Background of issuance of Measures for M&A Promotion
The Ministry of Strategy and Finance on March 6, 2014, announced its Measures for M&A Promotion for the purposes of revitalizing the momentum of the economy through M&A market functions. These Measures for M&A Promotion includes measures relating to all areas of M&A such as relaxation of private equity fund ("PEF") related regulations, tax and finance support relating to M&A, suggestion of guidelines for leveraged buy outs ("LBO"), and the introduction of various new M&A methods etc., and thus is expected to bring about a large-scale change to the system and practice of M&A, and through the implementation of such new measures, the PEF industry is expected to grow and corporate reorganization activity is expected to be stimulated.
Main features of the Measures for M&A Promotion
- Increasing participation in the M&A market – Relaxation of PEF fund formation and investment regulations
- Business transfer transactions through newly established entities by a PEF will be permissible.
- If a financial institution intends to be the general partner ("GP") of a PEF, then it must obtain investment approval under the Act on the Structural Improvement of the Financial Industry, but in exceptional situations such as when closing of the transaction must be done urgently, after-the-fact approval may be obtained, thus newly enabling prompt and swift investment.
- Business combination filings needed at each step of a PEF investment transaction such as PEF fund formation, establishment of a special purpose company ("SPC"), acquisition of target company shares, etc. will be unified into a combined filing at the time of investment into the target company thus simplifying the process.
- Corporate Finance Stabilization PEFs which have special exceptions as to its asset management methods will now be able to invest in normally operating companies if such companies are within a company group that is undergoing reorganization.
- As for PEFs where the GP is within a company group that mainly engages in the financial industry or specializes in managing PEFs, then such PEFs shall be exempted from restrictions arising from being designated as a "Company Group subject to Limitations on Cross-shareholding" under the Korean Fair Trade Act, such as restriction of voting rights, public notice obligations, obligation to dispose of interests in subsidiaries within 5 years, etc. that may restrict the operations of the PEF.
- Up until now, companies whose largest shareholder is a PEF have been in practice restricted from being listed on a stock exchange. However, to facilitate the exit of PEF investments, such companies may now be listed.
- Tax support for M&A
- For reorganizations such as Work-outs that use stock swaps, a new tax exemption will be established that will enable the deferral of any capital gains tax until such stock is disposed.
- For M&As of venture companies and certain small medium enterprises, there is a tax credit equal to 10% of the technology value. This tax credit will be extended to a larger range of companies.
- For Qualified Mergers and Divisions, the range of exemptions regarding post-merger/division management requirements to obtain tax deferral will be expanded to include disposals pursuant to Work-outs, etc. in addition to disposals pursuant to rehabilitation procedures, thus relaxing requirements for applying for special tax benefits.
- Corporate Finance Stabilization PEFs will be temporarily exempt from securities transaction tax until the end of 2016.
- Exemptions for Deemed Acquisition Tax of Oligopolistic Stockholders in M&A transactions will be expanded from KOSDAQ companies to include KOSPI companies as well.
- Finance support for M&A
- When a financial investment company provides credit in relation to a M&A transaction, the range of M&A related loans exempted from the credit limit will be expanded, and M&A related loans will be excluded when calculating Net Capital Ratio ("NCR"), thus reducing restrictions on M&A related credit provision.
- Guidelines regarding LBOs that will reduce legal uncertainty for breaches of fiduciary duty and promote healthy LBO transactions are planned to be announced.
- Regulations, including capital requirements, for Specific Purpose Acquisition Companies ("SPAC") will be relaxed.
- Improvement of M&A systems and procedures
- Under the 'Financial Investment Services and Capital Markets Act, in the case of a merger between listed companies the merger price may only be decided within a +/- 10 percent range of the average market price. Such regulations will be relaxed so that transactions may take into consideration premiums, etc. while supplementary measures such as obtaining an objective outside valuation, etc. may be introduced when necessary.
- In addition to triangle mergers provided for under the current Korean Commercial Code, new M&A methods such as reverse triangle mergers, triangle divisions, and triangle stock swaps will be introduced, thus enabling a variety of possible M&A transaction methods and structures.
- The range of small-scale and simplified mergers where a shareholders' resolution may be replaced by a board of directors' resolution will be expanded, and a simplified business transfer system will be introduced where business transfers from a subsidiary to a parent company can be effectuated by a board of directors resolution in lieu of a shareholders' resolution.
- The range of exemptions for Mandatory Tender Offers will be expanded from sales of stock of companies under rehabilitation and companies under Work-out to include sales of stock pursuant to a voluntary agreement with creditor financial institutions.
We expect that through the implementation of the Measures for M&A Promotion, M&A activity of PEFs will be even more stimulated, and through the various tax and finance support systems, corporate reorganization through M&A will increase. However, the implementation of the Measures for M&A Promotion will require the amendment of the Financial Services and Capital Markets Act, the Korean Commercial Code, and the Korean Fair Trade Act etc., and the contents of such measures may be changed during the legislative process. Therefore, a close observation of the ensuing legislative process will be needed as well.