South Korea

When investing in a company by subscribing to new shares, the investor can pay the subscription price in cash or in kind. Contributions in kind may be made using tangible assets (e.g. real estate and movable property) and intangible assets (e.g. good-will and intellectual property rights). Recently in Korea, several foreign investors contributed or contemplated contributing trademarks, tangible assets (e.g. theme park attractions) and trademark licences to foreign-invested companies participating in theme park development projects, hotels and/or education businesses. When an investor makes contributions in kind to a company to subscribe to its shares, the investor must follow a two-step process: obtain an appraisal by a certified appraisal of the in-kind contributions, and obtain approval of the appraisal result by the court.

Appraisal by a certified appraiser
In principle, an inspector appointed by the court is required to investigate whether a contribution in kind has been provided to the company offering the subscription and then report that information to the court. However, following an amendment to the Korean commercial code (KCC) dated December 29, 1995, which provides that an appraisal by a certified appraiser may substitute for the investigation of the inspector in connection with certification of contributions in kind, most share subscriptions obtained through contributions in kind go through the appraisal process.

Pursuant to a further amendment to the KCC dated April 11, 2011, an inspection by the court-appointed inspector and an appraisal both are exempted if the value of assets subject to an investment in kind do not exceed one fifth of the total capital of the company, and are no more than KRW 50 million; if the assets subject to an investment in kind are publicly tradable securities; or when a pecuniary claim which has become due against the company is to be contributed. Because most intellectual property rights do not fall within any of those three categories, an appraisal by a certified appraiser generally is required when an investor contributes intellectual property rights.

Appraisal authority
The appraisal can be conducted by an appraiser authorised by law to perform appraisals of the type needed, depending on the type of assets being contributed. This includes a certified public appraiser as defined under the public notice of values and appraisal of real estate, and certified public accountants as defined by the certified public accountants act.

Several other persons or entities are permitted to provide appraisals. For example, where a foreign investor under the foreign investment promotion act contributes industrial property rights, technology appraisal institutions as defined under Article 4 of the enforcement decree of the act on special measures for the promotion of venture businesses will be permitted to provide the appraisal under the KCC. Additionally, where a foreign investor contributes capital goods (e.g. machinery, equipment or facilities), a confirmation of in-kind contributions, prepared by the commissioner of the Korea customs services, will be deemed a valid investigation report, obviating the need for a separate appraisal.

Examination of share subscriptions
Pursuant to Article 422 of the KCC, the court is required to examine the result of appraisals conducted in connection with share subscriptions through in-kind contributions. This process is known as the share subscription examination process. If the court determines that the valuation of the in-kind contributions is reasonable and proper, the court does not examine the appropriateness of the issue price, specific type or number of shares to be issued in exchange for the subject in-kind contribution. The purpose of the court’s examination is to promote the capital fulfilment of a company. Thus, the court generally approves the share subscription, even if the investor who provides in-kind contributions benefits from shares being issued at a price lower than the market value, so long as the issue price of the shares is above the face value of the shares and does not diminish the capital fulfillment.

Generally, it takes approximately three to eight weeks to obtain court approval. But it may take longer to obtain court approval on appraisals of intellectual property rights, as they are non-tangible assets and it may be more difficult for the court to evaluate the reasonableness of such appraisals.

If the court concludes that the valuation of the in-kind contribution is improper, after examining the result of the appraisal, usually the court will first seek explanations from directors and/or the person who has made the in-kind investment. If it deems the value of the exchange to be inadequate, the court may modify the particulars of the in-kind contribution exchange, such as by reducing the number of shares to be granted to the person who made the in-kind contribution. The person who made the in-kind contribution may either appeal the court’s modification or cancel his/her subscription to the shares.

Lee International IP & Law Group
Poongsan Bldg. 23 Chungjeongro
Seodaemun-gu, Seoul 120-013, Korea
Tel: 82 2 2262 6297 / Fax: 82 2 2273 4605
Email: sycha@leeinternational.com
Website: www.leeinternational.com

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