The Korean Commercial Code (“KCC”) has recently been amended. The amendments, which took effect on April 15, 2012, represent the most extensive revisions to the KCC since it was enacted in 1962 and contain far-reaching and significant changes in various aspects of company law encompassing incorporation, corporate governance, corporate finance and M&A.
Most notably, these amendments expressly permit a new squeeze-out mechanism through compulsory acquisition. The compulsory acquisition right allows a controlling shareholder holding for his or its account 95% or more of shares in a Korean target company to require minority shareholders to sell their shares to the controlling shareholder at an agreed price or a fair price determined by the court if no agreement is attainable.
Alongside the compulsory acquisition right, the amended KCC grants minority shareholders a sellout right allowing minority shareholders to require the controlling shareholder at any time to buy out their shares at an agreed price or a fair price determined by the court.
The amended KCC provides that the following requirements must be satisfied for a compulsory acquisition:
- The controlling shareholder should hold at least 95% of the total issued and outstanding shares of the target company;
- The proposed compulsory acquisition should be necessary to accomplish a “business purpose” of the target company;
- The minority shareholders’ shares should be appraised by a certified appraiser and the outcome of such appraisal (together with the purpose and other details of the compulsory acquisition) should be (i) disclosed in the notice sent to the shareholders to convene a general meeting of shareholders of the target company (“GMS”) to approve the proposed compulsory acquisition and (ii) explained by the controlling shareholder at the GMS;
- The compulsory acquisition should be duly approved at the GSM; and
- At least one month’s public and individual notice on the compulsory acquisition should be provided to the target company’s shareholders.
The table below summarizes the major steps required and timeline for a compulsory acquisition. Without any unforeseen complications, it will take two to three months to complete those steps. The process may take much longer, however, if the controlling shareholder and the minority shareholders cannot reach agreement on the price to be paid for the minority shareholders’ target company shares. In case the controlling shareholder and a minority shareholder fail to agree on the purchase price, either the controlling shareholder or such minority shareholder may seek to obtain a Korean court’s decision on the purchase price, which may take a long time.
Click here to see table.
- Ambiguities and Legal Issues
Although quite straightforward at first glance, the compulsory acquisition entails many issues and uncertainties, as the relevant KCC provisions are unclear in some respects and there are no case precedents in Korea directly applicable to the compulsory acquisition. Complicated legal issue would arise as to, among others: (i) who should be viewed as the controlling shareholder; (ii) what constitutes a “business purpose”; (iii) when minority shareholders lose their status as shareholders if the purchase price for the compulsory acquisition cannot be agreed upon; and (iv) when interest on the purchase price starts to accrue.
The legislature may need to take a proactive approach in clarifying the ambiguities. Before such legislative action, however, rational interpretations of the newly introduced KCC provisions would be necessary to promote the compulsory acquisition.