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Insights into the South Korean Legal Market

Sandwiched between China in the West and Japan in the East and sharing a northern border with the Kim regime, South Korea occupies a unique position in East Asia. Benefiting from significant Western investment following the Korean War, it has become one of the world’s leading trade nations and is now the fifth largest export economy in the world and the sixth most complex economy. However, the ability to practise in Korea had until recently been strictly limited to Korean firms. With government legislation to open up its legal market, this is beginning to change. Earlier this year, Who’s Who Legal travelled to Seoul to meet some of the country’s leading lawyers and to find out more about the changes taking place in South Korea.

Seoul

Opening up the Korean legal market

South Korea has a strong and well-established domestic legal market, which has traditionally been dominated by the “Big Five” Korean firms: Kim & Chang; Bae, Kim & Lee; Lee & Ko; Yulchon; and Shin & Kim. The balance of work, one source told us, is somewhat skewed. Kim & Chang takes around one quarter of legal work generated within South Korea; the other four firms take up another quarter. This demonstrates not only how omnipresent the Big Five firms have historically been, but also how Kim & Chang’s market dominance is almost unprecedented by the standards of most developed legal jurisdictions.

It is perhaps for this reason that the South Korean government’s recent decision to open up the legal market to foreign firms has been met with some scepticism. First of all, Korean lawyers argue, the current legal market works – so why change it? For some national firms, the introduction of foreign firms raises the possibility that the market will be damaged, or at least needlessly and irrevocably altered, particularly when there is a fairly harmonious situation whereby international legal issues are handled by foreign firms and Korean law is handled by Korean firms. Not everyone we spoke to was so pessimistic, however. Foreign firms were enthusiastic about the work they had taken on in the few years since opening in Korea and the progress that had been made. While many fully accepted that the current number of foreign law firms in South Korea – approximately 28 – is untenable, they have welcomed the competition and new energy that the recent change in the law has brought.

The opening up of the South Korean legal market has advanced in three stages:

  1. Firstly, the EU-Korea Free Trade Agreement, which came into force in 2011, allowed firms from EU member states to establish an office in South Korea, but only to provide consultative services on international law;
  2. The second stage began in 2013, allowing foreign law firms to fee-share with Korean firms. It did not allow for foreign firms to practise Korean law; and
  3. The third and final stage allows for foreign firms present in the market for at least five years to form joint ventures with Korean firms. This is the only way they can practise Korean law.

Many foreign firms are looking to transition into this third phase, but both Korean and foreign lawyers are appreciative of the difficulty of forming joint ventures. This stems partly from the fact that the Big Five have no desire to form a joint venture that will likely make only a marginal difference to their performance but will almost certainly complicate bureaucracy.

From the perspective of national firms, such reticence is understandable. Joint ventures will require South Korean firms to have 51% ownership but share full liability. This makes the venture clearly beneficial to a foreign firm. Moreover, one foreign firm we spoke with suggested that around 50% of foreign firms would eventually leave the South Korean market because, they opined, it just isn’t big enough to accommodate them all with the level of work they would need to survive.

Some lawyers noted that, as Japan did when it opened its market to foreign practitioners, South Korea’s law firms will need to create a working relationship between Korean and non-Korean lawyers that will allow its legal market to continue to flourish. As one Korean lawyer at a foreign firm said, “lack of harmony” between the two sides – particularly regarding what amount of work is taken from Korean lawyers and given to foreign ones – remains an issue.

Boutique firms have also made headway in the South Korean market, which has been traditionally dominated by full-service outfits. International dispute resolution boutique KL Partners was established in 2015 by former partners of Shin & Kim and has become a well-regarded provider in the market. Similarly Cho & Partners, founded in 2002, focuses on all matters of IP. It is unclear how the new legislation will affect these smaller players, but it is hard to imagine a joint venture between a small Korean outfit and a large foreign firm being beneficial to either party.

Korea’s place in the wider market

South Korea’s position in Asia has always been unique. Its neighbour, North Korea, casts a constant shadow with its belligerence and volatile leadership, but it is South Korea’s reputation as a hub for commerce, finance, energy and shipping activities that has made it one of the foremost places in Asia to do business. The country has the 11th highest nominal GDP in US dollars and is the fourth-largest Asian economy behind only China, Japan and India – two of which have over 1 billion inhabitants to South Korea’s 50 million.

The country’s attempt to combat cartels over recent years has been a qualified success. The Korean Fair Trade Commission (KFTC), awarded five stars out of five in Global Competition Review’s Rating Enforcement 2016 report, has had many recent victories in combating a historically cartel-heavy environment in South Korea. Its recent investigation into Qualcomm’s business practices ended with it levying an administrative fine of approximately 1.03 trillion South Korean won (approximately $865 million), underlining its recent reputation for handing out tough fines to companies it considers to be in violation of Korean competition law.

South Korea’s arbitration landscape has been somewhat changed by the arrival of foreign firms, particularly those with considerable dispute resolution capabilities like Herbert Smith Freehills and Clifford Chance, which recently became the first non-Korean firm to pass the 10 billion South Korean won ($8.35 million) mark in annual revenue. The Korean Commercial Arbitration Board (KCAB) accepted 400 new cases in 2016, far more than the 15 to 20 per year of its Japanese counterpart, the JCAA. Additionally, the Seoul International Dispute Resolution Centre has been backed by the LCIA, ICDR and HKIAC. Despite this, South Korea remains a small market for arbitration when compared with Hong Kong and Singapore.

The country has also recently been rocked by the impeachment of its president, Park Geun-hye, on bribery and corruption grounds. These stemmed from her relationship with Choi Soon-sil and the alleged extortion of around US$70 million from chaebols – large family-owned Korean firms – to Choi Soon-sil’s own non-profit foundations. Such events have left the country facing its own questions regarding its political elite, and may damage credibility at home and abroad.

Brexit also looks likely to affect South Korea, due to the EU-Korea Free Trade Agreement. With the UK set to leave the EU, it is now in the process of discussing new trade agreements via a working group. Trade between the UK and South Korea is reportedly worth £11 billion. However, this is still fairly small when compared with South Korea’s biggest export partners, China (US$131 billion), the United States (US$72.7 billion) and Vietnam (US$26.6 billion). Whatever the outcome of Brexit and South Korea’s new trade agreement with the UK, it is clear the bulk of South Korea’s trade will continue to be with its immediate regional neighbours and the United States.

Conclusion: A changing society?

Some Korean lawyers have suggested that the new legal settlement is representative of wider and deeper societal changes in the country. Despite its internationalist business culture, South Korea only embraced full democracy in 1987 with the establishment of the Sixth Republic. Strikingly, its pensioners will still remember the struggle of the Korean War and the absolute deprivation that followed; they will remember how far the country has come in little more than a generation. This perhaps puts an even greater spotlight on the impeachment saga which is still yet to conclude – Koreans might admit they are going through something of a transition period. However, it is clear that South Korea remains a highly favourable jurisdiction for businesses and for law firms.

Its arbitration and competition regimes are stronger and more effective than they have been in the past and if the reforms succeed it will mean an internationalisation of its legal culture and a significantly changed landscape. However, it is hard to see the dominance of the Big Five diminishing. What is more likely is that South Korea will continue to grow as a hub for legal work in the Asia-Pacific region, and its competitors will be watching increasingly closely to see what happens next.

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