M&A activity in Korea slowed significantly in the first half of 2020 following the breakout of the COVID-19 pandemic, but deal activity began accelerating starting in the fourth quarter of 2020.
Technology M&A activity in Korea is far more active than 12 months ago. Large technology M&A transactions including Shinsegae affiliate E-Mart’s acquisition of eBay Korea, Yanolja’s acquisition of Interpark, Match Group’s acquisition of Hyperconnect, and the Affinity/Permira/GS Retail consortium’s acquisition of Delivery Hero Korea (the entity behind Yogiyo) have led the overall M&A market. Deal activity in the technology space is generally in line with global trends. Notably, Korean buyers are seeking technology assets abroad and have completed or are in the process of evaluating significant transactions (eg, Hyundai Motor Group’s acquisition of Boston Dynamics).
Technology M&A activity has been robust despite practical restrictions due to COVID-19, including limitations on international travel, on-site due diligence and in-person negotiations. In some respects, COVID-19 has led serious buyers and sellers to take a more efficient and practical approach to the deal process.
The Korean technology sector is rapidly changing, and M&A deal activity is providing much of the impetus. Other than tech companies focusing on specific sectors heavily impacted by COVID-19 (such as international travel or restaurant services), tech companies have seen large increases in enterprise value. Valuations and investment amounts have correspondingly increased for both M&A transactions and pre-IPO investments.
At the same time, public opinion and the press are taking issue with competition concerns regarding online platform businesses (including search engines such as Naver and Google or messenger services such as Kakao), and government supervisory agencies are strengthening regulations and enforcement efforts. Such regulatory trends have had significant impact on M&A transactions and this trend is expected to continue. For instance, the much publicised USD4 billion acquisition of Woowa Brothers (which owns Korea’s leading food delivery app) by Delivery Hero was approved by the Korea Fair Trade Commission on condition that Delivery Hero divests its own existing app (Yogiyo). Delivery Hero subsequently entered into an agreement to sell Yogiyo to a consortium led by PE funds.
Most new start-up companies founded by Koreans are incorporated in Korea.
Incorporation is a fairly simple process, taking about one week; there is a modest initial capital requirement, especially for technology companies which generally do not require many initial regulatory permits.
However, there are increasing cases of founders incorporating in jurisdictions viewed as more business-friendly than Korea (especially in the United States) or, where a start-up is already incorporated in Korea, carrying out a "flip" transaction by forming a holding company above the Korean company in a foreign jurisdiction.
Motivations for the above vary, but some key factors include:
Start-ups usually have an IPO in mind, and therefore entrepreneurs typically form a joint stock company (jusik hoesa), which facilitates an IPO (unlike a limited company (yuhan hoesa) or a limited liability company, both of which must be converted into a joint stock company in order to consummate an IPO).
While a start-up is sometimes structured as a limited company or limited liability company if the entrepreneur has a clear intention of continuing to operate it as a close company, such a choice is rare and most start-ups take the form of a joint stock company.
There is no typical source of early–stage financing for Korean start-ups. The type of investor varies by company and by transaction. Seed investments often come from domestic venture capital firms, the investment arms of large Korean conglomerates or the government. For such seed investments parties typically enter into standardised investment agreements, which tend to be investor-friendly.
Typical sources of venture capital in Korea are governmental policy funds, domestic pension funds, private venture capital firms (both domestic and foreign), the venture investment arm of large conglomerates, and non-banking financial institutions. Therefore, there are plentiful capital raise opportunities for a promising start-up.
Following the Act on Special Measures for the Promotion of Venture Businesses, a fund of funds managed by the Korea Venture Investment Corp (a public entity affiliated with the Ministry of SMEs and Start-ups) with capital contributed from various government agencies, has been actively investing in promising funds and start-ups since 2006. Additionally, the government frequently assists start-ups in other ways, such as by providing a credit guarantee.
Foreign venture capital firms have become more active in the past ten or so years, with Altos Ventures and Softbank among the especially prominent players.
Standards for venture capital documentation in Korea are not yet well-developed. In many cases (especially if the start-up does not engage sophisticated legal counsel) the contracts and other legal documents are poorly drafted or prepared by the investors. There is increasing legal demand arising out of this situation for better-developed standards in venture capital documentation, and model documentation similar to those of the National Venture Capital Association (USA) are beginning to be adopted.
As Korean start-ups develop and mature, subsequent changes in their corporate form are unusual, as Korean start-ups tend to be in the form of joint stock companies from the outset.
They often do, however, achieve an effective change in jurisdiction by forming a foreign parent company (usually a USA entity).
Korean start-ups looking for a liquidity event may either take the company public or run a sale process; the decision is very much on a case-by-case basis and depends on the specifics of the start-up, market conditions and investor demands. Currently, the trend is to have a dual-track process.
It has been customary for Korean start-ups to pursue a listing on the KOSDAQ market of the Korea stock exchange. However, there is an increasing number of cases in which a Korean start-up pursues an IPO on a foreign stock exchange, most notably in the USA. Many Korean start-ups are planning and preparing for future IPOs with exchanges in both Korea and abroad.
If a Korean company chooses to list on a foreign exchange, the feasibility of a future sale would depend on the rules and regulations of such foreign jurisdiction. Most companies seeking an IPO in a foreign jurisdiction are concerned primarily with liquidity and pricing, although the availability and ease of a squeeze-out may be one of the considerations in considering a listing in a particular jurisdiction.
If a company seeks a liquidity event through a sale of the company, the sale process is run either as an auction or as a bilateral negotiation (which can turn into an auction). One type is not clearly dominant or preferred and depends on various factors, such as prior arrangements with investors and the size of the company.
Among important recent sale transactions, eBay Korea, Yogiyo, and JobKorea were sold through an auction process while Hyperconnect directly engaged in a bilateral negotiation with Match Group.
If a private technology company has a number of existing VC investors, the sale transaction may either lead to a sale of the entire company or a sale of only a controlling interest (with existing VCs continuing on as minority shareholders).
Recent trends show original or early round VCs generally making a full exit; however, depending on market dynamics and the VC fund’s internal investment criteria, it is not uncommon to see VC investors maintaining a minority stake if they see continued upside potential or strategic rationale.
Transactions in Korea for the sale of the entire company are generally done on an all–cash basis. However, stock consideration (in whole or in part of the purchaser entity or its parent) is also used for various reasons such as seller tax considerations and continuing participation in upside potential.
Similar to other jurisdictions, controlling shareholders close to the management of the company would be expected to provide representations and warranties regarding the company and its business, while minority shareholders such as VCs will resist providing such representations and warranties and the associated indemnities. However, minority shareholders with significant stakes often provide representations and warranties on a several (and not joint) basis with the controlling shareholder. Escrow and holdback mechanisms are both used in Korea, although a holdback is uncommon. Representations and warranties insurance is an established product and often used in Korean M&A transactions.
While not customary in the technology industry, Korean companies, especially conglomerates, have been carrying out spin-offs on a case-by-case basis. Factors in conducting a spin-off include operational agility, concentration on core competencies, facilitating a potential M&A transaction and tax planning.
Spin-offs can be structured as a tax-free transaction in Korea by satisfying the following requirements:
There is an ex post facto management period of three years following the spin-off (four years regarding assumption of employment), and the following scenarios would lead to a breach of the ex post facto management:
It is possible to carry out a share transfer or business combination in Korea immediately following a spin-off (horizontal or vertical) or an in-kind contribution (however, the possibility of deferring tax must be carefully analysed for each transaction).
Spin-offs take effect by operation of law from commercial registration following approval by the board of directors and the shareholders of the company. To sever joint liability between the legacy entity and the spun-off entity, a one-month-long creditor protection procedure is required, entailing public notice and notice to creditors, along with discharge of liabilities.
In-kind contributions take effect from commercial registration following approval by the board of directors of the company, and for an in-kind contribution by a joint stock company, the court’s review and approval is required. A valuation is also performed, typically by a third party, for the court’s review.
The timing for a spin-off varies depending on various factors, but generally a spin-off or in-kind contribution can be completed in two to four months. A ruling from a tax authority is not generally required to complete a spin-off or an in-kind contribution. However, depending on particular tax issues present in a specific transaction, obtaining a tax ruling may be necessary or advisable.
To acquire a Korean public company, it is most common for a would-be acquirer to purchase a controlling shareholder block or major shareholder block through over-the-counter trading, pursuant to a privately negotiated share purchase agreement.
Unlike many other jurisdictions, Korea does not have many true "public companies" ‒ that is, public companies with no controlling shareholder. For most public companies, there is a controlling shareholder that exercises meaningful control.
Therefore, it is customary for acquirers to directly purchase the shares owned by the controlling/major shareholder(s), usually with a control premium. Therefore, "toehold" type acquisitions are typically not made in Korea. In certain cases, the purchaser subsequently attempts a tender offer to purchase the remaining minority shares.
If, as the result of such acquisitions, the acquirer comes to hold 5% or more of the issued and outstanding shares of a public company, under the Capital Markets Act it must file a report regarding such acquisition with the Financial Services Commission within five business days of the execution of the share purchase agreement or as of the date of decision regarding such share acquisition.
This report must indicate the purpose of the investment (eg, whether the investment is passive, or whether the investor intends to exert influence over the company’s management). This report is publicly disclosed.
If the acquirer seeks to pursue a tender offer, it must submit a tender offer registration statement, stating in detail the purpose of the tender offer along with the acquirer’s future plans.
Korea has no "put up or shut up" type requirement, but if the stock exchange makes a disclosure inquiry to the target public company, information regarding the acquisition must be accurately disclosed by the target company.
If a buyer acquires shares of a public company through over-the-counter trading from ten or more holders within a six-month period, and the acquired shares represent more than 5% of the entire issued share capital of such public company, the requirement for a mandatory public offer is triggered.
As discussed above, public company M&A in Korea usually takes the form of an over-the-counter share acquisition of the equity stake held by the controlling/major shareholder.
While a merger is possible, it is not frequently used in Korea because in certain types of mergers such as a reverse triangular merger (whereby the merger sub is merged into the target, with the target as surviving entity) the surviving entity’s shareholders may not be permitted to cash out. Additionally, a cash-out merger is usually not recognised as a qualified merger for tax purposes.
For public company acquisitions in the technology industry, stock-for-stock transactions are uncommon; instead, all-cash transactions are customary. While it is possible to use cash consideration for a merger, such cash-out merger is not frequently used because a qualified merger is not recognised unless 80% or more of the merger consideration consists of stock of the purchaser or its parent company.
In a tender offer or in an over-the-counter share purchase between the acquirer and a specific shareholder, there is no specific minimum price requirement but it is common to see a price somewhat higher than the then-market price reflecting a control premium; on the other hand, in a merger or share issuance involving a public company, a minimum price (based on the market price of the target) is specified.
Earn-outs and deferred purchase price mechanisms are included from time to time in over-the-counter share purchases as methods to bridge valuation gaps between parties, in similar fashion to private M&A transactions.
Takeover offers are uncommon in Korea.
Instead, tender offers are a potential follow-up (or sometimes simultaneous) step to the initial transaction whereby the acquirer makes an over-the-counter purchase of shares from the controlling/major shareholder block.
The dynamics of an over-the-counter purchase with a specific shareholder are similar to a private M&A transaction. There are no specific limitations regarding the terms thereof; however, the main terms and conditions of the ultimate transaction are publicly disclosed.
Conditions of a tender offer, on the other hand, are subject to strict regulations from the financial regulatory authorities from a minority shareholder protection perspective, although the offeror is permitted to condition the completion of a tender offer on acceptance by a specific percentage of outstanding target stock. For instance, financial regulatory authorities are currently of the position that the successful completion of an over-the-counter deal and that of the tender offer cannot be structured as mutual conditions.
A share purchase agreement is typically used for an over-the-counter purchase of shares from a specific shareholder, similar to a private M&A transaction. As such, the selling shareholder (and not the target public company) bears specific obligations and provides representations and warranties.
For a tender offer, the offeror provides public notice, then submits and discloses the registration statement and disclosure statement of tender offer to the Financial Services Commission and the relevant stock exchange; no separate share purchase agreement (or similar contract) is executed. As in the case of over-the-counter transactions, the target company does not bear obligations or provide any representations and warranties.
In many Korean tender offers, the offeror can simply purchase the shares that have been tendered, without any minimum threshold.
It is possible to launch a tender offer with a minimum threshold condition. However, it is difficult to state a “typical” minimum threshold condition, as the motivations of an acquirer and each target company’s situation and particularities may vary. It may be possible to secure effective control over some companies with a 30% stake, while a greater than 50% stake may be required for other targets.
If a shareholder holds a 95% stake in the company, under Korean commercial law such shareholder can exercise its statutory purchase right as a controlling shareholder and request to purchase the remaining 5% of shares from the minority shareholders at fair value. However, in case of a dispute regarding the purchase price, the squeeze-out can only be completed upon resolution of such dispute.
Given that a minority squeeze-out under Korean commercial law requires the high threshold of 95%, a "comprehensive share swap" can used as an alternative. This entails a compulsory acquisition of the target company’s shares, in exchange for the acquiring company shares or cash as consideration to the target shareholders. A comprehensive share swap requires shareholder approvals of both the acquirer and the target companies, with approval by shareholders holding at least two thirds of the voting rights present at each of the respective company’s shareholder meeting (with such meeting being attended by shareholders holding at least one third of the total issued shares).
For an over-the-counter share purchase from a specific shareholder, there is no mandatory "certain funds" requirement and the parties may agree on the terms through negotiations.
For a tender offer, on the other hand, there are strict regulatory requirements proving that the funds required for the tender offer have been obtained (such as a deposit balance). This proof of funds must be submitted to the Financial Supervisory Service at the time of the submission and disclosure of the registration statement of the tender offer.
As public M&A transactions similar to ones in other jurisdictions such as the USA is very rare in Korea, deal protection measures from a target company (eg, break-up fees, matching rights, force-the-vote provisions in a merger, non-solicitation), although theoretically possible, are almost never used in practice. There are, however, frequent cases of a negotiated break-up fees between a controlling/major shareholder and an acquirer in over-the-counter transactions.
The governance rights that a bidder with less than 100% ownership in a target can obtain depends on the equity stake that it has acquired.
Generally speaking, if the bidder’s ownership of voting shares exceeds 50%, the bidder would have the power to appoint directors and to approve general resolutions at the meeting of shareholders; if the ownership of voting shares amounts to 66.66% (two thirds) plus one share, it would have the power to approve special resolutions at the meeting of shareholders (such as amendment of the articles, and "fundamental transactions" including mergers and spin-offs).
Even with voting shares below 50%, the bidder may have sole control if it is the largest shareholder with the power to constitute the board, or negative control if it holds specific veto rights under a shareholders agreement.
As previously mentioned, public M&A transactions similar to ones in other jurisdictions such as the USA are very rare in Korea, as controlling shareholder or other principal shareholders enter into a share purchase agreement with the acquirer. These undertakings tend to be irrevocable contracts and it is extremely unusual to permit principal shareholders to have an "out" if a better offer is made.
In the case of a tender offer, the tender offer may be the subject of coordination with the financial regulatory authorities on a voluntary basis. There is no mandatory review process. However, following the submission of the tender offer registration statement, the financial regulatory authorities may raise issues regarding its contents or request amendments or corrections thereto.
A tender offer period is at least 20 days and no more than 60 days, to be determined by the offeror. The tender offer registration statement must state the principal terms, including any minimum threshold requirement.
For a tender offer, the tender offer period may be extended only under limited circumstances, such as in connection with changes made to the tender offer terms within the final ten days of the tender offer period. Notably, the tender offer period cannot be extended or conditioned upon the receipt of governmental approvals. For a tender offer in which specific governmental approvals are required, such governmental approvals must be obtained prior to launching the tender offer.
The technology industry in Korea is less regulated compared to other industries such as banking or utilities (unless there is a nexus with such industries). However, certain sectors may be subject to specific government regulations, such as broadcasting and communications (under the jurisdiction of the Korea Communications Commission), personal information/privacy (under the jurisdiction of the Ministry of the Interior and Safety and the Personal Information Protection Commission), or e-commerce (under the jurisdiction of the Fair Trade Commission).
Certain permits and approvals may be required depending on the specific industry sector, and it is difficult to generalise on the time it takes to obtain each. With proper planning and documentation, permits and approvals can be obtained within a reasonable timeframe.
The primary securities market regulators for M&A transactions in Korea are the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS).
The FSC generally carries out rulemaking and licensing functions, such as developing financial policies and issuing licenses to financial service providers and overseeing cross-border matters (from perspectives of both financial soundness and unlawful acts or anti-money laundering).
The FSS has a primarily executorial role of supervising business practices, including capital market supervision, consumer protection, and conducting other oversight and enforcement activities. It supervises corporate disclosures (including for an IPO or for a secondary offering), oversees securities trading from an investor protection perspective and investigates securities violation, sometimes in collaboration with other law enforcement authorities.
There are generally no restriction on foreign investments into Korea except for specific sectors. Foreign investment is prohibited in the public service, school, postal communications and national defence sectors, and only permitted on a limited basis (for instance, not being permitted to own more than 49% of a specific company) in certain sectors such as power generation, electricity transmission, air transport, journalism/broadcasting, and cable communications. On the whole, however, the breadth of sectors where foreign investment is limited is quite narrow.
Foreign investment filings in Korea are de-facto mandatory (omission would lead to loss of benefits and require the more onerous FX filing process) and take a suspensory nature – that is, wiring of the investment amount is limited prior to such filing. The minimum foreign investment amount is KRW100 million.
M&A transactions involving a company or assets engaged in the defence industry requires prior approval from the Minister of Trade, Industry and Energy.
Additionally, for a foreign entity to acquire control of a Korean company in possession of "national core technology", it must receive approval from the Minister of Trade, Industry and Energy. A similar process is required to transfer or license national core technology overseas.
An acquisition of shares (for at least 20% of the voting shares of a private company, or 15% in the case of a publicly listed target company), merger, business transfer, or joint venture formation meeting specific thresholds regarding assets or revenue (generally, when the total assets or revenue of one party are at least KRW300 billion, and that of the other party are at least KRW 30 billion) triggers a requirement to file a business combination report with the Korea Fair Trade Commission. A size of transaction test (purchase price of at least KRW5 billion) also applies to business transfers, but not to other transactions.
Assuming the filing requirement above is triggered, the Korea Fair Trade Commission’s approval of the business combination report will be required prior to the transaction’s closing when at least one party is a large company with total assets or revenue of at least KRW2 trillion; in other cases, the business combination report can be filed post-closing.
There are generally no labour law regulations in Korea that an M&A acquirer must comply with; consultation with unions or employees are not statutorily required in connection with a share transfer or business transfer.
However, some target companies may have collective bargaining agreements requiring consultation with (or, in certain cases, consent from) the labour union or the employees.
Moreover, while not a statutory obligation, it is increasingly becoming common in a change of control transaction for employees to receive a "change of control bonus."
A typical M&A transaction meeting the criteria for qualified foreign investment (foreign acquisition of a Korean company’s shares or extension of a long-term loan to a Korean company, in return for qualified consideration such as cash, shares in a foreign public entity, limited IP rights, etc) only requires a foreign investment filing and does not separately require approval from the Bank of Korea. On the other hand, transactions which do not meet such criteria may require a report to the Bank of Korea depending on the deal structure and type of capital transaction.
The most significant Korean court decision impacting technology M&A in recent years relates to leveraged buyout transactions. On 15 October 2020, the Supreme Court of Korea rendered decision on the "Hi-Mart case", overturning the appellate decision to find that the largest target shareholder (also a director) breached his fiduciary duty by approving a loan arrangement whereby the target and an SPC set up by the investor PE fund were party to the same loan agreement and the target provided collateral (including a kun-mortgage over its real estate). This decision is leading M&A practitioners and target directors to closely review leveraged buyout transactions, in particular the buyer’s financing.
In addition, the Doosan Infracore case cast a spotlight on potential shareholder agreement disputes. Financial investors in the Chinese affiliate of Doosan Infracore sought to exercise a drag-along right as minority shareholders, and brought suit claiming Doosan’s failure to cooperate in the sale process (including due diligence, claiming confidentiality concerns) constituted breach of obligation to act in good faith. The Supreme Court overturned the appellate court (which had found in favour of the financial investors) by holding that Doosan’s acts did not constitute breach of good faith, and that a specific prospective purchaser was required at the time of exercise of the drag-along right for an agreement to be deemed to exist under the clause.
Following this decision, transaction documents are trending towards listing specific drag-along terms and procedures in much greater detail in order to enhance enforceability.
In theory, a public company is not legally restricted from providing due diligence information at a similar level as expected in a private M&A transaction to purchasers if a non-disclosure agreement is executed; regulatory issues from specific statutes (including data privacy) are an exception and must be followed.
It is possible ‒ and common in practice ‒ for a purchaser to carry out sufficient due diligence (including regarding material non-public information) and subsequently engage in over-the-counter trading or after-hours block trading with specific existing shareholders.
It is not mandatory to provide the same due diligence information to each bidder in an auction, but bidders are provided a substantially same level of data and information in practice in order for the seller to pre-emptively address any potential challenges by bidders regarding alleged omission of material facts.
There are data privacy restrictions regarding providing personal data or credit information. In practice, target companies provide applicable information after redacting or masking the relevant information (eg, employee names, date of birth).
As mentioned earlier, public M&A transactions similar to ones in other jurisdictions such as the USA are rare in Korea; however, public disclosure requirements would apply (as discussed above) at the time of submitting the tender offer registration statement or, for other transactions, at the time of signing or of board resolutions approving such transaction.
An over-the-counter share purchase with a specific shareholder where the purchase price is paid in stock may fall under the definition of a "public offering" and trigger related regulations if the acquirer’s shares are offered to (or solicitation for the transaction is made to) 50 or more non-accredited investors. In such case, the acquirer must submit a registration statement to adhere to rules regarding the public offering; other M&A transactions will not require submission of a registration statement or prospectus.
If the target is a private company, there are no limitations to what shares the acquirer may offer as consideration. However, if the target is publicly listed, while a domestic entity acquirer is not limited in what shares it may offer, a foreign entity acquirer may only offer shares that are publicly listed, due to regulations on qualified foreign investment.
Offering shares as consideration for a tender offer is difficult (and not used in practice) because under tender offer rules, such offered shares must be deposited in escrow. In this case, an acquirer would have to submit a registration statement because the transaction structure would trigger the definition of a public offering (as set forth above).
If the bidder pays the purchase price in cash, there is no requirement to produce financial statements. If, however, the purchase price is paid in stock, the offeror must submit a registration statement if the public offering definition is triggered (as discussed above), and such registration statements will require production of financial statements.
Financial statements need to be prepared in Korea in compliance with Korean GAAP or IFRS.
If a party to the transaction is publicly listed and such M&A transaction meets the criteria of a material transaction, the transaction documents must be filed together with a report on important matters to the financial regulatory authorities and publicly disclosed. Generally, only the main transaction document (eg, purchase agreement) can be disclosed without attaching ancillary documents such as disclosure schedules. Certain commercially sensitive information in the main transaction document can be redacted.
This filing requirement only applies if the acquirer is a publicly listed company. There is generally no filing requirement if only the target company is public company, unless there is a change in the largest shareholder, which would trigger a disclosure obligation for the target company. Information regarding the transaction would also be disclosed through the acquirer’s filings if it comes to hold 5% or 10% of the target company’s shares through such transaction.
Directors of Korean companies have a general fiduciary duty to act in the best interests of the company, which is also applicable in in the context of M&A transactions; in case of a conflict of interest, directors are subject to a duty of loyalty.
Unlike other jurisdictions, directors of a Korean company owe fiduciary duties to the company and not to the shareholders.
It is not common for boards of directors to establish special or ad hoc committees in M&A transactions. If a director has a conflict of interest, the remaining unconflicted directors would make the relevant resolutions for such transaction.
Given that public M&A transactions similar to those in other jurisdictions such as the USA are very rare in Korea and typical transactions involving a public company entail a share sale from a controlling/major shareholder to the acquirer, the boards of Korean target companies do not become actively involved in negotiations.
While specific board members of either the acquirer or the target take part in M&A negotiations from time to time, it is extremely rare that the board itself (of either party) takes part.
On the other hand, if a public company is itself party to a transaction (whether as seller or purchaser), the board would review such transaction and make recommendations in case of certain transactions (such as merger or spin-off), which would then require shareholder approval.
Shareholder litigation regarding an M&A transaction is very rare in Korea, because public M&A transactions are generally over-the-counter private transactions.
It is not customary for the target board to receive separate outside advice or for a financial adviser to provide a fairness opinion to the board regarding a takeover, because the target itself is not a party to the transaction and the board would not be actively involved in the negotiation process.
In case where the public company is itself party to the transaction (whether as seller or purchaser), the board would consider separate outside advice in connection with its review of the transaction.