Contributed By Lee & Ko
The Korean M&A market has seen a slight growth in 2019 compared to 2018. According to Bloomberg, there was a total of 1,509 deals targeting Korea with deal amounts worth approximately USD74.1 billion in 2019, which represents a 2.9% increase in the number of deals and 1.4% increase in deal volume compared to 2018. Further, the total deal volume for cross-border outbound transactions increased by approximately 24.7% to USD57 billion in 2019, whereas the total deal volume for cross-border inbound transactions decreased by approximately 8% to USD17.3 billion in 2019.
M&A of listed companies has also increased. According to the Korea Securities Depository, of the listed companies in 2019, there were 128 companies that have completed or are in the process of M&A, which is a 20.8% increase from 106 in the same period the previous year. Among these transactions, mergers (108 companies) were the most common, followed by comprehensive share exchange and transfers (13 companies) and business transfers (seven companies). Please note that the statistics provided by the Korea Securities Depository is limited to those transactions which require approval by special resolution of shareholders and do not include those transactions (mainly, purchase and sale of shares) that are consummated without shareholders’ approval.
Significant M&A transactions in 2019 include the acquisition of Daewoo Shipbuilding & Marine Engineering by Korea Shipbuilding & Offshore Engineering (USD4.6 billion), Delivery Hero’s acquisition of Woowa Brothers (USD4 billion), Macquarie PE’s acquisition of Daesung Industrial Gases (USD2.5 billion) and the acquisition of Asiana Airlines by a consortium of Hyundai Development Company (HDC) and Mirae Asset Daewoo (USD2.2 billion).
The top trend in Korea in 2019 was the uninterrupted growth of private equity deals and outbound deals.
Private equity firms (PE) have been actively participating in the Korean M&A market in recent years. Data from multiple institutions similarly showed growth for deals in which PE participated for four consecutive years since 2016 for both buyout and exit. According to Mergermarket, PE buyouts increased steadily from USD9.7 billion in 2016 to USD11.3 billion in 2017, USD12.0 billion in 2018 and USD14.9 billion in 2019 and such rise of PE buyouts also extended to increase in PE exits from USD5.9 billion in 2016 to USD7.2 billion in 2017, USD9.9 billion in 2018 and USD12.1 billion in 2019.
As described in 1.1 M&A Market, there was a significant increase in the volume of outbound activities in 2019. According to Mergermarket, the United States was the largest outbound destination and the acquisition of the US-based Strategic Hotels & Resorts by Mirae Asset Global Investments for USD5.8 billion headed as the largest outbound deal in 2019, accounting for 32.8% of total outbound activity value followed by the acquisition of 27.38% stake in Line Corp. by a consortium of Naver Corporation and SoftBank Group Corp for USD3.2 billion. Vietnam ranked as the second largest outbound destination by recording USD2 billion across 12 deals and acquisition of a 6.15% stake in Vietnam-based Vingroup Joint Stock Company by SK Holdings for USD1 billion was the third largest outbound deal in 2019.
As COVID-19 spreads across the globe, the first quarter of 2020 has seen a stall in M&A deals, presumably due to the pandemic-fuelled economic downturn and various administrative measures (including social distancing) advanced by the government to prevent further spread of COVID-19. Challenges imposed by COVID-19 are still evolving and the full impact of the risks and disruption to businesses remain uncertain.
According to Bloomberg, in 2019, M&A involving the financial sector was the most active, with a 22% share of the total market (in terms of deal volume), followed by the consumer sector (cyclical) with 18%, the industrial sector with 15%, the basic materials sector with 14% and the telecommunication sector with 11%. Mergermarket, which adopts a slightly different industry classification, noted industrials and chemicals (USD20.2 billion) as largest sector accounting for 33.7% of deal value. Transportation (USD7.2 billion) and Real Estate (USD1.7 billion) recorded the highest deal value increase year-on year in percentage terms – 343.8% and 306.8%, respectively.
The different methods of acquiring a company typically utilised in other jurisdictions – namely, share acquisition, asset purchase and merger – are also available in Korea. Out of these, regardless of whether the target company is a listed or an unlisted company, the most common form of acquiring a company in Korea is through the acquisition of its shares. The second most common form is an asset purchase, which has to take the form of a business acquisition if an entire business is purchased through an asset purchase. In the case of a merger, it is used mainly as a means of restructuring between affiliated companies and rarely used as a buyout method.
The reason why share acquisition is also the primary tool for acquiring a listed company in Korea is due to the unique shareholding structure of listed companies in Korea. It is often the case that listed companies have a controlling shareholder and thus public M&A transactions typically involve the acquisition of such controlling stake from the controlling shareholder through share acquisition. However, if there is no controlling shareholder, or if the acquirer intends to go private after taking over the remaining shares following the acquisition of the controlling shareholder’s shares, or if the acquirer intends to conduct a hostile takeover, a tender offer of a listed company is another means by which a company may be acquired. Tender offers are primarily regulated by the Financial Investment Services and Capital Markets Act (FISCMA).
In recent years, there have been legislative efforts to introduce other means of conducting M&A transactions. For example, in 2012, the Korean Commercial Code (KCC) was amended to introduce triangular mergers. Despite such efforts, triangular mergers have rarely been used as a means of acquiring a company since its introduction, primarily because amendments to other laws and regulations such as tax legislation that are necessary in practice to make use of a triangular merger have not yet been completed.
Regulation of M&A activity in Korea involves regulation of:
Different government agencies have supervisory responsibilities over these regulations.
On the one hand, the Ministry of Trade, Industry and Energy (MOTIE) oversees foreign direct investment in general. On the other hand, the Ministry of Strategy and Finance and the Bank of Korea jointly regulate matters relating to foreign exchange. Additionally, M&A activity in certain industries may be further regulated by the relevant government agencies supervising those particular industries.
In regard to antitrust and competition issues, the Korea Fair Trade Commission (KFTC) has responsibility to evaluate the potentially anti-competitive effects of M&A.
The Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) are two primary regulators that regulate M&A activity by regulating the trading of shares of listed companies of the Korea Exchange through implementation of securities regulations.
With respect to distressed M&A transactions, courts oversee M&A activities of companies under bankruptcy or restructuring proceedings.
In Korea, the vast majority of areas and industries of business are open to foreign investment and it can be said that there are few restrictions on foreign investment in Korea.
However, foreign investments in certain business sectors are restricted for national security reasons. For example, the Telecommunications Business Act provides that foreigners may not own more than 49% of shares in a core telecommunications company. Similar restrictions are also applicable to other sectors, including electric power transmission and distribution, education and defence. Furthermore, certain cross-border transactions are subject to review and may be restricted for national security reasons; see 2.6 National Security Review.
Other than the rare cases of foreign investment restrictions mentioned above, foreign investment into Korea is a relatively simple process that requires the satisfaction of certain filing requirements. In the case that a foreign investor acquires either 10% or more of the total issued and outstanding voting shares or equity of a Korean company, or less than 10% but dispatches or appoints an executive officer to a Korean company, and the investment amount is KRW100 million or more, the investment will be considered as foreign direct investments (FDI) and subject to the aforementioned simpler filing requirement. Foreign investments that are not FDI per the requirements above are treated as portfolio securities investments and are subject to a filing requirement under the Foreign Exchange Transaction Law.
The Monopoly Regulation and Fair Trade Act (MRFTA) requires the filing of a business combination report if, whether listed or unlisted, a party that has total assets or sales of KRW300 billion or more combines its business with another party that has total assets or sales of KRW30 billion or more. In calculating the total assets or sales of a party, the total assets or sales of all affiliates of the party that remain affiliated with the party after the business combination are aggregated.
The filing of the report must be made to the KFTC generally within 30 days from the closing of the transaction. However, transactions involving a large company group with total assets or sales of KRW2 trillion or more are, in principle, subject to pre-closing review by the KFTC. The statutory review period is 30 days from filing regardless of whether the filing is made before or after the closing. However, the KFTC, at its own discretion, may extend the period for up to 90 additional days, thus making the total possible review period 120 days. Further, if the KFTC makes a request for additional information or materials, the review period is tolled until the requested items are submitted.
In practice, if the competition restrictiveness of the transaction is deemed not to be great, the review period usually takes approximately 30 days. If, on the other hand, there are competition restriction concerns, the review period may take several months.
In Korea, there are no labour law regulations that require companies to obtain approval from their employees for M&A transactions. However, the terms of any M&A transaction must comply with provisions of the Labour Standards Act (LSA). Under the LSA, involuntary termination of employment is permitted only for 'just cause' and an M&A transaction itself cannot be the ground for any involuntary termination, such as a lay-off, or restructuring. Satisfying the requirements under the LSA for such involuntary termination is considered difficult in Korea, which limits the acquirer’s ability to conduct any significant HR restructuring in connection with the M&A transaction.
Employment issues that investors may face in connection with M&A transactions include demands of the labour union relating to job security, bonuses, or concessions under collective bargaining agreements, discriminatory treatment issues between regular employees and non-regular employees and under paid, or unpaid, wages or allowances. Investors need to conduct appropriate due diligence on these potential HR issues, all of which may have significant financial implications for the acquirer.
In the case of acquiring a defence company, in order for a foreign investor to acquire a 10% or more share ownership in a defence company for a purchase price equal to or in excess of KRW100 million, the investor must obtain prior approval of MOTIE pursuant to the Foreign Investment Promotion Act. If the acquirer intends to acquire controlling interest over management of defence companies by means of purchase or exchanges of shares, mergers or business transfers, such acquirer must obtain prior approval of MOTIE pursuant to the Defence Acquisition Programme Act.
According to the Industrial Technology Protection Act (ITPA), as amended on 20 August 2019 and effective from 21 February 2020, foreign investors are required to obtain prior approval of MOTIE to make certain investments (by way of acquisition, merger, joint venture or other types of investments) in Korean entities which hold national core technologies (NCT) developed with government R&D subsidies. On the other hand, foreign investors are required to report in advance to MOTIE to make certain investments in entities which hold NCT developed without government R&D subsidies.
As such, a recent amendment of ITPA has expanded the scope of reporting requirements to include foreign investments made in entities holding NCT developed without government R&D subsidies, a form of investment and entity which was previously not subject to reporting obligations. Under the Presidential Decree of ITPA, the types of transactions that are captured include acquisitions of 50% or more of shares in entities holding NCT, acquisition of all or substantially all of the businesses of entities holding NCT and gaining the ability to exercise controlling influence over entities holding NCT by providing loans or contributing funds. Where MOTIE deems that divulgence of NCT may seriously affect national security, MOTIE may order a suspension, prohibition or even unwinding of the transaction. As evidenced by the amendment of ITPA, the Korean government has heightened its protection of NCT.
Pursuant to the Act on Electronic Registration of Stocks, Bonds, etc, the Electronic Security System (ESS), which requires full dematerialisation of securities certificates of listed companies, came into force on 16 September 2019. Following dematerialisation of the securities certificates, physical certificates previously held by shareholder ceases to be valid and effective. While non-public companies are not subject to the ESS, voluntary application and compliance therewith is permitted. As such, sale and purchase of shares is processed by transferring electronically registered shares from the securities account of the seller to that of the purchaser, effectively discarding the need of physical delivery of the share certificates. Similarly, pledging of the shares also occurs by electronically registering establishment of pledges over shares.
On 20 July 2018, the Supreme Court rendered the following decision with respect to claims arising out of seller’s breach of representations and warranties made in a share purchase agreement (SPA):
Beginning in 2018, the government is taking initiatives to relax regulations on PE by amending FISCMA. The current FISCMA classifies privately placed funds into private equity funds (PEFs) and hedge funds:
The amendment alleviates regulations by eliminating the distinction between PEFs and hedge funds; eliminating all equity, voting rights and lending restrictions; and allowing borrowing of up to 400% of net asset value of the privately placed funds. However, the bill on the above amendment (proposed in November 2018) still remains pending in the National Assembly as of the date of this article, and will expire if it is not passed before the general election (to be held in April 2020). Nonetheless, passage of the bill may still be feasible as the FSC continues to push for amendment of regulations on PEFs and neither political parties appear to have dissented to the bill. Upon passage of the bill, it is expected that the private equity activity in the M&A market will be further increased.
With respect to takeover laws, although no amendments have been made to the KCC in 2019 related to takeover laws, several related amendments are pending in the National Assembly. The proposed amendments put forward by the government and the ruling party include, for example:
Proposed amendments on the KCC remains pending in the National Assembly and will expire if the amendment bill is not passed prior to the general election date. Although it is difficult to predict whether such amendments to the KCC will pass, if they are ratified into law, such amendments will likely affect hostile takeover and other activist activities in the future, as they will facilitate the entry of minority shareholders and management oversight.
In the case of acquiring a Korean listed company in a friendly transaction, if there is a controlling shareholder in the company, the purchaser acquires the shares of the controlling shareholder first and then acquires the remaining shares of the minority shareholders through a tender offer, to go private thereafter.
In the case of a hostile takeover of a Korean listed company, the bidder usually acquires less than 5% of the target company’s shares in order to avoid filing the 5% Disclosure Report; see 4.2 Material Shareholding Disclosure Threshold. A failure to fulfil the requirement to file a 5% Disclosure Report will result in restrictions on voting rights and the FSC may order the disposal of such shares held in violation.
On the other hand, in some cases a mandatory tender offer may be required; see 6.2 Mandatory Offer Threshold.
The FISCMA provides that if an investor (which includes specially related persons and parties acting in concert) intends to hold 5% or more of the voting shares or other equity securities issued by a listed company, such investor must file a report with respect to the contemplated shareholding with the FSC and the Korea Exchange (KRX) within five business days of both the execution date of the relevant SPA, as well as the closing date of the transaction contemplated thereby (the 5% Disclosure Report). In the case of any change of 1% or more in shareholding of the investor, an update report must be filed with the FSC and KRX within five business days of such change.
When filing the 5% Disclosure Report, the investor must indicate whether its investment in the company demonstrates a passive portfolio investment or an intention to exert influence over the management of the company. If the purpose of the investment changes at any time, an update report must be filed. In the case that the investor intends to participate in the management of the company through its investment, a cooling-off period of five business days will apply from the date immediately following the filing of the 5% Disclosure Report. During this cooling-off period, the investor is prohibited from exercising its voting rights or purchasing any additional shares in the company.
In the event that the shareholding of the investor reaches 10% or more of the issued and outstanding voting shares of the listed company or the investor otherwise gains the authority to influence the management of the company by, for example, election of the majority of the board of directors of the company, a report must be filed (each) with the Securities and Futures Commission (SFC), a subcommittee of the FSC and KRX within five business days of the relevant event that has triggered the reporting obligation (the 10% Disclosure Report). Thereafter, any additional change in the shareholding of the investor in the company must be reported to the SFC within five business days of such change.
Both the 5% Disclosure Report and the 10% Disclosure Report must be publicly disclosed and therefore a bidder’s stakebuilding is significantly affected by such disclosure (in particular, the 5% Disclosure Report) since the purchase price of the shares as well as the purpose for which the purchase of the shares is made is disclosed to the public.
A company is prohibited from implementing any higher or lower reporting thresholds, either in its articles of incorporation or by-laws, or by way of any other means, that would change the rules triggering the filing of the 5% Disclosure Report or the 10% Disclosure Report.
Further, an investor must make a tender offer if it intends to purchase 5% or more of the total issued and outstanding shares or equity-related debt securities of a listed company from ten or more persons outside the KRX pursuant to the FISCMA; see 6.2 Mandatory Offer Threshold. Such mandatory tender offer obligation will also likely negatively impact a bidder’s stakebuilding strategy.
Defence mechanisms to stakebuilding activities in the context of hostile takeovers such as poison pill, golden shares and golden parachutes, which are sometimes found in other jurisdictions, are not permissible under Korean law.
Dealing in derivatives is permitted subject to certain filing/reporting obligations. For further information, see 4.5 Filing/Reporting Obligations.
Derivative transactions are subject to certain reporting obligations and approval requirements under the foreign exchange regulations. Further, derivatives with listed shares as the underlying assets are generally subject to public disclosure obligations if the purchaser of such derivatives is entitled to acquire title to the listed shares. Under the competition laws, relevant merger filing requirements are only triggered when the purchaser actually acquires the shares by exercising rights attached to the derivatives.
Shareholders of listed shares must make known the purpose of their acquisition in the 5% Disclosure Report. For further information, see 4.2 Material Shareholding Disclosure Threshold.
In share purchase transactions, the target company is generally not a party to the transaction and thus is not required to disclose the deal. However, the seller may be subject to public disclosure requirements, particularly if it is a public company. In the case of business transfers or mergers where the target company is a party to the transaction, such target company may be subject to public disclosure requirements. In such case, disclosure is required when a binding agreement is signed. In addition, listed companies are also required to comply immediately with requests made by the KRX to confirm or disclaim any rumours or media reports regarding the company through public disclosures.
In the context of a tender offer, it should be noted that in Korea, a target company and its board are not active participants in the tender offer process. Further, as described in 4.3 Hurdles to Stakebuilding, defence mechanisms such as poison pill and golden parachutes are not permissible under Korean law. Therefore, a prospective acquirer generally does not seek an endorsement of its tender offer bid from the board of directors of the target company.
Instead, the tender offer process is often driven by the acquiring party and existing shareholders of the target company, and the success of a tender offer bid is largely more dependent on its appeal to public shareholders than to the board of the target company. The party making the takeover bid should post in at least two daily newspapers or economic daily newspapers with national circulation a public notice setting forth certain information contained in the tender offer statement and thereafter file its tender offer statement with the FSC.
Although parties may choose to make a voluntary disclosure earlier than as required under the laws, in the vast majority of cases, disclosure is only made at the time when it is required under the relevant laws. On rare occasions, parties decide to make voluntary disclosures in order to respond to media reports or to co-ordinate the timing of disclosures to be made at multiple stock exchanges.
The scope of due diligence conducted in Korea is similar to that conducted in other jurisdictions, in material respect. The scope of due diligence is determined on a case-by-case basis depending on the particular needs of the relevant parties, the nature of the proposed transaction and the characteristics of the target company. Common areas of due diligence involve legal, tax, business and accounting issues. Environmental, HR and technology, including IT separation, issues may also be covered.
If a listed company is involved, standstill provisions or agreements are usually requested at an early stage of the deal process if they are negotiated between the parties.
Exclusivity provisions are also requested on a case-by-case basis by potential investors. However, significant M&A transactions are frequently structured as auction deals where the seller does not accept such exclusivity provision or only accepts such provision once the bidder has been selected as the preferred bidder and only for a short period of time.
It is permissible and common for tender offer terms and conditions to be documented in a definitive agreement between the offeror and controlling shareholders of the public target company prior to launching a tender offer to public shareholders. The target company is generally not a party to such an agreement. The procedure would usually involve the following two steps: completing a purchase from controlling shareholders and conducting a tender offer to purchase shares from public and minority shareholders.
A private purchase from controlling shareholders must be adequately disclosed in the course of the tender offer. After expiration of the tender offer period, the acquiring party purchases all the shares tendered for sale by the public shareholders in accordance with the terms and conditions (and method of purchase) as set out in the tender offer statement.
Whilst the precise length of a particular transaction may differ depending on the circumstances, the duration of M&A transactions is generally similar to that observed in many other jurisdictions. In general, due diligence takes place for a period of about four to six weeks and negotiation, finalising the transaction documents and the internal approval process and execution are performed for a period of about one to two months after the end of the due diligence.
Execution to completion usually takes two to three months, which can vary largely depending on how long regulatory approvals, especially merger filing, take. For transactions that could be deemed to restrain competition or those requiring merger filings in multiple jurisdictions, it may take significantly longer to close the transaction.
However, for M&A transactions in which a special resolution of a general meeting of shareholders is required, such as the merger of a listed company or a transfer of all or an important part of its business, it takes at least two and a half months because it takes at least one and a half months to convene a general meeting of a listed company and about one month for procedures under the KCC, such as the creditor protection procedure.
If the shares of a listed company are to be acquired from ten or more persons outside the KRX by an investor within a six-month period and the total shareholding ratio of such investor (including specially related persons and other parties acting in concert) reaches or exceeds 5%, a tender offer must be made. There is no special requirement for unlisted companies.
Cash is more commonly used as consideration in comparison to shares. Shares are often used as consideration in the case of internal reorganisation; for example, a merger or comprehensive share exchange with an affiliated company.
For tender offers, the FISCMA requires the offeror to submit evidential materials to the regulators that the consideration payable to the tendering shareholders will be paid at the time the tender offer statement is filed. Usually, this will be in the form of a certificate issued by a bank in the case of cash consideration or a custodian in the case of consideration in the form of securities. Bank commitment letters are not sufficient for the purpose above. When a foreign company is a tender offeror, it is usual practice to deposit funds in foreign currency without converting such funds into Korean won. In the case of a cancelled or failed bid, the consideration in cash or securities can be returned to the bidder with the relevant bank or custodian without any significant difficulty.
As a general principle, the tender offeror must, without delay, purchase all stocks tendered during the tender offer period in accordance with the terms and conditions of the tender offer that are set forth in the tender offer statement. However, the tender offeror does not need to acquire all tendered stocks if the tender offer public notice and the tender offer statement indicate that:
In practice, it is customary to add a condition that allows a tender offer to be withdrawn in the latter case, or if there is a counter tender offer.
In Korea, tender offers are not commonly used by investors to obtain a controlling stake in a listed company. They are more frequently used by an existing controlling stakeholder to acquire additional shares in the company and as such, although minimum acceptance conditions can be set forth in the tender offer statement, more often than not, such minimum acceptance conditions are not included in tender offers. However, when tender offers are used in the context of a hostile takeover or M&A transaction where the bidder is trying to obtain a controlling stake, the below control thresholds would be considered, and a certain minimum acceptance condition would be included in the tender offer statement.
In respect of control thresholds:
Although it is possible to make private deals conditional on the procurement of financing by the bidder, it is very rare to find "financing-out" condition precedents in Korean M&A transactions.
In the case of tender offers, making the tender offer conditional on the successful financing by the bidder is not permitted in Korea.
In private deals, the parties can agree on break-up fees, reverse break-up fees or any other similar arrangements. In Korean M&A transactions, it is quite common for the purchaser to pay a deposit at the time of signing. If such deposit is paid, and if the deal is terminated due to reasons attributable to the purchaser, the deposit vests in the seller.
As a counter to such scheme, it is also quite often the case that the purchaser requests that the seller pays double the deposit if the deal is terminated due to the reasons attributable to the seller. That is, the deposit will function as a break-up fee and a reverse break-up fee. However, because purchasers do not want to pay a deposit, they generally do not request for a break-up fee if the seller is not requesting for a deposit and a reverse break-up fee.
In the context of a tender offer, if the total number of shares tendered is less than the number stipulated in the tender offer statement as a minimum condition, the offeror may choose not to purchase any of the tendered shares. In this regard, the tender offer statement may expressly state that the offer is conditional on the number of tendered shares satisfying the minimum number of shares set by the offeror.
The bidder may execute a shareholders’ agreement with the other shareholders for additional governance rights such as the right to appoint directors or the statutory auditor with respect to the target in the case that it does not seek to obtain full ownership of the target. Furthermore, the articles of incorporation of a target may be amended to provide for additional governance rights to the bidder.
For example, articles may be set forth in the articles of incorporation to require a special resolution at the shareholders’ meeting and/or board meeting, which can secure veto rights for certain corporate actions by requiring an increased number of affirmative votes from the shareholders and directors. In any event, such execution of the shareholders’ agreement and amendment of the articles of incorporation must not violate the KCC’s mandatory rules regarding corporate governance.
Shareholders may vote by proxy by having a third party submit a proxy at the shareholders’ meeting.
In the case of listed companies, in order to make a solicitation of voting by proxy, one must follow the procedures set forth in the FISCMA. For example, a solicitor must provide a proxy form and reference documents to the one being solicited in a certain way and submit the documents to the FSC and KRX no later than two business days prior to the date of delivery, and the documents should be kept in a certain place where they are accessible to the general public.
Squeeze-out of minority shareholders at fair value is possible in Korea. However, a squeeze-out is only permissible if the major shareholder owns at least 95% of the outstanding shares (the number of shares held by subsidiaries is aggregated) and complies with certain procedures. Whilst the squeeze-out mechanism was used for some time at the early stage of its introduction in 2012, it has not been frequently used thereafter. This is because it is not easy to acquire 100% of stocks of shareholders who are unreachable or dispute the amount of the purchase price, and it takes a long time to complete the procedure.
As such, as a method of purchasing the remaining shares that are not tendered in the tender offer, many companies take alternative approaches such as a comprehensive share exchange, or a capital reduction or a stock consolidation. In the case of a comprehensive share exchange, when a special resolution of the shareholders is passed for each of the parent company and the subsidiary, the parent company receives all of the subsidiary’s stocks from the shareholders of the subsidiary and the parent company’s shares are granted to the shareholders of the subsidiary in exchange. Here, it is allowable to give cash in lieu of the parent company’s shares, in which case, the minority shareholders of the subsidiary will be naturally cashed out. Capital reduction or stock consolidation is a method of cash out by making shares of minority shareholders fractional shares by setting the merger or the capital reduction ratio high.
In Korea, the target company is generally not involved in the tender offer process and, therefore, it is not common to obtain irrevocable commitments to tender or vote by controlling shareholders of the target company. However, it should be noted that there have been some cases in which irrevocable commitments to tender by controlling shareholders have been obtained through privately negotiated definitive agreements.
Prior to launching a tender offer, the bidder makes various preparations for the tender offer, such as selecting the tender offer agent, drafting the tender offer statement, prior consultation with the FSS, reserving space in newspapers, depositing the tender offer funds and procuring a certificate of deposit from the bank. Once such preparations have been completed, the bidder launches a tender offer whereby public notice of the tender offer is made. Public notice must be made in two or more newspapers and the bidder must also file a tender offer statement and prospectus with the FSC and the KRX, and send a copy of the tender offer statement to the issuer of the target shares.
In principle, if a target company issues new shares and solicits offers from 50 or more persons (excluding professional investors and certain other excluded parties) to acquire new shares and the total value of shares issued is KRW1 billion or more, the target company must file a registration statement and prospectus with the FSC. The registration statement and prospectus must also be publicly disclosed. Additionally, in the event that a listed company issues new shares, it must submit board resolutions approving the issuance to the FSC and the KRX. Furthermore, if a company issues new shares to a specific investor without complying with the pre-emptive rights of the existing shareholders, the company is required to publish a public notice or give individual notices to the existing shareholders in advance.
In the context of issuance of new shares in a business combination such as a merger, rather than a new share issuance for general capital increase, if the target/issuing company is a listed company, several types of disclosures must be made in stages over the course of several months. First, the target company must disclose the board resolution for the business combination or the execution of the contract, whichever comes first. Further, the acquirer, who acquires more than 5% of the shares of the target company through the relevant business combination, has to file a 5% Disclosure Report at the time of contract execution.
If a business combination results in the issuance of new shares of a listed company (unless it is issued to a limited number of persons and all of them deposit the shares in the Korean Securities Depository for a one-year period), the target company must disclose the registration statement and prospectus. Such a registration statement will be accepted by the FSC and will take effect after a certain period. After the effective date, the shareholders’ meeting will be held to approve the business combinations, such as a merger. All convening and results of the general meeting of shareholders must be disclosed and after the issuance is made, the result of the business combination and the issuance of share results must be disclosed, and a 5% Disclosure Report and a 10% Disclosure Report (if 10% or more is acquired) must be made.
The financial statements of the corporate bidder must be included in the tender offer statement. The financial information of the target company for the quarter immediately preceding the tender offer, as well as those of the past three years, must also be included.
There is no statutory requirement related to the tender offer that the bidder’s financial statements be subject to generally accepted accounting principles, International Financial Reporting Standards or any other accounting standards at the time of the tender offer. However, if the bidder is a listed company in Korea, there is a general obligation to prepare the financial statements according to K-IFRS standards. With respect to financial information of the target company, all companies listed on the KRX (either KOSPI or KOSDAQ) are required to prepare financial statements in accordance with K-IFRS.
In the case of a merger, the merger agreement, the merger ratio estimation report and the company’s latest balance sheet and income statement must be made available for a shareholder or creditor’s review at the principal office of the constituent companies two weeks prior to the shareholders’ meeting for the merger approval.
Furthermore, there are also circumstances in which transaction documents such as the SPA, business transfer agreement (or asset purchase agreement) or merger agreement are required to be disclosed to the public. Specifically, those companies (including publicly listed companies) subject to disclosure obligations (ie, to disclose its annual report), must submit a material fact report which describes the major terms of the contemplated transaction to the Financial Supervisory Service (FSS) upon their decision to enter into a transaction to acquire businesses or assets (including shares) in which the purchase price of the transaction or book value of the assets (as of the most recent fiscal year-end) is not less than 10% of the total assets of the company, or upon their decision to enter into a merger agreement.
The material fact report should include a copy of the relevant transaction documents such as the SPA, business transfer agreement (or asset purchase agreement) or merger agreement. In the past, FSS has not actively enforced obligations to submit transaction documents in the material fact report and the submitted transaction document, if any, have not been disclosed to the public. However, from 29 April 2019 and onwards, following a system change of the FSS, material fact reports are accepted only if the relevant transaction documents are also submitted and disclosed to the public; provided that confidential and sensitive information such as classified military information, personal information, NCT and trade secrets may be redacted.
In addition to the above, transaction documents may also be required to be submitted as part of the filings to regulators, such as the KFTC or the KRX.
Directors owe fiduciary duties (that is, duty of care and loyalty) to the company. It is a well-established principle in Korea (and recognised by the Korean courts) that a director owes a fiduciary duty to the company and not to the shareholders of the company even if the company is wholly-owned by a single shareholder on the ground that the shareholders and the company are separate legal persons.
Because a target company is usually not involved in the takeover bid process, it is not common for boards of directors to establish special or ad hoc committees in business combinations in Korea. Even in business combinations where the target company is a party, such committees are rarely established in practice.
Under the KCC, any director who has special interests in the matter for a board resolution is prohibited from voting on such resolution. This is to avoid a conflict of interest situation between the company and such director. Therefore, in the context of business combinations, whether or not a particular director is subject to limited voting rights is subject to case-by-case analysis.
Although there is no Korean statute that has specifically adopted the concept of "business judgment rule" as it applies in the USA, Korean courts recognise a similar principle. According to court precedents, a director is deemed to have discharged his or her duty of care even if such decision results in loss or damage to the company, when the relevant director has:
The above principle is also applicable in takeover situations, although it should be noted that, as discussed previously, the board of directors of the target company generally does not play a significant role in takeover transactions in Korea.
In Korea, the board of directors seeks independent outside advice with respect to takeover bids only in special circumstances. Such circumstances often arise in the case of a merger or a comprehensive share exchange transaction in which the company is a party and therefore the board is responsible for determining the fair merger or exchange ratio. These third-party opinions may be helpful to mitigate the risk of the board being found to have breached its fiduciary duties. According to the FISCMA, if a listed company engages in business combinations such as a merger or a comprehensive share exchange and does not set its valuation at market price, it is obliged to be evaluated by an outside valuation agency.
Directors are deemed to be fiduciaries of the company and owe a duty of care and loyalty to the company, and officers are also under similar duty of care depending on their responsibilities. While Korean law does not specifically impose any duties on a controlling shareholder in relation to a business combination, a controlling shareholder may be found to be a de facto director and thereby owe fiduciary duties to the company if such controlling shareholder exercises control over the decisions made by a director.
In addition, the KCC restricts direct and indirect self-dealing, prohibits usurping corporate opportunity, and prevents interested directors from voting, so as to address potential conflict of interest issues. A director or a manager in breach of a fiduciary duty may be subjected to criminal and/or civil liabilities.
Hostile tender offers are permitted in Korea but they are not common; in rare cases where they have been attempted, such attempts have most often failed. Recently, shareholder activism has become more prominent in M&A transactions.
A director is allowed to take defensive measures against a hostile takeover so long as the director satisfies his or her fiduciary duty to the company and complies with the relevant laws and regulations. However, the scope of such measures may be limited in this context because in Korea, a director owes its fiduciary duties to the company and not to the shareholder. Furthermore, it should be noted that more often than not a controlling shareholder is involved in a transaction, such that the defensive measures are taken by the controlling shareholder.
Common defensive measures that directors of a target company may take against a hostile takeover can be categorised into proactive and reactive measures.
Proactive measures include adoption of defensive strategies such as staggered board elections, limits on the number of directors, acquisition of treasury shares and requiring supermajority shareholder approval. Reactive measures include third-party allotment of new shares, third-party allotment of convertible bonds and bonds with warrants, disposition of treasury shares and public offering of new shares. The directors of the target company must comply with relevant laws and regulations and satisfy their fiduciary duties when adopting such defensive measures.
Defensive measures such as the use of poison pills, multiple voting shares or golden shares are not permissible defensive measures under Korean law.
When adopting defensive measures, directors must comply with the relevant laws and regulations, the company’s articles of incorporation, as well as satisfy their fiduciary duties owed to the company. Any breach of the rules and/or their duties would subject the director to civil liability and/or criminal sanctions if such breach causes losses or damages to the company.
With respect to defensive measure enactments, whether issuing new shares or convertible bonds or selling treasury shares to non-hostile parties in the context of a hostile takeover infringes upon the pre-emptive rights of existing shareholders and is therefore illegal has been the subject of constant debate. If the issuance lacks a valid business reason and therefore it is clear that the main purpose of issuing new shares to a third party is to maintain control over a company, the issuance may be found to infringe on the pre-emptive rights of the existing shareholders in violation of the KCC.
The board of the target company is allowed, but not required, to express its opinion on a tender offer. If the transaction involves the issuance of new shares or a merger to which the target company is a party, such transaction cannot be implemented without board approval.
Both civil and criminal litigations are common in hostile takeover situations, although it should be noted that hostile takeover situations are quite rare in Korea. Litigation (including injunctive relief proceedings) is usually a part of the hostile takeover process. In other non-hostile transactions, minority shareholders rarely bring claims or initiate lawsuits. However, in recent years, minority shareholders have increasingly complained about merger ratios or share exchange ratios in the case of mergers involving listed companies or comprehensive share exchanges. Furthermore, lawsuits have occasionally arisen in private M&A deals in connection with the return of deposits or breach of representations and warranties.
In the case of a hostile takeover, a lawsuit is often brought at the very first stage of determining the intention of the hostile company and the ownership of the shares of the company. It is often the case that the hostile company engages in litigation at the start of the process to grasp the scope or size of the problems of existing management by requesting access to book of accounts.
In friendly deals, the deposit will often be asked to be returned if the deal is terminated midway and compensation for damages will be claimed in the case of a breach of representations and warranties. However, in such cases, it is more common for the parties to come to a settlement. In the case of high-profile corporate reorganisations, injunctions contesting the unfair merger or share exchange ratio are generally brought by minority or activist shareholders during the period between the first public notice of the deal and the date of the general shareholders' meeting.
Conventionally, shareholder activism has not been active in Korea, but it is showing signs of becoming more active recently. In 2015, Elliott Management engaged in shareholder activism against the merger of Samsung C&T and Cheil Industries. In 2018, KCGI, the domestic activist fund, became the second-largest shareholder by acquiring Hanjin Kal, the largest shareholder of Korean Air, and Hanjin, its subsidiary, to improve the corporate governance structure, establish a shareholders’ council composed of the majority shareholders and general shareholders, sell off insolvent business, improve management efficiency and strengthen risk management. Other than KCGI, multiple activist funds have been founded in 2018 and 2019 and have tried to influence the management of companies by various means, such as delivering public letters and pro-actively exercising shareholder’s rights including voting rights in shareholders’ meetings. Requests made by activist funds include demands to increase dividends, improve corporate governance, conduct share revaluation and dispose of non-core businesses or assets.
On the other hand, the National Pension Service, which owns a large number of shares (but typically less than 10%) in a number of domestic listed companies, is also actively exercising shareholder rights by introducing a stewardship code in July 2018. Other institutional investors including pension funds, asset management firms, securities companies and PEFs have also adopted stewardship codes. As of 31 December 2019, a total of 116 institutions were found to have implemented stewardship codes. This number is a vast growth from 18 institutions in 2017 and 73 institutions in 2018.
Recently, KCGI, a representative activist fund in Korea, has requested the Hanjin Group to sell assets such as insolvency business and real estate, and to merge subsidiaries, on the ground that the Hanjin Group is undervalued due to its ineffective management, and therefore the measures should be taken for the improvement of corporate value. Although not activists, major institutional investors in publicly listed companies often require listed companies to carve out non-core businesses. In the future, the activities of activists who require M&A, spin-offs and divestitures are expected to increase.
There have been several cases where activists have sought to interfere with the completion of announced transactions in Korea. In 2015, Elliott opposed the merger of Samsung C&T and Cheil Industries as shareholders of Samsung C&T. At the time, Elliott claimed that the merger ratio was unfairly disadvantageous to the shareholders of Samsung C&T. At the shareholders’ meeting, which was convened to approve the merger, there was a conflict with the largest shareholder in regard to use of proxy and a preliminary injunction asking the court to stop the merger was filed. However, Elliott failed to prevent the merger because it could not secure sufficient votes to block the merger.
In 2018, Elliott argued that the Korean government violated the Korea-US free trade agreement by unfairly intervening in the process of the merger and submitted an application for an investor-state dispute against the Korean government, and the dispute is still in progress. In addition, labour unions and other minority shareholders often raise claims about major shareholders’ mergers and comprehensive share exchanges.