The Current State of Equity Investments by Foreign Funds [in South Korea] and Related Legal Issues
Kang, Hee Chul, Pacific Rim Law & Policy Journal
Translated by Eugene Kim[double dagger]
On September 15, 2004, the South Korean press gave extensive news coverage to a series of private individual "Question & Answer" session meetings which the Capital Group Companies Fund ("Capital Group") held with many of the top chief executive officers ("CEOs") of major Korean corporations.1 Known worldwide as a top U.S. private equity management company, the Capital Group is currently the largest institutional investor in South Korea. As a major shareholder of large corporations such as Samsung Electronics, the Shin Han Financial Group, SK Group, and Hyundai Motors, the U.S. investment firm invited their CEOs to address questions and seek answers concerning the corporations' overall performance and business trends. The fact that the CEOs readily accepted the Capital Group's invitation reveals just how great of an influence foreign investment funds exert on corporate management and governance of major corporations in South Korea.
News of Sovereign Asset Management ("Sovereign")'s clash with SK Corporation ("SK") in early 2004 has also been well publicized, highlighting foreign funds' willingness to participate in company management in South Korea. After having acquired 14.99% of SK Corp. shares, the European private equity fund took a hostile turn against SK Corp.'s management and controlling shareholders. At SK Corp.'s annual shareholders meeting held in March 2004, Sovereign submitted a shareholder proposal seeking to elect new candidates for the board of directors and to amend the company's articles of incorporation, culminating in a bitter proxy contest between Sovereign and SK Corp.2
Moreover, in recent years, large foreign funds investing in South Korea have either acquired or attempted to acquire management control rights of some of the country's largest companies and financial institutions. Notable examples include Newbridge Capital, the Carlyle Group, and Lone Star, which purchased controlling stakes in Korea First Bank, KorAm Bank,3 and Korea Exchange Bank, respectively.
As a result of this wave of foreign acquisitions, there has been much public discussion about whether domestic private equity funds should be encouraged to compete more effectively with foreign funds operating on Korean soil. In response, the South Korean government recently amended the Act on Business of Operating Indirect Investment and Assets ("Indirect Asset Management Act" or "IAMA").4 The amended IAMA went into effect on December 6, 2004, and is poised to establish a new framework for the establishment and promotion of domestic private equity funds5 in South Korea.6
It should come as no surprise that foreign funds have been able to establish a successful presence in the Korean market, wielding considerable influence over South Korea's domestic industries and securities market. The very existence of foreign funds and their overall activities in South Korea has become a major social and economic concern. In particular, public attention has been increasingly focused on so-called foreign private equity funds and hedge funds.
This Article explores the current state of investments by foreign funds in South Korea and examines related legal issues. Part I briefly summarizes the basic concepts and types of investment funds. Part II examines the current status of securities investments made by foreign funds in South Korea. Part III examines several key legal issues in connection with such investments.
With respect to foreign investments in general, there are other major issues which this Article does not cover. For example, discussions relating to domestic sales of beneficiary certificates of foreign funds (especially mutual funds) and domestic registration of foreign asset management companies are excluded. Furthermore, while certain foreign funds (e.g., Lone Star Korea and Lend Lease Global Properties) continue to play an important role as major investors in the South Korean real estate and insolvent credit bond markets, this Article limits its discussion to securities investments made by foreign funds. …