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The Role of IPO and Law Firms

2010.03.17

As of March, 2010, there are eleven foreign corporations listed on the Korea Exchange (the "KRX") in total, of which ten are Chinese and one is Japanese. Soon, the New Pride Corporation of the USA is expected to be listed on the KRX, along with other corporations from China, Japan, Britain, Vietnam, and Indonesia, A notable feature in this surge of foreign corporations on the KRX is the active role of Korean law firms. 
 
As a matter of fact, Korean lawyers do not have much of a role in initial public offering ("IPO") of domestic corporations. Most of the work that may utilize the services of lawyers, such as establishing internal control system, conducting due diligence, and preparing applications for listing eligibility review and securities registration statements, has been carried out by the managing underwriters. This is a stark contrast to the general practice in the capital markets of the USA and other developed countries, where lawyers and law firms play a significant role in the IPO of domestic corporations. In the USA, for example, representing issuers and underwriters in IPO is an exclusive domain reserved for lawyers, and many law firms derive their important source of income from this line of service. 
 
There are a number of reasons which may explain why Korean law firms' role in the domestic IPO market has been kept to a minimum. First of all, the various applications and reports to KRX for IPO do not require the applicants to submit a legal opinion, and the due diligence of the applicant corporations is of arbitrary nature. Because lawyers' participation in the process of IPO of domestic corporations is not mandatory, the issuing companies do not wish to pay expensive legal fees to hire lawyers for IPO matters. 
 
However, when foreign corporations wish to list themselves on the Korean stock exchange, the engagement of Korean law firms is essential, as they are required by law to provide legal opinions of both a law firm in their country of origin and a Korean law firm. To issue such legal opinion, law firms must perform due diligence on the issuing company or its stockholders, which necessitates active involvement of Korean law firms in the process of IPO of foreign corporations. Moreover, the issuing companies need legal advice of Korean law firms on various aspects of Korean law, and they also need Korean law firms to prepare their articles of incorporation that are acceptable by the KRX and are in accordance with the applicable Korean law. 
 
Hence, the managing underwriters consider the engagement of domestic law firms crucial in determining and minimizing the legal, institutional, tax, and foreign-exchange related risks. Many cases in which problems arise from the exposure to these risks cannot be solved without the involvement of Korean lawyers, due to the fact that these matters are specific to the Korean market, Korean laws and regulations. Because foreign corporations require legal service of Korean law firms for listing maintenance, such as public announcements and capital increases, Korean law firms' continued presence in the IPO market is ensured. Due to these reasons, the practice of listing foreign corporations on the Korean stock market has become a profitable niche market for many Korean law firms. 
 
In the case of listing Korean corporations on the overseas stock exchange market, the role of domestic law firm is limited to the role of a local counsel to large international law firms based in Hong Kong. However, domestic law firms now engage foreign law firms as their sub counsels to list foreign corporations on the Korean stock exchange market. This is the result of the enormous efforts put in by the KRX, Korea Securities Depository, and domestic securities companies to attract foreign corporations into the domestic capital market. And it is not an overstatement to say that Korean law firms and accounting firms are beneficiaries of this development. In order to attract many more foreign corporations to our domestic stock market to realize Korea's ambition to become the financial hub of Northeast Asia, Korean law firms should recognize their unique and, at the same time, important role as a gatekeeper in maintaining and enhancing investors' confidence and trust in the Korean capital market for its long term growth.

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