Use the Lexology Getting The Deal Through tool to compare the answers in this article with those from other jurisdictions.

Transaction formalities, rules and practical considerations

Types of private equity transactions

What different types of private equity transactions occur in your jurisdiction? What structures are commonly used in private equity investments and acquisitions?

Private equity transactions that commonly occur in Korea include the following:

  • acquisition of the entire or controlling equity of a listed or private company; and
  • acquisition of minority equity in a listed or private company by way of:
  • purchasing already issued shares;
  • subscribing to newly issued shares; or
  • subscribing to mezzanine securities including convertible bonds and bonds with warrants.

Structures commonly used for private equity investments and acquisitions in Korea include the following:

  • direct equity investments into investment targets (portfolio companies) by a private equity fund (PEF) established under the provisions of the Financial Investment Services and Capital Markets Act (FSCMA); and
  • indirect equity investments into portfolio companies through an investment purpose company (IPC) established by a PEF under the provisions of the FSCMA.

It should be noted that although a PEF established under the FSCMA is prohibited from acquiring debt, an IPC established by a PEF under the FSCMA can incur debt. Accordingly, Korean PEFs can only carry out leveraged buyouts by way of establishing and using an IPC for such purpose.

Corporate governance rules

What are the implications of corporate governance rules for private equity transactions? Are there any advantages to going private in leveraged buyout or similar transactions? What are the effects of corporate governance rules on companies that, following a private equity transaction, remain or later become public companies?

Most Korean companies are incorporated using the jusikhoesa (stock company) form of business organisation. A somewhat smaller number of companies are established using the yuhanhoesa (limited company) form of business organisation. Although the Commercial Code recognises a number of other forms of business organisation, such forms are impractical for most purposes and the number of companies established using such forms is negligible. The limited company cannot be listed on the Korea Exchange (KRX) and KOSDAQ exchanges, but the limited company provides a greater degree of freedom in corporate governance matters than is provided by the stock company form. One key advantage for the limited company is the fact that it is not required to have audits by outside auditors and publicly disclose its audit reports. Accordingly, until recently, such features have provided an incentive for some listed companies to go private and convert from the stock company to the limited company form. The relevant law was amended recently, however, with the result that, beginning in 2019, the limited company will no longer be exempt from such requirements.

The Commercial Act, FSCMA and KRX rules impose a number of corporate governance rules on listed companies that are not imposed on non-listed companies, such as the following:

  • appointment of independent director;
  • restriction against extending financing to affiliates;
  • appointment of full-time auditor or establishment of audit committee;
  • establishment of a committee for recommending independent director candidates;
  • appointment of chief compliance officer;
  • restriction on determination of issue price for newly issued shares; and
  • filing and disclosure of quarterly reports, includes financial status (also applicable to some non-listed companies, such as companies having more than 500 shareholders and formerly listed companies).

Accordingly, although there may be some advantage to going private under certain circumstances, going-private deals have not been particularly common in Korea. To the best of our knowledge, there have been fewer than 10 going-private deals that have been implemented by Korean PEFs. Perhaps the most important reason for this is that there has been no simple and economical procedure available for going private. Until recently, the only way to go private was to first buy minority shares through a tender offer process to the level required by the KRX as a pre-condition to allow delisting (ie, approximately 90 to 95 per cent of the total issued and outstanding shares). Furthermore, if the controlling shareholder desired to freeze out all minority shareholders, it had to acquire 95 per cent of the total issued and outstanding shares.

Recently, however, comprehensive share-swap transactions have been used by some companies to eliminate minority shareholders. In a comprehensive share swap in Korea, a parent company that desires to convert its subsidiary to a wholly owned subsidiary issues its own shares or gives its treasury shares to shareholders of the subsidiary in exchange for the subsidiary shares. But the Commercial Act allows the parent company to give cash to shareholders of such subsidiary instead of issuing new shares to them or giving them treasury shares. Recently, a few parent companies have used the comprehensive share-swap strategy to eliminate minority shareholders. We are not aware of any instances where the minority shareholders of the relevant subsidiaries have attempted to legally challenge such transactions and the validity of such comprehensive share swaps has not yet been tested in a Korean court. In the event that a Korean court upholds the validity of such comprehensive share swaps, we expect that going-private deals will become more attractive to PEFs.

Issues facing public company boards

What are some of the issues facing boards of directors of public companies considering entering into a going-private or private equity transaction? What procedural safeguards, if any, may boards of directors of public companies use when considering such a transaction? What is the role of a special committee in such a transaction where senior management, members of the board or significant shareholders are participating or have an interest in the transaction?

In Korea, directors are legally charged with carrying out their role in compliance with a general fiduciary duty regarding the interests of the company managed by them. Such duty includes a ‘duty of care as a prudent manager’ and a ‘duty of loyalty’. In Korean law, a person’s ‘duty of care as a prudent manager’ is essentially a ‘reasonable person’ standard in a management context, meaning the duty of care that is ordinarily expected from similarly situated managers exercising reasonable prudence in carrying out management responsibilities. Further, in Korean law, the ‘duty of loyalty’ requires that the directors must, as a matter of priority, impartially conduct the affairs of the company for the profit of the company as a whole, rather than for the special benefit of any specific shareholder or subset of shareholders.

Directors may face significant potential liability-risk issues with respect to actual or perceived violations of their fiduciary duty in connection with certain types of private equity transactions and going-private transactions where possible conflicts of interest may reasonably be expected and the directors can be seen as having particular motivations or incentives to give priority to the interests of a specific subset of shareholders at the expense of the interests of the company, thereby violating their fiduciary duty to the company.

It should be noted that, under Korean law, not only are directors subject to such fiduciary duty, but also any management executives (such as presidents, vice-presidents, chairs, vice-chairs, etc) who are authorised to represent or control the company (or both) regardless of whether such executives serve concurrently as directors who are subject to such obligations.

With regard to special committees, Korean companies rarely establish special committees of independent directors for particular transactions and the effectiveness of such special committees as a safeguard has not been ruled on in Korean court cases.

Disclosure issues

Are there heightened disclosure issues in connection with going-private transactions or other private equity transactions?

No heightened disclosure issues apply specifically to going-private transactions or other private equity transactions. However, there may be disclosure obligations associated with particular types of transactions or procedures incidental to implementing a particular going-private transaction or other private equity transaction.

More specifically, a going-private transaction or other private equity transaction in Korea may be structured to involve one or more types of relevant transactions, including, for example, issuances of new shares, issuances of mezzanine securities, tender offers, mergers, share exchanges, spin-offs and share transfers. Such transactions will by themselves (without regard to whether they are conducted in the context of a going-private process) trigger requirements for advance public disclosure of matters such as the purpose and content of the relevant transaction, the identities of the parties involved and other related information. By way of further example, under relevant legal provisions governing disclosure requirements in relation to transactions involving listed companies:

  • disclosures must be made with regard to shareholders who acquire shareholding ratios of 5 per cent or more (with follow-up disclosures to be made for subsequent 1 per cent changes of such shareholding ratios);
  • disclosures must be made to disclose attainment of major shareholder status (usually attained by acquiring a 10 per cent or greater shareholding ratio) and each subsequent change in the shareholding ratios held by the major shareholders;
  • tender offer statements must be filed in connection with any tender offer;
  • disclosures must be made in connection with private offerings of new shares or mezzanine securities; and
  • filing of a securities registration statement is generally required with respect to an offering or sale of securities in connection with a merger, share exchange, spin-off or transfer of shares.

Timing considerations

What are the timing considerations for a going-private or other private equity transaction?

Timing considerations for a private equity transaction depend upon a variety of factors, including for example:

  • the time needed by the target’s board (or controlling shareholders) to evaluate the transaction and any alternatives;
  • the time required for the completion of any necessary bank financing syndication arrangements or the placement of relevant debt securities;
  • the time required for completion of regulatory review by regulators such as the Fair Trade Commission and, in cases involving financial institutions, the Financial Services Commission and Financial Supervisory Service;
  • timing factors related to solicitation of proxies, setting shareholding record dates and compliance with requirements relating to convening necessary shareholder meetings; and
  • the time required to establish any required alternative investment vehicles and special purpose vehicles or to complete a restructuring of the target prior to closing.

Dissenting shareholders’ rights

What rights do shareholders have to dissent or object to a going-private transaction? How do acquirers address the risks associated with shareholder dissent?

Under Korean law, the common going-private method is to buy minority shares through tender offers up to the level that will allow delisting under KRX rules (ie, approximately 90 to 95 per cent of total issued and outstanding shares). Furthermore, if the controlling shareholder wants to freeze out all minority shareholders, it has to acquire 95 per cent of total issued and outstanding shares.

Korean law does not explicitly provide for rights of shareholders to dissent in relation to a tender offer process. However, in order for a company to delist itself, the controlling shareholder is required to hold approximately 90 to 95 per cent of the then outstanding shares. In this regard, a dissenting shareholder may effectively manifest passive dissent by not selling its shares to the controlling shareholder.

Korean law also allows a controlling shareholder who has 95 per cent or more of the total issued and outstanding shares to compel minority shareholders to sell their shares. Correspondingly, minority shareholders can compel a controlling shareholder who has 95 per cent or more of the total issued and outstanding shares to buy the minority shareholders’ shares. In any such process, the purchase price must first be agreed upon between the controlling shareholder and the minority shareholders. If an agreement cannot be reached, the parties may petition the court to determine the price.

In cases where a comprehensive share swap is implemented to implement a squeeze-out, the minority shareholders may exercise their appraisal rights. In this context also, the purchase price for the shares must first be agreed upon between the company and the shareholders. If they fail to reach such agreement, the purchase price will be determined by the court.

Purchase agreements

What notable purchase agreement provisions are specific to private equity transactions?

Purchase agreements in private equity transactions do not generally differ in substance and scope from purchase agreements used in various other transactions for the acquisition of investment interests. As with other types of purchase agreements in Korea, purchase agreements for private equity transactions can be varied and customised to reflect the particular objectives of the parties involved. To further clarify, no provisions are specifically required by law or market practice for purchase agreements relating to private equity transactions. Similarly, the scope of provisions relating to representations and warranties, conditions precedent to closing, time and manner of payment, future roles (if any) of existing shareholders and management, etc, are generally all subject to negotiation between the parties based on their particular circumstances and objectives.

Participation of target company management

How can management of the target company participate in a going-private transaction? What are the principal executive compensation issues? Are there timing considerations for when a private equity buyer should discuss management participation following the completion of a going-private transaction?

The issues relevant to directors, as described in question 3, are equally applicable to this question.

As a brief summary, management participation in going-private transactions in Korea is not prohibited and generally does not trigger any specific procedural requirements (other than abstention from voting by directors in conflict-of-interest situations). However, management participation tends to significantly increase the exposure of participating directors to charges or allegations (from shareholders or other parties who may have standing) that they have breached their fiduciary duties. Concerning the timing of a private equity sponsor’s participation in management following the completion of a going-private transaction, no legal restrictions apply as to when a private equity sponsor may begin to participate in the management of the target company.

Tax issues

What are some of the basic tax issues involved in private equity transactions? Give details regarding the tax status of a target, deductibility of interest based on the form of financing and tax issues related to executive compensation. Can share acquisitions be classified as asset acquisitions for tax purposes?

Capital gains tax

Korean withholding taxes are generally imposed on capital gains of a non-resident when the non-resident sells securities held in a Korean company. The applicable rate is whichever is the lower of 11 per cent of the gross sale proceeds or 22 per cent of the net capital gains (if sufficient documentation of the cost basis is available). The general capital gains tax provisions may be subject to exemption or reduction in relevant circumstances under Korean tax law provisions or any applicable tax treaty provisions, but it is generally the responsibility of the taxpayer to claim such exemption or reduction and provide such documentation and information as may be required as evidence of the taxpayer’s eligibility for the relevant exemption or reduction.

Dividends and interest

Unless a tax reduction or exemption is otherwise available under an applicable tax treaty, such as under a tax treaty’s anti-double-taxation provisions, any Korea-source income received by a foreign corporation from a Korean corporation is subject to withholding by the Korean corporation in accordance with the withholding rates specified in the relevant Korean tax law provisions, based on the classification of such income. The withholding rate that is generally applied to dividends and interest payments in Korea is 22 per cent (including local surtax). This rate may be subject to reduction if the foreign entity is eligible to claim a reduction under an applicable tax treaty.

With respect to the tax liabilities of Korean corporations, dividends are not recognised as deductible expenses, but interest payments, subject to thin capitalisation restrictions, are generally recognised as deductible expenses.

Securities transaction tax

Sales of Korean securities (ie, securities issued in Korea by a Korean company) are subject to a securities transaction tax, which is imposed at a rate of 0.5 per cent of the gross sale proceeds (or 0.3 per cent in the case of on-exchange transactions). Please note that this is in addition to any applicable capital gains tax imposed on gains derived in the sale of the securities.

In cases where the seller of shares in a Korean company is a non-resident of Korea and the purchaser is a resident of Korea, the purchaser must withhold the share transfer tax amount and remit such amount to the tax authority within two months following the end of the quarter within which the purchase of the shares occurred.

Taxation on PEF

A Korean PEF is generally taxable as an entity separate from its investors. However, the PEF may elect to be treated as a partnership for Korean corporate income tax purposes. In such cases, the PEF is treated as a pass-through entity and earnings received by the PEF’s investors are subject to Korean income tax payable by each investor in accordance with the amount received by such investor. More specifically, such earnings when allocated to the PEF’s limited partners or members, are treated as dividend income, regardless of the nature of the underlying source of the income.

Deemed acquisition tax (DAT)

Under Korean tax law, a shareholder who acquires more than 50 per cent of a Korean company’s shares is subject to DAT. In such instance, the shareholder is deemed to have indirectly acquired the company’s assets (such as any land, buildings, rolling stock, etc) and is therefore deemed liable for any asset acquisition taxes that may apply generally to acquisitions of the relevant types of assets.

The DAT is calculated by multiplying the book value of the relevant asset by the applicable tax rate (namely, 2.2 or 2.0 per cent, depending on the asset), and then multiplying this result by the shareholding ratio that the shareholder holds in the Korean company.

Debt financing

Debt financing structures

What types of debt are typically used to finance going-private or private equity transactions? What issues are raised by existing indebtedness of a potential target of a private equity transaction? Are there any financial assistance, margin loan or other restrictions in your jurisdiction on the use of debt financing or granting of security interests?

Going-private or private equity transactions can include one or more forms of debt, such as senior loans provided by banks (usually in two or three tranches) and mezzanine loans by banks or specialised lenders. Debt instruments in the form of various types of notes and bonds (for example, convertible bonds and bonds with warrants) are also commonly used in structuring going-private and private equity transactions.

In general terms, the nature and degree of existing indebtedness of the target company will, of course, affect the availability and terms of financing that may be required for investment in the target company. Beyond this, the most significant issues relate to accommodating the concerns of existing creditors of the target company and, correspondingly, the ways that existing indebtedness will influence the overall structure adopted for the contemplated investment transactions.

In some cases, private equity transactions will be structured to include arrangements with financial institutions to finance both the investment by the acquirer and the refinancing for the target company. The objective in arranging a combined financing and refinancing package is to avoid difficulties with existing creditors of the target company that may otherwise ensue when restructuring the target, such as reduction in capital of the target or divestiture of the company. Structuring an acquisition to include refinancing of the debt of the target company is often aimed at ensuring that the post-acquisition circumstances will be relatively ‘clean’ by reducing the overall number and diversity of creditors and, where possible, ensuring that the acquirer and the target company will have a common creditor or group of creditors whose interests will be more closely aligned with each other and overall investment objectives. Such an approach generally ensures greater cooperation and flexibility with the relevant creditors in connection with capital reductions and similar matters.

In practice, acquisition financing obtained by an investor is typically secured by one or a combination of the following: the shares of the target company acquired by the investor; the shares of the investor held by the investor’s shareholders; and any other assets of the investor. In connection with such financing, certain restrictions will apply according to the type of institution that is providing the financing.

It should also be noted that investors in private equity may not use their influence to cause target company assets to be used as collateral to secure the investor’s acquisition financing.

Except for certain limited circumstances, PEFs organised under the FSCMA are prohibited from borrowing funds. In those limited circumstances in which borrowing is permitted, such borrowing cannot exceed 10 per cent of the value of the private equity fund’s assets. On the other hand, IPCs established by such private equity funds are generally permitted to engage in borrowing and may provide guarantees for debts of portfolio companies or persons related to portfolio companies, provided that the aggregate of such borrowing and guarantees does not exceed 300 per cent of the IPC’s equity capital.

Debt and equity financing provisions

What provisions relating to debt and equity financing are typically found in going-private transaction purchase agreements? What other documents typically set out the financing arrangements?

In the case of Korean PEFs, it is generally the case that the PEF itself will be a party to the purchase agreement (executed on the PEF’s behalf by the authorised manager), entering into such agreement after the PEF has been duly established. In such cases, the commitment amounts of the PEF’s investors will have already been determined and will be specified in the PEF’s articles of incorporation. Because the PEF investors assume direct obligations for the PEF’s undertakings in the purchase agreement up to their respective commitment amounts, purchase agreements in this context do not usually contain separate equity financing provisions. Furthermore, because borrowing by Korean PEFs is restricted, such purchase agreements also do not typically contain debt-financing provisions.

In cases where a PEF indirectly obtains supplemental debt-financing through an IPC, the IPC will itself be a party to the relevant purchase agreement. In such cases, it is common for the IPC to enter into a purchase agreement for a going-private transaction in circumstances where the terms of the debt-financing have been finalised, but the definitive debt-financing agreement has not yet been formally executed by the parties. In such circumstances, a commitment letter from the third-party lender (ie, the lender to the IPC) that includes the final draft (agreed form) of the debt-financing agreement will be furnished to the seller before execution of the purchase agreement. In contrast to this practice, there are also instances where the purchase agreement will be executed before the debt-financing agreement terms are finalised. In recent years, however, the trend increasingly favours the practice of requiring that the terms of any related debt-financing be substantially finalised at the time that the purchase agreement is executed. .

In cases where foreign private equity funds obtain debt financing from Korean third-party lenders, it is nearly always the case that the relevant definitive debt-financing agreement will be entered into simultaneously with the foreign private equity fund’s execution of the definitive purchase agreement.

Fraudulent conveyance and other bankruptcy issues

Do private equity transactions involving leverage raise ‘fraudulent conveyance’ or other bankruptcy issues? How are these issues typically handled in a going-private transaction?

No particular problems have been raised in this regard.

Shareholders’ agreements

Shareholders’ agreements and shareholder rights

What are the key provisions in shareholders’ agreements entered into in connection with minority investments or investments made by two or more private equity firms? Are there any statutory or other legal protections for minority shareholders?

Shareholders’ agreements frequently provide for share transfer restrictions, tag-along rights, drag-along rights or veto (or consent) rights. Key provisions often include a right for the acquirer of a minority stake to recommend or nominate a representative for appointment to the board of directors. In terms of investment exit strategies relating to investment in an unlisted company, covenants to implement a listing and IPO are sometimes provided in the relevant agreement. However, the most common strategy is to include put-option rights exercisable against the largest shareholder of the company. In Korea, agreements purporting to give put option rights to a shareholder against the company itself are not recognised and are therefore unenforceable. Redemption rights in respect of redeemable shares are enforceable, however, as long as the company has sufficient distributable profits that can be applied to making such redemptions.

The Commercial Code requires the consent of two thirds of the shares represented by those attending a relevant general shareholders’ meeting for approvals of such things as:

  • amendment of the articles of incorporation;
  • mergers;
  • splits;
  • comprehensive share swaps;
  • comprehensive share transfers;
  • transfers of all or any substantial portion of the company’s business;
  • removals of directors or standing auditors; and
  • company dissolution, etc.

Further, certain legal rights (for example, the right to request the convening of general shareholders meetings, the right to request the removal of directors, the right to inspect the financial records of the company, the right to request an audit of the business and financial condition of the company and the right to submit proposals for resolution by the general shareholders of the company, to file a derivative action against directors) are provided by law for the protection of minority shareholders who meet certain statutory minimum shareholding ratio requirements. Such minimum shareholding ratio requirements vary depending on the nature of the right and whether the company is a listed company (generally, the Commercial Code applies much lower minimum shareholding ratios for listed companies).

Acquisition and exit

Acquisitions of controlling stakes

Are there any legal requirements that may impact the ability of a private equity firm to acquire control of a public or private company?

A public tender offer process must be carried out in accordance with procedures prescribed in the FSCMA when the contemplated acquisition of shares of a listed company entails certain factors prescribed in the FSCMA (namely, a public tender offer must be carried out in circumstances where the acquirer acquires shares outside of the stock exchange from 10 or more persons during the preceding six months and such acquirer, together with specially related persons, holds 5 per cent or more of the total issued shares of the target company after such acquisition). Otherwise, there are no particularly significant regulatory obstacles that would adversely affect the ability of a private equity firm to acquire control of a public or private company in Korea.

In this regard, it should be noted that, in a relatively limited number of cases, depending on the nature of the target company’s business, certain additional restrictions may be imposed with regard to the qualifications required of any entity that becomes or seeks to become the target company’s largest shareholder, as well as requiring approval from relevant governmental institutions for shareholding above a specified level. (See discussion concerning strategic industries in question 17.) In such cases, these additional restrictions would not be imposed to disqualify the PEF per se, but rather may apply to prevent the PEF from acquiring the relevant shares owing to the fact that the PEF (as would be the case for numerous other entities) did not meet the qualifications necessary to be the largest shareholder of the relevant target company.

Exit strategies

What are the key limitations on the ability of a private equity firm to sell its stake in a portfolio company or conduct an IPO of a portfolio company? In connection with a sale of a portfolio company, how do private equity firms typically address any post-closing recourse for the benefit of a strategic or private equity buyer?

There are no particular restrictions or regulatory limitations on the ability of a PEF to sell its stake in a portfolio company or conduct an IPO of a portfolio company.

A Korean PEF and its general member (manager) usually seek to avoid exposure to any long-term indemnification obligations. The main reasons are that usually the articles of incorporation of Korean PEFs have no limited member clawback provisions and that the general member is itself the entity responsible for managing the PEF. Some PEFs avoid indemnification obligations or reduce the period of indemnification obligation exposure by lowering the selling price. Some PEFs put an amount in escrow to cover potential indemnification liability until the indemnification period ends. Traditionally, insurance was generally not used by purchasers who acquire portfolio company shares from PEFs in order to address post-closing recourse issues. More recently, however, there has been a gradual increase in the number of purchasers who obtain indemnification insurance and PEFs agreeing to essentially pay the insurance premiums by way of reducing the sale price to an extent that corresponds to the amount of the insurance premiums.

Portfolio company IPOs

What governance rights and other shareholders’ rights and restrictions typically survive an IPO? What types of lock-up restrictions typically apply in connection with an IPO? What are common methods for private equity sponsors to dispose of their stock in a portfolio company following its IPO?

Ordinarily, a private equity fund will have board appointment rights with respect to a portfolio company. In such cases, the private equity fund may sometimes agree, by way of shareholders’ agreement, to give up such board appointment rights following the IPO. This is, however, a matter of market practice and not a legal requirement. In Korea, when a company undertakes an IPO and applies for listing of its shares in connection therewith, it is required to include all of its issued shares of the same class in the listing. Following the IPO, such listed company must apply for the listing of any additional new shares issued by the company of the same class as the previously listed shares from time to time. Accordingly, there is no scope for application in the Korean system of the concept of registration rights in the way that such a concept is used in other jurisdictions.

In terms of lock-up restrictions, the largest shareholder is restricted from selling its shares for a prescribed period (namely, in principle, six months for the securities listed on the Korea Composite Stock Price Index market and in principle, six months for the securities listed on the KOSDAQ market) following an IPO and persons who acquire shares from the largest shareholder (including any person who acquires new shares issued by the company by way of allotment to the third party) during the one-year period preceding the date of the application to the relevant exchange for a preliminary listing assessment are also subject to a lock-up period restriction and are required to place such acquired shares into a custodial account with the Korean Securities Depository for the prescribed lock-up period.

Target companies and industries

What types of companies or industries have typically been the targets of going-private transactions? Has there been any change in focus in recent years? Do industry-specific regulatory schemes limit the potential targets of private equity firms?

As the number of going-private transactions in Korea is not particularly extensive, attempting to extrapolate any meaningful trends or conclusions as to the types of companies or industries that are typical targets is not possible at this stage. It may take a number of years before there have been enough such transactions to identify any particular trends.

However, it can be noted that one type of going-private transaction category that may be worthy of attention as a possibly emerging trend involves foreign companies engaged in a particular industry or area of business outside of Korea who seek to establish a substantial business presence in Korea by acquiring a listed Korean company engaged in the same industry or business area, and taking such company private as the foreign company’s Korean subsidiary.

In this regard, laws and regulations specifically limit the shareholding ratios that foreign investors may hold in companies in certain strategically important industries, such as telecommunications. Additionally, certain restrictions are imposed under relevant laws and regulations regarding the activities of controlling shareholders and largest shareholders of financial institutions, and regarding certain types of transactions subject to approval from the Financial Services Commission.

Special issues

Cross-border transactions

What are the issues unique to structuring and financing a cross-border going-private or private equity transaction?

Under Korean law, thin capitalisation rules are applicable to transactions involving foreign controlling shareholders. In relevant cases, such rules may affect the structuring and financing of foreign private equity investment in Korea.

Additionally, it should be noted that agreements that require the remittance of funds from or to Korea are subject to applicable reporting requirements under either the Foreign Exchange Transaction Act or the Foreign Investment Promotion Act.

Direct investment by foreign investors in Korean companies pursuant to the Foreign Investment Promotion Act is generally unrestricted, with the exception of a limited number of business categories that are subject to foreign ownership ceilings. Foreign investors desiring to acquire newly issued shares of Korean companies are required to file a report to the Ministry of Trade, Industry and Energy (MOTIE) prior to making the acquisition. (The MOTIE has generally delegated the task of processing and accepting such reports to licensed foreign exchange banks in Korea. In practice, therefore, the relevant report will be filed with an appropriate foreign exchange bank and must be formally accepted by such bank to be recognised as validly filed.)

Club and group deals

What are some of the key considerations when more than one private equity firm, or one or more private equity firms and a strategic partner or other equity co-investor is participating in a deal?

If multiple private equity firms participating in a club or group investment in a listed company, the participants in such club or group may be regarded as parties ‘acting in concert’ and in such case their shareholding ratios are aggregated together for the purpose of determining whether they must file a large-block shareholding report (namely, a reporting requirement triggered by the holding of 5 per cent or more of the issued and outstanding shares of a listed company) pursuant to the relevant provisions of the FSCMA.

Issues related to certainty of closing

What are the key issues that arise between a seller and a private equity buyer related to certainty of closing? How are these issues typically resolved?

Issues related to certainty of closing are covered by the relevant contractual arrangements between a seller and a private equity buyer. Standard condition precedent provisions are typically adopted, such as material accuracy and validity of representations and warranties, legality of contemplated transactions, etc. At present, there are no clearly predominant standard practices or provisions with regard to termination rights and allocations of expenses and costs owing to failure to close. The different approaches adopted often depend on the respective bargaining positions of the parties. Parties that have roughly equal bargaining power tend to include provisions for each party to bear its own expenses and costs. Termination fees per se are not particularly common. However, the parties in some cases do include provisions for ‘termination fees’ in the form of liquidated damages provisions for certain types of termination events where termination is solely the fault of one party.