Acquisition finance in South Korea: overview

A Q&A guide to acquisition finance in South Korea.

This Q&A is part of the global guide to acquisition finance. Areas covered include market overview and methods of acquisition, structure and procedure, acquisition vehicles, equity finance, debt finance, restrictions, lender liability, debt buy-backs, post-acquisition restructurings and proposals for reform.

To compare answers across multiple jurisdictions, visit the acquisition finance Country Q&A tool. For a full list of jurisdictional Q&As visit www.practicallaw.com/acquisitionfinance-guide.

Contents

Market overview and methods of acquisition

Acquisition finance market

1. What parties are involved in acquisition finance?

The most active parties in the Korean acquisition finance market are:

  • Private equity funds on the borrower side.

  • Domestic commercial banks on the lender side.

Traditionally, corporate purchasers have mostly financed their acquisitions by issuing bonds or obtaining bank loans, in each case relying on their own credits. It was not until private equity funds became active in the Korean M&A market that the leveraged buyout structure became widely used for acquisitions.

Corporate purchasers continue to rely primarily on the issue of equity, bonds or bank debt (on their own credit), while private equity funds actively seek financing from domestic banks. International banks are fairly inactive in the Korean acquisition finance market for the following reasons:

  • The acquisition cost is usually paid in the Korean currency: Won. In turn, loans extended for the purpose of financing acquisitions are usually made in Korean Won.

  • Loans taken out by Korean companies from non-resident lenders are subject to Korean withholding tax in relation to the interest payments, and the foreign exchange reporting requirements.

Methods of acquisition

2. What are the main methods used for acquiring business entities in your jurisdiction?

Both asset and share acquisitions are common in Korea. The choice of acquisition type ultimately depends on the commercial objectives of the parties.

Asset acquisition

The main advantages of an asset acquisition are:

  • The purchaser can select the assets to be transferred and can normally leave liabilities with the target company.

  • Goodwill could be recognised and may be tax deductible, unlike in a share acquisition.

The main disadvantages of an asset acquisition are:

  • An asset acquisition is a more difficult process since all of the business contracts must be transferred to the purchaser with the consent of the counterparty of each of the business contracts and the government approvals must be transferred or re-acquired. This can be very time consuming and costly, and for these reasons the share acquisition is more common.

  • An asset acquisition (compared to a share acquisition) can often result in additional taxes for the seller group as a whole. This is because an asset deal will trigger capital gains tax at the entity level, and if the proceeds from the sale are distributed at shareholder level, tax implications could generally arise from the distribution of dividends to the seller group/shareholders of the transferring entity.

  • VAT applies to the sale of an asset that is not deemed to be a comprehensive business transfer (see below). VAT does not apply to the sale of shares.

If the asset acquisition is deemed to be a comprehensive business transfer (that is, comprehensive business acquisition as a going concern rather than a straightforward asset acquisition):

  • The purchaser will be bound by the terms of existing employment agreements and other commitments by operation of law (unless the employees agree otherwise) with respect to those employees being transferred to the purchaser.

  • The purchaser will be liable for employee-related liabilities arising from claims based on existing employment relationships (under Korean employment and labour laws).

  • The purchaser may be held responsible for any environmental orders issued before the transfer in connection with a permit obtained for the transferred assets.

Share acquisition

The main advantages of a share acquisition are:

  • Transaction-related procedures are simpler (in an asset acquisition, all of the assets, any business contract and any government approval related to the acquisition must specifically be transferred).

  • Acquisition tax is payable at a lower rate. In a share acquisition, acquisition tax is payable by the purchaser at 2.2% of the book value of the underlying acquisition's taxable assets (such as real estate) multiplied by the ownership ratio, if the share purchaser, on closing, owns more than 50% of the company's shares (except in the case of a listed company). In contrast, acquisition tax of 4.6% is generally payable on the acquisition price of purchased assets (9.4% for acquired real property located in the Seoul Metropolitan Area, subject to certain exceptions).

The main disadvantages of a share acquisition are:

  • Liability, including tax liability, of the target company, remains with the target company. As a result, the new shareholder may indirectly be subject to contingent tax liabilities of the target.

  • A shareholder that owns more than 50% of the target is subject to secondary liabilities for any overdue taxes of the target company if the target company does not pay its overdue taxes.

Merger

A cash-out merger or a triangular merger can be used as alternatives to an asset or share acquisition. However, it is difficult for these types of merger to satisfy the requirements for treatment as a "qualified merger" (jeok- kyek-hap- byeong), which allows for tax deferral. As a result, these structures are rarely used other than for the mergers of affiliated companies.

 

Structure and procedure

Procedure

3. What procedures are typically used for gaining acquisition finance in your jurisdiction?

Typically, the bidder (that is, the person intending to acquire a target through its acquiring vehicle) makes a request to financial institutions interested in acting as mandated lead arrangers to provide indicative term sheets. Large commercial banks and securities companies mainly act as mandated lead arrangers.

In the Korean market, since the sellers are not willing to accept a "financing-out" provision in the sales and purchase agreement (that is, where successful completion of financing by the buyer is a condition precedent for closing), it is common to obtain commitment letters to ensure the financial institution's commitment to the financing of the acquisition cost on or before the execution of the share sale and purchase agreement. The term sheet and the commitment letter generally used in Korea are relatively simple and short compared to those used in Europe or the US. However, if the seller requires the satisfaction of strict "certain fund" requirements, full documentation of the loan documents with "certain fund" provision is usually completed on or before the execution of the applicable sales and purchase agreement.

Vehicles

4. What vehicles are typically used in acquisition finance?

There are three corporate forms of acquisition vehicle that can offer investors limited liability:

  • Joint stock corporation with limited liability (chusik hoesa) (joint stock company).

  • Closed corporation with limited liability (yuhan hoesa) (closed company).

  • Limited liability company (yuhan chaegim hoesa) (LLC). This type of entity is similar to the US limited liability company.

As the LLC was only recently introduced in the Korean Commercial Code, joint stock companies and closed companies are more commonly used in acquisition finance. Compared to joint stock companies, closed companies are more flexible from a corporate governance perspective because they:

  • Allow more flexibility in distributions to their members.

  • Provide for relatively simpler capital increase procedures.

However, closed companies have certain disadvantages:

  • They cannot issue corporate bonds.

  • There are uncertainties on the legal basis for closed companies to issue different classes of membership interests.

A private investment company (samotujaheosa) is a corporate entity with the characteristics of a private equity fund. In the case of a private investment company established and governed under the Financial Investment Services and Capital Markets Act (FSCMA), since it is prohibited from financing acquisitions through borrowing, a special purpose company (an investment purpose company (tujamokjeokheosa)) can be established to acquire the necessary financing. This special purpose company can be formed as either a joint stock company or a closed company.

Under the FSCMA, the investment purpose company can raise funds if the aggregate amount of borrowing and guarantees does not exceed 300% of its shareholders equity.

 

Equity finance

5. What equity financing structures are typically used in acquisition finance?

Equity financing is common for acquisitions in Korea. The most common form of equity financing is redeemable convertible preference shares (RCPS). RCPSs are treated as liabilities in the books of the issuer but are deemed equity under the Korean Commercial Code. Because RCPSs are deemed to be equity:

  • The holders of RCPS cannot demand their interest to be secured by the assets of the issuing company.

  • RCPS interests always rank below the interests of lenders.

If the purchaser is considering both RCPS and bank loans to finance a proposed acquisition, the senior loan agreement usually imposes a restriction on the aggregate face amount of RCPS that can be issued and the preferred dividends to be paid to the holders of RCPS.

 

Debt finance

Structures and documentation

6. What debt financing structures are typically used in acquisition finance?

Debt financing structures

A typical debt financing structure involves extending senior loans to a newly formed company that acts as the acquiring vehicle. In larger deals, mezzanine financing in the form of mezzanine loans or redeemable shares is often used. At syndication, most of the investors participating in the senior loan also participate in the mezzanine loan. A secondary market for subordinated bond/high-yield debt is not active in Korea.

The amount of the senior loan is usually around 50% of the total acquisition cost, which may be adjusted mainly based on the target's earnings before interest, taxes, depreciation and amortisation (EBITDA). Senior loans usually consist of one or more term loan facilities and a revolving facility. The purpose of the term loan facilities is to pay the acquisition cost together with the equity investment amount, and the purpose of the revolving facility is usually to pay the financing cost and other working capital requirements.

The bullet repayment of the senior loans on the final repayment date is most common. The term of the senior loans is usually four to five years. A prepayment fee is usually charged on the voluntary prepayment of the term loan facility within one or two years from the closing date.

Mezzanine loans are usually term loan facilities, the purpose of which is to pay parts of the acquisition cost. As discussed above, since the investors participating in the senior loans and mezzanine loans are usually the same or are a similar group of financial institutions:

  • The length of the mezzanine loan is usually the same as the senior loan.

  • The same security package given to the senior lenders is also provided in favour of the mezzanine lenders.

Further, the documentation for mezzanine loans is often similar to those for senior loans (although certain financial covenants or events of default are more lenient than for senior loans). Also, the upfront fee, interest rates and prepayment charges are usually higher for the mezzanine loans than for the senior loans.

Documentation

Typically, the loan documentation is drafted by the lender's legal counsel. No particular standardised forms are used (for example, the Loan Syndications and Trading Association standard provisions or Loan Market Association templates are not typically used). The law firm acting as counsel to the lenders uses its own templates for producing the loan documents. However, the contents of the loan documents used in Korean acquisition finance market do not materially differ from those governed by the laws of England and Wales or the State of New York. Loan documents are usually written and negotiated in Korean, although they can be prepared in English in cases where the sponsor is a non-Korean entity. Regardless, the governing law of the loan documents is almost always Korean law.

Inter-creditor arrangements

7. What form do inter-creditor arrangements take in your jurisdiction?

Contractual subordination

Contractual subordination is the most common form of inter-creditor arrangement in Korea. Contractual subordination is usually accomplished by executing an inter-creditor agreement between the senior lenders and mezzanine lenders: there is no particular form or template. The contents of the inter-creditor agreement used in Korean acquisition finance market do not materially differ from those governed by the laws of England and Wales or the State of New York, but the forms are relatively simpler.

Structural subordination

It is possible to set up a holding company above the acquiring vehicle so that the acquiring vehicle becomes the borrower of the senior loan and the holding company becomes the borrower of the mezzanine loan. Structural subordination is not common in Korea but there are some cases where the structural subordination is used.

Payment of principal

In the contractual subordination structure, the usual arrangement in Korea is to first pay off the senior loan in full before payment of the mezzanine loan.

Interest

It is most common that the interest on the senior loan is paid in cash on a quarterly basis. In the case of mezzanine loan, a recent market trend is for the:

  • Interest at the lower coupon rate to be paid in cash on a quarterly basis.

  • Yield to maturity accrued on a compounded basis to be paid on the final maturity date.

Fees

The arrangement fee and upfront fee for both senior and mezzanine loans are usually paid on the closing date.

Sharing arrangements

In the case of mortgages or other types of securities that allow separate registration of different ranking security interests, the security interests for each group of lenders are taken and registered separately. However, not all assets can be pledged and perfected for each group of lenders separately (for example, securities firms do not record second ranking liens on listed shares (only one lien can be recorded)). For these assets, it is most common to create a common security interest over the asset and then contractually designate priorities among the creditors in the inter-creditor agreement.

Subordination of equity/quasi-equity

Equity is subordinated to debt by law and the equity holders are not made parties to the inter-creditor agreements.

Secured lending

8. What security and guarantees are generally entered into for an acquisition financing?

Extent of security

Upstream guarantees (that is, where a subsidiary company provides a guarantee for its parent company's obligations) or collateral are generally not requested or given in Korea. This is because, under Korean law, the directors can be subject to civil and criminal liability for breach of fiduciary duty if they act with the intent to benefit a particular third party (which in this context can include the shareholders). For the rules relating to financial assistance, see Question 10.

Types of security

A general charge or assignment over all assets of a party is not acknowledged in Korea. Therefore, a separate security interest should be created in relation to each type of asset. The three main types of security interest are:

  • Statutory mortgage. These are a statutory form of security interest. Since mortgages provide secured creditors with priority over subsequent creditors and purchasers of the relevant property, mortgages are generally preferred by creditors. Mortgages can only be created over registrable property, that is, types of property that require title to be registered with appropriate judicial and government authorities (such as real property, aircraft, automobiles, and certain categories of ships and heavy equipment (but not intellectual property rights)).

    The most common form of mortgage is a kun-mortgage, which is used for establishing security interests in real property. A kun-mortgage requires only that some maximum secured amount be specified when recording the kun-mortgage with court registry (the actual secured amount can vary over time due to accrual of interest or otherwise). The actual secured amount of a kun-mortgage therefore does not need to be provided when the kun-mortgage is recorded with the court registry, as long as the maximum secured amount is stipulated.

  • Title transfer by way of security (yangdo dambo). Unlike mortgages, yangdo dambo is not a statutory security interest but rather a contractual security arrangement that has come to be recognised by the Korean courts over time. Although a pledge is also available as a form of security interest (see below), yangdo dambo is preferred by creditors because the title in the collateral is transferred to the secured parties. The security interest over receivables, monetary claims and certain movable assets, such as inventory, is generally granted in the form of yangdo dambo. Yangdo dambo is particularly useful in cases where the collateral cannot be physically delivered to the secured party (such as inventory). Under Korean law, while a pledge over the collateral such as inventory requires physical delivery of the property, yangdo dambo is valid even in cases where the transferred property (the collateral) remains with its transferor (the security provider), provided the transferor acknowledges that it is holding the property on behalf of the transferee (the secured party).

  • Pledge (jil-kwon). A pledge is created by the parties entering into a pledge agreement. The pledge requires the collateral provider to surrender possession of the collateral to the secured party but permits the debtor to retain title to the collateral with certain exceptions. If specifically agreed between the secured party and the collateral provider, the secured party may be able to resort to a private sale or direct acquisition of title to the collateral in addition to the judicial foreclosure. A pledge is typically created over intellectual property rights, monetary claims (such as claim over amount on deposit in bank deposit accounts), shares, and bonds.

Shares. A pledge over shares is created on the delivery of the share certificate, representing the shares subject to the pledge, on which the name of the pledgee is endorsed by the pledger, to the pledgee. To perfect the pledge against the company issuing the shares, the name and address of the pledgee must be registered with the shareholders' registry of the company.

If the shares are issued in book-entry form (that is, where the shares of a Korean company are issued through the deposit system of the Korea Securities Depository (KSD), and the KSD acts as the share's central depository and is registered as the nominal shareholder on the issuer's shareholders' registry), the following rules apply in relation to the pledge:

  • If the pledgor is a participant in the KSD, the pledger can instruct the KSD to place a notation on the pledgor's account with the KSD indicating that the specified shares are pledged in favour of the pledgee together with the pledgee's name and address.

  • If the pledgor is not a participant in KSD, the pledgor must open an account with a third-party custodian that is a participant of KSD (such as a securities company) and instruct the custodian to place a notation on the pledgor's account with the custodian indicating that the specified shares are pledged in favour of the pledgee, together with the pledgee's name and address.

Inventory. Korean law generally requires assets subject to a security interest to be specifically identifiable. Therefore, under Korean law, a valid security interest cannot be granted over a fluctuating pool of assets where each asset within the pool is not specifically identified. However, certain exceptions have been recognised by courts (for example, a valid security interest can be granted in inventories that are stored in a segregated storage facility).

Bank accounts. A bank deposit is considered as the depositor's claim against the depository bank. The pledge of a claim can be perfected against third parties in such manner as discussed in relation to monetary claims. The bank's deposit agreement will usually prohibit a pledge from a bank account without the bank's consent: meaning consent from the depository bank is usually required (and should be fixed-date stamped).

Monetary claims. To perfect a pledge or yangdo dambo over monetary claims (such as receivables) against any third party (including the underlying obligor), the security provider must either:

  • Deliver a notice of pledge (or assignment) to the underlying obligor with a fixed date stamp affixed to it (for example, a notice to the debtor by a contents-certified mail via a post office in Korea).

  • Obtain a written consent to the pledge (or assignment) with a fixed-date stamp affixed to it.

If there is a contractual restriction on the assignment or creation of a security interest in the underlying contract, the security provider must obtain the underlying obligor's consent to the pledge (or assignment) with a fixed-date stamp affixed. In addition, any instruments relating to the monetary claim should be delivered to the secured party.

In relation to the effectiveness of the security interest over future monetary claims, the following elements are required for the valid creation of the security interest over monetary claims to be generated in the future (based on the views of leading commentators and precedents from the Korean Supreme Court):

  • The monetary claims are capable of being reasonably identified and specified.

  • The monetary claims are likely to actually be generated in the near future.

Intellectual property rights. For the creation of pledge over a trade mark, patent or any other intellectual property rights, the pledge must be registered with the Korea Industrial Property Office (KIPO).

The KIPO registration fees must be paid. The relevant fees and expenses depend on the number of intellectual property rights subject to the pledge. It usually takes two weeks from the date of submitting the application to the KIPO to complete the registration of the pledge.

Real property. The most popular forms of security granted over real property are:

  • Mortgage. This must be registered with the appropriate court registry. The registration and education taxes must be paid and national housing bonds must be purchased for a mortgage to be registered.

    The taxes and expenses depend on the maximum mortgage amount. A mortgage is automatically perfected on creation, and no further action is required for perfection. One particular form of mortgage used for taking a blanket security interest over a factory is a "factory mortgage". This creates a security interest in the factory's underlying land, facilities, fixtures and equipment. Recording a factory mortgage with court registry requires attaching a schedule, which lists specific items covered by the factory mortgage.

  • Collateral trust. A security interest over real property can also be created using a collateral trust (often favoured by the lenders). The property owner as trustor enters into a real property collateral agreement with a trustee and the trustee issues a beneficiary certificate to the lender as the primary beneficiary. Title to the property is then transferred to the trustee. On the occurrence of an event of default under the loan agreement, the lender can instruct the trustee to dispose of the property. The key difference between a collateral trust and a mortgage is the method under which the collateral property can be disposed of. In a collateral trust, the trustee can sell the property through a private sale. In a mortgage, however, the disposal of the property can only be carried out under a court-administered auction process, which:

    • can take a significant amount of time; and

    • may or may not result in optimal amount of sale proceeds.

Another advantage of the collateral trust arrangement is that because the sale proceeds are distributed in accordance with the waterfall set out in the trust agreement, it is easier to administer. However, the kun-mortgage has the advantage that the purchaser can take over the property from the foreclosure auction, free of all liens (subject to exceptions of the super-senior liens).

Movable assets. Security interests over movable assets can be created using either a pledge or yangdo dambo. To create yangdo dambo over movable assets (that are not registrable property), the parties (that is, the assignor and the assignee) must agree to both:

  • Transfer title of the movable assets to the assignee.

  • Allow the assignor to maintain physical possession and continued use of the inventory while holding it "in trust" for the assignee (which constitutes the delivery of the movable assets to the assignee under Article 189 of the Korean Civil Code).

Guarantees

A company can guarantee the debt of another person provided the guarantee can be justified on the basis of corporate benefit from the guarantor's perspective. A downstream guarantee (that is, where the parent company provides a guarantee for the benefit of its subsidiary) is usually recognised as justifiable, however, an upstream guarantee require specific grounds for justification. Upstream guarantees are restricted due to the fiduciary duty limitations imposed on the directors (see above, Extent of security).

In addition to the restrictions on upstream guarantees, the following restrictions apply to guarantees under Korean law:

  • Limitations under the Financial Investment Services and Capital Markets Act (FSCMA). The FSCMA restricts a private investment company from providing guarantees with respect to the obligations of any third parties, including the obligations of a special purpose company (namely, investment purpose company) wholly owned by it. A private investment company's borrowing and issuance of guarantees is only permitted if any of the following apply:

    • it is unavoidable for repaying a contribution amount to a departing member;

    • there is a temporary shortage of operating funds, or

    • there is a temporary shortage of funds for an investment in a target company.

The total amount of such borrowings and guarantees, however, must not exceed 10% of its assets. The borrowing and issuance of guarantees by an investment purpose company is also limited to 300% of the shareholder's equity of the special purpose company. However, there is no restriction on its purpose (unlike in the case of the private equity fund).

  • Limitation on listed companies under the Korean Commercial Code (KCC). Articles 542-9 of the KCC prohibits a listed company from guaranteeing the obligations of its major shareholders or other specially related persons, with certain exceptions.

  • Limitation on debt-guarantee restriction corporate groups under the Monopoly Regulation and Fair Trade Law (FTL). The FTL sets out certain criteria for a corporate group to be designated as a "debt-guarantee restriction corporate group" (for example, where the corporate group's total assets are in excess of a threshold amount set out in the Presidential Decree of the FTL). Companies that are members of a corporate group designated as debt-guarantee restriction corporate group are prohibited from guaranteeing the obligations of its domestic affiliate companies owed to domestic financial institutions.

Security trustee

Generally, the concept of "security trustee" is not recognised under the laws of Korea as it is required that all security interests (other than those created by the entrustment of collateral by a security provider to a trust company licensed in Korea) have the same person to act as both the secured party and the creditor.

However, the concept of "parallel debt" has been used in many offshore financing transactions governed by the laws of England and Wales or the State of New York, to address both:

  • The unavailability of a security trust in Korea.

  • The requirement for the security trustee, as the grantee of the security created under Korean law-governed security documents, to be the creditor of the relevant security provider.

 

Restrictions

Thin capitalisation

9. Are there thin capitalisation rules in your jurisdiction? If so, what is their impact on an acquisition finance transaction?

The deductibility of interest payments in relation to a loan extended by a foreign controlling shareholder (FCS) of the Korean borrower may be restricted under Korean law (International Tax Coordination Law). If the amount of the Korean borrower's debt owed to an FCS or to a third party under a guarantee issued by an FCS exceeds 300% of the "net FCS equity" in the Korean borrower, interest expenses on the excessive debt are not deductible to the Korean borrower for corporate income tax purposes. In addition, the non-deductible interest amount is treated as dividends if the debt is owed to an FCS.

An FCS is a foreign shareholder who either:

  • Directly or indirectly owns 50% or more of the voting power in the borrower.

  • Substantially controls the business policies of the borrower. Factors indicating control include (among others):

    • interlocking directors;

    • significant financial support;

    • business dependency; and

    • licensing of intangible property

The "net FCS equity" in the borrower for this purpose is defined as its proportionate share of the larger of either:

  • The net equity (total assets minus total liabilities) amount of the company.

  • The shareholder's investment amount (paid-in capital plus share premium plus gain from capital reduction, minus discount from capital increase, minus loss from capital reduction) as of the end of the fiscal year.

However, if there is any capital increase or capital reduction during the fiscal year, the new FCS equity should be calculated under the average basis. Accordingly, a thin capitalisation problem cannot be avoided by:

  • Extinguishing loans just before the end of the fiscal year.

  • An injection of additional capital immediately before the end of the fiscal year.

Financial assistance

10. What are the rules (if any) concerning the prohibition of financial assistance?

There is no financial assistance rule in Korea. However, all actions taken by the directors of the company providing financial assistance must comply with the relevant fiduciary duty restrictions. Under Korean law, the directors can be subject to civil and criminal liability for breach of fiduciary duty if they act with the intent to benefit a particular third party. In this context, a third party includes the shareholders of the company since the prevailing view is that the fiduciary duty of directors runs to the company itself rather than to the shareholders of the company. Therefore, the directors of the target that support providing guarantees (or providing the assets of the target as collateral) with respect to the obligations of the target's parent could potentially be subject to both civil and criminal liability.

Regulated and listed targets

11. What industries are regulated in your jurisdiction? How can the fact that a target is a regulated entity affect an acquisition finance transaction?

Regulated industries

The key regulated industries in Korea include institutions for which applicable laws impose restrictions on the eligibility of major shareholders and/or changes to the composition of the shareholders. These institutions include:

  • Commercial banks.

  • Insurance companies.

  • Securities companies.

  • Public broadcast companies.

  • Telecommunication companies.

The Bank Act prohibits any one person from acquiring more than 10% of outstanding voting shares of any commercial bank (including any shares held by any specially related persons of such person) unless either:

  • Approval is obtained from the Financial Services Commission (FSC).

  • Some other limited exception under the Bank Act is applicable.

In addition, if any person acquires more than 4% of the voting shares of any commercial bank, this person must file various reports regarding their acquisition of the interests with the FSC. The FSC's approval is also necessary for a person to become a major shareholder of insurance companies, securities companies, mutual savings banks or other financial institutions.

Various restrictions are also imposed on:

  • The eligibility of shareholders for broadcasting companies governed by the Broadcasting Act or the Telecommunications Business Act. The acquisition of any controlling interests in a broadcasting company also requires the approval of the Korea Communications Commission.

  • The eligibility of shareholders for telecommunication companies governed by the Telecommunications Business Act. The aggregate amount of shares held by foreigners in any given telecommunication company must not exceed 49% of the total number of outstanding shares.

Effect on transaction

Since the necessary approvals are required from the applicable government agencies to acquire equity interests or make a change to the shareholding, the acquisition financing documentation for an M&A transaction for companies in these restricted industries generally provides for a longer "availability period" for the drawing of the loan.

The loan document will also include:

  • Covenants requiring the borrower to obtain and maintain all the applicable approvals and permits.

  • Financial covenants requiring the borrower's compliance with the financial conditions prescribed by the applicable laws.

 
12. How does the fact that a target is listed impact on a transaction?

Specific regulatory rules

The acquisition of a listed target company must comply with the special provisions under the Financial Investment Services and Capital Markets Act (FSCMA).

Methods of acquisition

Acquisitions of listed target companies are usually conducted by purchasing the shares from the controlling shareholders over the counter. This is done to circumvent the various restrictions under the FSCMA (except for certain disclosure requirements) in relation to the sale and purchase of listed shares.

However, where the number of sellers exceeds ten, the public tender offer procedure must be used. Further, if the seller shareholder is a foreigner, the shares held by the seller should have been acquired as "foreigner investment" under Korea's Foreigner Investment Promotion Law. Otherwise, the shares held by the foreigner seller cannot be sold over the counter without the approval of the Financial Services Commission (FSC).

If there are no controlling shareholders in the listed target, a public tender offer under the FSCMA can be used to acquire the controlling shares. For a public tender offer, the offeror must submit an application to the FSC and the Korea Exchange containing certain information regarding:

  • The identity of the offeror and the target.

  • The purpose of the tender offer.

  • The types and number of shares to be purchased.

  • Key terms (duration, price, execution date and so on).

  • The funding plan for payment.

Under the FSCMA, the offeror must deposit an amount sufficient to pay the total purchase price payable with a bank if the maximum number of shares the offeror offered to purchase is tendered. The deposit must be made before launching the tender offer, and the bank holding such deposit must issue a certificate confirming that the deposit of a sufficient amount to pay the total purchase price has been made.

The public tender offer is rarely used for the acquisition of the controlling shares because:

  • The procedure is complicated and strictly regulated.

  • The total purchase price must be funded and deposited in advance.

However, after the acquisition of the controlling shares, it is possible for the purchaser to acquire additional shares through tender offers.

Funding

For an acquisition of share in a listed target from controlling shareholders over the counter, the following general method of funding is used. For a public tender offer, the offeror must deposit an amount sufficient to pay the entire purchase price with a bank at the time application is submitted. To facilitate this, bridge loans (secured by the security over the account on which such loan is funded) are used to finance the transaction. If the tender offer is successful, the bridge loan is paid from the proceeds of the main debt financing and equity investments. Conversely, if the tender offer is unsuccessful, the bridge loan is simply repaid. The bridge loan is usually extended by one lender because:

  • Confidentiality is a crucial factor in these types of transactions.

  • The offeror generally prefers to deal only with one lender.

Squeeze-out procedures

If a purchaser acquires 95% or more of the target's shares through a public tender offer, the remaining shareholders can request the purchaser to purchase their shares at a fair price. If the parties fail to agree a fair purchase price, the shareholders can request the appropriate price be determined by the court.

It is possible for a target to be de-listed even without the controlling shareholder (together with its specially-related persons) acquiring 100% of the shares in the target. In such a scenario:

  • The controlling shareholder must commit to purchase the shares held by the minority shareholders within a certain period after the de-listing if requested by the minority shareholders within that period.

  • The purchase price for the shares held by the minority shareholders after de-listing must be discussed with the Korea Exchange.

Typically, the purchase price is based on the tender offer price if a tender offer is conducted immediately before the de-listing.

Pension schemes

13. What is the impact, if any, of pension schemes held by the target or purchaser on the acquisition?

From an acquisition perspective, the usual scope of review relating to pension schemes in Korea is limited to ensuring that the target has properly accrued the reserves for statutory severance payments as required under applicable laws. If the purchaser, on review of the status of the reserve, determines that the reserve is insufficient, he can request either or both:

  • An injection of additional funds into the reserve as a condition for closing of the financing transaction.

  • An adjustment of the purchase price to reflect the deficiency.

 

Lender liability

14. What are potential liabilities of the lender on an acquisition?

Korean law makes no specific provision in relation to the liability of the lender. In general, the liability of a lender as party to a contract can arise. The lender can be liable for any damage it causes if it:

  • Breaches its obligations under the loan agreement (for example, by not making a loan even if all conditions therefore are satisfied).

  • Exercises its rights in a manner that is not in compliance with the terms of the loan agreement.

 

Debt buy-backs

15. Can a borrower or financial sponsor engage in a debt buy-back?

Secondary market for loans is not active in Korea, although the lenders sometimes transfer loans. Borrowers generally refinance their debt positions instead of "buying back" their debt.

 

Post-acquisition restructurings

16. What types of post-acquisition restructurings are common in your jurisdiction?

The merger between the acquiring vehicle and the target is often used for debt push-downs. In such situations, the liabilities of the target (the surviving company) is increased by the outstanding loans borrowed by the acquiring vehicle by operation of law on the completion of the merger. Therefore, issues can rise on whether the directors of the target will be liable for breach of fiduciary duty in approving the merger. To ensure the merger does not raise any fiduciary duty concerns, the transaction should be reviewed on a case-by-case basis.

In this regard, the Seoul Central District Court recently rendered a decision regarding the alleged breach of fiduciary duty in connection with a certain leveraged buyout (LBO) transaction. The court held that, considering the circumstances, the directors of the target should not be held liable for breach of fiduciary duty in a merger type LBO when the following are applicable (among other things):

  • A considerable portion of the purchase price (about 56% of the total) was financed through equity investment.

  • The merger was consummated in full procedural compliance with the applicable statutes and regulations.

However, this case is currently being reviewed by the appellate court.

 

Reform

17. Are there reforms or impending regulatory changes that are likely to affect acquisition finance transactions in your jurisdiction?

There presently are no impending regulatory changes in relation to acquisition finance.

 

Online resources

National Law Information Center

W www.law.go.kr/eng/engMain.do

Description. A website maintained by the Ministry of Government Legislation which provides the texts of Korean laws in Korean and, in certain cases, in non-binding English translations.



Contributor profiles

Kye Sung Chung, Senior Partner

Kim & Chang

T +82 2 3703 1102
F +82 2 737 9091/9092
E kschung@kimchang.com
W www.kimchang.com

Professional qualifications. Admitted to bar, Korea, 1976

Areas of practice. Banking; M&A.

Non-professional qualifications. LLB, College of Law; Seoul National University, 1973

Languages. Korean, English and Japanese.

Jina Myung, Senior Attorney

Kim & Chang

T +82 2 3703 1205
F +82 2 737 9091/9092
E jamyung@kimchang.com
W www.kimchang.com

Professional qualifications. Admitted to bar, Korea, 1999

Areas of practice. Structured finance; project finance; ship finance; acquisition finance; real estate & construction.

Non-professional qualifications. BA, College of Social Science, Seoul National University, 1991

Languages. Korean and English.

Chong Woo Kim, Foreign Attorney

Kim & Chang

T +82 2 3703 4749
F +82 2 737 9091/9092
E chongwoo.kim@kimchang.com
W www.kimchang.com

Professional qualifications. Admitted to bar, New York, US, 2008

Areas of practice. Banking; acquisition finance; corporate governance; anti-trust & competition; international trade and customs.

Non-professional qualifications. JD, University of Pennsylvania Law School, 2007; BS in Economics, Finance and Accounting, The Wharton School of the University of Pennsylvania, 2004

Languages. Korean and English.


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