south korea special focus - iflr.com

www.iflr.com IFLR/March 2015 57

SOUTH KOREA SPECIAL FOCUS

Gen2 Partners p58Encouraging growthKyle Shin, CEO of Gen2 Partners discusses the

domestic regulatory regime and the future for

hedge funds in the country

NYSE p60Looking outwards David Ethridge, senior vice president and head

of capital markets at the New York Stock Exchange,

discusses opportunities for Korean companies in

the US equity capital markets

Corporate Governance Service p62Improving the environment In light of recent chaebol activity, overseers at the

Korea Corporate Governance Service explain

how the market must improve

Global share offerings p66International investors take note Dong Chul Kim of Paul Hastings charts the rise

of international offerings by Korean issuers

IPR guidelines revised p68Tackling unreasonable behaviour John H Choi and Changhun Lee of Shin & Kim look

at amended guidelines on the unreasonable

exercise of IP rights

Privacy protection regulations p72Better late than neverSky Yang of Bae Kim & Lee outlines recent legislative

changes as South Korea finally comes round to

tightening its data protection regulations

South Korea specialfocus

Contents

Encouraging growthKyle Shin, CEO of Korean hedge fund Gen2 Partners, discusses the domestic regulatoryregime and the future for hedge funds in the country

58 IFLR/March 2015 www.iflr.com

SOUTH KOREA SPECIAL FOCUS GEN2 PARTNERS

K orean hedge funds have been an important area of growth inthe country’s financial industry. And, unlike nearly every juris-diction globally, regulators are supporting their growth. So far

it appears that they are succeeding.

According to a report released by the Financial Supervisory Service(FSS) in December 2014, hedge funds in Korea received KRW 2.7 trillion($2.5 billion) in investment in the last three years – a 12.5% increase overKRW 200 billion in 2011. The number of hedge funds in the country hasnearly tripled, from only 12 in 2011 to 32 in 2014.

But more could still be done to boost domestic hedge funds, such asallowing managers to invest in their own funds. On the market side, exist-ing hedge funds should look to diversify their strategies.

Here, IFLR speaks with Kyle Shin, CEO of Korean hedge fund Gen2Partners, about the local regulatory environment and what he expects nextfrom the industry.

How has Korea’s hedge fund industry developed in the last fiveyears? What are the regulatory changes that spurred thatdevelopment?The Korean government announced that it would develop the Korean hedgefund industry back between 2006 and 2008. That was why I left KingdomCapital, a global New York-based hedge fund.

Following the Lehman crisis, the government plan was put on hold. Butwe have seen growth since then: Korean onshore hedge funds’ assets undermanagement (AUM) was near zero a few years ago, and has now grown to$2.5 billion. But compared to the Korean gross domestic product of $1.1trillion, onshore hedge funds remain very small. This is just the beginning.

Korea is probably the only country in the world where the governmentis trying to grow the domestic hedge fund business. Everywhere else, reg-ulators are trying to regulate and control hedge funds, but Korea is mov-ing in the opposite direction. That is probably because Korea’s governmentwants to help build its broker businesses; a few years ago, it permitted themto begin raising equity by rights offerings.

As a result the top Korean brokers raised billions of dollars to seedKorean hedge funds. Before that, there were very few industry expertsonshore in Korea, and a few years ago only a few investors who were ableto invest in Korean hedge funds. Brokers raised billions of dollars and seed-ed some to hedge funds, which is how Korean hedge funds began.

Regulators, particularly the FSS and the Financial Services Commission(FSC), are working with Korean hedge funds. But at the same time, theyare controlling for the risks of hedge funds – although they allow leverageof up to four times, compared to almost none for public funds. While they“If hedge funds are going to

continue to grow, they mustexpand their mandates fromKorea to across Asia


GEN2 PARTNERS

are considering risks, the government also wants to support Korean primebrokers – especially since that market has been protected from global players.

Who are typically the investors into Korean hedge funds? Are youseeing more interest from foreign investors?Foreign investors can invest in hedge funds, but that may require a 22%corporate tax rate. Offshore it is tax free. At the moment it is primarily theKorean brokers and high net worth individuals that invest through theprivate banking channel.

The industry is still waiting for more aggressive institutional investors.For example, National Pension Service (NPS) has $450 billion AUM inKorea. That is expected to grow to $770 billion by 2020 and to $2.3 tril-lion by 2043, but it is not yet allowed to invest in Korean hedge funds.Although it is encouraged by the government; it has been blocked by itsinvestment committee.

Does the Korea hedge fund market differ from elsewhere in Asia? Ifso, how?Most Korean hedge funds have an equity long-short strategy that is Korea-specific. The borrowing costs in Korea are usually 2.5% or above, and theleverage cost is also 2.5% or above.

Under that strategy, it is difficult to make decent returns. Plus, theKorea market is not that deep in terms of borrowing – and it is difficult toget the borrow these days at reasonable terms – so if hedge funds are goingto continue to grow, they must expand their strategy by expanding theirmandates from Korea to across the Asia Pacific. Otherwise they are goingto be very confined.

What are some of the regulatory concerns that the FSC or FSScould address to further encourage hedge fund growth?What is interesting about Korea is that in other jurisdictions – includingHong Kong – regulators would encourage fund managers to invest theirown capital into funds to ensure that they are especially careful aboutmaking investment decisions.

The FSS did not allow fund managers to invest their own capital in thefunds that they manage until recently. The law now has been changed toallow hedge fund managers to invest in their own funds.

Other issues include regulatory hurdles such as foreign exchange (FX)and PE [permanent establishment] tax issues; those have been blockingsome growth of the Korean hedge fund industry as well.

What would be the biggest market-driven change that would spurgrowth for Korean hedge funds?Foreign funds coming onshore in Korea would be a very important boost forthe Korean hedge fund industry. When Korea first opened its hedge funds,it tried to invite global hedge funds to open funds onshore, but none decidedto open. Their presence in the domestic market would be very helpful.

We also hope that the government can convince NPS to invest andallocate their billions into Korean hedge funds. That would be a stablesource of funding for domestic funds.

Diversifying hedge fund strategies is also an area that could beimproved, as I mentioned before. They are now too focused on Korea-spe-cific long-short strategies.

“Foreign funds coming onshore in Korea would

be a very important boost for the Korean hedge

fund industry

About the contributorKyle Shin is an expert in the Korean and Asian markets with over 16years of experience in the industry. Since establishing Gen2 Partners in2008 he has built a firm recognized as a leader in customised Asianhedge funds for institutional investors and family offices.

Before founding Gen2 Partners, Shin was head of Kingdom CapitalKorea, a top-tier global New York-based fund, where he was responsiblefor Korean investments and researched pan-Asian markets, includingGreater China and Singapore.

With experience at ING Barings, Shinhan, Woori and HyundaiSecurities, Shin is a recognised industry expert regularly invited to speakon hedge fund investments at Korea Financial Investment Association(KOFIA) and Korea Fixed Income Research Institute (KFIRI) seminarsas well as international fund conferences. Kyle earned his BS in businessmanagement and marketing from Cornell University.

Kyle ShinCEO of Korean hedge fund Gen2 Partners

W: www.gen2ks.com

Looking outwardsDavid Ethridge, senior vice president and head of capital markets at the New York StockExchange, discusses opportunities for Korean companies in the US equity capital markets

M ost Korean companies look to list domestically on the KoreaExchange (KRX). But some – either high-growth technologycompanies or others looking to an international audience –

consider listing in Singapore, Hong Kong and the US. A case in point ismobile chat application Line – owned by Korean company Naver – whichhad contemplated an initial public offering (IPO) on the New York StockExchange or the Tokyo Stock Exchange (TSE) earlier this year.

And others may follow – perhaps this time with live deals. While com-panies listed on the KRX have been able to offer shares to foreign investorsin the IPO process since its listing rules were amended in 2007, the JOBSAct has changed the landscape for foreign companies considering listingvenues. Companies hoping to attract investors globally or avail themselvesof the benefits of the JOBS Act will continue to look to the US capitalmarkets.

Here, Ethridge discusses the advantages of the US capital markets, andwhat that means for Korean companies – particularly for those in high-growth sectors.

Which Korean companies is the NYSE looking to attract? Are thereany particular sectors that it is focussing on?There are a number of reasons companies focus on the US as a potentialdestination in the context of an IPO.

One reason is that the US capital markets are still the deepest in theworld by orders of magnitude. That’s not to say you couldn’t do an IPOsuccessfully in many markets around the world, but the US has a uniqueposition in being so deep. That depth brings a substantial number of list-ed companies that help investors triangulate on valuation for any compa-ny from outside the US that goes public here.

The second reason is that investors here are very comfortable with pric-ing growth. When they look at a company that’s high growth on the rev-enue side but losing money because it’s investing in business or is in anearly stage, they’re okay with that. They know how to evaluate and effec-tively price that financial picture.

And third, it’s not only comparable companies and investors, but also alarger ecosystem that includes banks and research analysts who are com-fortable with high-growth companies, and they’ll publish research on thosecompanies to help investors support them once they’re listed.

That developed ecosystem can translate to valuation benefits for listingin the US.

There are also other structural issues that will sometimes force compa-nies to list in the US versus other markets. SomenonUS exchanges won’tallow companies that don’t have profitable operating histories to list, so“Investors here are very

comfortable with pricinggrowth


SOUTH KOREA SPECIAL FOCUS NYSE

Website


NYSE

that will bring certain groups of companies to the US – particularly tech-nology companies that are early stage and high growth.

As for types of listings, the other way we capture listings is nonUS com-panies that are public on other exchanges will also list on the NYSE via anAmerican Depositary Receipt (ADR), potentially raising capital in theprocess.

There are other companies in Asia that are already public in non-USmarkets but looking at their potential to also list in the US. It can bringadvantages from the investor, customer and branding perspectives.

What are the advantages for a Korean company listed in the US?What are some of the disadvantages?I’ve already outlined the advantages, and I don’t think being a Koreancompany changes that versus companies from other jurisdictions.

The challenges are not too distinct as well. If you’re looking from yourside of the world to this market, there’s a 12 to 13-hour difference, depend-ing on the time of year. That can be challenging for companies as theythink about how they cooperate with their investors. Obviously languagedifferences can also challenge some management teams, and there are dif-ferent ways to solve that.

Historically prospective companies were also worried about regulationin the US, such as Sarbanes-Oxley and the cost of that. We don’t tend tohear that anymore. After the JOBS Act was passed, it alleviated some ofthose pressures out of the gate and allows companies to grow into thatcapability. That’s taken the regulatory concerns out of the equation formost companies looking to go public here.

What do US investors find appealing about Korean companies? Istheir perception of Korean companies different from that ofcompanies from those elsewhere in Asia? Investors will look at the management team, growth strategy and the totaladdressable market for that company and they’re going to make adetermination of whether they want to own a company on those factors;it’s not really about where the company is from.

In some cases, macroeconomic issues from a country affect the IPO cli-mate or an investor willingness to buy. We’ve seen that from companies inEurope and Latin America if the political or macro economic winds areblowing in the wrong direction, that will slow down the pipeline of com-panies going public and affect investor appetite. I don’t really see that forKorean companies at this time.

This year MSCI removed Korea from its developed markets review.Do you expect this to have a significant effect on demand forKorean shares?I don’t expect it to have an impact; and when you say removed, it reallymeans that it’s remained in its original category– an emerging market.

In the context of an IPO, investors are looking at particular growthopportunities and the execution of that on the part of the managementteam. The MSCI side is related to the index side – the secondary market –rather than the initial performance of the IPO. Ultimately the index reviewwon’t make a difference in the primary markets.

“The JOBS Act has taken theregulatory concerns out of theequation for most companies

looking to go public here

About the contributorBefore joining NYSE, Ethridge worked for over 20 years in globalbanking firms developing strategic and capital raising plans forcorporate clients across industries. Most recently he managed the cleantechnology investment banking team at Cowen and Company thatincluded bankers in New York, San Francisco and Shanghai. Beforethat, Ethridge helped lead the IPO of Cowen, as well as run the firm’sprivate placements group and financial sponsor coverage.

His banking career has included over 10 years as a senior banker atCowen and Company, seven years in equity capital markets andcorporate finance at JP Morgan, and two years at Bank of Americabefore attending business school.

Ethridge received his BA in economics from Davidson College in 1988.He followed his undergraduate studies with a year of study inIndonesia, India and Egypt as a Thomas J Watson Fellow, and receivedan MBA from Harvard Business School in 1993.

David A EthridgeSenior Vice President and Head ofCapital MarketsNYSE

W: www.nyse.com

Improving the environmentIn light of recent chaebol activity, overseers at the Korea Corporate Governance Serviceexplain how the market must improve

R ecent chaebol activity meant corporate governance remained infocus in Korea in 2014. Hyundai Motor Group’s November pur-chase of $10 billion of real estate in Seoul’s Gangnam district was

funded by three companies – Hyundai Motor, Kia Motors and HyundaiMobis – and prompted a renewed focus on board input and shareholderrights. The family behind Samsung was also active at the end of last year, list-ing Cheil Industries – its de facto holding company – on the Korea Exchangeas part of its restructuring.

A chaebol is a large family-owned conglomerate, typically in which onechairman maintains control over multiple companies. The businesses oftenhave complex interlocking ownership structures, and investors remain con-cerned about the possibility of related party transactions or actions thatbenefit the controlling family rather than individual shareholders. A so-called chaebol discount even exists on the Korea Exchange.

But organisations within Korea are working to improve corporate gov-ernance and transparency within chaebol and other listed companies. One

of these is the Korea Corporate Governance Service (KCGS), a researchinstitute that provides environmental, social and governance (ESG) rat-ings, proxy voting and socially responsible investment (SRI) consulting,among other services. It was established in June 2002 by four foundingmember organisations: the Korea Exchange, Korea Financial InvestmentAssociation, Korea Listed Companies Association and KOSDAQ ListedCompanies Association. The Korea Exchange utilises its ESG evaluationdata to publish its Socially Responsible Indices every September, encour-aging companies to voluntarily improve their governance and lead share-holder-friendly management practices. KCGS also provides proxy votingservices to institutional shareholders including the National PensionService.

IFLR speaks with KCGS researchers about their work in both improv-ing corporate governance within Korean listed companies, as well asimproving ESG and SRI awareness in the country.

What are the criteria for which KCGS evaluates corporate governance?KCGS has evaluated the corporate governance of all KOSPI and KOSDAQ-listed companies since 2003, and its coverage reached 1,615 companies in2014. The corporate governance evaluation comprises 100 multiple choicequestions spanning five categories: protection of shareholder rights, boardof directors, disclosure, audit system, and dividends. Each question can scorebetween one to seven points, and the full score is 300 points.

Of these assessment categories, the protection of shareholder rights cat-egory has the largest weighting. KCGS evaluates whether firms haveminority-shareholder-friendly policies, their ownership structure and the“Large shareholders – including

their related parties – shouldbe responsible for their management’s behaviour


SOUTH KOREA SPECIAL FOCUS CORPORATE GOVERNANCE

Website


CORPORATE GOVERNANCE

related party transactions (RPT) that may be happening between chaebol’s’family members or affiliated companies. The policies that belong to thisfirst subcategory include: cumulative, postal and electronic voting; priornotice of shareholder meetings; reaching the upper limit on the issuance ofconvertible bonds and bonds with warrants; staggered boards; golden para-chute; and a supermajority voting condition in the case of M&A activityor CEO dismissal, among other considerations.

How does KCGS evaluate related party transactions and otherownership structures? Are there any that are more corporate-governance friendly than others?To maintain consistency in our evaluations, KCGS considers ownershipstructures based on the total shareholding rate with five criteria:

1) total shareholding of registered executives excluding the largest share-holder and his family members;

2) total shareholding of outside directors;3) total shareholding of the affiliated firms in a conglomerate; 4) total shareholding of the largest single shareholder and his family

members;5) total shareholding rate of the shareholders who hold shares greater

than five percent of the total shares and are neither the largest shareholdernor his related parties.

Aside from this quantitative evaluation method, it is important thatlarge shareholders – including their related parties – should be responsiblefor their management’s behaviour, as most of them participate in manage-ment of the company.

We also evaluate the internal transactions within or among the con-glomerate member firms with six criteria, being the ratio of:

1) the total value of transactions between the evaluated firm and itsrelated persons to the company’s net worth (excluding related entities);

2) the total investment amount to the affiliated companies to the com-pany’s net worth;

3) the total amount of payment guarantees and mortgage offer to thenet worth;

4) the total amount of transaction between the evaluated firm and itsrelated entities to the net worth;

5) the revenue induced by the affiliates to the total revenue of the com-pany;

6) the purchase amount induced by the affiliates to the gross purchaseof the company.

Korean chaebol conglomerate firms tend to show high internal-transac-tion rates, which can damage fair competition. We recommend firms min-imise internal transactions and establish a holding company or execute avertical integration.

So far, KCGS has awarded S-Oil Corp, Doosan Heavy Industries &Construction and KB Financial Group as the companies with the best cor-porate governance in 2014, 2013 and 2012, respectively.

What are some trends on corporate social responsibility (CSR) andsocially responsible investment (SRI) in Korea? Do you see anincreasing number of companies interested in this space?CSR and SRI are sprouting in Korea, and there is a gap between the interestshown by large-caps and small- or middle-caps. Multinational firms withpotential customers and investors across the globe are sensitive to the publicinterest and try harder to put their efforts in CSR. They are verified byrunning an independent team or a committee solely designed for CSR. Thetotal number of listed Korean firms that published CSR report has beengrowing; it was 49 in 2009, but had increased to 68 in 2011, and then 77for the period of January 2012 to April 2013. Although most CSR reports

are quite informative, with verification by third-party assurers and alignmentwith GRI 3.1 or G4 guidelines, they mainly focus on social andenvironmental issues while corporate governance issues usually take up onlytwo to six pages.

The total net asset size of SRI in Korea is estimated to be over KRW 7trillion ($6.44 billion) as of April 2013. Public pension funds such as the

National Pension Service (NPS) play a significant role in building up theSRI-friendly investment infrastructure in Korea. SRI-themed trusteeinvestment size of NPS is about KRW 5.13 trillion, which takes up over72% of the total SRI. That is followed by Korea Teachers’ Pension withKRW 146 billion, Government Employees Pension Service with KRW 120billion, and Korea Postal Savings Fund with KRW 40. Some private assetmanagement firms sell SRI-themed public offering funds with the total netasset size of KRW 1.63 trillion, and there are two SRI-themed exchange-traded funds (ETFs) in the domestic market with a total valuation of KRW13.9 trillion.

How could corporate governance in Korea improve? What are someof the changes that KCGS most frequently recommends?In the 2012 presidential election President Park Geun-Hye campaigned ona theme of economic democratisation – a slogan which emphasisedregulating chaebol conglomerates to lessen the gap between haves and have-nots, and establishing a fair market economy through tough lawenforcement. But regulatory reforms have been limited to some extent bychaebols’ strong opposition.

The amendments to the Financial Investment Services and CapitalMarkets Act (Capital Markets Act) in May 2013 enforced the requirementfor listed companies to disclose the remuneration of individual directorsand executive officers who receive an amount equal to or higher than KRW500 million. Other amendments put an end to the shadow voting systemfrom 2015 onwards; through shadow voting, companies were able to meetthe quorum requirement to pass resolutions with the help of the KoreaSecurities Depository, which cast votes on behalf of absent shareholders inproportion to the actual votes. Last December the Financial ServicesCommission (FSC) amended the decree of Capital Markets Act lettingfirms utilise shadow voting for the next three years, until 2015, in the caseof introducing the electronic voting as well as the proxy solicitation.

In April 2013 the FSC formed the Financial Company GovernanceImprovement Taskforce, which formulated a plan to strengthen the role ofboard of directors by making them more responsible for risk management,and establish and disclose a remuneration system in accordance with theiraccomplishments and responsibilities.

On November 10 2014, the FSC released the draft CorporateGovernance Code for Korean financial institutions. This required them topublish a more detailed corporate governance annual report and explaintheir current governance under a comply-or-explain requirement to pro-mote the monitoring activities within the market, planning to assess theforementioned corporate governance annual report through the assess-ment-specialised institution. After the 20-day public consultation period,

“Regulatory reforms have beenlimited to some extent by

chaebols’ strong opposition


CORPORATE GOVERNANCE

the FSC released the Corporate Governance Code for Korean financialinstitutions with some amended content concerned with a director candi-date nominating committee.

KCGS recommends firms build a more shareholder-friendly environ-ment by introducing electronic and cumulative voting so that more share-holders cast votes, and make it easier for minority shareholders to proposeagenda items at annual grand meetings (AGMs). Additionally, KCGS rec-ommends that firms adopt the comply-or-explain method when they pub-lish their annual reports or sustainability reports based on best practicecodes, such as KCGS’s ESG best practice code.

Are you seeing an increasing trend of shareholder activism inKorea? How does KCGS contribute to that?We believe shareholder activism will be receiving more attention as theabolishment of shadow voting schemes became effective on January 1 2015.So far most institutional investors have consistently voted in favour of the

board of directors, which results from a lack of understanding andinfrastructure to produce advice for exercising voting rights properly.However NPS, along with some asset management firms and minorityshareholders, has made an increasing number of proposals in shareholdermeetings. The total number of listed firms’ AGM agenda items proposed byshareholders in 2013 was 41 – nearly three times the 15 agenda itemsproposed in 2008.

KCGS strongly believes that institutional investors should not followthe passive attitudes of investors trading shares, and exercise their votingrights to increase their customers’ benefits through becoming activelyinvolved in monitoring management activities of target investment com-panies and making decisions as a representative of customers. To helpthem, KCGS has enacted Proxy Voting Guidelines and provided proxyvoting services based on those guidelines.

About the contributorDeokkyo Oh is responsible for evaluating ESG performance at listedcompanies, as well as the best practice code for ESG performance. Hehas worked at the KCGS since 2011.

Previously he worked at the Korea Institute for the Advancement ofTechnology (KIAT) from 2002 to 2008, where he assessed small andmedium enterprises and developed national policy for technologycommercialisation. He received his PhD in business administrationfrom Texas Tech University in 2010, where he specialised in productionoperations management. He has written several articles regarding ESGperformance and is deeply concerned with developing a nationalauthentic ESG profile in Korea and finding the path for improvingESG performance in Korea.

Deokkyo OHChief in ESG evaluation team, Korea Corporate Governance Service

W: www.cgs.or.kr

About the contributorSang A Ahn has evaluated the ESG performance of listed companies inKorea since 2012. She previously worked as a research assistant in theequity research team of Meritz Securities and Hana Daetoo Securities.She received her bachelor’s degree from Korea University, where shedouble-majored in Economics and Business Administration. She isinterested in SRI and integrated reporting, and has written severalarticles on Korean companies’ ESG performance as well as theirdisclosure of that performance.

Sang A Ahn ESG Analyst in the ESG evaluation team,Korea Corporate Governance Service

W: www.cgs.or.kr

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SOUTH KOREA SPECIAL FOCUS GLOBAL SHARE OFFERINGS

I n the fourth quarter of 2014, two large initial public offerings(IPOs) of Samsung Group affiliates, Samsung SDS and CheilIndustries, drew the attention of the international investment

community. The IPOs raised approximately $1.1 billion and $1.4billion respectively, making them the two largest IPOs in Korea in2014. These IPOs were well received not only among Koreaninvestors but among international investors and were heavily over-subscribed. This article provides background information on howKorean IPOs are sold to international investors.

Following POSCOStarting from POSCO’s first-ever listing on the New York StockExchange as a Korean company in 1994, several blue-chip corporateissuers and financial institutions followed suit, listing their Americandepositary receipts (generally known as ADRs and which facilitatepayment of dividends and trading in the US) on the New York StockExchange in the late 1990s and early 2000s. These issuers includedKorea Telecom, SK Telecom, Korea Electric Power Corporation, LGDisplay, KB Financial Group, Woori Financial Group and ShinhanFinancial Group. Meanwhile, a few start-up companies in thetechnology sector sought listings on the Nasdaq, which generallyoffered the most favourable valuation to tech companies. For example,Thrunet listed its ADRs on Nasdaq in 1999 during the internet bubble(although it was later delisted) while companies like G-market, Gravityand Pixelplus listed on Nasdaq in the mid-2000s. Since the mid-2000s, however, listings in the US became less popular among Koreanissuers (like other non-US issuers), due in part to the tightenedcorporate governance standards and certification requirements underthe Sarbanes-Oxley Act. Instead, Korean companies seeking to raisemoney from foreign investors sought other listing venues such asLondon or Singapore. For example, STX Pan Ocean listed its shares onthe Singapore Exchange in 2005 and Lotte Shopping listed its shareson the London Stock Exchange and the Korea Exchangesimultaneously in 2006, which raised $3.7 billion.

Amendment to listing rules In 2007, the amendment of the listing rules in Korea that permittedKorean companies listing on the Korea Exchange to offer their sharesto foreign investors in the IPO process brought about a significantchange in Korean companies’ equity financings from foreign investors.Since then, most of the large IPOs in Korea, such as the IPOs ofSamsung Life, the largest ever by a Korean issuer, Samsung Card,Mando, Hi-mart and CJ HelloVision, featured an overseas tranchewhich was offered to institutional investors in the US and other foreigncountries. The growth of the Korea Exchange in size and therecognition of it as a reliable market among foreign institutionalinvestors also contributed to this trend.

The table on the page opposite shows IPOs listed on the KoreaExchange which included an international tranche.

International offerings: pros and consFrom the issuer’s point of view, selling shares to international investorsin its IPO has both pros and cons. The primary benefits of offering theshares to international investors include the positive effect on pricingby bringing in a larger pool of investors and the opportunity tobroaden the international shareholder base. International institutionalinvestors also tend to hold the shares for a longer period than retailinvestors, helping to stabilise the share price following the IPO. Thesebenefits are mostly highlighted in larger offerings, where it is necessaryto find sufficient demand for the offering beyond the amount ofcapital available in the domestic market.

On the other hand, international offerings increase the risk ofinvestor lawsuits under US or other securities laws that may be moreinvestor friendly than the Korean law. International offerings alsoentail the additional cost of preparing offering documents in Englishin accordance with the international standard, the fees ofinternational counsel and accounting firms and expenses for globalroadshows. Accordingly, only the large IPOs, usually with an offeringsize of more than $300 to $500 million tend to have an internationaltranche. For this reason, most of the issuers that chose to have aninternational tranche were established companies affiliated with largeKorean conglomerates, or chaebols, rather than start-up companies.

Underwriting proceduresAs these offerings are sold to both Korean and international investors,issuers need to engage international investment banks, as well asKorean securities firms, as underwriters. They enter into two separateunderwriting agreements with the issuer – a standard Korean-styleunderwriting agreement covering the entire offering and aninternational underwriting agreement covering the internationaltranche. While the offering mechanics and subscription procedures areset out in the Korean underwriting agreement, the internationalunderwriting agreement contains standard representations and

International investors take noteDong Chul Kim of Paul Hastings charts the rise of international offerings by Korean issuers

“The primary benefits of offering the shares to international investors includethe positive effect on pricing

www.paulhastings.com


GLOBAL SHARE OFFERINGS

warranties of the issuer, US-style indemnity provisions formisstatements or omissions contained in the disclosure documents,and typical closing conditions and termination provisions found ininternational securities offerings. In order to comply with Koreanregulations, underwriting agreements are first signed at the time offiling the Korean securities registration statement, which are subject tothe confirmation of pricing and signing of the final underwritingagreement. The final underwriting agreement with the final price issigned immediately after pricing.

In addition, two sets of offering documents are prepared. ForKorean investors, a Korean securities registration statement includinga Korean prospectus, is filed with the Financial Supervisory Serviceof Korea (FSS), which is the regulator overseeing the financialmarkets. For international investors, an offering circular is preparedin accordance with the international market standards, includingEnglish financial statements prepared under Korean internationalfinancial reporting standards (IFRS) and management’s discussionand analysis (MD&A) of the financial information. Considerableeffort is taken to ensure that the Korean offering document isconsistent with the international offering document, as anyinconsistent statement could increase legal risk. In this process,certain sections of the offering circular, such as the risk factors andMD&A are often translated into Korean and included in the Koreanprospectus.

As with many other countries, the Korean prospectus is reviewedby the FSS, and sometimes the FSS provides material comments thatcan delay the offering process. Therefore, it is essential to prepare theprospectus carefully and build a cushion into the timetable to reflectany material comments from the FSS. In addition, the Korea

Exchange reviews the eligibility of the issuer’sshares for listing before the offering processbegins and sometimes it takes a considerableamount of time to clear the Korea Exchange’sreview process. These offerings are typically notregistered in any other country and sold only toinstitutional investors outside of Korea relyingon Rule 144A/Regulation S under the USSecurities Act.

Some of the peculiar aspects of the KoreanIPO process can raise issues in the context ofthe international offering. In Korean IPOs, theshares start trading a few days after the closing,which can be up to two weeks after pricing. Theinvestors are exposed to any adversedevelopments affecting the issuer during thisperiod, while they are not able to trade theshares. Another Korean regulatory requirementthat often raises issues is the requirement to

include underwriters’ valuation of the issuer in the Koreanprospectus, which underwriters can be uncomfortable with.

Looking aheadIt is expected that large Korean IPOs will continue to include aninternational tranche because it can bring in additional demand for theoffering. It depends on the market conditions how many of these IPOswill appear from Korea each year. If the Korean equity marketconditions improve, we may be able to see an increase in the numberof sizeable IPOs from Korea, including those of chaebol-affiliates,privatisation of state-owned enterprises and start-up technologycompanies.

Another recent trend of overseas equity financing involvessecondary listings of global depositary receipts on foreign exchanges,such as the Singapore Exchange, by companies already listed on theKorea Exchange. In 2011 and 2013, OCI and Youngone issuedglobal depositary receipts (GDRs) in this manner, which enabledthem to issue shares at better prices than in domestic offerings. In2014, Hanwha Chemical and Industrial Bank of Korea also issuedGDRs that were listed on the Singapore Exchange and theLuxembourg Exchange, respectively. While these GDRs are initiallylisted in foreign exchanges, most of them are soon converted back tothe original shares and traded on the Korea Exchange. Similar toIPOs offered to foreign investors, offering of GDRs can broaden theissuer’s international investor base and help increase long-termdemand for the stock. This trend may continue among issuers thathave stable financial results and business portfolios attractive toforeign investors.

IPOs on Korea Exchange with an international tranche

1

2

3

4

5

6

7

8

9

10

11

12

13

14

Issuer

Samsung Card

STX PanOcean

Tong Yang Life Insurance

Jinro

SK C&C

Korea Life Insurance

Samsung Life Insurance

Mando

Hyundai HCN

Hi-Mart

CJ HelloVision

Hyundai Rotem

Samsung SDS

Cheil Industries

Industry

Credit card

Shipping

Life insurance

Beverage

IT services

Life insurance

Life insurance

Auto parts

Cable TV

Retail

Cable TV

Industrial

IT services

Leisure and

fashion

Year

2007

2007

2009

2009

2009

2010

2010

2010

2010

2011

2012

2013

2014

2014

Size ($

million)

530

545

315

545

500

1,650

4,525

460

80

390

270

575

1,100

1,410

Int’l Offering

Format

144A/Reg S

144A/Reg S

144A/Reg S

Reg S only

144A/Reg S

144A/Reg S

144A/Reg S

144A/Reg S

144A/Reg S

144A/Reg S

144A/Reg S

144A/Reg S

144A/Reg S

144A/Reg S

About the authorDong Chul Kim is a partner in the corporate practice of Paul Hastingsand is based in the Seoul office. He specialises in debt and equity capitalmarket transactions and mergers and acquisitions, and has represented anumber of international investment banks and Korean corporateclients. Recently, Kim represented the underwriters in the $1.1 billionIPO and listing of Samsung SDS on the Korea Exchange, representedthe underwriters in the $340 million GDR offering by HanwhaChemical and represented the underwriters in the $298 million GDRoffering by the Industrial Bank of Korea. He graduated from ColumbiaLaw School and Seoul National University.

Dong Chul Kim Partner, Paul Hastings

Seoul, KoreaT: +82 2 6321 3803 F: +82 2 6321 3903E: [email protected]: www.paulhastings.com


SOUTH KOREA SPECIAL FOCUS IPR GUIDELINES REVISED

T he Korea Fair Trade Commission (KFTC) amended the ReviewGuidelines on Unreasonable Exercise of Intellectual PropertyRights (IPR Guidelines) on December 17 2014. Although the

IPR Guidelines lack binding force, they are meaningful in that they pro-vide the specific illegality standards for the KFTC to decide individualissues, increasing clarity and consistency in its enforcement. The KFTCexpects that the amended Guidelines will allow more effective regulationof non-practising entities (NPEs) and global companies’ abuses ofmonopolistic power through patent rights, and greater protection ofdomestic companies from abuses of patent rights. The KFTC stated thatit plans to actively monitor abuses of patent rights based on the amend-ed IPR Guidelines.

Basic principles The basic principles of the IPR Guidelines have been substantially revised,and the regulation standards for the exercise of IPRs generally seem tohave become stricter. There are several amendments to the basic principles,including the addition of the definition of ‘the proper exercise of IPRs’(excluded from the application of the Monopoly Regulation and FairTrade Act – MRFTA – under article 59).

While the previous version of the IPR Guidelines focused on unfairtrade practices, the amended Guidelines limit the scope of their applica-tion to market dominant companies. The IPR Guidelines state that mar-ket dominant power is not automatically presumed for IPR holders andthat an IPR holder’s market dominant power does not automaticallyimply that their exercise of IPRs violates the MRFTA

In determining whether the exercise of IPRs violates the MRFTA, theamended IPR Guidelines now use ‘anti-competitive effects’, instead ofthe previously used ‘effect of impeding fair trade’ (this included bothanti-competitiveness and unfairness).

Further, the amendment clarifies that exercise of IPRs has both posi-tive and negative effects (both pro-competitive and anti-competitive).

Illegality standards The previous version of the IPR Guidelines included unfairness as well asanti-competitive effects as the standard in determining unreasonableness.In the amended IPR Guidelines, the standard for determiningunreasonableness of IPR use has been unified as anti-competitiveness. Thisis an important acknowledgement that the regulation of IPR use shouldbe consistent with the fundamental purpose of antitrust law – protectingcompetition. Based on this amendment, the KFTC now, in principle,should prove that ‘conducts at issue restricted competition’, which isbeyond the level of simply proving ‘conducts at issue caused detriments toother companies’. This amendment is expected to substantially reduce thescope of IPR use subject to application of the IPR Guidelines.

The amended IPR Guidelines state that:Anti-competitive effects of exercise of IPRs in the relevant market are

determined by comprehensively considering whether the exercise of IPRscauses price increase or output reduction, restriction on the variety ofproducts or services, hindrances to innovation, foreclosure effect, increaseof competitors’ expenses, or possibility of such effects being created in therelevant market. These consideration factors are examples of criteria thatare important in determining anti-competitive effects, and it does notmean that a factor not included in the list cannot be considered indetermination of anti-competitive effects.

Package licensing and tyingThe amended IPR Guidelines expressly refer to the pro-competitive nature(efficiency-enhancing effects) of package licensing, while also mentioningthat package licensing can possibly constitute tying. In particular, theGuidelines provide the example of licensing standard essential patents(SEPs), on the condition of also licensing unnecessary non-SEPs, and statethat in such case, the licensing is highly likely to constitute tying.

The amended IPR Guidelines state that:Package licensing – in licensing one or more closely related patents,

licensing multiple patents together – can have pro-competitive effectsthat enhance efficiency in the relevant market through, among others,reduction of search costs for relevant technologies, reduction of costs ofnegotiation with the patent holders, reduction of risks of patentinfringement suits, and elimination of uncertainty regarding R&Dinvestments. However, forcing licensees to also purchase unnecessarypatents can constitute tying. In particular, when the licensee wants toobtain a license for subject non-SEP’s substitute technologies from athird party, licensing unnecessary non-SEPs together with the SEP maybe unreasonable.

Standard technologiesThe previous version of the IPR Guidelines included provisions regulatingthe exercise of patent rights related to standard technologies. These

Tackling unreasonablebehaviourJohn H Choi and Changhun Lee of Shin & Kim look at amended guidelines on theunreasonable exercise of IP rights

“The regulation standards forthe exercise of IPRs seem tohave become stricter

www.shinkim.com


IPR GUIDELINES REVISED

included: in the standardisation process, unreasonably agreeing onconditions regarding the price, output volume, geographic regions,counterparties; unreasonably not disclosing information of patentapplications or registrations to increase the possibility of being designatedas the technical standard or to avoid prior consultation on licenceconditions; unreasonably refusing to license; and unreasonably imposingdiscriminatory conditions or unreasonable level of royalties.

The amended IPR Guidelines include additional provisions to regu-late the following conducts: (i) excluding competitors through evadingor circumventing the fair, reasonable, and non-discriminatory (Frand)commitments; and (ii) unreasonably restricting licensees’ exercise of theirpatent rights or unreasonably requiring licensees to cross-license theirnon-SEPs.

SEP holders’ injunction claims

The IPR Guidelines state that the Frand commitment imposes on SEPholders the duty to negotiate the licence agreement in good faith with thepotential licensee in accordance with the Frand terms.

The amended IPR Guidelines provide that when an SEP holder whomade the Frand commitment brings an injunction claim against a will-ing licensee (a potential licensee who is willing to receive the licence), theclaim can be found anti-competitive and outside the scope of properexercise of patent rights. In particular, if the SEP holder does not dili-gently satisfy the duty to negotiate and bring an injunction claim, suchconduct may be unreasonable. However, when the injunction claim isthe only means of relief or when the injunction claim is against anunwilling licensee (a potential licensee who is not willing to receive thelicence), there is a low probability of the claim being found unreason-able.

To a significant degree, the new provision appears to reflect the SeoulCentral District Court’s decision from Samsung Electronics v Apple Koreaof August 24 2012 (case 2011Gahap39552). The court upheldSamsung’s patent infringement claim for its SEPs based on the fact thatdespite its knowledge of the SEPs, Apple used them without requestingthe licence from Samsung.

It is also notable that a definition of SEP has been newly added to theGuidelines.

The amended IPR Guidelines state that: SEPs are patents to implement standard technologies – the patents,

licenses for which are essential in manufacturing products or providingservices that requires standard technologies.

When SEP holders do not diligently satisfy the duty to negotiateand bring an injunction claim, the conduct may be found unrea-sonable. In determining whether an SEP holder diligently satisfiedits duty to negotiate, the following factors can be considered:whether the SEP holder officially made an offer to negotiate to the

potential licensee, whether the negotiation period with the potentiallicensee was appropriate, whether the licence conditions offered tothe potential licensee were reasonable and non-discriminatory,whether the parties agreed to go through the court or an arbitrator,if the parties failed to agree on the licence terms.

If an SEP holder’s injunction claim is not allowed against anunwilling licensee (a potential licensee who is not willing to receivethe licence), the potential licensee may not diligently negotiate ordelay or avoid payment of royalties (ie reverse hold-up). Also, inspecial circumstances, the injunction claim may be the only meansof relief for the SEP holder. Therefore, in the following cases, thereis a low probability of the SEP holders’ injunction claims beingfound unreasonable:

(1) When the potential licensee refuses to follow the decision ofthe court or the arbitrator, or refuses to enter the licence agreementon Frand terms even though objective Frand terms have been found,such as in the process of the case at the court or the arbitrator.

(2) When the injunction claim is the only means of relief becauseit is difficult to expect compensation because, among others, thepotential licensee is on the verge of bankruptcy.

NPEs’ exercise of patent rights Another noteworthy point in the amended IPR Guidelines is that newregulation provisions on NPEs’ exercise of patent rights have been added(in the Guidelines, NPEs are called companies specialising in patentmanagement). In defining an NPE, the Guidelines state that: (i) NPEsdo not manufacture, sell or provide services using the patentedtechnologies; and (ii) earn profits through the exercise of their patentrights against those using the patents.

The amended IPR Guidelines provide types of anti-competitive con-ducts of NPEs, including: imposing excessive royalties; for patent rightsobtained from a third party, denying the application of Frand conditionsthat were applied to the previous patent holder, while imposing unrea-sonable levels of royalty; using deceitful means to raise patent infringe-ment suits; and, after a patent holder transfers its patent rights to anNPE, using the NPE to abuse the patent rights (privateering). For priva-teering, the patent holder is considered the subject of the violations, butat times NPEs can also be the subject of the violations.

The general assessment is that NPE activities have not been a signifi-cant problem in Korea, but it is possible that through the amendment,the KFTC may start to actively enforce the new regulation provisions onNPEs. Therefore, it would be necessary to pay greater attention to theKFTC’s activities in this regard.

The amended IPR Guidelines state that a:Company specialising in patent management’ is a company that does

not manufacture or sell goods nor provide services using patented tech-nologies but earns profits by exercising its patent rights against, amongothers, those implementing the patent.

The company specialising in patent management’s main businessmodel is building a strong patent portfolio by purchasing patentrights from third parties and earning profits using the portfolio byproviding licences to other companies or using patent infringementsuits. The company specialising in patent management purchases,manages etc patents of those who lack the ability to exercise theirpatent rights or do not have the intent to commercialise the patentson their own – such as individuals, small- and mid-sized companies,

“The amendment clarifies thatexercise of IPRs has both positive and negative effects



research institutions – and through these means, ensure that theyreceive proper compensation and provide incentives to invent. Also,by playing the role of middlemen to ensure the patent rights aretransferred to the party that needs the patents, the company spe-cialising in patent management can vitalise the patent technologytransactions and contribute to capitalisation of patent rights.

However, despite these pro-competitive effects, as the companyspecialising in patent management does not engage in manufactur-ing, there is no need to enter into cross-licence agreements with thecounterparties and there is low risk of infringement suits by thecounterparties. Therefore, there is higher risk of the company spe-cialising in patent management abusing its patent rights, comparedto the patent holders in general. In particular, the following con-ducts can be found outside the proper exercise of rights and to haveconcerns for anti-competitive effects.

A. The standards for abusing patent rights as set forth in theseGuidelines basically apply to the company specialising in patentmanagement’s exercise of patent rights, just as the patent holders ingeneral’s exercise of patent rights. Therefore, besides the type of con-ducts listed below, if the company specialising in patent manage-ment engages in the conducts specified in sections III.1 through 6,the conduct may be outside the proper scope of excise of patentrights. Also, if a patent holder other than the company specialisingin patent management engages in the conducts below, it may beoutside the proper scope of exercise of patent rights.

Because the company specialising in patent management doesnot engage in manufacturing, the company specialising in patentmanagement, compared to regular patent holders, has the incentiveor ability to impose excessive royalties. Therefore, the company spe-cialising in patent management’s conducts are more likely to befound unreasonable than those of regular patent holders. In deter-mining whether the royalty level is reasonable, various factors can beconsidered including the objective technological value of the patent,the royalty the patent holder receives from other licensees, theamount of royalty licensees pay for similar patents, characteristicsand scope of the licence agreements, duration of the licence, andprofitability of the products manufactured using the patents.

In particular, in case of royalties for SEPs (including de factostandard) licensed on Frand terms as described in Section III 5 A,the conduct may be unreasonable.

B. With respect to patent rights obtained from a third party,denying the application of Frand conditions that applied to the pre-vious patent holder, while imposing unreasonable level of royaltycompared to the regular transactional practices

C. Agreeing with the multiple companies that established thecompany specialising in patent management through a consortium

to unreasonably reject licensing patents to the companies that didnot participate in the consortium or to license on discriminatoryterms

D. Raising patent infringement suits or sending warning lettersfor patent infringement through deceptive means, including con-cealing, omitting, or causing confusion regarding facts crucial forthe counterparty to respond to the company specialising in patentmanagement’s exercise of patent rights.

An example of such conduct is sending identical demands forroyalties to multiple parties through a shell company where it isimpossible to know who the patent holder is, without providingspecific details on the patents that have been allegedly infringedupon. In particular, when the company specialising in patent man-agement does not own the patent rights, is not in the position toexercise the patent rights, or has expired patents, demanding royal-ties or threatening lawsuits is highly likely to be found unreason-able.

E. After the patent holder transfers patent rights to the companyspecialising in patent management, making the company specialis-ing in patent management to take certain conducts, such as 7 A orB of these Guidelines, against other companies

In this case, the patent holder, in principle, is the subject of theviolation. However, the company specialising in patent manage-ment can also be the subject of the violation comprehensively con-sidering the relationship between the patent holder and the compa-ny specialising in patent management, the specific details of theunreasonable conducts, the level and type of participation by thecompany specialising in patent management in the unreasonableconducts.

Other provisionsThere are a few other significant provisions in the amended IPRGuidelines. For example, in the amended IPR Guidelines, the provisionsregulating excessive royalties for licence agreements in general have beenremoved. There has been much criticism in Korea for the regulation ofpricing abuses, with almost no cases of the KFTC’s regulation of pricingabuses in the past 20 years or so. However, unlike licence agreements ingeneral, the excessive royalty provisions still remain for the exercise of SEPrights and NPE’s exercise of patent rights. Also, the MRFTA (as well as theEnforcement Decree) contains express provisions on excessive pricing.

The amended Guidelines also provide a definition of grantbacks, theirpro-competitive and anti-competitive effects, and the standards to deter-mine unreasonableness of grantbacks.

The amended IPR Guidelines state that:Grantbacks refer to, in licence agreements, when the licensee

improves technologies relevant to the licence, requiring the licensee totransfer or licence the improved technologies to the patentee. Grantbackscan be exclusive so as to transfer rights to use the improved technologiesonly to the patentee, and they can also be non-exclusive so that theimproved technologies can be transferred to other companies in additionto the patentee. These grantbacks, particularly when they are non-exclu-sive, can have pro-competitive effects. Specifically, providing the patent-ee the compensation for grant of patents on improved technologies canexpedite early-stage innovation, allows licensees and patentees to sharethe risk of improving technologies, and enables additional innovationbased on the licensed technologies.

“The general assessment isthat NPE activities have not been a significant problem in Korea



However, grantbacks can reduce the licensees’ incentives to con-duct R&D and restrict competition in the relevant market. In deter-mining whether a grantback restricts competition and falls outsideof the proper scope of rights, the following factors are relevant.

(1) whether the grantback is exclusive or non-exclusive;

(2) if exclusive, whether the licensee has the right to use theimproved technologies ;

(3) whether the scope of the grantback includes improvementsthat are not relevant to the licensed patented technologies;

(4) duration of the grantback;

(5) whether the grantback is royalty-free;

(6) whether either party has market dominant power andwhether they are competitors;

(7) the effect of the grantback on incentive to conduct R&D.

In relation to relevant markets for exercise of IPRs, the previous ver-sion of the IPR Guidelines only included the product market and tech-nologies market, and the concept of innovation market was newly addedthrough the amendment. Innovation market refers to relevant marketsfor specific R&Ds for new or improved products, technologies, orprocesses.

The KFTC expects that the addition of the concept of innovationmarket will facilitate the proper analysis of the effects of the exercise ofIPRs on competition, which was formerly difficult in terms of productand technology markets.

About the authorChanghun Lee is a partner at Shin & Kim. He has been practising lawsince 2004 when he began working as the public advocate at theMinistry of Justice. After he began working at Shin & Kim, Lee’s mainareas of practice included KFTC investigations and litigations (such asappeals against KFTC decisions, follow-on private damages suits)involving cartels, abuse of market dominance and unfair trade practices.Throughout his career, he has been at the forefront of many leadingantitrust cases.

Lee is a graduate of Seoul National University College of Law and hascompleted an LLM at Georgetown University. He is a member of theKorean Civil Code Amendment Committee of the Ministry of Justiceof Korea.

Changhun LeePartner, Shin & Kim

Seoul, KoreaT: + 82 2 316 4645 F: +82 2 756 6226E: [email protected]: www.shinkim.com

About the authorJohn H Choi is a senior foreign attorney at Shin & Kim, and specialisesin antitrust matters. He has frequently represented global conglomeratesin cases involving the Korea Fair Trade Commission and their cross-border investments in Korea. He has also been an adjunct professor oflaw at Seoul National University College of Law.

Choi has co-authored the Korean chapters of The Public CompetitionEnforcement Review 2009, The International Comparative Legal Guide to:Competition Litigation 2010, and Representing the Asian Client 2010. Heis a magna cum laude graduate of, and also holds a JD from, UCLA,and has been invited to speak at various conferences and meetings,including cartel training workshops.

John H ChoiSenior foreign attorney, Shin & Kim

Seoul, KoreaT: + 82 2 316 4232F: +82 2 756 6226E: [email protected]: www.shinkim.com


SOUTH KOREA SPECIAL FOCUS PRIVACY PROTECTION REGULATIONS

I n 2014, Korea entered into a new era of privacy protection after expe-riencing one of the biggest data breaches of credit card companies inthe country. The breach involved over 100 million items of cus-

tomers’ personal information, including names, resident registration num-bers (RRNs), addresses, and credit information.

Subsequent investigations revealed that the data leak was the result of:(i) insufficient data privacy measures and controls under Korean laws andregulations (from a regulatory perspective); and, (ii) data processors’ negli-gence (in particular, financial companies that hold and process a largeamount of customers’ personal information).

Korea’s lack of stringent data protection regulations had been undercriticism for years, but it was not until 2014 that the regulators moved toreform the country’s data protection policy by amending the PersonalInformation Protection Act (PIPA) and the Financial Holding CompanyAct (FHCA).

The new amendment to the PIPA, which became effective on August 72014, included stricter regulation on the processing of RRNs. The amend-ment has created challenges for many business operators in Korea, includ-ing financial firms, which had depended on easy access to customers’ per-sonal information in marketing products and businesses. In addition, theFHCA was amended to restrict the sharing of customers’ personal infor-mation within financial holding groups, which has created challenges forfinancial firms’ sales activities.

These recent changes and developments in the country’s data protectionregulations are viewed by some market players as overreaching and highlyburdensome. However, these developments show that the regulators beganto see the need to strengthen protection of customers’ information and toprevent the type of misuse and abuse of personal information as experi-enced in the country in 2014. Further developments and changes areexpected to take place in the future.

Changes to RRN processingBefore the PIPA amendment

Unlike in the US, Canada, Sweden or the UK, where the collection anduse of personal identification information are permitted only for limitedpurposes, in Korea RRNs have long been the mostly widely and

conveniently used type of personal identification information in every area(including administrative, financial, medical, and other public and privateservice areas). As such, any information leakage involving RRNs may leadto more serious breaches of other personal, credit or financial information.For this reason, the PIPA categorises RRNs as ‘unique identificationinformation’ (UII) and provides for more stringent standards RRNprotection compared to other types of general personal information.

The PIPA generally prohibits the processing of UII unless: (i) the datasubject’s explicit consent to such processing has been separately obtained;or (ii) any laws or regulations other than the PIPA require or permit suchprocessing, where the term processing includes collection, creation, record-ing, saving, holding, modification, editing, searching, retrieving, correc-tion, recovering, usage, provision, disclosure, and destruction.

Before the adoption of the 2014 amendment to the PIPA, the aboverestriction was also applicable to RRNs. This approach, which regulatesRRNs in the same manner as other UII, was under criticism because inpractice it was easy to obtain a data subject’s consent and as a result manydata subjects were exposed to large scale data breaches such as the creditcard information leak in 2014.

After the PIPA amendment Under the 2014 amendment to the PIPA: (i) the processing of RRNs isprohibited regardless of the data subject’s consent; and, (ii) the dataprocessor must, within two years of the date of implementation of the2014 amendment to the PIPA (by August 6 2016), destroy all RRNscollected before August 7 2014, unless certain exceptions apply.

Exceptions include where the processing of RRNs: (i) is required or per-mitted by any law or regulation other than the PIPA (for example for thepurpose of sharing personal credit information it is permitted by the Useand Protection of Credit Information Act); (ii) is necessary to protect theinterest of a data subject or a third party concerning their life, physical safe-ty or property (for example in case of emergency patients or criminal vic-tims); or, (iii) is required or permitted by the enforcement regulationpromulgated by the Ministry of Security and Public Administration ofKorea (the Mospa) in November 2014. The Mospa’s enforcement regula-tion (which is in the form of an amendment to the presidential decrees ofvarious relevant laws governing public services) permits the processing ofRRNs where such processing is necessary to facilitate the key administra-tive services conducted by public authorities and lists other circumstanceswhere the processing of RRNs is permitted.

The above changes apply to all corporations and institutions (bothdomestic and foreign) in both public and private sectors. The most signif-icant change to the PIPA is that the processing of RRNs is now prohibit-ed regardless of the data subject’s consent – a change which is expected toprevent data leakage and misuse of personal information, especially by pri-vate-sector data processors.

Better late than neverSky Yang of Bae Kim & Lee outlines recent legislative changes as South Korea finally comesround to tightening its data protection regulations

“Korea’s lack of stringent dataprotection regulations hadbeen under criticism for years

www.bkl.co.kr


PRIVACY PROTECTION REGULATIONS

In fact, it has long been criticised that in Korea individual customers areoften required by service providers (such as financial companies) to giveconsent for the service provider to access all the customer’s personal iden-tification information; the customer cannot only select certain informationthat they are comfortable sharing, and this is a typical requirement of mostcompanies in Korea.

The PIPA only provides a basic framework for the processing of RRNs,and its interpretation and enforcement are subject to the guidelines of thecompetent authorities, including the Mospa (which is in charge of super-vising the enforcement of the PIPA) and the Financial ServicesCommission of Korea (FSC – which regulates data protection policies withrespect to credit or financial information and financial companies).

The Mospa and the FSC provide a three-step approach as follows:

With regard to step 2, the FSC’s position is that under the Use andProtection of Credit Information Act (Credit Information Act), the collec-tion of RRNs for the purpose of identifying the data subject with certaincredit information (as defined in the Credit Information Act) is allowed,despite the changes adopted in the 2014 amendment to the PIPA.

An information processor in violation of the regulations on RRNs issubject to an administrative fine of up to W30 million ($27,000).However, the Mospa granted a compliance period (until February 6 2015)during which no punitive measures will be taken against minor violations.

Outsourcing of data processing Before the FHCA amendmentThe FHCA, before its amendment in 2014, did not impose heavyregulatory burdens on data protection and privacy measures to facilitateefficient data management by financial companies. While the PIPA, theCredit Information Act and the Real Name Financial Transactions andConfidentiality Act (Real Name Act) usually require the data subject’sconsent for data transfer (either within or outside the holding group), theFHCA alleviates such burden by providing an exception to the consentrequirement. Under the FHCA, a financial company, without obtainingthe consent of the relevant data subject, is allowed to share the datasubject’s financial transaction information (as defined in the Real NameAct) and personal credit information (as defined in the Credit InformationAct) within its financial holding group for any business purposes(including sales, distribution, and marketing purposes). Other than thepurpose test (the requirement for business purposes), there is no other wayto effectively restrict or regulate data transfer within a financial holdinggroup.

The above exception, which in practice allowed data sharing amongaffiliates within each financial holding group, was pointed out as being oneof the causes that made financial companies vulnerable to massive databreach cases such as the data leak of credit card firms in 2014.

An interim measureTo prevent mass data leaks, the Korean government drastically changed itsposition with respect to group-wide data transfers by proposing anamendment to the FHCA on May 28 2014, which became effective onNovember 29 2014. In addition, the Financial Supervisory Service ofKorea (FSS) issued a Model Business Guideline on May 1 2014, whichprovided for more stringent regulations on intra-group data transfers, to beeffective during the interim period until the implementation date of the2014 amendment to the FHCA. Under the FSS’s supervision, the ModelBusiness Guideline was adopted by most financial holding groups inKorea.

The Model Business Guideline is similar to the 2014 amendment to theFHCA in that it allowed group-wide data transfers without the consent ofdata subject only for ‘internal business management’ of the financial hold-ing group. In addition, the Model Business Guideline required individualnotification of data transfers to relevant customers at least once a year, andprohibited the use of such transferred data for more than one month unlessotherwise approved by the chief information officer (RR).

However, like the FHCA, the Model Business Guideline provided cer-tain exceptions under which group-wide data transfers for business pur-poses (such as sales or marketing purposes) are allowed. These exceptionsare: (i) if the interest or consent of the relevant customer is clearly expect-ed; or, (ii) if the chief information officer (CIO) and the board of directorsof the company approve such transfer. This was the most significant dif-ference from the 2014 amendment to the FHCA.

Post-amendment FHCAThe FHCA before its amendment in 2014 allowed intra-group datatransfers for any business purposes, while the Model Business Guidelineallowed such data transfers only for internal business managementpurposes subject to certain exceptions.

The 2014 amendment to the FHCA further reduced the scope of per-missible data transfers by limiting them to transfers for internal businessmanagement purposes only and required that data shared within a finan-“These recent changes in the

country’s data protection regulations are viewed bysome as overreaching andhighly burdensome

Mospa’s guideline

General prohibition:

The processing of RRNs is

in principle prohibited.

Amend/enact:

An amendment or

enactment of relevant laws

and regulations is

necessary to allow the

processing of RRNs only to

the minimum extent

necessary.

In the long term:

An alternative personal

identification (such as i-pin

or My-Pin) system must be

established.

FSC’s guideline

Sort-out:

The processing of RRNs is

allowed in some laws and

regulations (such as the

Real Name Financial

Transactions and

Confidentiality Act).

Amend/enact:

The FSC must amend the

relevant laws and regula-

tions (such as the Banking

Act, the Use and Protection

of Credit Information Act) to

allow the processing of

RRNs for certain financial

businesses (for whom the

processing of RRNs is

indispensable) and

companies.

In the long term:

The FSC must encourage

financial companies to

develop, establish or use

alternative personal identifi-

cation systems.

Step 1

Step 2

Step 3



cial holding group for business purposes (other than for internal businessmanagement purposes) be destroyed by February 28 2015.

Under the amendment to the FHCA, a financial company is allowed totransfer financial transaction information and personal credit informationwithout obtaining the consent of the relevant data subject. However, thisis only if such data transfer is necessary for certain internal business man-agement purposes as provided in the amendment, and as set out in theenforcement decree of the FHCA and the FSC’s Regulation onSupervision of Financial Holding Company for the following purposes: (i)risk management, internal control or inspection of subsidiaries for the pur-poses of improving corporate integrity; (ii) product or service develop-ment, customer analysis or business delegation for the purposes of creatinga group-wide synergy effect; or (iii) distribution of performance or costsbetween subsidiaries for the purposes of performance management.

Most importantly, the amendment excludes from the scope of permis-sible purposes of data sharing the introduction or solicitation of sale ofproducts or services to customers. The above list is more restrictive thanthe Model Business Guideline, and is expected to restrict financial holdinggroups’ ability to share customer-related data within the group.

Both the enforcement decree of the FHCA and the FSC’s Regulationscontain additional details regarding intra-group information transfers.

In addition, the 2014 amendment to the FHCA requires financial hold-ing groups to comply with the following procedures to share data withinthe group:

• a notice of data transfer (specifying the transferor, transferee, and thepurpose and items of transfer) must be sent to the relevant customer atleast once a year;

• the transferred data may be used (processed) for a maximum of onemonth, unless otherwise approved by the CIO;

• the provision of the original documents is prohibited (only copies ofsuch original documents can be shared within the financial holdinggroup);

• the CIO must review the purpose and period of use, scope of the shareddata and authorised persons to use such data;

• the data shared must be stored or saved in a separate location from thetransferee’s own customer data;

• the shared customer data must be codified;

• the shared data must be destroyed immediately after such data becomesno longer necessary; and

• the CIO of the financial holding company must comprehensivelyinspect the data transfer within the group at least once a year, andreport the outcome of the inspection to the FSS.

A notable difference from the FHCA before its 2014 amendment is thatthe 2014 amendment: (a) requires the transferor to notify the relevant cus-tomers of the data sharing that took place at least once a year; and (b) lim-its the period of use of the shared data to a maximum of one month (unlessotherwise approved by the CIO).

“To prevent mass data leaks,the Korean government drastically changed its position with respect to group-wide data transfers

About the authorSky Yang has been in the financial regulatory practice for over 20 years,advising various financial companies in Korea. He also handlednumerous cross-border transactions in the forms of foreign directinvestments, overseas acquisitions, joint ventures and leveraged buyouts.Yang’s strength lies in areas of M&A and restructuring of financialinstitutions such as commercial banks, securities firms, assetmanagement companies and insurance firms. He has represented:domestic and foreign financial companies and institutional investors,including Hana Financial, Shinhan Financial, STX, UBS, PCA, andMassMutual; domestic and foreign private equity funds including VogoFund and KKR; government organisations like Korea DepositInsurance Corporation and Financial Supervisory Commission.

Yang earned an LL.B. from Seoul National University in 1988 and anLL.M. from New York University Law School in 1999. He activelyparticipates in pro bono activities as a member of Financial SupervisoryCommission, Ministry of Justice, Korea Exchange, and Korean BarAssociation.

Sky YangPartner, Bae Kim & Lee

Seoul, KoreaT: 82 2 3404 0143F: 82 2 3404 7304E: [email protected]: www.bkl.co.kr

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