When establishing a Korean subsidiary, foreign-invested companies often use standard-form Articles of Incorporation provided by incorporation service providers without conducting a separate legal review. By focusing primarily on completing the corporate registration and administrative procedures as quickly as possible, companies may overlook the fact that signing the Articles without sufficient consideration can gradually weaken the foreign parent company’s control over its Korean subsidiary.
Even where the parent company has established sophisticated corporate governance policies or entered into a comprehensive shareholders’ agreement, such arrangements may not have the intended external legal effect in Korea if the relevant provisions are not properly reflected in the Articles of Incorporation, which constitute the Korean company’s fundamental governing document.
This article examines three areas that foreign-invested companies should carefully consider when preparing their Articles of Incorporation: board composition, restrictions on share transfers, and provisions relating to overseas remittances.
- 1. Articles of Incorporation under Korean Commercial Law
- 2. Board Composition and Remote Corporate Governance
- 3. Restrictions on Share Transfers and Shareholder Rights
- 4. Overseas Remittances, Interim Dividends, and Capital Repatriation
- Preventing Cash Lock-Up through Interim and Quarterly Dividend Provisions
- Preparing for Review by the Designated Foreign Exchange Bank
- Capital Repatriation through Share Buybacks and Capital Reductions
- Entering the Korean Market Without Properly Tailored Articles Is Like Driving a Car Without Brakes
1. Articles of Incorporation under Korean Commercial Law
Under the Korean Commercial Act, the Articles of Incorporation serve not merely as internal corporate rules, but as the company’s fundamental organizational framework, certain aspects of which are reflected in publicly available corporate registration records.
Even if the foreign parent company’s legal team has incorporated sophisticated governance provisions into a shareholders’ agreement (“SHA”) or internal corporate policies, arrangements that are not properly reflected in the Articles may operate primarily as contractual obligations between the parties and may not necessarily be enforceable against third parties.
For example, restrictions on the authority of the representative director or restrictions on transfers of shares that are not properly incorporated into the company’s constitutional documents may not have the intended legal effect against third parties.
The Korean Commercial Act also recognizes certain matters that become legally effective only when expressly provided for in the Articles of Incorporation. Depending on the provision concerned, these may include procedures relating to share transfer approvals and interim or quarterly dividends.
Standard-form Articles prepared for ordinary Korean companies often contain only default provisions and may therefore omit provisions specifically required by foreign-invested companies. Such omissions can result in practical difficulties concerning corporate control, governance, and the repatriation of funds.
Many multinational companies assume that a carefully drafted SHA is sufficient to manage the risks associated with their Korean subsidiary. Korean corporate law, however, distinguishes between the legal effect of the Articles of Incorporation and that of contractual arrangements among shareholders.
2. Board Composition and Remote Corporate Governance
Under Article 383(1) of the Korean Commercial Act, a small company with paid-in capital of less than KRW 1 billion may appoint only one or two directors and is not necessarily required to establish a board of directors.
Nevertheless, if standard-form Articles requiring three or more directors and at least one statutory auditor are adopted without modification, the foreign parent may unnecessarily need to register overseas executives as directors. This can also create substantial administrative costs and delays whenever board meetings must be convened and resolutions adopted.
Where no board of directors is established, certain functions ordinarily exercised by the board may instead be exercised through the shareholders’ meeting. For a wholly owned Korean subsidiary, this can significantly simplify the parent company’s corporate decision-making process.
Even where a board structure is maintained, the Articles should appropriately address remote participation and decision-making in light of the time differences and geographical distance affecting executives of the foreign parent company.
| Category | Standard Articles under Korean Commercial Law | Articles Tailored for Foreign-Invested Companies |
|---|---|---|
| Board composition | Three or more directors and one statutory auditor | For companies with capital below KRW 1 billion, one or two directors without establishing a board, or a single representative-director structure |
| Decision-making method | Primarily based on directors attending meetings | Expressly permit participation and resolutions through simultaneous video or audio communication |
| Convening board meetings | Seven days’ prior notice | Shortened notice period and notices by email/electronic documents |
| Shareholders’ resolutions | Physical attendance by shareholders or attendance through a proxy | For qualifying companies with capital below KRW 1 billion, simplified decision-making through written resolutions |
3. Restrictions on Share Transfers and Shareholder Rights
Under the Korean Commercial Act, shares are freely transferable in principle. Accordingly, unless the Articles expressly provide that “the transfer of shares requires approval of the board of directors” pursuant to Article 335(1) of the Korean Commercial Act, it may be difficult to prevent a Korean joint venture partner or minority shareholder from transferring its shares to a third party or even a competitor without the foreign parent company’s consent.
This issue is particularly important for joint ventures between foreign investors and Korean companies. The essential purposes of rights contained in an SHA—such as rights of first refusal (“ROFR”), tag-along rights, and drag-along rights—should be appropriately reflected in the Articles of Incorporation to the extent permitted and advisable under Korean law.
Korean courts generally distinguish between contractual restrictions contained solely in an SHA and restrictions properly incorporated into the Articles. A contractual restriction may remain binding between the contracting parties, while a transfer to a third party may not necessarily be invalidated merely because it violates the SHA.
Accordingly, the Articles should carefully establish the applicable approval procedures for share transfers, whether by the board or shareholders, as well as the requirements governing the issuance of new shares to third parties, thereby strengthening the company’s corporate governance framework.
4. Overseas Remittances, Interim Dividends, and Capital Repatriation
One of the principal objectives of many foreign-invested companies is to repatriate profits generated by their Korean subsidiaries to their overseas parent companies and, where necessary, recover invested capital in a flexible manner.
Inadequate drafting of the Articles, however, can create a practical “cash lock-up” problem in which a Korean subsidiary has sufficient cash but the foreign parent cannot distribute or repatriate those funds at the desired time.
Preventing Cash Lock-Up through Interim and Quarterly Dividend Provisions
As a general matter, dividends under the Korean Commercial Act are determined in connection with the company’s annual financial statements and shareholders’ meeting.
If the Articles do not provide that the company may make an interim dividend once per year by resolution of the board of directors pursuant to Article 462-3 of the Korean Commercial Act, the foreign parent may be unable to receive an interim distribution even where it has an urgent need for funds.
Appropriately drafted dividend provisions can therefore provide the foreign parent with greater flexibility in managing and repatriating the Korean subsidiary’s available cash.
Preparing for Review by the Designated Foreign Exchange Bank
Article 3 of the Foreign Investment Promotion Act protects a foreign investor’s ability to remit dividends and proceeds from the sale of shares overseas.
In practice, however, the designated foreign exchange bank handling the remittance may review the company’s Articles of Incorporation together with relevant board or shareholders’ resolutions and other supporting documentation.
If the dividend procedure or the corporate body authorized to approve the dividend does not comply with the applicable requirements under Korean law and the company’s Articles, the remittance may be delayed while additional or corrected documentation is prepared.
Capital Repatriation through Share Buybacks and Capital Reductions
When restructuring a business, a foreign investor may also seek to return excess capital to the parent company through a company’s acquisition of its own shares or a paid-in capital reduction.
The Articles should therefore be reviewed together with the statutory procedures and voting requirements applicable to share buybacks and capital reductions. A properly designed corporate structure can provide the foreign parent with additional options for capital repatriation while reducing the risk of disputes regarding the validity of the transaction or adverse tax treatment.
Entering the Korean Market Without Properly Tailored Articles Is Like Driving a Car Without Brakes
The convenience of standard-form Articles of Incorporation can conceal significant financial and legal risks, including weakened control by the foreign parent company and difficulties in repatriating funds.
No matter how sophisticated the safeguards contained in an SHA or the parent company’s internal policies may be, they cannot always substitute for corporate governance provisions that must be properly incorporated into the Korean subsidiary’s Articles of Incorporation under Korean law.
Foreign-invested companies should therefore establish Articles of Incorporation tailored to their ownership structure and operational needs from the outset of their Korean investment.
A proactive legal review of the Articles can help protect the foreign parent company’s assets and management rights, facilitate efficient repatriation of profits and capital, and provide a more stable foundation for long-term business operations in Korea.