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Jun 13, 2011

Korean Commercial Code Revisions Make Capital Reductions in Korea Easier

The recently amended Korean Commercial Code (KCC) will make it simpler for local and Korean foreign-capital invested companies to make nominal capital reductions. The law will come into effect next year.

Previously in the KCC, there was no differentiation between a real capital reduction, in which assets are distributed to shareholders in proportion to their holdings, and a nominal capital reduction (also known as a reduction of capital “without consideration.”)

A nominal capital reduction is, obviously, inherently less cumbersome than a real capital reduction. In the case of a nominal capital reduction, the company in Korea could choose to reduce the book value of assets to, in turn, reduce losses shown in financial statements. This tactic was often used in Korea to help a company show more accurate figures when the real value of the loss is significantly less than the book loss.

However, even though there is no reduction in the company’s total assets, the existing KCC gives the same treatment to these reductions as to real capital reductions. Scholars, for these reasons, have criticized the current version of the KCC.

The amended KCC will allow for differentiation of these two types of capital reductions. In the current version, either type of reduction must be passed by 2/3 of the shareholders present at the meeting representing 1/3 of the total issued and outstanding shares. In addition, the company must go through a creditor protection procedure, in which the company must do the following:

  • Notify each known creditor of the decision to conduct a capital reduction;

  • Make a public announcement requesting any creditor dissenting to the capital reduction to submit his objection within a designated period (one month or more);

  • Compensate these dissenting creditors, provide a security interest in the amount of the creditor’s claim, or entrust a trust company with net assets equal to the claim.

While these requirements are sensible for a real capital reduction, where the creditors risk a company dispensing funds to shareholders rather than paying their debts, they are unnecessary for nominal reductions, in which a creditor’s risk will not increase.

The amendments to the KCC include a provision to exempt companies from the creditor protection procedure in a nominal capital reduction, if it is to compensate for a capital deficiency. In addition, such reductions only require an ordinary resolution to pass. This means that only ¼ of shareholders present, accounting for ¼ of total outstanding shares are needed to pass these nominal capital reductions.

This change will allow businesses to operate more efficiently without the need for the lengthy creditor protection process in cases where creditors are apparently not at risk. If a firm is considering any of these financial strategies, it is always best to contact an attorney experienced in Korean law to advise on the plan.

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SeanHayes@ipglegal.com