INSIGHTS
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Newsletters VIEW MORENewslettersKFTC Issues Administrative Notice on Proposed Amendment to Improve Business Conditions for Franchisees On October 1, 2019, the Korea Fair Trade Commission (“KFTC”) issued an administrative notice regarding a proposed amendment to the Enforcement Decree to the Fairness in Franchise Transactions Act (“FFTA”) that was first announced last month as part of its Measures to Improve the Business Conditions of Franchisees. The KFTC will gather feedback from interested parties and related government agencies until November 11, 2019, and thereafter plans to quickly obtain the necessary approvals for enactment from the Regulatory Reform Committee, the Ministry of Government Legislation, and the presidential cabinet. The proposed amendment seeks to (i) improve the quality of information provided to prospective franchisees; (ii) simplify the grounds for immediate termination of franchise agreements; (iii) specify the criteria for determining an unfair refusal to renew franchise agreements; and (iv) ease the burden of having to pay a cancellation penalty when a franchisee decides to close its store due to poor sales. The details of the proposed amendment are as follows. 1. Improve Quality of Information Provided to Prospective Franchisees Current provision Currently, franchisors provide prospective franchisees a Disclosure Statement and Sales Projection containing information about the franchise business. However, the forms do not ask for sufficient information that would enable prospective franchisees to make reasonable/well-informed decisions on whether to open a store under the particular franchise brand. 1. Without knowing the average operation period of a company’s franchise stores it is difficult to assess the soundness of the franchise business, the brand’s reputation in the market, or the degree of stability in operating a franchise store. However, the current Sales Projection form only requires that the franchisor provide the status of store openings and closures. 2. The support a franchisor offers for the stable operation of its franchise stores is important, especially considering how changes in the store’s surrounding area, etc., could lead to a (sudden) decline in sales. However, the current Sales Projection form does not require the franchisor to provide such information. 3. While the current Sales Projection form requires that the franchisor provide the sales of nearby franchise stores, it does not specifically ask for the distribution of competing brand’s franchise stores in the area, even though it may likely have a significant impact on the store’s sales. Post-amendment The proposed amendment adds (i) the average franchise store operation period (as of the end of the preceding business year) and (ii) the conditions and amount of the support, if any, the franchisor offers for the stable operation of its franchise stores as information required to be included in the Disclosure Statement. The proposed amendment additionally requires (iii) the number and locations of franchise stores of competing brands in the relevant business territory to be provided as supporting materials to the Sales Projection. 2. Simplify Grounds for Immediate Termination of Franchise Agreements Current provision In principle, any franchisor that hopes to terminate a franchise agreement is required to first give the franchisee a chance to make the necessary corrections. However, the franchise agreement may be terminated immediately (i.e., without giving the chance to make corrections) if there are grounds to do so as specified under Article 14 of the Enforcement Decree to the FFTA. Many have criticized that some of the permissible grounds for immediate termination are too abstract and unclear, and thereby enable franchisors to immediately terminate contracts based on an arbitrary interpretation of the law. Post-amendment The proposed amendment deletes the following grounds for immediate termination that are abstract or overlap with other existing grounds, and require franchisors to go through the standard termination process when such grounds exist. 1. Damaging the reputation/credibility of the franchisor, and leaking trade secrets or important information of the franchisor, will be deleted for being too abstract. Instead, in either case immediate termination will be possible once such conduct/violation is confirmed by court, under the updated grounds of receiving administrative sanctions for violating the law. 2. Failure to make necessary corrections upon receipt of administrative sanctions within the deadline, and causing damage to public health or safety that requires urgent attention/response, will be deleted for reasons of overlap with receiving administrative sanctions from competent authorities. 3. Specify Criteria for Assessing Unfair Refusal to Renew Franchise Agreements Current provision Franchisees have the right to request that their contract be renewed during the first ten years (under Article 13 of the Enforcement Decree to the FFTA), and accordingly franchise agreements have been usually renewed for ten years, unless there is a special reason not to. However, once the ten-year period ends, certain franchisors have refused to renew the contracts with no special reason, leading to disputes with the franchisees. While unfair refusal to renew a franchise agreement is prohibited regardless of the franchise period, the current Enforcement Decree does not specify the criteria for assessing/determining the fairness of a refusal to renew. Post-amendment The proposed amendment divides unfair refusals to renew into the three following types, and specifies the criteria for determining whether a specific refusal falls under each type. 1. Refusal to renew for the purpose of opening a directly-operated store: unfairness is recognized when the franchisor refuses, without justifiable reason, for the purpose of furthering its interests by changing the franchise store into a directly-operated store. 2. Refusal to renew as discrimination against a particular franchisee: unfairness is recognized when the franchisor refuses as a means to fulfill an unfair objective against a particular franchisee, such as to prevent the franchisee from engaging in union activity. 3. Refusal to renew without ensuring enough time to earn back interior design costs: unfairness is recognized when the franchisor makes the franchisee remodel the store’s interior, and later refuses to renew the contract without ensuring enough time for the franchisee to earn back the interior design costs. 4. Ease Burden of Cancellation Penalty When Closing a Franchise Store Due to Poor Sales Current provision Disputes between franchisors and franchisees have continued due to the discrepancy between the projected sales provided by the franchisor to persuade the prospective franchisee to open a store, and the actual sales. Further, as the business conditions of franchise stores have continued to deteriorate in the increasingly crowded industry, cancellation penalties for the early closing of a franchise store (before the agreement term ends) are expected to increase in frequency and amount. Under these circumstances, any franchisee that decides to close its store (before the agreement term ends) due to poor sales has to shoulder the additional burden of any cancellation penalty. Post-amendment The proposed amendment adds the act of imposing a penalty (on the franchisee) for closing the franchise store due to poor sales as a type of unfair imposition of the duty to compensate for damages. 1. Unfairness is recognized when the cancellation penalty is imposed despite the fact that actual average sales during the first year since opening are lower than what the franchisor had said was the lowest expected sales amount in the Sales Projection. 2. This excludes cases where the franchisee is responsible for a decline in sales, by breach of contract, non-compliance with management policies, etc. Better Business Conditions for Franchisees Expected Under the Proposed Amendment When the proposed amendment takes effect, (i) prospective franchisees will be better informed to make reasonable decisions on whether to open a franchise store based on the information made available on the average operation period of the company’s franchise stores and the support that the franchisor offers when sales are down; (ii) there will be fewer cases where the franchisor makes arbitrary decisions to immediately terminate agreements, or unfairly refuses to renew agreements, thus fostering a stable operation environment for franchisees; (iii) franchisors will have a greater responsibility to provide an accurate sales estimate to prospective franchisees; and (iv) franchisees closing a franchise store due to poor sales will have a lesser burden in terms of the cancellation penalty. Going forward, franchisors will need to exercise greater caution when filling out and revising Disclosure Statements and Sales Projections to fulfill the greater responsibilities required of them under the proposed amendment. Also, in consideration of how there will be fewer grounds for immediate termination and refusal to renew, franchisors are advised to make sure not to violate the FFTA when signing or terminating a franchise agreement.2019.10.10
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Newsletters VIEW MORENewslettersCustoms & FTA Bulletin (Issue 12) Japan Understanding and Implementing Japan’s Export Restrictions USA Developments in U.S.-China Trade Negotiations and Potential Impacts on Korea Korea New Customs Administration in the Second Half of 2019: Including Amendments to the Notification on the Valuation of Imported Goods for Customs Purposes WCO Classification Cases: Recent Trends in International Tariff Nomenclature WTO Key Contents of Recent International Trade Statistics2019.10.04
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Newsletters VIEW MORENewslettersGovernment Announces Proposed Amendments to 5% Reporting Requirements The Financial Services Commission (“FSC”) announced draft amendments to the Enforcement Decree to the Financial Investment Services and Capital Markets Act (“FSCMA”) (the “Proposed Enforcement Decree”) on September 6, 2019. The Proposed Enforcement Decree includes amendments to the reporting requirements of persons holding 5% or more of the total issued equity securities of a listed company (the “5% Reporting Requirements”) to facilitate increased activism by institutional investors. 1. Background to Amendments Shareholder activism by institutional investors has increased with the adoption of the Principles on Stewardship Responsibilities of Institutional Investors (the “Stewardship Code”). To further this trend, institutional investors have called on the FSC to amend and supplement the 5% Reporting Requirements, which require shareholders to file a report with the FSC and the Korea Exchange (“KRX”) of their shareholding status within five business days of obtaining 5% or more of the total issued equity securities of a listed company or making any subsequent change in their shareholding. For the purposes of the 5% Reporting Requirements, shareholding is aggregated with the holdings of certain related persons and persons acting in concert with the shareholder. In addition, if a shareholder obtained the equity securities with the intent to “influence management,” it must disclose such in a specified report (the “Management Influence Report”). Institutional investors have raised concerns that the definition of “influence management” is too broad and unclear under the current 5% Reporting Requirements. 2. Proposed Amendments A. Clarifying Scope of “Influence Management” The Proposed Enforcement Decree clarifies and narrows down the scope of the definition of “influence management” (as defined in Article 154(1) of the Enforcement Decree of the FSCMA). The Proposed Enforcement Decree clarifies and narrows down the scope of the definition of “influence management” (as defined in Article 154(1) of the Enforcement Decree of the FSCMA). Amendments to the articles of incorporation proposed by a public pension fund where such pension fund has proposed such amendments in accordance with previously published guidelines relating to improving corporate governance for all of its portfolio companies (and not certain limited specified portfolio companies); provided, however that this exclusion would not apply to any proposed amendments that would directly influence the appointment or dismissal of a specific director or auditor; Any shareholder activities in relation to dividends, which are a primary right of shareholders; and Any simple statements of opinion made to the listed company or any third parties. B. Threefold-reporting classification based on Purpose of Holding If an investor does not intend to “influence management” and therefore does not need to file a Management Influence Report, pursuant to the 5% Reporting Requirements, it is required to instead file a simplified report. The Proposed Enforcement Decree creates three categories of reports: Management Influence Report: when the shareholder intends to “influence management”; General Investment Report: when the shareholder intends to actively engage in shareholder related activities, for example, making proposals in respect of director compensation or dividends to be voted on at shareholders' meetings, but without the broader purpose to “influence management”; and Simple Investment Report: when the shareholder intends to exercise only basic shareholder rights, such as voting and receiving dividends. The Simple Investment Report will include minimum disclosure obligations, while the General Investment and Management Influence Reports include more stringent disclosure obligations. Under the Proposed Enforcement Decree, the deadline for filing an initial report continues to be five business days from the trade date on which the 5% Report Requirement filing obligation is triggered. However, the deadline for any subsequent change report would differ based on the type of report: (i) in the case of a Management Influence Report, within five business days; (ii) in the case of a General Investment Report, within ten days; and (iii) in the case of a Simple Investment Report, by the tenth day of the month immediately following the month in which there is any change of 1% or more in respect of the holding. In addition, in the event of any change in the purpose of the holding, a report of such change must be filed within five business days of the change. It is expected that the Proposed Enforcement Decree will be finalized following the expiry of the comment period, October 16, 2019. The FSC anticipates to pass the Proposed Enforcement Decree during the first quarter of 2020. Investors in equity securities subject to 5% Reporting Requirements should carefully monitor the status of the Proposed Enforcement Decree to ensure that it duly files an appropriate report in a timely manner as required by the proposed amendments.2019.09.24
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Newsletters VIEW MORENewslettersAmendment to the Industrial Technology Protection Act An amendment to the Industrial Technology Protection Act (the “ITA Amendment”) was promulgated recently on August 20, 2019, which will take effect in six months thereafter on February 21, 2020. The ITA Amendment is legislation essentially reflecting the Korean government’s “Plans to Combat/Prevent Leakage of Industrial Technologies” announced on January 3, 2019 and is noteworthy in the midst of the ongoing global trade war. The most notable changes introduced by the ITA Amendment may be summarized briefly as follows: (i) expanded protection and regulation of industrial technologies; (ii) strengthened sanction for infringement on industrial technologies and remedies therefore; and (iii) protective measures to prevent leakage of industrial technologies during judicial proceedings. Discussed below are the specific changes of the ITA Amendment related to the above changes. 1. Expanded obligation on the head of companies that possess/manage National Core Technologies (Article 10(1)) Companies that possess/manage the so-called “National Core Technologies” will be required to have their technical personnel with access to such technologies enter into an agreement designed to limit/manage their departure (to join another company) and to maintain confidentiality of those technologies. Not complying with this obligation, the company could be subject to an administrative fine of KRW 10 million or less (about USD 8,500 at current exchange rate). 2. Strengthened regulation on merger and acquisition by foreign companies of domestic companies with National Core Technologies (Article 11-2) Classification Before ITA Amendment After ITA Amendment Companies with National Core Technologies developed with R&D funding from the Korean government Subject to prior reporting Subject to prior approval Companies with National Core Technologies developed without R&D funding from the Korean government No applicable regulation Subject to prior reporting The ministry empowered to administer/enforce the prior reporting/approval requirement for M&As involving companies with National Core Technologies is the Ministry of Trade, Industry, and Energy (“MOTIE”); and MOTIE can issue a corrective order to suspend, prohibit, and/or restore the M&A transaction if the prior reporting/approval requirement is not complied with. 3. Punitive damages for leakage of industrial technologies (Article 22-2) Similar to the punitive damages award now available for trade secret misappropriation (effective July 9, 2019), infringement of industrial technologies will also be entitled to seek recovery of up to three times the actual damages suffered. 4. National Intelligence Service (NIS) given jurisdiction to investigate industrial technology infringement cases (Article 15) With the NIS’s jurisdiction to investigate industrial technology leakage cases now codified in the ITA Amendment, the NIS is expected to take initiative to more actively investigate such cases. 5. Strengthened punishment for leakage of National Core Technologies outside of Korea (Article 36) Category Before ITA Amendment After ITA Amendment Leakage of National Core Technologies outside Korea Imprisonment of 15 years or less OR criminal fine of KRW 1.5 billion or less (about USD 1.2 million) Imprisonment of three years or more AND criminal fine of KRW 1.5 billion or less Leakage of industrial technologies (including National Core Technologies) within Korea Imprisonment of seven years or less OR criminal fine of KRW 700 million or less (about USD 580,000) Imprisonment of ten years or less OR criminal fine of KRW 1 billion or less (about USD 830,000) 6. Strengthened protection for right-holders during judicial proceedings related to industrial technologies (Article 22(3)-(6)) In a lawsuit involving leakage or infringement of industrial technologies, the court can now order the accused infringer to produce materials related to his/her infringing acts and/or damages caused, thereby lowering the relevant burden of proof on the part of the injured company. Further, protective measures (through court orders compelling confidentiality) have been adopted to prevent utilization of the industrial technologies at issue outside the court proceedings and the party in violation of such protective measures will face criminal prosecution. In short, the ITA Amendment greatly strengthened the protection of industrial technologies and also expanded the scope of obligations on the part of companies with National Core Technologies. With the categories of National Core Technologies expanded recently on July 8, 2019, more companies will be now subject to the laws/regulations governing those technologies. As it is expected that the scope will be further expanded, companies should first check whether their business operations involve any of the enumerated categories of National Core Technologies to ensure compliance with the ITA. Finally, the current ITA Amendment provides that more detailed guidelines to implement the above changes will be further clarified through a Presidential Decree to follow. Considering its practical, significant implication, companies dealing with National Core Technologies would be well advised to closely monitor relevant future developments.2019.09.10
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Newsletters VIEW MORENewslettersGovernment Policy to Strengthen Labor Inspections The Ministry of Employment and Labor (“MOEL”) recently amended its Labor Inspector Work Regulations, effective as of September 1, 2019, mainly to enhance the efficiency of labor inspections by, among other things, expanding the scope of businesses subject to labor inspections. The key details of the amended Regulations are as follows: Special labor inspections, which were previously conducted on businesses that had labor disputes or had received criticism from the public, etc., will now also be conducted on “businesses which received criticism from the public for unfair treatment against employees, such as verbal abuse, assault, workplace harassment, sexual harassment, etc.” During the process of inspecting a particular business, if it is found that other businesses that entered into certain types of service agreements with the business, such as a subcontract agreement or a worker dispatch agreement, violated labor laws, the labor inspector may also inspect those other businesses (principal company, subcontractor, service recipient company, etc.). For regular/occasional inspections, the scope of the inspection shall cover the period of one year before the inspection date, and for special inspections, the relevant period shall cover the three years before the inspection date. However, if it is determined that repeated labor law violations occurred or occurred prior to these defined periods, the scope of the inspection may be expanded to labor law violations that occurred before these periods for which the statutes of limitations have not expired. If any allegation is raised by a news article/media report, anonymous report or rumor, and a labor inspector, through internal investigation, recognizes the allegations of criminal conduct, a criminal investigation shall be immediately commenced. In addition, the MOEL issued a press release on September 11, 2019 concerning the establishment and implementation of “Comprehensive Improvement Plans for the Administration of Labor Inspections”, and stated that it would implement strategic labor inspections to proactively address social issues and also implement inspections based on data analysis using big data analysis. In the press release, the MOEL stated that the key areas of focus will be “workplace harassment, working hours, minimum wage, illegal dispatch, and unfair labor practice,” and stated that it would especially strengthen planned labor inspections for businesses at high risk of violating the relevant laws. The press release also noted that the focus will be on inspecting industries and sectors with poor working environments and that have generally not been subject to inspections. The MOEL announced that it would expand and create more digital forensic teams in addition to the existing ones in six regional labor offices to enhance collection of scientific evidence. In practice, “digital forensic” methods were used in only 418 cases during the first half of 2019, which is almost double the amount of an average year. Pursuant to the policy to enhance labor inspections, businesses will be required to even more strictly comply with the relevant laws.2019.09.24
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