The anatomy of South Korea corporate law
Beatrice Olavarría Montes
The South Korean corporate legal system is based on the civil law system. Therefore, in some legal
aspects, it may share similarities with the continental European legal tradition; thus, differing from
the common law system. This paper seeks to canvass the sources of South Korean corporate law,
the different types of corporate forms available, their basic structures and formation procedures, as
well as assess the critical corporate law issues related to corporate governance rules and practices.
Sources of South Korean corporate law and enforcement
The main source of corporate law in South Korea is the Korean Commercial Act/Code (KCC),
whilst the civil code remains a secondary source covering all which is not applicable by the KCC1.
In comparison the Spanish Commercial Code, it follows a likewise structure: beginning with the
definition and characteristics of a merchant, the roles of the directors and shareholders, the
establishment of different types of business and their specific elements to insurance, even including
marine commerce. Although the laws were heavily influenced by the European civil law system, the
US law has been influencing more recent legislations.2
In addition, other matters regarding the governance of listed companies are stipulated in the Listing
Rules on the Securities Market, the Listing Rules on the KOSDAQ Market and other rules set forth
by the Korean Exchange (KRX), which have been established by the Financial Investment Services
and Capital Markets Act (FSCMA) and the special rules for listed companies set forth in the KCC.
The Act on Corporate Governance of Financial Companies (the Corporate Governance Act) shall
apply in preference to the KCC with respect to the corporate governance of financial companies.3
Related to enforcement, the Ministry of Justice (MOJ) is responsible for the issuance of ex ante
rulings under the Korean Commercial Code, as well as for the ex post facto imposition of fines or
other sanctions for any breach contained within the KCC. Nonetheless, the Financial Services
Commission (FSC), with help of the Financial Supervisory Service (FSS), are responsible for the
issuance of rulings under the Corporate Governance Act and the enforcement thereof, even
including sanctions.
Business vehicles / Corporations types
Joint stock company (jusikhoesa/주식회사 )
The joint stock company is governed by articles 288 - 542 of the Korean Commercial Code. This is
the most commonly used corporate vehicle as it offers shareholders limited liability and shares are
generally freely transferable. Shareholders are only liable up to the amount of their contribution to
1 Article 1 KCC. Available online: https://elaw.klri.re.kr/eng_service/lawView.do?hseq=29875&lang=ENG
2 ‘Doing Business in South Korea: Overview’ by Chi-Hyoung Cho, Chan Sik Ahn and Sang Jun Kim, HMP
Law. Online article: https://uk.practicallaw.thomsonreuters.com/5-501-0628?
transitionType=Default&contextData=(sc.Default)&firstPage=true#co_anchor_a547861
3 Hyeon-Deog Cho, Min-yung Hong, Seung Yeon Seo and Jung-Chull Lee Kim & Chang, ‘The Corporate
Governance Review: South Korea’. Available online: https://thelawreviews.co.uk/title/the-corporate-
governance-review/south-korea#footnote-051
1
the company’s shares capital. A joint stock company is appropriate for a large business requiring
large amounts of fixed capital and continued procurement of funds.
To operate the joint venture, a shareholders' agreement, an operative agreement or a joint venture
agreement can be executed. The parties can choose which contract to use; contracts between
shareholders are commonly used for joint investment in a joint stock company. There are many
active joint investments between domestic and foreign companies in South Korea. They are made in
various forms, as companies see fit. The most common form is direct involvement in management
by purchasing shares. In this case, the joint investment consists of entering into a contract between
shareholders. Joint investment usually consists of direct investment into already existing companies.
Except for certain businesses that require additional licenses, there is no minimum capital
requirement; however, in case of a foreign investor, at least KRW100 million is required for each
foreign investor to be qualified for benefits under the Foreign Investment Promotion Law (the
FIPL).4 Before the amendment of the Commercial Act in May 2009, the minimum capital required
was KRW50 million. After the amendment, the face value of a stock must be more than KRW100,
and one founder is sufficient. Theoretically, a company can exist with only one founder and a
capital of just KRW100. In other words, there is no requirement for a minimum number of shares to
be held by the public. Further, there is no limitation on the amount of gross capital.
Limited liability company (yuhanhoesa/유한회사)5
As with a joint stock company, the liability of all shareholders is limited to the amount of their share
capital contribution to the company. However, the individual character of each shareholder is taken
more into account, transfer of equity is limited, and the company is not open to the public.
Therefore, it could be considered appropriate for the operation of a small or medium-sized business
owned by a small number of people. As in a joint stock company, there is no minimum capital
requirement, unless it is the case of a foreign investor (KRW100 million)
Private limited company (yuhanchaek-imhoesa/유한책임회사)
The liability of shareholders is also limited to the amount of their share capital contribution to the
company. Externally, a private company is similar to a limited liability company, but the specific
regulation of a private limited company is different. In contrast with a limited liability company,
internally a private limited company is a type of trade association. This corporate form is ruled
under Part III: Chapter V, articles 543- 613 of the Korean Commercial Code.
General partnership company (hapmyeonghoesa/합명회사)
Members bear direct, joint and unlimited liability in relation to the business’s creditors6. As stated in
article 178, in order to incorporate a partnership company, articles of incorporation shall be
executed jointly by at least two members of the company. In principle, all members bear rights and
obligations relating to the implementation of partnership affairs and the representation of the
4 DLA Piper: “GUIDE TO GOING GLOBAL CORPORATE: South Korea”. Available online: https://
www.dlapiperintelligence.com/goingglobal/corporate/index.html?t=03-minimum-capital-requirement&c=KR
5 Part III: Chapter III-2, articles 287-2-45 of the KCC
6 Part III: Chapter II Partnership company (arts. 178- 267 KCC)
partnership. Thus, this ‘vehicle’ is appropriate for an enterprise jointly owned by a small number of
persons with a close association.
To set up a general partnership company, the members promise to join a business with unlimited
liability, regardless of their participation in its management. Two or more people must draft articles
of association and every member must sign it. The general partnership company then has to be
registered at the registry office in the jurisdiction where the head office is located.
The employees jointly hold unlimited liability. Therefore, must specify its employees by recording
them in the articles of association and cannot change them freely. In principle, inheritance of an
employee’s shares is not permitted. Changing investment by resignation is permitted subject to
restrictions. However, resigning employees have subsidiary liability for the company’s debt for a
certain period from the time of resignation, to protect the company’s creditor.
Taxation of a general partnership company does not differ from other types of corporate vehicles; it
is subject to corporate income tax. In addition, investment is made through the employees’
performance of their determined investment duties under the articles of association.
Limited partnership company (hapjahoesa/합자회사)
This consists of at least one member with unlimited liability and at least one member with limited
liability.7 Members with limited liability can only participate in the business through their capital
contributions, and have no right to undertake partnership affairs or represent the partnership.
As foreseen for every partnership company, matters absolutely required to be entered in the articles
of incorporation, including all members names and their seals, are the following: objetives; trade
name; Name, resident registration number and domicile of each member; place of the principle
office; and finally the date of execution of the articles of incorporation.8 In addition, this ‘vehicle’
must also enter the objetive and amount of capital investments fo the members, the amount of
capital and the names and addresses of the managers. 9
In contrast to a general partnership company, to set up a limited partnership company at least one
member has to have unlimited liability and at least one member with limited liability, as previously
mentioned. The members must draft articles of association, and the company hast to be
subsequently registered at the registry office in the jurisdiction where the head office is located. For
members with unlimited liability, the same rules apply as for a general partnership company.
Regarding the limited liability members, they must be listed in the articles of association and, such
members, can be easily changed, compared to members with unlimited liability. Another difference
between members is that unlimited liability members can provide labour investment and credit
contributions, aside from cash contributions; whereas, limited liability members cannot provide
credit or labour as an investment. Nonetheless, the liability of a member shall be limited to the
amount of his or her investment.10
7 Article 268 KCC
8 Article 179 KCC
9 Article 287-3 KCC
10 Article 287-7 KCC (Liability of members)
Establishing a foreign company
The most common options for foreign companies establishing a business presence in South Korea
are set out below.
Independent local company
This governed by the Foreign Investment Promotion Act and the Commercial Act, and is recognized
as a foreign investment11. Generally, a joint stock company is the most common option for foreign
companies establishing a business presence in South Korea. This limits business losses by limited
liability, and many persons can easily invest because the capital structure and business organization
of the company is open. This can also absorb a large scale of public capital through a stock listing.
However, one disadvantage in setting up a joint stock company is that it may also be taxed on its
foreign income.
Branch
To establish a branch in South Korea, foreign companies must report the establishment of the
branch to a specified foreign exchange back12 and complete court registration and business
registration. There are advantages to establishing a domestic branch by registration only without
incorporation, for example, compared to incorporation, the domestic branch only pays corporate tax
on its domestic source income.
Liaison office
This usually occurs at the initial stage and is governed by the Foreign Exchange Transactions Act
and the Commercial Act. These types of business entities are categorized as a domestic branch of a
foreign corporation.
To open a liaison office only, in a similar way to opening a domestic branch, the company must
report the establishment of the office to a specified foreign exchange bank and then complete
business registration. The main advantage is that a liaison office only has co-operative tax duties
(that is, withholding taxes and reporting payment records). However, the scope of business it can
conduct in South Korea is limited to preparatory and ancillary activities of the foreign corporation's
business.13
Role of directors
There are no general restrictions or requirements on the appointment of directors under local law,
but such restrictions can be imposed by the articles of association. Further, a corporate body cannot
be appointed as a director of a company. There is no regulation of the nationality of a person who
11 Article 2 of Foreign Investment Promotion Act. Available online: https://legal.un.org/avl/pdf/ls/
Shin_RelDocs.pdf
12 Korea Trade Investment Promotion Agency (KOTRA): authority handling all details related to foreign
investment and permitting reports received. Website: https://www.kotra.or.kr/foreign/biz/
KHENKO040M.html
13 ‘Establishing a business in South Korea’ by Thomas Pinansky, Ki Tai Park and Eugene Lee, Barun Law
LLC. Online: https://content.next.westlaw.com/0-575-2387?
__lrTS=20200814171735614&transitionType=Default&contextData=(sc.Default)&firstPage=true#co_ancho
r_a284046
4
can be appointed as a director. However, with regard to non-executive directors, there are certain
restrictions under local law.
Regarding the board composition, the BOD is required under the Commercial Art and companies in
South Korea usually have a unitary board structure. A director becomes a member of the company’s
board of directors without any separate procedures. The board of directors consists of every director
of the company. There must be at least three or more directors, except for a small scale company
(total capital under KRW1 billion), which can have one or two directors. Employees do not have a
statutory right to board representation.
In terms of legal duties, there is no distinction between executive (inside) directors and outside
directors. Both are obliged to perform their duties for the company in good faith in accordance with
their duty of care as bona fide managers, and in accordance with the law and the articles of
incorporation.14
A director shall be liable for damage suffered by the company if he or she has violated any law or
the articles of incorporation by his or her willful misconduct or negligence, or has neglected his or
her duties.15 If the foregoing acts were performed in accordance with a resolution of the board of
directors, the directors who have consented to that resolution shall assume joint and several liability
against the company. Directors may be exempted from the foregoing liabilities pursuant to the
unanimous consent of shareholders.
If a company fails to do so, shareholders may file a lawsuit against the directors on behalf of the
company based on the directors' breach of their duties.16 This also includes a multi-step derivative
action, which has been introduced under the amended KCC and allows the parent company's
shareholder to bring derivative actions directly against directors of certain of its subsidiaries.
Directors may be liable under the Criminal Act for breach of fiduciary duty if they have breached
their duty of care as a bona fide manager or a fiduciary obligation to the company, and the company
has suffered damage because of that breach and the director or a third party profited therefrom.17
To prevent a conflict of interest between a company and a director, when a director, or any of their
relatives and entities they controls, intends to engage in a transaction with the company, the relevant
party shall disclose the material facts regarding the self-dealing to the board of directors in advance,
and obtain approval therefore by an affirmative vote of at least two-thirds of the total number of the
directors. Any self-dealing shall be fair in terms of its conditions and procedures.18
According to the 2012 amendment to the KCC, a director shall also obtain the approval of the board
of directors by an affirmative vote to exploit business opportunities that are likely to present current
or future profits to the company for his or her own benefit or that of a third party.19
14 Article 382, Paragraph (2) and Article 382-3 KCC; Civil Code, Article 681.
15 KCC, Article 399.
16 KCC, Article 403.
17 Criminal Act, Article 355, Paragraph (2).
18 KCC, Article 398.
19 Article 397-2 KCC
Finally, since outside directors cannot engage in the regular business of a company, they are not
able to directly engage in the performance of a company's business. However, they shall monitor the
management as members of the board of directors by, inter alia, reviewing and examining matters
reserved to the board of directors, participating in the board of directors, engaging in discussions or
exercising voting rights.20
Shareholders
Every shareholder shall have one vote for each share held, and no extra vote or dividend shall be
acknowledged for the reason that the shareholder has been holding shares for a long time. However,
a company may issue shares without voting rights in accordance with the articles of incorporation.
Because the appointment or dismissal of directors is a matter reserved to the general shareholders'
meeting, shareholders have an indirect influence on the board of directors.21
With regards to shareholder duties and responsibilities, a shareholder of a listed company is
required to publicly disclose his or her equity interest with regard to certain matters if the equity
interest constitutes at least 5 or 10 per cent, but shall not assume any other special legal obligations
or responsibilities.22
However, any person who instructs a director to perform business by using his or her influence over
the company shall assume the same responsibility as that director with regard to the instructed or
performed business.23 It is possible that the foregoing responsibilities would be recognized for the
controlling shareholder.
Although there have been theoretical discussions on the responsibilities assumed by a controlling
party against minority shareholders, there is currently no legislation in this regard.24
Shareholder activism is increasing in Korea, and proxy battles frequently take place. Nevertheless,
there seem to be conflicting views about shareholder activism: on the one hand, such activity is not
optimal for long-term corporate value, as it merely seeks short-term profits; however, on the other
hand, shareholder activism should be understood as a reasonable aim to protect minority
shareholders and improve corporate governance.
Anti-bullying laws25
To conclude this insight in South Korean corporate law, a distinguishing feature, currently rising, is
the importance of protection from with a company: South Korea’s workplace anti-bullying law
defines bullying, mobbing and harassment and prohibits such behaviour. The revised Labour
Standards Act forces employers to immediately investigate any incident of workplace harassment
20 Article382, Paragraph (3), KCC
21 Articles369, 382 and 385 KCC
22 FSCMA, Articles 147 and 173
23 KCC, Article 401-2
24 “The Corporate Governance Review: South Korea" by Hyeon-Deog Cho, Min-yung Hong, Seung Yeon
Seo and Jung-Chull Lee, Kim & Chang. Available online at https://thelawreviews.co.uk/title/the-corporate-
governance-review/south-korea#footnote-008-backlink
25 Book: “Asian Perspectives on Workplace Bullying and Harassment” by Premilla D’Cruz, Ernesto Noronha
and Avina Mendonca (Editors); Chapter 10: “Workplace Harassment in South Korea: Evaluation and
Improvement Measures for the Workplace Anti-bullying Law” by Sookyung Park
6
and take measures for victim protection, such as changing the work area and taking disciplinary
action against the assailant employment.26 The Act makes it mandatory for all employers to include
the prevention of workplace harassment and the actions to be taken in case of its occurrence when
writing the rules of employment. 27
The Occupational Safety and Health Act was revised to include the preparation of criteria for
preventive measures for workplace harassment and the guidelines and support in the government’s
liability provision; as well as the Industrial Accident Compensation Insurance Act was revised to
include the illnesses caused by work-related mental stress from workplace harassment in the list of
occupational illnesses.
As workplace harassment is an act of infringement of personal rights in the course of labour,28 the
negative influence is not only on the victim but also on the employer. Until the ban on workplace
harassment took effect on 16 July 2019, no direct legal provisions were in effect regulating or
prohibiting such behaviour. Hence, at that point, no preventive measures against workplace
harassment existed either; the problem was solved with ex-post interventions. Although some
companies had independently introduced preventive measures against bullying in the workplace,
these voluntary initiatives were not legally enforced due to the absence of legal regulations and
guidelines at the government level.29 The current workplace anti-bullying law, therefore, serves an
important purpose. Even so, it is considered that the workplace anti-bullying law requires further
improvements to effectively address the issue of workplace harassment. Notwithstanding its gaps,
as the act aims to actively create a better work environment and to protect workers from any of the
mentioned actions, it has great significance as the first piece of legislation to ban such behaviour in
South Korea.
26 Labour Standards Act, Article 76-3.
27 Labour Standards Act, Article 93, paragraph 11
28 Chun, Y. (2012). A study on protecting the personality rights of employees. Labour Law Review, 33, 127–
162. Shin, K. (2019). Legal definition and requirement of work-related harassment. Journal of Labour Law,
69, 217–251.
29 Park, S. (2013). Workplace bullying and harassment in South Korea. In JILPT (Ed.), Workplace bullying
and harassment: 2013 JILPT seminar on workplace bullying and harassment (pp. 91– 111). Japan Institute
for Labour Policy and Training.
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BIBLIOGRAPHY
The bibliography and footnotes appearing with this paper have been prepared according to the
Australian Guide to Legal Citations 3rd Edition, 2010.
Articles
Hyeon-Deog Cho, Min-yung Hong, Seung Yeon Seo and Jung-Chull Lee, Kim & Chang, (29 March
2021), “The Corporate Governance Review: South Korea”. Available online at https://
thelawreviews.co.uk/title/the-corporate-governance-review/south-korea#footnote-008-backlink
Chi-Hyoung Cho, Chan Sik Ahn and Sang Jun Kim, HMP Law, ’Doing Business in South Korea:
Overview’. Available online at: https://uk.practicallaw.thomsonreuters.com/5-501-0628?
transitionType=Default&contextData=(sc.Default)&firstPage=true#co_anchor_a547861 (Law
stated as at 01 April 2020)
DLA Piper: “GUIDE TO GOING GLOBAL CORPORATE: South Korea”. Available online:
https://www.dlapiperintelligence.com/goingglobal/corporate/index.html?t=03-minimum-capital-
requirement&c=KR (Last modified 20 June 2021)
Thomas Pinansky, Ki Tai Park and Eugene Lee, Barun Law LLC, ’Establishing a business in South
K o r e a ’ . Av a i l a b l e o n l i n e a t : h t t p s : / / c o n t e n t . n e x t . w e s t l a w. c o m / 0 - 5 7 5 - 2 3 8 7 ?
__lrTS=20200814171735614&transitionType=Default&contextData=(sc.Default)&firstPage=true
#co_anchor_a284046 (Law stated as at 01 May 2015)
Books
Premilla D’Cruz, Ernesto Noronha and Avina Mendonca (Editors) “Asian Perspectives on
Workplace Bullying and Harassment” Publisher NameSpringer, Singapore; Chapter 10: Sookyung
Park (11 August 2021) “Workplace Harassment in South Korea: Evaluation and Improvement
Measures for the Workplace Anti-bullying Law”
Codes/Legislations
Korean Commercial Act/Code (KCC, 2010).
Foreign Investment Promotion Act (1998).
Criminal Act (2013).
Civil Code (2013).
Financial Investment Services and Capital Markets Act (FSCMA, 2017).
Labour Standards Act (2012).
