‘Flip’ has increased 6-fold in 10 years... How do we prevent global tickets from becoming ‘poisonous’?

Column by American lawyer Dong-hoo Son of Daeryun Law Firm (Limited)

The number of so-called ‘flip’ cases, in which companies move their headquarters overseas to attract global investment and successfully advance overseas, is increasing. The number of Korean companies attempting to enter the global ecosystem by establishing local joint ventures (JVs) is also increasing. According to a media report, the number of domestic startups that conducted flips increased six-fold in 10 years from 32 in 2014 to 186 in 2024. This suggests that for export companies, restructuring their governance structure in line with global standards is no longer an option but an essential gateway to growth.

However, hasty promotion of flipping can actually be toxic. This is because you may face an unexpected tax bomb or management crisis. This is a tragedy that occurs when only superficial procedures are followed without a professional understanding of ‘cross border’ work, in which the laws and systems of both countries are complicatedly intertwined. We must be aware that a flip that is not preceded by a thorough legal diagnosis can become a fatal trap that strangles the company, and we must thoroughly check the legal risks.

The first challenge encountered is the tax burden. The flip is carried out by exchanging existing Korean corporation stocks for newly established U.S. holding company stocks. At this time, there is a high risk that Korean tax authorities will regard this as an actual transfer of stocks and impose a large capital gains tax. If the tax treaties and tax laws of both countries are not simultaneously analyzed and a legitimate tax saving structure is not designed, a situation may arise where the entrepreneur has to pay hundreds of millions of won in transfer tax without actually receiving cash, depending on the valuation at the time of stock exchange.

In addition, the threat to management rights caused by the differences in corporate law systems between Korea and the United States cannot be overlooked. The U.S. state of Delaware, where many companies head, broadly recognizes the ‘principle of business judgment’ and strongly protects the authority of the board of directors. However, paradoxically, in order to keep this in check, American investors put strong pressure on entrepreneurs through ‘contracts’ rather than laws. They control the board of directors by inserting detailed protective provisions, such as an extensive right of veto, into investment contracts, and after the fact, they actively utilize shareholder lawsuits to challenge directors' violations of their strict fiduciary duties. Ultimately, if the toxic clauses contained in the local standard investment contract cannot be filtered out, there is a high possibility that the founder will lose actual management leadership or become embroiled in enormous litigation risk, despite having a nominal equity advantage. In fact, there are many cases where founders of famous domestic startups were effectively excluded from the board of directors after Series B.

The risk of violating the Foreign Exchange Transactions Act that arises during the capital transfer process is also fatal. This is because omitting Korea's foreign exchange prior reporting obligation or violating procedures can escalate into a criminal risk that will result in investigation by investigative agencies. Therefore, if the regulatory networks of both countries are not carefully examined, successfully attracted funds can suddenly become shackles that can shake the existence of a company. In other words, overseas capital movement is a highly complex project that goes beyond simple contract review and can only be completed when the laws, systems, and regulatory systems of both countries are aligned.

Ultimately, the key to solving all these problems lies in actual cross-border capabilities. Korean and American laws differ not only in language but also in the regulatory systems surrounding companies. It should not be overlooked that decisions made solely based on U.S. law may directly violate the taxation logic of Korean tax authorities or foreign exchange transaction law regulations. With the existing fragmented method in which large domestic law firms delegate practical work to local law firms, it is difficult to understand the organically intertwined legal issues of the two countries in a timely and three-dimensional manner. There are also concerns that communication may be delayed in urgent situations.

Therefore, for a company that is about to take a full-fledged global leap forward, it is essential to have the assistance of a working expert who can apply the legal standards of both countries simultaneously and formulate a detailed strategy. Beyond the fragmentary review of documents, lawyers from both countries should be able to communicate in real time about a single case and come up with a comprehensive solution. In a structure where the headquarters in Korea and local lawyers in the U.S. provide separate advice on the same case, the gap becomes a risk. The success or failure of the flip ultimately depends on whether the legal environments of both countries can be controlled simultaneously within one strategy.

[View full article]
'Flip', which has increased six-fold in 10 years... How do you prevent global tickets from becoming 'poisonous'? (Shortcut)