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Kim & Chang Legal Newsletter (2024 Issue 2) This is a quaterly update of legal developments in Korea from Kim & Chang. This issue includes: Korea Introduces Anti-Circumvention System in Customs Act Trends in Institutional Improvements Aimed at Enhancing Corporate Value and Protecting Shareholder Value Cases With RMP Cleared From Suspicion Under SAPA FTSA Amendment Strengthening Punitive Damages Liability for Technology Misappropriation to Take Effect on August 28, 2024 Amendment to E-Commerce Act Strengthening Regulations on Dark Patterns to Take Effect on February 14, 2025 Stress Capital Buffer Requirement for Banks: The Financial Supervisory Service’s Risk Assessment and Implications Strengthened Regulations and Disclosure Requirements on Exercise of Minority Shareholders’ Rights and Operation of General Shareholders’ Meetings Domestic and Overseas Climate Disclosure Standards and Policy Trends Supreme Court Eases Plaintiff’s Burden to Prove Causation for Environmental Damage Enactment of Regulations on the Investigation of Virtual Asset Markets Enforcement of Framework Act on Supply Chain Stabilization Support for Economic Security Amendment to Notification Regarding Designation of National Core Technologies Measures for Stable Implementation of New Insurance Accounting Standard IFRS 17 Supreme Court Rules That Amount Exceeding Co-Payment Ceiling Is Not Covered by First-Generation Indemnity Medical Insurance First-Time Ruling Classifies Use of Mark in Mobile Applications as Use for Services Provided by App Implementation of New Heightened Measures for Collecting Customs Valuation Data During Customs Audits Recent Court Decision Recognizing a Bank’s Wage Peak System Key Improvements to REITs System in 2024 Procedures for Amending Subordinate Regulations of Corporate Governance Act That Introduces Responsibilities Map Completed and Effective Since July 3, 2024 Tax Tribunal Rules That Whether a Distribution Fee Constitutes a Royalty for Use of Copyright Under a Tax Treaty Should Be Determined in Accordance With Copyright Act of Korea PIPC Releases Draft Subordinate Regulation and Guidance on Data Subject Rights Regarding Automated Decisions To view the newsletter, please click on the link below. Kim & Chang Legal Newsletter (2024 Issue 2) .content_view .view_area a { color: #2c3e50; text-decoration: none; }
2024.07.19

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Current State of Product Liability for Software and AI in Korea With the increasing integration of software into a wide range of products across various industries, the question of whether software constitutes a “product” under Korea’s Product Liability Act (the “Act”) has been controversial. The Act defines “product” as “manufactured or processed movable property (including those that form parts of other movable or immovable property).” However, this definition has been under criticism as being outdated and insufficient to address the realities of today’s complex, tech-laden commodities, particularly in the current age of AI. AI refers to software embedded in computer systems or other devices that mimic human intelligence and can learn, infer and understand natural languages. A key threshold question when assessing liability for any damages caused by AI is whether it qualifies as a “product” under the Act. 1. Prior Debates in Korea Whether data and software qualify as a “product” under the Act has been an ongoing debate. Some have argued yes, on the grounds that software is essentially electricity, a form of natural forces that can be controlled. However, the more prevalent view has been that software is not a “product” because it is not a tangible object. Accordingly, it has been viewed that software fixed on a storage medium, such as a flash drive or a semiconductor chip, is a “product” as part of that medium, and the manufacturer of the medium should be liable for any damages caused by a defect in the embedded software, not the software developer. In a case against Microsoft involving its operating system software for servers, the Seoul Central District Court held that “products” under the Act can reasonably be understood to mean “movables” as defined under the Civil Act. The court ruled that Microsoft’s operating system software constituted a “product” under the Act for the following reasons: (i) if a software is fixed in a uniform storage medium (e.g., CD-ROM) for distribution to consumers, the storage medium and software become a unified, tangible product, (ii) if a software is only available through online distribution, the downloaded software must be stored in a hard drive or some other tangible medium to be a “product,” and (iii) given the legislative intent of the Act, it is reasonable to consider the software at issue, which was produced and distributed in bulk, as a “product” (Seoul Central District Court Decision 2003Gahap32082, November 3, 2006). However, the court found that the product was not defective, and there has been no High Court or Supreme Court decision that treated software as a product for purposes of product liability. In 2017, the Korean National Assembly introduced a bill to amend the Act to explicitly define software as a “product,” in anticipation of disputes concerning damages caused by defective software. However, the bill encountered opposition due to concerns of impeding the software industry and lack of similar laws at the time in other countries, and ultimately expired without a vote. 2. Survey of Overseas Legislations, Precedents and Trends We summarize below the current state of software/AI liability in key overseas jurisdictions which are likely to influence whether and how Korea amends the Act. (1) United States The US remains without a consensus on whether software is a “product” subject to strict liability. For many years, the only court decision on point was a Ninth Circuit decision that declined to expand product liability law to ideas and expression in a book (Winter v. G.P. Putnam’s Sons, 938 F.2d 1033 (9th Cir. 1991)). No case explicitly considered whether software can be considered a “product” until 2007, when a Louisiana District Court held that the software at issue ? used by the defendant insurance company to calculate the plaintiffs’ losses from Hurricane Katrina ? can be a “product” in light of the legislative intent of the Product Liability Act of Louisiana (Schafer v. State Farm Fire & Cas. Co., 507 F.Supp.2d 587 (E.D. La. 2007)). (2) Japan The Product Liability Act of Japan defines “product” as “manufactured or processed movable property,” limiting it to tangible goods. Some scholars believe that a software that is integrated into a product can itself be considered a product under the Product Liability Act. However, the prevailing view is that a tangible good as a whole constitutes a product under the Product Liability Act, and software alone is not a tangible good and not subject to the Product Liability Act. (3) European Union Under the current EU Product Liability Directive (85/374/EEC), a “product” is defined as any tangible movable item, including those incorporated in other movable or immovable items. Electricity is also specifically included within the definition of a product. On March 12, 2024, the European Parliament approved the new Product Liability Directive to be adopted by the Member States. Among other things, the new Directive expands the product scope to cover software, including AI systems and AI-operated products. Regarding AI specifically, in September 2022, the EU Commission tabled a proposal for an AI Liability Directive, to complement the Product Liability Directive and provide protection to individuals harmed by AI systems. Under the proposal, causation between the alleged damage and the AI system will be presumed if certain conditions are met, so that the plaintiff does not bear the burden of proof explaining inner workings of the AI system. Also, the proposal allows claimants against “high-risk AI system” manufacturers access to relevant evidence that may not be available under the existing legal regime. 3. Outlook on Software and AI Product Liability in Korea There have been calls to modernize the Act to ensure the quality and safety of software and AI products. Past legislative efforts to that end were hampered by concerns about the lack of similar rules and precedents in other jurisdictions, but now with the above recent developments in Europe, we expect a renewed effort to update the Act to adapt to the product liability issues arising from the integration of software and AI in all corners of society. We also expect to see discussions on expanding the range of compensable harms and making it easier to prove defects in software and AI products, as well as pursuing a balanced approach to avoid discouraging innovation in the software industry. With the EU taking a leading role in shaping the legal framework for software and AI related product liability, we recommend monitoring future developments in Europe and reviewing their impact on the Korean legislative environment. [Korean Version]
2024.07.05

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IASB Announces Exposure Draft “Business Combinations – Disclosures, Goodwill and Impairment” to Improve M&A Disclosures On March 14, 2024, the International Accounting Standards Board (the “IASB”) announced the Exposure Draft “Business Combinations ? Disclosures, Goodwill and Impairment (“BCDGI”)” (the “Exposure Draft”). The IASB is to receive comment letters from stakeholders around the world on the Exposure Draft (comment period: July 15, 2024). While the Exposure Draft remains subject to change and steps remain before the accounting standards are amended, there have been media reports that developed nations such as the US and the EU are in support of the amendments. The Exposure Draft is drawing attention from the market as it adds the following new disclosure requirements by a company: (i) information about key objectives and related targets for a strategic business combination, (ii) the extent to which those key objectives and related targets are met in subsequent periods, and (iii) quantitative information about expected synergies from a business combination, in addition to qualitative descriptions. If the relevant accounting standards are amended based on the Exposure Draft, such amendments will also be reflected in K-IFRS. Key proposed amendments set out in the Exposure Draft are as follows: Proposed Amendment to IFRS 3: Companies Are to Disclose Information About the Performance of Strategic Business Combinations Upon Review by Their Key Management Personnel In case of a strategic business combination (i.e., one for which failure to meet any one of the key objectives of an acquisition by an entity would put the entity at serious risk of failing to achieve its overall business strategy), the key objectives and related targets for the strategic business combination must be disclosed in the year in which the acquisition takes place. The extent to which those key objectives and related targets are met should also be disclosed in subsequent periods. For all material business combinations (including strategic business combinations), businesses must provide detailed quantitative information about expected synergies expected from the business combination, in addition to qualitative explanations. Proposed Amendment to IAS 36: Provision of Additional Guidelines and Proposal for Simplifying the Calculation of Use Values Regarding the disclosure of goodwill, it requires disclosure of information about the relevant reporting segment so that users may assess whether the management’s cash flow assumptions are reasonable. With regard to the above, the Korea Accounting Institute held a forum on June 12, 2024, to introduce the Exposure Draft and hear opinions of Korean stakeholders. During the discussions at the forum, there were positive views on the Exposure Draft that the proposed amendments would (i) address issues related to business combinations that undermine shareholder value and (ii) facilitate external monitoring and check-and-balance on the decision-making process of M&As. On the other hand, there were views that (i) subsequent disclosure of information on the results of strategic business combinations may burden companies’ overall M&A activities, (ii) auditing management’s assertions on synergies may be difficult due to the lack of a standardized method of measurement, (iii) it is difficult to maintain the reliability of information related to synergies, (iv) costs would be incurred due to the risk of litigation, insufficient disclosures, etc., and (v) there may be a regulatory overlap with disclosure requirements stipulated in the Financial Investment Services and Capital Markets Act. Recently, Korea Exchange announced the “Guidelines on the Corporate Value-up Program (May 2024),” which also require businesses to disclose specific plans for enhancing their corporate value, such as the restructuring of their business, and to disclose the results of the implementation of such plans. Through the abovementioned proposed amendments to accounting standards, which also aim to improve information disclosed in M&As, companies engaged in M&As and business restructuring would be subject to heavier disclosure going forward. Companies should assess the above factors and carefully prepare for risks of disclosure-related liability such as unfaithful disclosure in the course of M&As. [Korean Version]
2024.06.28

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Guidelines on Criteria for NFT Categorization as Virtual Assets On June 10, 2024, the Financial Services Commission (“FSC”), the Korea Financial Intelligence Unit (“KoFIU”), and the Financial Supervisory Service (“FSS”) announced the “Guidelines on Criteria for NFT Categorization as Virtual Assets” (the “Guidelines”). Non-Fungible Token (“NFT”) is a token that contains unique information and therefore, is non-fungible. The Enforcement Decree and the Supervisory Regulations of the Virtual Asset User Protection Act (the “Act”), which is set to take effect on July 19, 2024, will exclude NFTs that meet certain requirements from the scope of “virtual assets.” The Guidelines have been established to clarify the criteria for determining whether an NFT is categorized as a virtual asset. Key Details A person who intends to issue, distribute, or handle an NFT is required to (i) examine whether the NFT constitutes a security under the Financial Investment Services and Capital Markets Act (the “FSCMA”), and (ii) if it is not a security, examine whether it constitutes a virtual asset under the Act. 1. Categorization as Security Whether a right to be acquired by an investor constitutes a security under the FSCMA is determined based on the actual substance of such right, irrespective of the method and form of such right, whether certain technologies have been adopted, or the name of such technologies. The “Security Token Guidelines” included in the “plan to overhaul the regulatory framework around the issuance and distribution of security tokens” announced by the FSC and other regulators on February 6, 2023 may serve as a reference to determine whether an NFT would constitute a security. For such purpose, it is necessary to review and determine whether such NFT may constitute an investment contract security based on the totality of circumstances, in addition to whether such NFT may fall under a conventional type of security. For more details, please refer to our previous newsletter titled “Overhaul of the Regulatory Regime Regarding Issuance and Distribution of Security Tokens in Korea” (Link). 2. Categorization as Virtual Asset If an NFT does not constitute a security, whether it constitutes a virtual asset should be separately reviewed. The Proposed Enforcement Decree and Supervisory Regulation of the Act defines an NFT, excluded from the scope of virtual assets, as “a digital certificate primarily for collection and digital certificate only for the purpose of confirming transactions between the parties to the transaction, or any other digital certificate which exists in a single unit and is non-fungible with other digital certificates, but excludes digital certificates that can be used as a means of payment for certain goods or services.” Therefore, a digital certificate lacking uniqueness (existence as one of its kind) and non-fungibility is unlikely to fall under such definition and, as a result, would constitute a virtual asset. The Guidelines determine that if an NFT falls under any of the following cases, it is highly likely to be considered a virtual asset as its uniqueness and non-fungibility are impaired. (1) Case where it is issued in large volume or large-scale series and is highly likely to be fungible The case where a large number of identical or similar NFTs have been issued to the extent that it is difficult to recognize their uniqueness based on social norms. The case where a market price is set based on the same or similar NFT, and a transaction is conducted mainly to gain profits from the market price of the same or similar-type NFT, not the price of an individual NFT. However, whether an NFT constitutes a virtual asset shall be determined by taking into account all specific circumstances on a case-by-case basis (i.e., the total number of the NFTs issued, whether NFTs of the same or similar type are issued, the number of such NFTs, the price, transaction patterns such as frequency of transaction of the NFT), and shall not be determined simply based on issuance volume. (2) Case where its uniqueness is significantly weakened due to divisibility The case where one NFT is split-able, or if one NFT is split and then issued or sold. (3) Case where it can be used as a direct or indirect means of payment for certain goods or services (4) Case where it can be used as a direct or indirect means of payment for certain goods or services The case where an NFT is issued only for the purpose of exchange for another virtual asset. The case where an NFT can be exchanged with other virtual assets between unspecified persons. The case where an NFT is used to receive goods or services with prices, etc., indicated by other virtual assets. However, the Guidelines are intended to regulate the cases where NFTs are issued to circumvent regulations applicable to virtual assets, but not to prohibit purchasing NFTs using virtual assets at marketplaces where NFTs are currently traded. Separately, the Guidelines consider that a digital certificate with any of the following characteristics is highly likely to be deemed an NFT, not a virtual asset. (1) Case where it is for any value or utility other than economic value The case where it is used only for proof of identity or qualifications or proof (receipt) of assets or transactions. (2) Case where its economic function is insignificant in terms of place of use and purpose The case where performance tickets, etc., are issued in a limited volume and used only for exhibition or viewing. (3) Case where it is difficult to be deemed as a digital certificate that can be traded or transferred The case where trading thereof on secondary market is not possible. Implications As the Guidelines are now publicly available, the criteria for determining whether an NFT constitutes a virtual asset under the Act have been specified more. A business operator intending to issue, distribute and handle an NFT needs to comply with virtual asset-related laws and regulations, including the Act and the Act on Reporting and Using Specified Financial Transaction Information (the “Specified Financial Information Act”) if the NFT constitutes a virtual asset based on the results of the review under the Guidelines. In particular, please note that (i) if an NFT that a business operator distributes or handles is a virtual asset, and (ii) if the business operator engages in “sale or purchase, exchange, transfer, custody and management, and brokerage, intermediation and agency of sale and exchange” (see Article 2 (1) (n) of the Specified Financial Information Act) of such NFT, such business operator constitutes a virtual asset service provider under the Specified Financial Information Act, and thus, must file a report as virtual asset service provider. Failure to do so may result in certain criminal punishment (imprisonment of up to five years or a fine of up to KRW 50 million). As a business operator is responsible for reviewing and determining whether its NFT is a virtual asset and complying with the relevant regulations, it would be crucial for any person intending to issue, distribute, or handle an NFT to accurately and carefully review the legal nature of NFTs in accordance with the Guidelines and comply with the relevant laws and regulations accordingly. [Korean Version]
2024.06.18

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Extension of Short Sale Ban and Proposed Improvement Measures for Short Sale Regime On June 13, 2024, the Financial Services Commission (the “FSC”) announced that the current short sale ban in the Korean securities market (the “Short Sale Ban”) would remain effective until March 30, 2025, and announced contemplated measures to improve and amend the Korean short sell regime. For your reference, please find attached the relevant FSC press releases in English. 1. Securities Subject to the Short Sale Ban According to the FSC press release, the securities subject to the short sale ban remain the same, and include stocks and other instruments listed on the KOSPI Market, the KOSDAQ Market and the KONEX Market of the Korea Exchange (e.g., stocks, DR, ETF, ETN, ELW, warrants, warrant certificates and beneficiary certificates). 2. Proposed Improvement Measures for the Korean Short Sale Regime There was a consultation meeting among the FSC, the Financial Supervisory Service (the “FSS”), the Korea Exchange (“KRX”), the representatives of the ruling party and other stakeholders on June 13, 2024. After the meeting, the FSC issued a press release setting out the proposed measures to further improve and amend the current short sell regime in Korea (the “Proposed Measures”), including the following: (1) Establishment of Additional IT System(s) to Prevent Naked Short Sale Measures Details Requiring Legislative Action (a) Establishment of Real-Time Inventory Management System: by All Institutional Investors All institutional investors (corporate investors with a net short position balance of 0.01 percent or more, market makers, and liquidity providers) will be required to set the sellable inventory limit on a real-time basis. Yes (b) Establishment of Naked Short-Selling Detection System (the “NSDS”): by the KRX The KRX will develop the NSDS, allowing the KRX to confirm whether there were any naked short sale activities by market participants within a prescribed period (three days after the transaction), and requiring institutional investors to report to the KRX regarding SOD inventory and details of OTC trades within prescribed deadline (two days after the relevant transaction). Yes (c) Adoption of Internal Control Standards (the “Internal Control Guidelines”): by all institutional and corporate investors All institutional investors and corporate investors will be required to prepare the Internal Control Guidelines to prevent the systemic failure of the inventory management system and occurrence of naked short sale. Yes (d) Additional Verification Obligations for Korean Securities Companies KRX members receiving short sell orders will be required to (i) verify the internal inventory management system and the Internal Control Guidelines of the clients on an annual basis, and (ii) accept short sale orders only from the clients for whom the aforementioned verification process is completed. Yes (2) Levelling the Playing Field Measures Details Requiring Legislative Action (a) Term of Stock Loans For both institutional investors and retail investors, the applicable stock loan repayment period would be “90 days,” which may be extended for a total of 12 months. Yes (b) Adjustment of Collateral Ratio for Retail Investors The cash collateral ratio for both institutional investors and retail investors will be set at 105%. In addition, for retail investors, the collateral ratio for KOSPI 200 stocks will be set at 120% (which is lower than the 135% for institutional investors). No (3) Strengthened Enforcement Measures Details Requiring Legislative Action (a) Continued Enforcement Actions for Illegal Short Selling The FSS and the FSC will continue to strongly enforce the Korean short sale regulations. Yes (b) Increasing Monetary Penalties and Applicable Imprisonment Sentence The level of criminal fines for illegal short sales would be increased to four to six times the amount of unfair profits. The individual perpetrator(s) may be subject to a life sentence, depending on the amount of the unfair profits. Yes (c) Imposition of Additional Administrative Sanctions In case a person violates the Korean short sale regulations, the person may be subject to administrative sanctions including prohibition from (i) trading financial investment products in the domestic market for up to ten years, and (ii) serving as an executive for financial companies or listed companies for up to ten years. Yes (4) Miscellaneous Measures Details Requiring Legislative Action (a) More Stringent Disclosure Requirement Investor(s) with the net short position balance equivalent to 0.01 percent of total issuance volume or KRW1 billion or more would be required to make public disclosure of such position. Amendment of Enforcement Regulations (b) Restriction for Acquisition of Convertible Bonds (“CBs”) or Bonds with Warrants (“BWs”) Upon disclosure of a plan to issue CBs/BWs until disclosure of issuance price for relevant CBs/BWs, investors who placed short sale orders will be prohibited from acquiring relevant CBs/BWs. Yes As stated above, most of the Proposed Measures will require some form of legislative actions with assistance from the National Assembly. While the Korean regulators announced that they aim to complete the required legislative processes by the end of third quarter of 2024, given the current status of the National Assembly, it may not be easy to meet such legislative goals. Finally, the FSS circulated draft “guidelines” (Internal Control Guidelines on Short Selling, Guidelines on Internal Position Management Systems, and Checklist for Short Seller Review) in connection with item (1) “Establishment of Additional IT System(s) to Prevent Naked Short Sale” mentioned above, inviting comments from interested parties. We attach below the relevant English version for your reference. It remains to be seen whether the guidelines in their final forms would contain all the necessary details to enable the market participants to build and adopt the required internal control system(s) and IT system(s).
2024.06.18

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Named “South Korea National Law Firm of the Year”

Kim & Chang was recognized as the “South Korea National Law Firm of the Year” at the Chambers Asia-Pacific & Greater China Region Awards 2024. Since 2010, our firm has been honored with this title nine times, earning widespread recognition as one of Korea’s leading law firms.
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Named “South Korea Firm of the Year”

Kim & Chang was named as the “South Korea Firm of the Year” at the Benchmark Litigation Asia-Pacific Awards 2024. In addition, our firm won the “Tax Firm of the Year” award in the Practice Area Firm Awards.
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“Tier 1” in All Areas – Benchmark Litigation Asia-Pacific 2024

In the 2024 edition of Benchmark Litigation Asia-Pacific, a guide that recognizes leading litigation law firms and lawyers, Kim & Chang once again received “Tier 1” rankings across all ten practice areas. Additionally, 53 of our attorneys were named as “Litigation Stars” and “Future Stars.”
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