about Korea’s legal system, the ministry explained.

“We expect the book will help deepen investors’ knowledge and understanding about Korean law,” said Lee Ki-young, a ministry official. “This will also serve as the most credible source for overseas researchers and experts.”

Lee said the ministry will gradually extend the scope of issues covered by the magazine and also shorten the period of time for updates to make it possible for foreign investors to get access to up-to-date information as quickly as possible.

The government has paid greater attention to providing legal information in foreign languages, particularly English, with the strong belief that this will help boost the country’s international competitiveness.

Along with the justice ministry, the Ministry of Government Legislation (MOLEG) is also translating Korean laws and regulations into English.

MOLEG has run a website (oneclick.law.go.kr) providing basic legal information on six major subjects in English to support English-speaking foreigners here ― foreign investment, foreign workers’ employment, foreign students, interracial marriage, overseas Koreans and transportation/driving.

Source: Korea Times

Preparation, etc. of the Methods to Activate Indirect Investment in Real Estate
- Partial Amendment of the Real Estate Investment Company Act -
(Act No. 10269, enforced as of April 15, 2010)

1. Under the amended Real Estate Investment Company Act, the paid-in capital of a real estate investment company (the “REIC”) shall be lowered to not less than 500 million Korean Won (Article 6). Furthermore, the minimum capital of a real estate investment company for which has held a business permit for six months shall be decreased to 7 billion Korean Won inthe case of a self-management REIC and 5 billion Korean Won in the case of a consigned-management REIC (Article 10). Thus, the investment target of the REIC is expected to extend to small and medium-sized real estate and there will be more investment opportunities for real estate development projects.

2. The ratio of public offering of a REIC shall be lowered from not less than 30/100 to not less than 20/100 and the ratio of share ownership restrictions shall be raised from not less than 30/100 to nor less than 35/100 until December 31, 2012 (provisos to Article 14-3 (1) and Article 15 (1)). It is expected that the investment in a REIC is to be activated and the equity with the indirect real estate investment vehicle is to be secured through the reduction of public offering expenses of the REIC and the inducement of institutional investors.

3. Rights in the use of real estate, such as superficies and leasehold rights and beneficiary interests in real estate trust by which all of the properties in trust are reverted to a beneficiary upon termination of the trust shall be added to the property to be invested in kind to the REIC (Article 19 (2)). It is expected that the minimum capital of the REIC will be more easily secured by expanding the scope of property to be invested in kind to the REIC.

4. In the event where the REIC is not able to respond to the call option of shareholders due to lack of funds to purchase the shares, it may postpone the purchase of shares by obtaining the approval of the Minister of Land, Transport and Maritime Affairs (Article 20 (3)). It is expected that stable operation of the REIC will be possible by allowing the REIC to purchase the shares in consideration of its status of funds.

Preparation, etc. of the Method to Expand Assistance to Foreign-Invested Enterprises

- Partial Amendment of the Foreign Investment Promotion Act -
(Act No. 10272, to be enforced as of October 15, 2010)

1. Under the amended Foreign Investment Promotion Act, more land will be subject to private contracts and decrease of rent for foreign-invested enterprises (Article 13). Thus, the land, etc. that has been created under the Urban Development Act or the Act on the Development and Management of Logistics Facilities will be leased or sold on the basis of private contracts, the term of lease will be increased and the rent will be reduced for foreign-invested enterprises.

2. Of the requirements for assistance in cash to foreign investment, the ‘requirement of the foreign invested amount of not less than USD10 million’ was deleted and the scale of full-time research staff shall be lowered from 10 to 5 persons (Article 14-2 (1)). Thus, small-scaled foreign investment will also be able to receive financial support in cash if the effect of such investment can be proved to be of benefit to the national economy.

The article notes…
Major domestic companies has given Korean law firms 79 out of 100 points for competitiveness, and 83 percent of the companies say they could turn to foreign law firms should Korea’s legal market be opened.

The Dong-A Ilbo polled 50 large domestic corporations, state-run companies and financial institutions and 18 major law firms on the competitiveness of Korean law firms in response to the opening of the Korean legal market.

On whether they would turn to foreign law firms after the market’s opening, 71.4 percent or 35 of the legal departments of the 50 companies said they would do so for “certain sectors.” Just five companies (16.3 percent) said no.

On which sector will be the most affected by the opening, 13 law firms said the financial sector and six firms said the corporate sector, including mergers and acquisitions and fair trading. This indicates that foreign law firms will gain ground in the domestic market for legal services in finance and business, where they have a competitive edge.