Attracting Foreign Investment: Foreign Investment Reporting and Investment Agreement Review
Criteria for foreign investment, reporting and registration procedures, and key terms of the investment agreement
Raising capital from overseas venture capital firms and strategic investors provides both funding and a foundation for international expansion. However, reporting and registration under the Foreign Investment Promotion Act, cross-border remittance procedures, and the contract terms proposed by foreign investors must be reviewed together.
Missing a reporting step can delay payment and registration, and accepting contract terms without review can constrain management decisions and dispute resolution. It is advisable to review both the procedure and the agreement before the investment schedule is finalized.
1. Criteria for Foreign Investment
Under the Foreign Investment Promotion Act, a foreign investment exists where a foreign national invests KRW 100 million or more and holds 10% or more of the total voting shares of a Korean corporation. Where several foreign investors invest jointly, each must invest at least KRW 100 million.
Even with less than 10% of the shares, an investment may qualify if there is an agreement to dispatch or appoint executives. Minority investments that do not qualify are governed by the procedures under the Foreign Exchange Transactions Act.
2. Prior Reporting and Registration as a Foreign-Invested Company
Where an investment qualifies as a foreign investment, the investor must report it to KOTRA or a foreign exchange bank before investing. Once payment is completed, the company must in principle register as a foreign-invested company within 60 days of the triggering event.
Although there is no separate administrative fine for late registration, failure to register may lead to disadvantages in tax incentives, government support programs, and the visa status of foreign executives and employees.
3. Remittance and Payment Terms
Because foreign investment funds pass through currency conversion and remittance, the agreement should specify the payment date, the applicable exchange rate, and which party bears remittance costs. A gap between the KRW investment amount and the foreign currency remitted can affect the number of shares to be issued.
The agreement should provide that new shares are not issued or registered before the funds are received, and should address the deadline for termination if remittance is delayed and the scope of any restrictions on the use of proceeds.
4. Governing Law and Dispute Resolution
Foreign investors often request the law of their home country or arbitration in a third country. Because the company's shares and governance are subject to the Korean Commercial Act, conflicts with its mandatory provisions should be reviewed even where foreign law is chosen as the governing law.
If arbitration is chosen, the institution, seat, language, and allocation of costs should be specified, with consideration of enforceability after an award. The agreement should also state which language version prevails.
5. Scope of Investor Rights
Consent rights, director appointment rights, rights of first refusal and tag-along rights, and redemption and put rights should be defined in terms of the matters and periods to which they apply. Overly broad consent rights can make even routine management decisions dependent on investor approval.
Redemption and put provisions are linked to distributable profits and the restrictions on acquiring treasury shares under the Commercial Act, so they should be adjusted based on whether they can actually be performed.
| Item | Key Review Points |
|---|---|
| Qualification | Investment of KRW 100 million or more, 10% or more of voting shares, agreement to dispatch executives |
| Procedure | Reporting authority before investment, date of payment completion, registration as a foreign-invested company within 60 days |
| Remittance terms | Payment date, applicable exchange rate, remittance costs, termination deadline if remittance is delayed |
| Contract terms | Governing law and arbitration, scope of consent rights, feasibility of redemption and put rights |
6. Implications for Companies
Attracting foreign investment involves statutory procedures and contract negotiations proceeding at the same time. The closing schedule should reflect the order of reporting, registration, and remittance, and investor rights in foreign templates should be adjusted to the company's governance and financing plans.
Companies planning further rounds or overseas expansion can reduce the burden of later negotiations by establishing a sound shareholder rights structure at the first foreign investment.
Official References
Korea Law Information Center — Foreign Investment Promotion Act, Articles 5 and 21
