International Law

China Law Blog on How to Maintain Control of Korean Joint Venture

Okay, not really. But Seattle-based Harris & Moure, through its excellent China Law Blog, once again offers another one of those warnings that could be applicable to Korea after a find-and-replace job: Chinese Joint Ventures—The Information The Chinese Government Does Not Want You to Know.

Dan Harris writes about his partner Steve Dickinson’s short piece in the AmCham Beijing China Brief magazine entitled Avoiding Mistakes in Chinese Joint Ventures (Adobe Acrobat PDF; 376Kb), wherein Steve warns on the cost of foreign investors mistakenly assuming their 51% share ownership gives them control over a joint venture company, and suggests that foreign investors must bargain to hold onto the following three powers:

The power to appoint and remove the JV?s representative. The side that appoints the representative director will have significant control over operations. The usual practice of conceding the power to appoint a key officer or director to another investor is a mistake.

The power to appoint and remove the general manager of the joint venture company. It must be made clear that the general manager is an employee of the joint venture company who is employed entirely at the discretion of the representative director. The common practice of appointing the same person as both representative director and general manager is a mistake.

Control over the company seal, or ?chop.? The person who controls the registered company seal has the power to make binding contracts on behalf of the joint venture company and to deal with the company?s banks and other key service providers. The power over that seal should be carefully guarded. Ceding control over it as a matter of convenience is a mistake. There is a long, documented history of this seemingly minor consideration dooming EJVs.

The Korean story is almost identical, except that in the usual Korean practice there is no separation between the “Representative Director”, who is a member of the Board of Directors, and the day-to-day general manager of the company. They are for all intents and purposes the same person. While there is no legal bar to the Representative Director of a Korean corporation being a non-resident (or non-citizen), as a practical matter it is unwieldy to have a non-resident Representative Director and there will be a power vacuum in the local company that results from such a choice.

In all cases where a foreign investor wants to maintain control, or even have knowledge, of what’s going on in the local business, it’s essential to retain control over the company seal. The company seal in Korea is a totem which gives its holder all the powers of the Representative Director—including “signatory” authority over bank accounts and the power to make any contract or commitment on behalf of the company. Leave the seal in a secretary’s desk, and run the risk of being surprised by a legally-binding “contract” guaranteeing the secretary 20 years of employment, for example, or promising five years’ salary upon resignation. 

I second China Law Blog’s advice: If you’re a foreign investor and you let go of the company seal, might as well write off your investment. It’s that serious an issue. And yet so many foreign investors let themselves get buffaloed by objections from local staff.

Full post as published by Korea Law Blog on April 19, 2008 (boomark / email).