Advice on investment contracts -Corporation establishment, paid-in capital increase, bonus issue, etc.

K&P Law Firm advised on the investment in which investor B gives investment money to A in exchange for 50% ownership in the corporation, and A establishes a corporation using the money.  The Stock shares are divided 50:50 between A and B.

 

In the following, matters are simplified for the convenience of understanding, and the amount of investment, etc., is stated differently from the facts.

 

A's original plan was as follows.

• Investor B pays 1 billion won to A.
• A uses this money to establish a stock company with a capital of 1 billion won.
• Investor B owns 50% of the shares and investor A has 50%.

However, if A receives an investment like this, A will receive a gift of 500 million won from the investor. In other words, A has to pay gift tax later on 500 million won.

 

Then, what should A do to avoid paying gift tax?

You can do it like below.

1) A receives 1 million won from B and establishes a company X.

• The par value is KRW 500 and the issued shares are 2,000 shares.
• In this way, X becomes a company with a capital of 1 million won.

2) Company X receives an investment of KRW 999,000,000 from B.

• the price of the shares which will be issued is 499,500 won.
• At this time, the number of issued shares is 2,000, and B acquires these shares.
• Then the shareholders of X are A and B, and each holds 2,000 shares.
• As a result, A and B have a 50:50 stake.
• The capital of the company increases to 2 million won.

3) Above, B invested 999,000,000 won, but the company's capital increased by only 1 million won. 

• If shares are issued at a price greater than the par value, the portion corresponding to the par value becomes capital and the remaining portion becomes capital reserves.
• In the example above, the issue price of the shares is 499,500 won, and the par value of the shares is 500 won. Issued shares are 2,000 shares.
• In the end, 1,000,000 won (par value 500 won X 2,000 shares issued) becomes capital, and eventually, the capital of corporation X becomes 2,000,000 won.
• 998,000,000 won [(stock issue price 499,500 won - par value 500 won) X 2,000 issued shares) becomes the capital reserves.

4) 998,000,000 won is issued as a bonus issue.

• A bonus issue is the conversion of capital reserves into capital. The Commercial Act of Korea calls this capital transfer of reserves (Article 461 of the Commercial Act).
• The capital reserves are money that must be accumulated and cannot be used carelessly by Corporation X.
• Therefore, if you want to use most of the KRW 1 billion invested for business, company X must go through a bonus issue.
• In general, a bonus issue can be made by a resolution of the board of directors.
• The issuing price of new shares is KRW 500 (par value), and the number of issued shares is 1,996,000 shares (= 998,000,000 / 500).

 

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