Structure and process, legal regulation and consents
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
The process for acquiring a privately owned company or certain business or assets of a company can be flexibly structured and varies depending on the nature of the deal, the participants and the complexity of the deal, but parties typically proceed in the following manner in case of a competitive auction deal:
- seller and potential bidders execute a confidentiality agreement, following which the seller issues an information memorandum and process letter;
- seller conducts a preliminary bidding process to compile a shortlist of preliminary bidders;
- seller allows the shortlisted bidders to conduct due diligence on the target company, business or assets;
- seller circulates an initial draft of the definitive agreement;
- interested bidders submit a bid application, inclusive of a proposed purchase price and a mark-up of the seller’s draft of the definitive agreement;
- seller reviews the submitted bids and selects a preferred bidder;
- seller allows the preferred bidder to conduct confirmatory due diligence (if applicable);
- seller and the preferred bidder negotiate and execute the definitive agreement;
- following execution of the definitive agreement, the parties prepare closing deliverables and satisfy closing conditions; and
- following satisfaction or waiver of closing conditions, parties close the transaction.
The duration of a transaction varies widely depending on the nature of the deal and the dynamics and leverage among transaction parties, and lasts anywhere from a couple of months to a year.
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
The Korean Commercial Code governs general business and corporate governance of Korean companies, as well as acquisitions of shares, businesses or assets, mergers, spin-offs and other M&A transactions.
The governing law for the definitive agreements for M&A transactions is a matter subject to negotiation and agreement between the relevant parties, and need not be Korean law. However, certain matters set forth in a definitive agreement, depending on their nature and subject matter, may be subject to mandatory, compulsory Korean law (eg, Korean antitrust law) and cannot avoid applicability of Korean law, regardless of the choice of foreign governing law specified in the definitive agreement.
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
Unless otherwise agreed, a buyer will acquire the legal title to shares, business or assets of a company as prescribed under applicable law, and the level of assurance for such title can be negotiated between the parties. In certain transactions, such as mergers or spin-offs, title transfer of certain assets is automatically effected by operation of law. While legal and beneficial title generally are not separate, ownership of registrable assets, such as vehicles and real property, is evidenced through registration with the relevant authority, and hence may give rise to a distinction between legal and beneficial ownership.
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
Absent contractual rights to enforce a sale against existing shareholders (eg, a drag-along right or a call right), mean that a buyer must agree with each shareholder to acquire all of the issued and outstanding shares of capital stock of a target company. However, a major shareholder with at least 95 per cent of the issued and outstanding shares of capital stock of a company may force and effect a minority squeeze-out for fair value (ie, such a major shareholder has the right to request minority shareholders to sell their shares at fair value to the major shareholder). A squeeze-out must be conducted in accordance with applicable laws and regulations, including procedural requirements such as shareholders’ approval at a general meeting of shareholders, requirement for minority shareholders to sell their shares within two months of request from the major shareholder and, upon failure by the major shareholder and the minority shareholders to agree upon a purchase price within 30 days, the power of a court to determine the fair purchase price, upon a request by either party, based on the company’s financial status and other relevant circumstances.
Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
Parties generally have the freedom to choose the assets or liabilities to be transferred in a business or asset transfer transaction. However, if a transaction qualifies as a ‘business transfer’ under Korean law, the transferee may be exposed to assume the employment and employment related liabilities of the employees of the transferred business by operation of law, and also secondary liability for the transferor’s unpaid taxes.
To effect the transfer of assets and liabilities in a business transfer, the transferor typically needs to undertake the following procedures depending on the nature of the transferred assets or liabilities:
- contracts: obtain the consent of the counterparty (unless the contract allows for assignment or transfer without counterparty consent);
- receivables: provide notice (with confirmation date) to the debtor or obtain consent (with confirmation date) from the debtor;
- payables: obtain consent from the creditor;
- tangible property (eg, real properties): register the title change with the public registry office;
- intellectual property (eg, patents, copyrights, trademarks): register the title change with the relevant authority; and
- licences and permits: assign licences and permits pursuant to relevant regulations.
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
Aside from industry or asset-specific reporting or approvals, M&A transactions involving Korean companies should be reviewed to consider whether the transaction should be:
- reported to, and cleared by, the Korea Fair Trade Commission under the Monopoly Regulation and Fair Trade Law, which is the general antitrust statute - the following transactions, subject to a size (eg, revenue or assets) test of the relevant parties, require a merger filing notification to and approval by the Korea Fair Trade Commission:
- acquisition of 20 per cent (or 15 per cent if the target company is a listed company) or more shares or equity interest with voting rights in another company;
- merger with another company
- acquisition of (or assumption of control of) all or a major part of the business or assets of another company
- subscription as the largest shareholder of a newly formed joint venture; and
- interlocking directorships;
- reported to relevant authorities as a foreign direct investment (generally meaning a purchase by a non-Korean person of 10 per cent or more shares of a Korean company) under the Foreign Investment Promotion Law; and
- reported or approved under the Foreign Exchange Transaction Law with respect to inflow or outflow of funds to or from Korea.
Foreign investment in certain target industry, business or assets may require industry or asset-specific reporting or approval, or be subject to foreign ownership restrictions, under applicable laws and regulations. For example:
- the aggregate foreign ownership of certain telecommunications companies cannot exceed 49 per cent of the total issued and outstanding shares of capital stock;
- the aggregate foreign ownership of electricity transmission or electricity distribution companies is required to remain less than 50 per cent of the total issued and outstanding shares of capital stock, and a foreign person cannot be the largest shareholder of any such company; and
- effective as of 2012, a foreign person’s acquisition of, or merger with, a Korean company possessing ‘national core technology’ designated by the Ministry of Trade, Industry and Energy (MOTIE) is required to undergo review or approval by MOTIE under the Act on Prevention of Disclosure and Protection of Industrial Technology (Core Technology Act) - if a foreign person (including a Korean company owned and controlled by a foreign person) acquires 50 per cent or more of the shares of capital stock of a Korean company or becomes the largest shareholder having substantial control over the management of the Korean company, which owns ‘national core technology’, the proposed transaction must be reported to MOTIE prior to the closing of the transaction, and MOTIE may issue an order to prohibit or undo the transaction if it determines the consummation of the transaction may materially affect national security.
Furthermore, foreign and domestic investors alike are subject to major shareholder eligibility review of the financial regulator for investments in Korean financial companies (eg, banks, insurance companies, securities companies) in excess of a certain ownership threshold.
Are any other third-party consents commonly required?
In the absence of any contractual requirement to the contrary (eg, a change of control consent provision), a share transfer does not require third party consents other than the governmental approvals discussed in question 6 and requisite corporate approvals (eg, approval of the board of directors or shareholders).
On the other hand, a business or asset transfer may require third-party consents, depending on the assets or liabilities to be transferred as discussed under question 5.
Must regulatory filings be made or registration fees paid to acquire shares in a company, a business or assets in your jurisdiction?
See question 6 above for information on requisite regulatory filings.
M&A transactions generally do not require a registration fee, except that the issuer company in a share subscription and issuance is subject to a capital registration tax, and registration fees may be incurred for the registration of a transfer of certain assets or licences in the case of business or asset transfers.
Advisers, negotiation and documentation
In addition to external lawyers, which advisers might a buyer or a seller customarily appoint to assist with a transaction? Are there any typical terms of appointment of such advisers?
In addition to legal advisers, the advisers engaged to assist in a M&A transaction in Korea generally consist of accounting firms who conduct financial, accounting and tax due diligence, investment banks (in large transactions) who assist in valuation and negotiation of key commercial terms and (as necessary) special experts in environment, technology or intellectual property. Adviser fees depend on the size and complexity of the deal, and range from a time-charge basis, a contingency basis (including a guaranteed commencement fee and a contingent success fee) or a fixed (fee) basis depending on the nature and industry of the advisers.
Duty of good faith
Is there a duty to negotiate in good faith? Are the parties subject to any other duties when negotiating a transaction?
There exists no express duty to negotiate in good faith under Korean law, but a deal participant should be mindful of potential exposure to a tort claim for damages for an infringement of the good faith principle set forth under the Korean Civil Code or, in egregious cases, criminal liability for fraud. Furthermore, the directors of a buyer or seller may well owe a fiduciary duty to its company under the laws of the jurisdiction of incorporation of the buyer or seller, as applicable.
What documentation do buyers and sellers customarily enter into when acquiring shares or a business or assets? Are there differences between the documents used for acquiring shares as opposed to a business or assets?
Parties typically enter into a definitive share purchase agreement in share deals and a definitive asset or business transfer agreement in asset or business transfer deals. The terms and conditions of the two types of agreements are largely similar (having similar representations, warranties, covenants and indemnification provisions), but a definitive asset or business transfer agreement, by its nature, will have provisions (and, as necessary, ancillary agreements) governing the identification, and the effectuation of the transfer, of the applicable assets to be transferred.
Are there formalities for executing documents? Are digital signatures enforceable?
There exist no distinctive requisite execution formalities. As no particular formality is required under Korean law to legally effectuate agreements, digital signatures are enforceable as evidence of execution, unless the relevant parties agree otherwise. In practice, however, digital signatures have yet to be widely utilised, and parties often exchange signatures in PDF form via email to evidence execution (followed by delivery of original signatures).
When executing a document, the representative director (or the authorised person) of the company generally signs, or stamps the company’s registered corporate seal on, such document. Where the registered corporate seal is used for execution, a ‘certificate of registered corporate seal impression’ is almost always provided to the other party to verify the validity of the registered corporate seal.
Depending on the nature of the transaction, (a copy of) the resolution of the board of directors or the shareholders’ meeting of the company may be requested by and provided to the counterparty.
Due diligence and disclosure
Scope of due diligence
What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?
The due diligence of a target company typically comprises business, legal, regulatory, financial, accounting and tax due diligence. Legal due diligence customarily covers general corporate, business contracts, regulatory, human resources, real property, environment, intellectual properties, compliance, dispute, licences and permits.
While provision of due diligence reports by sellers to buyers has not been common in Korea, we have recently witnessed a noticeable increase in such deals, particularly in competitive auction deals conducted by private equity sellers. Where vendor (seller) due diligence reports are provided to potential bidders, the bidders are rarely permitted to rely on the provided due diligence reports, and the bidders rather review and digest the due diligence reports at their own caution and risk.
Liability for statements
Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?
Under the Korean Civil Code, a seller may be liable for pre-contractual misrepresentations or misleading statements as a tort if such misrepresentation or statement caused damage to the buyer. However, absent fraud, the seller may contractually avoid and exclude this liability by including an express disclaimer in the relevant definitive agreement for any liability arising from any representation or warranty provided outside of such definitive agreement.
Publicly available information
What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?
The most important public search conducted by potential buyers would be to locate and review the audited financial statements of the contemplated target company. Until recently, only stock corporations, and not limited companies, satisfying certain thresholds have been subject to an external audit and public disclosure of audited financial statements under Act on External Audit of Stock Companies. An amendment of the Act, however, was promulgated on 31 October 2017 and is scheduled to become effective on 1 November 2018, and, following a certain grace period, would require limited companies, in addition to stock corporations, to undergo external audits and publicly disclose their audit financial statements. The Financial Services Commission (FSC), the government agency with enforcement authority for the Act, recently proposed an amendment of the Enforcement Decree to the Act (Enforcement Decree), and the proposed amendment introduces an external audit requirement for limited companies and adds a new revenue threshold to the existing standards in determining the scope of companies subject to the external audit requirement. The proposed amendment of the Enforcement Decree requires all companies, stock corporations and limited companies, to undergo external audits, subject to an exemption based on certain financial threshold and standards.
Prior to the amendment of the Act and the Enforcement Decree, only stock corporations satisfying one of the following criteria as of the end of the immediately preceding fiscal year are required to undergo external audits:
- assets equal to or greater than 12 billion won;
- each of assets and liabilities equal to or greater than 7 billion won; or
- assets equal to or greater than 7 billion won and at least 300 employees.
The proposed amendment of the Enforcement Decree, on the other hand, requires all stock corporations and limited companies to undergo external audits, except for those that satisfy at least three of the following four criteria as of the end of the immediately preceding fiscal year:
- assets less than 10 billion won;
- liabilities less than 7 billion won;
- revenue less than 10 billion won; and
- less than 100 employees.
Impact of deemed or actual knowledge
What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?
On 15 October 2015, the Korean Supreme Court ruled that a purchaser in a M&A transaction may claim damages against a seller for the seller’s breach of its representations and warranties made in a definitive agreement even where the purchaser knew of the breach at the time of execution of the agreement. The Court held that, unless the definitive agreement makes clear that a seller’s obligation to compensate damages arising from a breach of a representation or warranty does not apply to breaches known by the purchaser, the intent of the parties would be that the seller compensate the purchaser for damages arising from the breach, regardless of the purchaser’s knowledge of the breach at the time of execution of the agreement. While lower courts were previously split on this sandbagging and anti-sandbagging issue, the Korean Supreme Court set forth a principle in favour of sandbagging where the relevant definitive agreement does not contain an anti-sandbagging provision. M&A practitioners should nonetheless carefully manage and proceed with M&A transactions, as the ultimate holding on the anti-sandbagging issue is likely to be determined based on the relevant facts and circumstances.
Pricing, consideration and financing
How is pricing customarily determined? Is the use of closing accounts or a locked-box structure more common?
Korean M&A practitioners had traditionally adopted a purchase price adjustment mechanism (eg, net asset value, working capital or net debt) to price Korean target companies. However, the locked-box structure has recently gained traction in Korean M&A deals, particularly in private equity exit transactions and deals involving European principals.
Form of consideration
What form does consideration normally take? Is there any overriding obligation to pay multiple sellers the same consideration?
Consideration is typically made in cash. The purchase price per share need not be the same, and can be different, for selling shareholders to the extent justifiable reasons (eg, control premium) exist.
Earn-outs, deposits and escrows
Are earn-outs, deposits and escrows used?
Deposits and escrows are frequently utilised in Korea. Korean conglomerate sellers, in particular, often request the potential purchaser to make a 5 per cent to 10 per cent earnest money deposit at the time of execution of a definitive agreement.
Earn-outs are less frequently adopted in Korean private company M&As, but appear from time to time in venture deals or deals where transaction parties are unable to resolve gaps in the valuation of the applicable business.
How are acquisitions financed? How is assurance provided that financing will be available?
Acquisitions, if financed, are typically supported with bank loans or issuance of notes or shares (or any combination thereof). Bank loans are commonly collateralised with the target company shares to be acquired, but assets of the target company are rarely provided as security for the bank loan due to concerns with a potential breach of fiduciary duty of the directors of the target company as explained under question 21.
The potential buyer frequently provides representations and warranties on its financing capability to consummate an acquisition. In competitive bid auctions, sellers often require bidders to submit evidence of their financing capabilities (eg, debt commitment letter, equity commitment letter), and this serves as one of the major factors affecting the preferred bidder selection decision of sellers.
Limitations on financing structure
Are there any limitations that impact the financing structure? Is a seller restricted from giving financial assistance to a buyer in connection with a transaction?
In Korea, a purchaser’s acquisition financing for leveraged buy-outs (LBOs) procured with credit support from the target company had historically raised breach of fiduciary duty concerns on the part of the directors of the target company. Korean LBOs are generally structured as one of the following three forms: the purchaser causes the target to provide its assets as collateral in securing acquisition financing (security interest-type LBO); the purchaser, upon consummation of the M&A transaction, subsequently merges with the target and provides its acquisition financing lenders a direct recourse to the assets of the target (merger-type LBO); the purchaser secures acquisition financing based on, and, upon consummation of the M&A transaction, receives, a cash stream from the target in the form of dividends, capital reductions or share repurchases.
Two Korean court decisions on LBOs were rendered in the first quarter of 2015, providing M&A practitioners with meaningful, practical guidance in structuring LBOs. First, with respect to merger-type LBOs (ie, an LBO where an acquirer would incorporate a special purpose company (SPC) that would borrow funds for the acquisition of the target company, and thereafter merge the SPC with the target company, thereby giving the creditor a direct recourse to the assets of the target company), on 22 January 2015, the Seoul Central District Court held that the directors of the target company should not be held criminally liable for breach of fiduciary duty in a merger-type LBO, underscoring, among other things, the financial soundness of the SPC, the assets of the target not being encumbered to secure the acquisition financing obligations of the SPC and the merger being consummated in accordance with applicable laws.
In the second decision rendered by the Korean Supreme Court on 12 March 2015 involving the provision of an upstream guarantee, or security interest-type LBO, the Korean Supreme Court found the representative director of the target to be not guilty of a criminal breach of the fiduciary duty in providing the target company’s assets as collateral to support the acquisition financing of the purchaser in the LBO. Reiterating that courts should consider the totality of circumstances in deciding upon a breach of a fiduciary duty matter in the context of LBOs, the Korean Supreme Court found the representative director to not have intentionally harmed the target to the benefit of the purchaser on the following basis:
- the purchaser invested its own capital in funding a significant portion of the purchase price for the acquisition;
- the target became a wholly owned subsidiary of the purchaser, and therefore the interests of the two were completely aligned;
- the financial condition of the target improved and its interest payment burden was reduced following the acquisition; and
- the target indirectly became a public company through the acquisition.
Note, however, that, unlike typical security-type LBOs, the purchase price in this case flowed directly into the target company as the purchaser subscribed to and purchased newly issued shares of the target company, which acted as a positive factor to support the Korean Supreme Court decision.
The recent Korean court decisions appear to suggest that the courts will not categorically find either a breach or non-breach of a fiduciary duty in an LBO transaction, but instead will consider the totality of the circumstances in order to determine the lawfulness of a given LBO transaction. In particular, the courts will consider factors such as whether the LBO transaction would be beneficial to the target company, the debt-to-equity ratio of the purchase price, and whether the transaction was carried out in a lawful manner and whether the interest of all parties were properly protected. However, as the Korean Supreme Court’s views on this matter are not yet conclusive, continuous monitoring of further developments is warranted.
Conditions, pre-closing covenants and termination rights
Are transactions normally subject to closing conditions? Describe those closing conditions that are customarily acceptable to a seller and any other conditions a buyer may seek to include in the agreement.
Common closing conditions include:
- completion of requisite regulatory and governmental approvals (if any);
- completion of requisite corporate approvals (eg, approval by the board of directors or shareholders’ meeting) for the transaction;
- all representations and warranties are true and complete (in material respects);
- performance of covenants and obligations (in material respects); and
- absence of a material adverse change.
What typical obligations are placed on a buyer or a seller to satisfy closing conditions? Does the strength of these obligations customarily vary depending on the subject matter of the condition?
The extent to which closing conditions are enforced, and the manner in which the satisfaction of closing conditions is tested, depends on the negotiation and leverage between the relevant parties. In the absence of any contractual agreement, the good faith principle under the Korean Civil Code may require the parties to act in good faith to satisfy the closing conditions.
Are pre-closing covenants normally agreed by parties? If so, what is the usual scope of those covenants and the remedy for any breach?
Customary pre-closing covenants include:
- best or reasonable efforts to consummate the contemplated transaction (including to obtain merger filing clearance);
- seller obligation to cause the target company to operate its business in the ordinary course of business consistent with past practice, and not engage in certain enumerated activities (without the consent of the buyer) such as corporate restructurings, share issuances or redemptions, dividend payments, affiliate transactions, material capital expenditures and execution and termination of material contracts;
- buyer best efforts to obtain financing necessary for the consummation of the contemplated transaction;
- notice to the other party upon violation of a representation or warranty; and
- seller granting the buyer with access to the books and records and personnel of the target company.
A breach of a pre-closing covenant can serve as grounds for indemnification or termination of the definitive agreement.
Can the parties typically terminate the transaction after signing? If so, in what circumstances?
Definitive agreements typically include a termination provision that allows parties to terminate the agreement upon the occurrence of events such as:
- an agreement between the parties to terminate the agreement;
- a party’s material breach of representations, warranties, covenants or other obligations set forth in the agreement where the breach is either not curable or was not cured for a certain period of time after delivery of a written request to cure the breach;
- the transaction fails to close before a particular drop-dead date; or
- a final and binding court order prohibiting the consummation of the contemplated transaction.
Are break-up fees and reverse break-up fees common in your jurisdiction? If so, what are the typical terms? Are there any applicable restrictions on paying break-up fees?
Parties often negotiate and agree on break-up fee or reverse break-up fees to provide a disincentive for either side to walk away from a deal. In government or creditor (financial institution)-driven sale transactions, the seller typically requires an upfront earnest money deposit at the signing of the definitive agreement, and this often serves as a reverse break-up fee; however, even in these cases, the buyer typically is not free to breach the contract and walk away from the deal by forfeiting the deposit.
On 14 July 2016, the Korean Supreme Court reversed the lower court decisions in a lawsuit brought by a consortium of investors for the return of a performance guarantee deposit delivered in an attempted acquisition. Based on long-standing principles that a performance guarantee deposit delivered by a purchaser to a seller is presumed to constitute liquidated damages unless otherwise deemed as a ‘penalty’ based on the relevant facts and circumstances, and that liquidated damages, unlike penalties, may be reduced if deemed to be unjustly excessive, the Korean Supreme Court found the performance guarantee deposit delivered by the proposed investors to constitute liquidated damages, and ordered a reduction of the amount although the definitive agreement expressly stated that the deposit would constitute a penalty when delivered to the seller for the breach of the said agreement. As such, potential sellers are now advised to look beyond the language of the agreement and take the foregoing decision into consideration if the performance guarantee deposit (if any) is contemplated to be forfeited and delivered to the seller in whole without reduction in the event of the purchaser’s breach of the definitive agreement.
Representations, warranties, indemnities and post-closing covenants
Scope of representations, warranties and indemnities
Does a seller typically give representations, warranties and indemnities to a buyer? If so, what is the usual scope of those representations, warranties and indemnities? Are there legal distinctions between representations, warranties and indemnities?
While ‘representation’ and ‘warranty’ refer to statements of past or existing facts and promises that existing facts are or will be true, such terms are used interchangeably as a matter of practice.
Parties in practically all deals provide warranties and indemnifications for fundamental aspects of the transaction, such as authority to execute and perform the definitive agreement, ownership and title to the transferred shares or assets and capitalisation. Further, it is more common than not to see warranties and indemnities provided for financial statements, undisclosed liabilities, absence of material chance, compliance with law, material contracts, litigations, tax, employment and labour and operations of the target company.
Indemnity is typically triggered upon a party’s breach of warranties or covenants, and its scope (which can be limited by a maximum cap, basket or threshold and de minimis or expanded through special indemnity) is determined based on negotiation between the parties.
Limitations on liability
What are the customary limitations on a seller’s liability under a sale and purchase agreement?
In general, a seller’s liability can be subject to the following limitations:
- materiality (ie, indemnity for material breach, as opposed to any breach);
- buyer knowledge (ie, no indemnity for known breaches of buyer);
- survival period for representation and warranty;
- basket or threshold;
- de minimis; and
- limitation on recourse other than indemnity.
However, the above limitation on a seller’s liability typically does not apply for the seller’s breach with bad intent or upon gross negligence.
Is transaction insurance in respect of representation, warranty and indemnity claims common in your jurisdiction? If so, does a buyer or a seller customarily put the insurance in place and what are the customary terms?
Representation and warranty (R&W) insurance is increasingly becoming a key consideration for sellers, particularly private equity sellers. The cost and coverage of the R&W insurance depends on the size and nature of the transaction, but customary coverage exclusions include known breaches, disclosed breaches, consequential loss, punitive damages, legally prohibited indemnification (eg, fines), forecasts, bribery or corruption, pension underfunding, secondary tax liability, transfer pricing and environmental contamination.
Do parties typically agree to post-closing covenants? If so, what is the usual scope of such covenants?
Typical post-closing covenants include the buyer’s obligation to maintain employment of existing employees without unfavourable change and the seller’s non-competition or non-solicitation obligation, in each case for a certain period of time.
Are transfer taxes payable on the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
A share transfer will subject the seller (or the buyer as the withholding agent, if the seller is a foreign entity with no permanent establishment in Korea) to capital gains tax and securities transaction tax (0.3 per cent to 0.5 per cent of the transfer price for listed and unlisted target company, respectively). If the seller is a foreign entity with no permanent establishment in Korea and the capital gains derived by the seller are not exempt under an applicable tax treaty, the buyer is required to withhold and pay the lesser of 11 per cent of the transfer price or 22 per cent of the capital gains (inclusive of relevant local tax). A share transfer under which the buyer becomes a majority shareholder (ie, more than 50 per cent shareholder) will also subject the buyer to a deemed acquisition tax equal to the net book value of certain properties (eg, real property, membership and vehicles) of the target company multiplied by the buyer’s shareholding ratio of the target company.
In a business or asset transfer, the seller will be subject to ordinary corporate income tax for the profits from the transfer of its business or assets (ie, transfer price of the relevant business or asset minus the cost basis of the relevant business or asset) at the following rates:
- 11 per cent, including surtax, for the first 200 million won;
- 22 per cent, including surtax, for taxable income between 200 million won and 20 billion won;
- 24.2 per cent, including surtax, for taxable income between 20 billion won and 300 billion won; and
- 27.5 per cent, including surtax, for any amount exceeding 300 billion won.
The buyer of assets would be subject to an acquisition tax payable on the acquisition of certain properties (including real property, membership and vehicles), normally at a rate of 4.6 per cent of the acquisition price. A heightened rate of 9.4 per cent is applicable if the acquired real property is located within the Seoul Metropolitan Area, subject to certain exceptions. In addition, a buyer of real property may be required to purchase a certain amount of housing bonds depending on the government-posted value of the real property.
Corporate and other taxes
Are corporate taxes or other taxes payable on transactions involving the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
See question 31 for transfer taxes arising in share transfers and business or asset transfers.
In an asset transfer, in addition to the taxes discussed under question 31 above, the seller is required to withhold and pay value added tax (VAT) on the transfer of VAT eligible assets (which include inventories, machinery and equipment, buildings and goodwill (however, land or accounts receivable are not subject to VAT)) at the rate of 10 per cent of the purchase price allocated to the relevant assets. On the other hand, no VAT is imposed in a comprehensive business transfer.
The buyer is generally eligible to credit VAT (except, eg, VAT on small passenger cars) paid against its VAT payable (or obtain a refund in the event of a shortfall) when it files a VAT return.
Employees, pensions and benefits
Transfer of employees
Are the employees of a target company automatically transferred when a buyer acquires the shares in the target company? Is the same true when a buyer acquires a business or assets from the target company?
In share acquisitions, the target company’s relations with, and employment of, its employees do not change. In mergers, the surviving company assumes the labour liabilities and employment of each of the non-surviving company’s employees by operation of law.
In asset transfers, the purchaser assumes the employment and labour liabilities, if any, of selected employees agreed to with the seller. In business transfers (and asset transfers deemed to be business transfers for labour law purposes), the purchaser will automatically assume the employment and labour liabilities of all employees of the transferred business, and be bound by the terms of existing employment agreements and arrangements by operation of law (unless the employees voluntarily agree otherwise). The transferee in a business transfer may not extend less advantageous employment terms to the transferred employees as compared to the terms previously provided by the transferor, unless the employees voluntarily agree otherwise.
Purchasers of Korean companies may experience labour union or employment related demands from target employees upon disclosure of an impending M&A transaction, including requests for job security, bonuses or certain concessions under collective bargaining agreements. Furthermore, purchasers may face demands from labour unions or employees following closing of the transaction, including with respect to disadvantageous changes to labour conditions or unpaid wages.
Notification and consultation of employees
Are there obligations to notify or consult with employees or employee representatives in connection with an acquisition of shares in a company, a business or assets?
Where a contractual obligation in an employment or collective bargaining agreement is absent or a commitment reflected in the rules of employment is absent, an employer is not obliged to inform or consult employees or their representatives or obtain employee consent in a share, business or asset purchase under Korean labour laws.
Transfer of pensions and benefits
Do pensions and other benefits automatically transfer with the employees of a target company? Must filings be made or consent obtained relating to employee benefits where there is the acquisition of a company or business?
See question 33. Pensions and other benefits do not change in share transfers, are assumed by the surviving company in mergers and are automatically applied to the buyer in the case of business transfers.
Update and trends
What are the most significant legal, regulatory and market practice developments and trends in private M&A transactions during the past 12 months in your jurisdiction?
Under the new President Moon administration, the Korean Fair Trade Commission (KFTC) has markedly strengthened its enforcement of restrictions on unfair support of affiliates through trade volume (il-gam-mol-a-joo-gi in Korean), unfair dealings with franchisees, distributors or subcontractors and unfair support practices, and is expected to not renew the grace period for restrictions on cross-shareholdings upon its expiration as of the end of 2018. These measures have led many conglomerates to undergo restructurings - the restriction on unfair support of affiliates through trade volume acted as the main driver and catalyst for certain restructurings of or investments in Hyundai Motors (eg, sale of 30 per cent equity stake of Innocean, sale of 13.4 per cent equity stake of Hyundai Glovis), CJ (eg, acquisition of core business of C&I Leisure Industry, sale of Joy Rent A Car), Hanwha (eg, spin-off of Hanwha S&C, and sale of 44.6 per cent equity stake of spin co) and LG (eg, acquisition of 24.7 per cent of LG International Corp.). Also, Samsung, Hyundai Motors and Lotte groups are undergoing restructurings to reduce cross shareholdings. The active enforcement of the KFTC of such regulations as well as fair trade law restrictions on shareholdings of holding companies, coupled with investors’ calls for more transparent corporate governance, will undoubtedly contribute to conglomerate restructurings, and, accordingly, a supply of potential targets, and market observers eagerly await to see how each conglomerate group reacts and responds to such fair trade regulations and changes in corporate governance.
Notwithstanding the general escalated enforcement environment and efforts to expand the scope of transactions subject to the merger filing requirement to include an independent test based on the monetary value of the transaction, the KFTC has consistently sought in recent years to improve efficiency in its merger filing review process, and effected the following as part of its continuing efforts on this front:
- as of October 2017, increased the previous worldwide assets or revenue threshold triggering a merger filing requirement with the KFTC from 20 billion won and 200 billion won to 30 billion won and 300 billion won, respectively - this means that, subject to additional qualifications applicable to offshore transactions and asset or business transfer transactions, a merger filing with the KFTC is required in onshore share transfers where either the acquirer or the target has total worldwide assets or revenues (inclusive of all affiliates, including the target if applicable, that remain as affiliates following consummation of the transaction) during the most recently completed fiscal year equal to 300 billion won or more and the other party has such assets or revenues equal to 30 billion won or more, and in onshore asset or business transfer transactions where the acquirer and the seller meet such asset or revenue thresholds (with respect to the acquirer, inclusive of all affiliates that remain as affiliates following consummation of transaction, and, in case of the seller, the seller only);
- as of December 2017, expanded the scope of transactions subject to the simplified fast track review process (subject to an accelerated 15-day review period) to include offshore joint venture establishments without anticompetitive concerns; and
- expressed support for legislations proposed and pending at the National Assembly to exempt establishment of private equity funds from the KFTC merger filing requirement.
In any event, navigating the regulatory requirements to consummate a M&A transaction in Korea is often a complex task, and potential investors are well advised to undertake a comprehensive review of regulatory requirements and hurdles early on in their investment review process, more so for investments in regulated or nationally important industries.