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ClassHankyul Wins 225 Options Appeal - KOFIA’s Standard Agreement in Violation of Capital Markets Act

On January 26, 2024, ClassHankyul won an appeal (Seoul High Court Civil Section 18, Presiding Judge Jun-yeong Jeong) on behalf of Winners Asset Management and others in a case contesting damages and claims for payments receivable between KB Securities and Winners Asset Management and their funds (“Winners Asset Management, etc.”) with regard to reverse trading conducted in connection with Nikkei 225 index options. (Nikkei 225 index | AP) Trial court’s simplistic interpretation of KOFIA Agreement, which failed to consider nature of individual products, is overturned  This case arose when KB Securities conducted a wholesale reverse trading on Nikkei 225 index options (Osaka Exchange) held by Winners Asset Management in February 2020 on the grounds of valuation losses due to a change in the price of the options, without issuing a margin call (a request that additional margin be deposited). KB Securities filed a claim against Winners Asset Management, etc. for receivables arising in this process, and Winners Asset Management, etc. filed a counterclaim against KB Securities for losses arising from the reverse trading. The trial court held that since KB Securities’ reverse trading was conducted duly in accordance with Article 14, Paragraph 2 of Korea Financial Investment Association (“KOFIA”)’s Agreement on Opening of Omnibus Accounts for Trading on Overseas Derivative Market (“KOFIA Agreement”), it was therefore lawful, and ordered Winners Asset Management, etc. to pay the receivables while absolving KB Securities from damages. This, however, was a ruling that failed to take into account a deficiency in the KOFIA Agreement. Nikkei 225 options are European options, meaning that temporary losses in valuation alone do not impose performance obligations on a customer. The Osaka Exchange and securities management firms in Japan reflect such losses only on the calculation of the margin and do not consider them grounds for reverse trading, a fact not taken into account in the KOFIA Agreement. Article 14, Paragraph 2 of KOFIA Agreement Agreement on Opening of Omnibus Accounts for Trading on Overseas Derivative Market §14. Handling of Nonpayment of Margin or Settlement Value  (1) The Company shall, in cases falling under any of the following Subparagraphs, liquidate the customer’s open interest without notice or prior approval and dispose of the deposited substitute securities to appropriate the unpaid margin or settlement value:  1. The customer has been notified of the Company’s demand for additional deposit of margin or payment of settlement value, but failed to comply with the demand by the designated deadline; or  2. The Company has failed, before the deadline for additional deposit of margin or payment of settlement value, to demand additional deposit or payment from the customer due to causes attributable to the customer or unavoidable causes that are not attributable to the Company.  (2) Notwithstanding Paragraph (1), in cases where the total appraised amount of the customer’s deposit falls ( ) % below margin due to sudden and significant changes in market price during the regular session, the Company may, instead of demanding additional deposit of margin to the customer, liquidate the customer’s open interest and dispose of the deposited substitute securities up to a required amount. Different standards should apply to financial products with different profit and loss structures ClassHankyul pointed out the unfairness in the KOFIA Agreement, which allows reverse trading for all types of financial products once a certain level has been reached in valuation losses, despite the fact that market-traded overseas derivatives have different profit and loss structures and different risks depending on their type, i.e., futures, European options, American options, etc., which an investment broker needs to consider when managing risk through margin. KB Securities, failing to give such consideration, enforced the same terms and policies on all 67 market-traded overseas derivatives it handled.  Attorneys Hyeok Lee and Kwangjoong Kim, who argued the case, opined that “KB Securities’ reverse trading in this case failed to consider the nature of European options and is therefore unlawful, and is also in violation of the duties of an investment brokerage under the Capital Markets Act.” The attorneys also voiced a strong warning on the risks posed by the practice of Korean securities management firms of enforcing the same terms and policies to derivatives with completely different profit and loss structures and risks. Court holds that the KOFIA Agreement, the grounds for the reverse trade, is in violation of the Capital Markets Act The appeals court upheld all of ClassHankyul’s arguments, and acknowledged deficiencies in the KOFIA Agreement, which KB Securities presented as the basis for the reverse trade. The court also ruled that KB Securities’ reverse trade, based on such unlawful grounds, was therefore also unlawful, and all the receivables arising in that process should be paid by KB Securities itself in addition to the damages borne by Winners Asset Management, etc. With the KOFIA Agreement, which KB Securities cited as the basis for the reverse trading, thus ruled to be in violation of the Capital Markets Act by the court, it is inevitable that the KOFIA Agreement and related policies will need to be amended and reformed, which portends much change in the brokerage practice of Korean securities firms for market-traded overseas derivatives. Advancement in the financial industry and enhanced investor protection through revision of unfair policies and changes in business practice Attorney Kwangjoong Kim commented on the ruling, sharing the view that, “Unlike the previous decisions, the present decision recognized the unlawfulness of the KOFIA Agreement and reverse trades based on that agreement, which will make a significant contribution in rectifying wrongful practices among Korean securities management firms and prevent similar grievances in the future.” It is hoped that this ruling will help remedy the unfairness in terms and policies enforced in the financial industry and improve the related policy system to firmly establish a sound financial business order, advance the Korean financial industry, and enhance investor protection. [Related Articles] [Ruling] “Reverse Trades on Overseas Derivatives Based on KOFIA Agreement Are Unlawful” Law Times, 2024. 1. 31. https://www.lawtimes.co.kr/news/195485  Reliance on Boilerplate Terms Leads to Billions in Losses... KB Securities Loses to Winners Asset Management  Hankyung, 2024. 1. 29. https://www.hankyung.com/article/202401285914i  KB Securities Loses Nikkei Reverse Trade Appeal… Risks Should Be Differentiated, Says Court Newsis, 2024. 1. 29. https://www.newsis.com/view/?id=NISX20240129_0002608983   

ClassHankyul Published in Guidebook on Export Voucher Services Providers and Consulting Services for Excellence in Service

ClassHankyul has been published for service excellence in the Guidebook on Export Voucher Services Providers and Consulting Services (the “Guidebook”). The Guidebook was published and distributed in 2023 by the Korean Standards Association (the “Association”), the entity responsible for management of the export voucher project, to help participating companies find providers of export voucher services.   The export voucher project was initiated to remove barriers between the various export support programs offered by the different government agencies and to help small and medium-sized enterprises (SMEs) freely select export support programs suitable for their export capacity, and is offered in the form of vouchers [as of 2023, the program had a budget of KRW 166.8 billion (KRW 47.1 billion from MOTIE and KRW 119.7 billion from the Ministry of SMEs), with a cumulative total of 30,000 participating companies]. ClassHankyul applied for and was selected in 2020 for participation as a provider of legal consulting services for businesses entering overseas markets, was re-selected after the evaluations conducted in 2022, and has entered into an extension agreement. The following is an introduction on the Guidebook, questions and answers during the interview, and where the material is distributed (download). Ⅰ. Guidebook 1. Material Name: Guidebook on Export Voucher Services Providers and Consulting Services 2. Subjects: Investigative and general consulting, brand development and management, legal, tax, and accounting consulting 3. Date of Publication: May 2023 4. Publisher: Korean Standards Association 5. Overview (1) Opening the Way for Exports (Overview of Export Voucher Project) (2) Connecting Exports and Exporters (Overall Manager of Export Voucher Project) (3) Help on the Road to Exports (Exemplar Cases) (4) Let’s Export Together, Hand in Hand (Agency Introduction) Ⅱ. Distributor (for Download) 2023 Guidebook on Export Voucher Services Providers and Consulting Services 1. Export Voucher Program (https://www.exportvoucher.com/portal/sample/main)  2. Community > Materials > No. 54 Ⅲ. Key Questions & Answers in Interview Published in Guidebook 1. Introduction to Practicing Attorneys Practicing attorneys with a wealth of international business experience At ClassHankyul, the Export Voucher Project is managed by the following attorneys: Jehyuk Lee (JTRI Class 31, 22 years of experience as an attorney), a longtime expert in international arbitration and international finance, including a case involving maritime wind power generation in Germany; Sangwon Yoon (JTRI Class 41, 12 years of experience as an attorney), who consults clients on out-bound (entering overseas markets) and in-bound (entering the Korean market) investments and procedures; and Soo-in Yoon, a graduate of Waseda University of Japan and an attorney licensed in Florida with 12 years of experience, who advises clients on out-bound and in-bound investments and intellectual property license agreements. 2. Unique Strengths of ClassHankyul One Stop Service on All Aspects of Overseas Market Engagement ClassHankyul has been advising clients on markets in the U.S., Europe, Australia, China, Japan, Southeast Asia, and other regions, as well as on conducting business in Korea. Services provided include establishment and investment in domestic and foreign joint ventures, review of suitable investment schemes and methods, preparation of various contracts required for operating the business and legal review of such contracts, recovery of investment, taxation, resolution of disputes and claims overseas, and other processes incidental to foreign investment and attracting investment to Korea. 3. ClassHankyul’s Competitive Edge on Exports International network - Hankyul’s de facto overseas offices ClassHankyul is distinguished in its robust international network. A member of a global network of law firms, ClassHankyul is able to maintain an effective business network with major law firms around the world, enabling the provision of speedy and reliable services. ClassHankyul is currently a member of Ally Law, a global network of 74 independent law firms and approximately 2,800 experts. Members of Ally Law are native to their countries of origin whose expertise, reliability and efficiency have been well established as attested by their high ratings from Chambers & Partners, a research firm known for its rankings for the global legal industry. ClassHankyul has also previously participated as a member of First Law International since its early days in 2003 and served as a member of the organization’s FLI Operating Commission for approximately 10 years from 2008. ClassHankyul’s membership in global networks of law firms helps it enjoy the effect of having de facto overseas offices through partnerships with other members, giving it the capacity to provide clients with the international services they need. 4. Most In-Demand Area of Consulting Services Advisory services for overseas entities throughout their lifecycles, from establishment to dissolution Past experience has shown joint venture services to be most in demand. In the case of a joint venture, an overall framework spanning its entire lifecycle is usually conceived in the early stages. A number of issues are determined early on, including the stability of the joint venture’s operation, exit strategies, and intellectual property protections provided by the local partner for the venture. ClassHankyul draws on a rich reserve of experience and know-how in the establishment, operation, and dissolution of overseas entities to advise clients not only on establishing a venture but also on business operation, recovery of investment, protection of intellectual property, and other potentially relevant issues and scenarios to reduce legal risks and ensure the present and future success of the enterprise over a long period of time. 5. A Case on Point: An Astounding Success Story A case notable for its success involved Company H’s establishment of a U.S. entity in 2021. A provider of remote healthcare services, the company had decided to establish a U.S. subsidiary to establish a presence there, but no specific plans had been drawn, and deciding the very basics of such a scheme was proving to be a challenge. To assist the client, ClassHankyul engaged in close cooperation with its local partners in the United States and provided advice on the structure of the establishment and underwent the required local procedures. ClassHankyul was able to successfully file a foreign direct investment report in Korea, and by introducing a consultancy specializing in such matters, was able to provide a solution for the visa issues facing the client’s Korean executives dispatched to its U.S. office. Company H’s entry in the U.S. market was made possible through the reliable support it received from ClassHankyul.  6. Most Important Element of Preparation for Participating Companies Seeking to Begin or Increase Exports Always be aware of the possibility of disputes when entering overseas markets Most companies focus only on expanding their market share and how to operate their business when making their forays into foreign markets, and often overlook matters such as securing returns on the investment, possibility of dispute and dissolution. From a business perspective, accepting a local counterparty’s terms and conditions without a careful examination due to rosy prospects may result in a situation where the business operation itself is successful, but the rightful returns cannot be secured, or worse, damages are borne. Once a dispute occurs, most of the proceedings take place locally, resulting in the loss of initiative and consequent disadvantage. Often, the prohibitive legal costs compel a party to give up its fight.  Preemptive measures are a must to prevent dispute As such, the most important element of the preparation that a company seeking to enter foreign markets must undertake is to incorporate preemptive measures against disputes into the relevant contracts at an early stage, in order to eliminate such legal risks.   Of increasing importance for Korean companies are intangible assets, such as technical patents, trademarks, copyrights and business secrets. Constituting much of the forte enjoyed by Korean businesses, such assets’ exposure to legal risks may result in damages beyond monetary proportions and may well prove to be irrecoverable. As such, measures for protection against legal risks are rightly even more emphasized in the area of intellectual property. Importance of planning in advance Here, one thing that should not escape attention is the importance of planning in advance. Factors such as the size of the investment, type of the entity to be established, number of directors, local executives, issuance of shares, and other elements of the operation must be determined in advance. Such advance planning will ensure effective legal consulting and save much time and money in the process.  7. Tips for Participating Companies Planning to Benefit from Export Voucher Project Foreign law firm fees can be paid from export vouchers Previously, foreign law firm fees arising in the process of establishing a joint venture overseas could be paid out of export vouchers, causing difficulties (only fees for Korean agencies could be paid out of export vouchers), but it has been recently confirmed with the Korea Standards Association, the competent authority, that agents may accept cases in a turnkey (one-stop) arrangement and directly transfer a portion of their contract amount to foreign law firms working with them. As this allows participating companies to engage advisory services at a much lower cost, prospective clients are encouraged to take advantage of this arrangement. Indeed, a recent case involving the establishment of a joint venture in Saudi Arabia was handled using a turnkey arrangement.  

Non-Finalized Voluntary Reporting and Amnesty Plus

1. Introduction This decision (“Decision”) is from a case in which I represented the Korea Fair Trade Commission (“KFTC”), and provides an express basis of determination on whether a disposition may be made on a first cartel conduct without Amnesty Plus prior to the KFTC’s decision on a second cartel conduct on which the plaintiff (“Plaintiff”) filed a priority voluntary report. 2. Summary of Facts In a service contract bid held by the Busan-Ulsan Regional Office of the Korea Electric Power Corporation for the transportation of supplies, including telegraph poles and transformers, Plaintiff colluded with other bidders and fake bidders on bid prices, and was cited for a violation of Article 19, Paragraph 1, Subparagraph 8 of the Fair Trade Act, resulting in the KFTC ordering corrective action and imposing a penalty surcharge (the “Disposition”). Plaintiff subsequently filed an appeal with the Seoul High Court to overturn the Disposition. 3. Plaintiff’s Arguments and the Court’s Decision A. Plaintiff’s Arguments Plaintiff argued that since it had filed voluntary reports on a number of other instances of illegal cartel conduct, and since some of those voluntary reports satisfied the criteria for priority voluntary reporting, it was eligible for further leniency (called “Amnesty Plus”) under Article 22-2, Paragraphs 1 and 3 of the Fair Trade Act, and Article 35, Paragraph 1, Subparagraph 4 of the Enforcement Decree of the same Act. At the time when Plaintiff initiated the present suit, investigations were still under way for a number of instances of cartel conduct and investigation reports were either submitted and awaiting review or undergoing the final deliberation process. Even though no determination had been finally made as to whether Plaintiff constituted a priority voluntary reporter  at the time when the other instances of cartel conduct were voluntarily reported, the defendant (“Defendant”) could sufficiently apply the Amnesty Plus program to the cartel conduct at issue in this case (“Conduct”) by either concurrently conducting the deliberation or deferring deliberation or decision on the Conduct. Nevertheless, Defendant failed to further reduce the penalty surcharge by undergoing a process of comparing the proceeds of the Conduct with other instances of cartel conduct, violating the principles of self-restraint and equality. B. Court’s Decision The court ruled as follows, rejecting Plaintiff’s argument on further leniency. i) Article 35, Paragraph 1, Subparagraphs 1 and 2 of the Fair Trade Act provide criteria for priority voluntary reporters and priority investigation cooperators (hereinafter “Voluntary Reporters” without distinguishing between reporters and cooperators). One such criterion is that the person shall have “conscientiously cooperated until the completion of an investigation, deliberation, and resolution… including testifying all the facts related to the illegal cartel conduct and submitting related materials.” Article 5, Paragraph 1 of the “Operating Regulation on Leniency Programs, Including Remedies for Voluntary Reporters of Illegal Cartel Conduct ” (“Leniency Regulation”) provides that “until the completion of an investigation” means “until the completion of the Commission’s deliberation”. ii) Considering the text and system of the relevant regulations, to qualify for further leniency on a penalty surcharge, the criteria for a priority Voluntary Reporter must be met, and as such, the voluntary report on the other instances of cartel conduct must also satisfy the temporal criterion that conscientious cooperation be given until the completion of the Commission’s deliberation. iii) Even though it was difficult to determine whether the criteria for priority reporting or cooperation in investigation were met due to the fact that the Commission’s deliberation on the other instances of cartel conduct had not been completed, it cannot be held that the failure to grant further leniency based on the assumption of priority Voluntary Reporter status during the computation of the penalty surcharge amount for the Conduct was wrongful. Neither may it be said that in the present case, concurrent deliberation had to be conducted on the Conduct and the other instances of cartel conduct subject to the leniency application, nor that the Disposition had to be deferred until deliberation or disposition on such other instances of cartel conduct. 4. Significance of Decision Article 22-2 of the Fair Trade Act provides leniency for Voluntary Reporters, and Article 35, Paragraph 1, Subparagraph 4 of the same Act provides that the perpetrator of an instance of cartel conduct is eligible for further leniency in terms of corrective measures and penalty surcharges if they file a priority voluntary report on other instances of cartel conduct that they have perpetrated. In other words, under the further leniency (Amnesty Plus) policy, if a person who is subject to a disposition for corrective action or penalty surcharge due to a failure to file a priority voluntary report on a specific instance of cartel conduct (“Conduct A”) files a priority voluntary report on another instance of cartel conduct in which they were involved (“Conduct B”), leniency, in the form of a reduction of corrective action or penalty surcharge, is granted not only for Conduct B, but also for Conduct A, hence granting “further” leniency or “Amnesty Plus”. The intent of this policy is to encourage reporting on other instances of cartel conduct by extending leniency on an initially prosecuted conduct in return, ultimately aiming at the elimination of all cartel conduct.   If there already is a decision of the KFTA on whether Conduct B is eligible for priority voluntary report status at the time a disposition is being decided on Conduct A, there are no issues because further leniency can be simply granted for Conduct A. However, no precedent had yet existed on whether, if the KFTC’s investigation is still under way for Conduct B, or deliberation is still in process on an investigation report, a disposition may be decided on Conduct A without granting further leniency, or whether such a disposition must wait until the deliberation has been completed on Conduct B in order to accordingly grant further leniency on Conduct A.  This issue is of particular importance when there are multiple instances of Conduct A and B, instead of just one. In cases where there are multiple instances of Conduct A or B, the extent of further leniency is determined by comparing the total size of Conduct A and that of Conduct B (see Article 13, Paragraph 2 of the Operating Regulations). As such, when there are multiple instances of Conduct B at the time when the KFTC is deliberating on a disposition, as in the present case, the issue is whether a disposition must be deferred until a decision is reached on all instances of Conduct B, so that the extent of the further leniency may be determined. If a decision has to be reached on all instances of Conduct B, the KFTC’s processing of cases may be delayed indefinitely, sometimes resulting in the expiration of the statute of limitations and preventing a decision on any disposition. The possibility also cannot be excluded that a business operator under investigation would deliberately file multiple voluntary reports in order to delay the handling of a case. In the KFTC’s practice thus far, in cases where a decision has been reached on Conduct A before a decision has been reached on Conduct B, and priority voluntary report status is later established for Conduct B, leniency has been granted ex-officio after-the-fact on corrective measures and penalty surcharges on Conduct A. Plaintiff in this case, however, asserted that a decision must not have been made on Conduct A in advance of one on Conduct B, and rather, either deliberations on both A and B had to be concurrently conducted or deliberation or decision on Conduct A had to be deferred. In response, the court held that the voluntary report on Conduct B had to meet the criteria for priority voluntary report status at the time of the computation of the penalty surcharge amount on Conduct A (meaning at the time of the disposition), and that there was no obligation to concurrently conduct deliberation on Conduct B or delay the disposition on Conduct A until after deliberation or disposition on Conduct B, and therefore, making a disposition on Conduct A without granting further leniency was not unlawful.  

Hankyul’s Election Law Team Publishes “Election Law in Practice, from A to Z”

Hankyul has published “Election Law in Practice, from A to Z” (Maeil Business Newspaper, 2020). The book, written mostly by the law firm’s election law consulting team, is notable not only for organizational effectiveness and expertise characteristic of a legal book, but also contains a diverse set of actual cases. Matter analyzed and incorporated in the book include amendments to statutes related to the lowering of the voting age and the latest precedents on the violation of election law, while commentaries on online election campaigns through social networking services achieve a harmony of theory and practice. Election practitioners seeking to ensure that their campaigns will be law-abiding will find the book to be of significant value.