Welcome to Korea! You just spent millions of dollars to buy a failing Korean firm. It may have been tough, but you bought the thing. Now you own it lock-stock-and-barrel. Or do you?
If all the restrictions in Korea were not enough, there is a growing movement to restrict something else, technology. Over the past few weeks, three major cases have been put in the press about foreign companies who have the gall to buy Korean companies and their Intellectual Property and then use that IP outside Korea.
I do not want to raise larger issues about property rights, the rule of law, and perhaps cultural attitudes. However these cases should be noted as it should give a foreign investor pause as to why he is buying assets in Korea and the portability of those assets once (he thinks) he has purchased them.
In perhaps the case furthest along, an NGO and related labor unions have sued Sssangyong motor for, well, making a business decision from the Joongang:
Spec Watch Korea, a civic group that monitors foreign investors, and members of Ssangyong Motor Co.’s labor union yesterday filed a lawsuit against nine directors of the Korean car maker for allegedly stealing auto assembly technology from the company for its Chinese parent firm, Shanghai Automotive Industry Corp (SAIC).
In late June, Shanghai Automotive announced it will make Ssangyong Motor’s sport utility vehicles in China through a licensing deal worth 24 billion won ($25 million). The pact sparked a massive protest among Ssangyong Motor workers here for “an unusually small amount of money” for a deal of its size.
Now I would assume that when SAIC bought Ssangyong for millions of dollars, part of that would include the intellectual property of the firm. This would include all plans, production methods, name plates, etc. The transfer cost of US$25 million, and whether or that is fair or not, is a bit of red herring if you ask me.
Moving on we now have the case of Daewoo Electronics. In perhaps one of the final chapters in the disintegration of the once huge Daewoo chaebol after the Asian Financial Crisis, Daewoo Electronics (a small piece of that) is planned to be sold to a consortium lead by an Indian electronics firm.
One would think this would be a cause to celebrate. This is a firm that has limped on long past the time a firm in the west would be taken out behind the barn and shot. It survived long enough to get a new life, and fresh capital. However that view is not the view shared by the CEO. The top paragraphs from his press conference announcing the deal:
There is no practical way to prevent Daewoo Electronics Co.’s technology from being leaked to India once its acquisition is final, said Lee Seung-chang, president of Daewoo Electronics.
Mr. Lee’s remarks came at a press conference in Seoul yesterday.
Mr. Lee confirmed that a joint consortium of RHJ International, the holding company of the U.S. private equity fund Ripplewood, and India’s Videocon Industries, was selected as the preferred bidder on Sept. 8.“After the merger, 10,000 patents that Daewoo Electronics owns may be turned over to India’s Videocon,” Mr. Lee said.
No granted that was not the entire content of the press conference, but one has to wonder the motives behind this comments/questioning and how it was of such import that it was dwelt on long enough to be noted.
The final case is interesting somewhat due in part by the omissions by the reporter:
Korean management at BOE Hydis requested court protection in an August 8 petition to Seoul Central District Court, saying that there was a shortage of capital at the company. BOE Hydis said its situation was in part due to parent company BOE Group failing to invest in the firm. BOE Group is a China-based firm that took over the Korean firm Hydis in 2003.
Chung Nam-il, a leader of the labor union at BOE Hydis, said that BOE Group “has not invested [in Hydis] at all since 2003 when it took over the company. BOE only has a mind to drain away state-of-the-art core technologies at an unreasonably low price.”
The BOE Group lent Hydis’ Advanced Fringe Field Switching (AFFS) technology to BOE’s Chinese affiliates in 2004. This year, the group’s Chinese affiliates tried to grab experts in the technology and bring them to China. This move was strongly resisted by creditor banks and the Korea-based company’s labor union. In addition, in 2004 BOE Group paid BOE Hydis 75 billion won (US$78 million) for using the technologies for 20 years, fueling controversy that the company had in effect been sold at a bargain rate.
The history left out of this article is the fact Hydis was once Hyundai Display Technologies. In other words it was part of Hynix nee Hyundai Electronics. The sale of Hydis to the Chinese firm was actually done at the behest of Korean government owned banks in order to shore-up Hynix.
In other words, the Korean government and all the stakeholders (even union leader Chung Nam-il) knew what they were getting into. They all agreed in some measure to both the sale of Hydis and the price. But for some reason it’s fine to buy the company to save Chung’s ass, but no to effectively leverage their assets.
Speaking of which I remember a scare tactic used by Hynix back then. When it was all but officially bankrupt, the company was desperate to keep going somehow. Part of this effort was to get more and more favorable terms from its creditors, who by this time were all government owned banks (Korea Exchange, Cho Hung, Korea Development Bank, et. al.). One of its negotiation cards was to discuss accepting a tender offer from an overseas company (with usually “Chinese” instead of overseas). Perhaps this is not a recent worry/phenomenon.
Consider yourself warned foreign investors.
8 Comments
Dram, on this one you’re being unfair to the Koreans. As an IP professional I guess you haven’t had much call to learn about corporate governance or M&A. Here’s the deal:
In most of these “big deals” for defunct chaebol the foreign investor takes a controlling stake, but does not own all the shares; there are other shareholders, including employee stock ownership plans, senior management (through stock options) the banks, and the government. The creditors sell some of their shares to the new “owner” of the business, but retain some shares in the expectation that the new controlling shareholder will raise the value of the shares retained — in other words, they hope to make more money by selecting a smart manager for the company.
But despite the Koreans’ love of the word “owner” to describe the controlling shareholder (who may not even be the majority shareholder), there are corporate-governance provisions in the Commercial Code to protect all shareholders. The “owner” doesn’t get to simply take company property for himself — the Representative Director shouldn’t have his hand in the petty cash box, and the controlling shareholder is required to transact business with the company more or less on even commercial terms. This is so the interest of the other shareholders is not subordinated to the interest of the controlling shareholder. This means the controlling shareholder doesn’t own the intellectual property of the company — it still belongs to the company.
In the SAIC-SsangYong Motor case, to the extent there are other shareholders, those other shareholders have a right to expect the company will seek and receive the best possible price for sale or license of the intellectual property of the company.
I don’t have any information about the terms of the SAIC-SsangYong license. But the complaint merits investigation and is not without justification under the laws of Korea. You’re partly correct in that I’m sure some of the tooth-gnashing is simply the anti-foreign bias which is endemic here.
It should also be pointed out that anyone with half a brain could have foreseen the possibility of this kind of thing happening with one of these Chinese investments. Sell to an investor from a developing country where “laws” and “intellectual property protection” are not actually observed as we understand them, which has a lower technical level than Korea, and which is your #1 up-and-coming challenger — odds are you’re going to get picked clean unlawfully. To the contrary, American, Belgian, or Dutch investors are more likely to transfer technology in to Korea in order to improve their investment’s performance. They usually don’t need Korean technology. (Western investors do, however, expect to be able to take profits home, while the Chinese seemingly just want to cart away the technology and the transportable machinery back to Hangzhou.) Live and learn.
Schadenfreude; crocodile tears; you reap what you sow.
As Brendon notes, there are legal constraints to protect other shareholders when one entity has less than 100% of the shares (although these restrictions interestingly don’t seem to be enforced against Korean companies for the benefit of foreign or domestic minority shareholders), but that wouldn’t seem to come into play in either the Daewoo Electronics or Hydis cases. Moreover, in the Ssangyong case there is no indication that Shanghai Automotive didn’t pay a fair price for the technology. The real gravamen of the whingeing here is based on the mercantilist mindset of all Korean “stakeholders”, one interesting element of which that these cases highlight is the presupposition that if a foreign company is permitted to take a position in a Korean business it is obligated to continue to make capital infusions to the Korean operation regardless of any countervailing economic considerations regarding the prudence or even the economic rationality of doing so.
Sperwer’s right, this is a Nelson moment for sure. The Daewoo Electronics article (I’ve fixed the links so they work now) surely does betray an odd sensibility on the part of the Daewoo Electronics President Mr. Seung-Chang Lee who says that continuous investment is necessary in the consumer electronics business (he’s right), and that the new investor better be prepared to dump a bunch of money into Daewoo Electronics because he and the rest of the Daewoo employees (nice to see they’ve aligned against the shareholder already!) sure as hell aren’t going to give up anything to reach profitability:
Guess they never heard, the company itself, through reinvestment of operating profits, is supposed to be its own biggest investor. In a turnaround, the goal is not to continue to destroy value just as before, by inducing a new sucker to dump money into your gaping maw, but instead to cut as much fat as possible in order to find whatever muscle is in there, then start reinvesting those profits?
If we’re looking for useless flab at Daewoo Electronics, might I suggest a cold-eyed look at Mr. Seung-Chang Lee? That company went into insolvency (I hesitate to say “restructuring”) in September 1999 — seven years ago! Lee is a 30-year Daewoo Group man, and before ascending to the CEO position he was a Daewoo Electronics (non-statutory) “managing director.” So, in the last seven years, this business visionary has been a key leader who managed to keep the company sickly and un-restructured the whole time. Why shouldn’t he get to keep burning up money? After all, he went to Korea University.
As an aside to Dram Man, Daewoo Electronics has not “been sold” to anyone yet. The Videocon/Ripplewood consortium has been appointed “preferred bidder”, which presages two more years of arduous negotiations before the talks break down acrimoniously. Videocon has no more been chosen the new owner of Daewoo Electronics (and thus, alas, not yet in a position to fire Lee) than the British School was chosen the new operator of Yongsan International School. Videocon has a right to negotiate for a final deal.
Mr Brendon, you get 2 hardcore-points for using “gaping maw”.
Granted I do not know the specific deal in reagards to SAIC-Ssangyong. I am aware there are some minority shares. However I find it a little humorous that Korea finds salvation in minority shareholdership when it fits them. If you ask me based on everything I have seen, SAIC did nothing that has not been done before here. If you ask me what they are guitly of, with the exception of possibly lowballing the value, is that they incorrectly assumed the same laws that applied to domestic companies applied to foreign ones (and that statement could even cover the exception). At times a dangerous assumption.
As for the Hydis and Daewoo worries, these are purchases outright (Hydis was, Daewoo is shapping up that way), which makes the carping futher inexplicable. The IP came with the business.
Incedently, I have heard indrect complaints about the patent pools that Samsung, Hynix, LG, and such are joining to limit liablity globaly. Some talk about how they are bad for Korea since their “best technologies” are included in the patent pool, and thereby giving access to the Japanese and Tawianese. Could be some simular logic here.
As for the questions raised about Mr. Lee. Based on what I have read about the whole Daewoo disintergration I am somewhat sympathetic. It took a good two years or so to decypher the books and equitable assign group debt amongst the affilates (it was the lack of this that held up the sale of Daewoo Motor, Ford backed away from that “tar baby”, to borrow Mitt Romney’s phrase). Then after that it was saddled with a bit of debt (sure did not help the Chairman decided to play “Where in the world is Carmen Sandiego” on Daewoo’s dime). Finaly, Mr. Lee was very effective in reciving govrenment aid and easy credit from govrenment controled/influenced banks. About what I would expect from a 30 year Daewoo man.
Sorry good point, will change the tense and wipe the egg off my face.
PS Is it just me, or does the name “Ripplewood” sound like the basis for a bad Beavis and Butthead joke?
Its amazing how convenient victimology is. Even when you are getting a good deal, you can raise the flag of ‘poor pitiful victim’ and you may get an even better deal (works just as well in the case of the Urinal lawmaker who wrote about the evil monster of the US).
Of course, when it suits Koreans, they are very concerned about the rights of minority shareholders. Too bad for those minority shareholder suckers at companies such as SK Corp and others (which companies haven’t seen a scandal involving the embezzling of cash by some high up director?), but then the smaller shareholders are either small fry Koreans or foreigners.
Oops, sorry about the nearly incoherent post. Short on time.
Yes, the Korea discount. Such anti-foreigner sentiment continues to keep the place from reaching its full potential.