Private mergers and acquisitions in South Korea: overview

Q&A guide to private mergers and acquisitions law in South Korea.

The Q&A gives a high level overview of key issues including corporate entities and acquisition methods, preliminary agreements, main documents, warranties and indemnities, acquisition financing, signing and closing, tax, employees, pensions, competition and environmental issues.

To compare answers across multiple jurisdictions, visit the Private mergers and acquisitions Country Q&A tool.

This Q&A is part of the global guide to private acquisitions law. For a full list of jurisdictional Q&As visit For a full list of jurisdictional Q&As visit www.practicallaw.com/privateacquisitions-guide.

Contents

Corporate entities and acquisition methods

1. What are the main corporate entities commonly involved in private acquisitions?

Joint stock companies (chusik hoesa) (JSC) are by far the most common corporate entities involved in private acquisitions. Limited liability companies (yuhan hoesa) (LLC) and private equity funds are also frequently involved in private acquisitions.

Joint stock company

Based on data disclosed by the Supreme Court of Korea, as of 22 January 2015, JSCs account for 91.70% of all registered companies, LLCs 6.30%, and limited partnership-like companies 1.69%. This shows the prevalence of JSCs. The main reasons for this are that:

  • A JSC provides its shareholders with limited liability and transferability of shares.

  • Only the shares of a JSC can be listed on the Korea Exchange, and only a JSC can issue corporate bonds.

  • A JSC is more familiar, and has a more established set of statutory laws and regulations, case precedents and theoretical foundations, which assure higher legal certainty.

Limited liability company

An LLC also provides its unitholders with limited liability, but it has a closed management structure. In other words, an LLC is subject to fewer formalities than a JSC, and has more flexibility in operating its business since, among other things:

  • An LLC can prohibit transfer of ownership units in its articles of incorporation (a lesser degree of transfer restriction is possible for a JSC (see Question 2).

  • An LLC is not required to have a board of directors and a statutory auditor (which are required for JSCs meeting a certain size threshold).

  • Unitholders can adopt a resolution by written resolution (which is, in principle, not possible for shareholders of a JSC).

Considering such features, an LLC is mainly used for small-size closed companies, in particular, subsidiaries of foreign investors or joint ventures with foreign investors.

Private equity fund

This is mainly used when multiple investors want to form a fund for a private acquisition. Under the Financial Investment Services and Capital Markets Act, other types of funds are not generally suitable for private acquisitions, as they are subject to restrictions on, for example, exercising voting rights. A private equity fund is well suited for private acquisitions, as it was created for this type of investment with active management participation.

When a private equity fund participates in a private acquisition, it is common to incorporate a special purpose company as its subsidiary, to act as the direct party to the private acquisition. Under the Commercial Code (the main body of corporate law in Korea), a private equity fund is a limited partnership-like company consisting of:

  • At least one general partner (typically, a professional asset management company registered with the financial regulator) in charge of making investment decisions and managing the private equity fund.

  • One or more limited partners, who contribute equity funds.

The special purpose company can be a JSC or LLC, and most of its shares/ownership units must be owned by the private equity fund.

 
2. Are there any restrictions under corporate law on the transfer of shares in a private company? Are there any restrictions on acquisitions by foreign buyers?

Restrictions on share transfer

Under the Commercial Code, shares are in principle freely transferrable. There are some restrictions on share transfer imposed by specific laws, such as a requirement for regulatory approval in case of a change of major shareholders of financial institutions.

The only way to restrict the transfer of shares is to require board approval for the transfer, by specifying this requirement in the articles of incorporation. However, this restriction is not an outright prohibition on share transfer. While a share transfer without such approval would be void, if the board refuses to approve the transfer the seller can request the company to designate an alternative buyer or buy back the shares.

In addition, if a company with such a restriction in its articles of incorporation wants to list on the Korea Exchange, it must remove the restriction.

Foreign ownership restrictions

The Commercial Code does not impose any restrictions on foreign ownership of shares. Almost all areas of businesses are open to foreign investment except for certain key industries, such as:

  • Telecommunications.

  • Broadcasting.

  • Publishing.

  • Banking.

  • Marine.

  • Aviation.

  • Agriculture.

  • Natural resources.

Foreign ownership in these sectors is restricted to a percentage ceiling, or subject to regulatory approval for reasons of national security, protection of critical technologies, and so on.

 
3. What are the most common ways to acquire a private company? What are the main advantages and disadvantages of a share purchase (as opposed to an asset purchase)?

A share purchase is by far the most common way to acquire a private company. An asset purchase is typically used if the buyer wants to purchase some of the target company's assets or businesses, but not all of them.

In addition, while a merger is often used to acquire the entire target company it is mostly used for an intra-group restructuring, and is rarely used in a private acquisition between unrelated parties.

Share purchase: advantages/asset purchase: disadvantages

The main advantages of a share purchase/disadvantages of an asset purchase are the following.

Simplicity of transfer procedure. A share transfer can be made effective simply by agreement of the parties on the share transfer and delivery of the relevant share certificates. In contrast, an asset purchase requires each item of the target company's business (assets, liabilities, business contracts, government licences/approval and employment relationships) to be individually transferred.

Less third-party involvement. In a share purchase, no third party consent is generally required except by contract, for example, under a change of control provision, and no separate reporting or approval is needed for licences/approvals held by the target company.

In an asset purchase, consents of counterparties to the transferred contracts and creditors of the transferred liabilities, and separate reporting or approval for the transferred licences/approvals, are generally required.

Tax. An asset purchase (compared to a share purchase) frequently results in additional taxes for the seller, by triggering capital gains tax at target company level, and at shareholder level if the proceeds from the sale are distributed to the shareholders.

Share purchase: disadvantages/asset purchase: advantages

The main disadvantages of share purchase/advantages of asset purchase are the following.

Inability to select assets/liabilities. In a share purchase, the target company continues to retain its assets, liabilities, business contracts, government licences/approvals and employment relationships. The buyer cannot single out particular assets and/or liabilities to be transferred.

In an asset purchase, the buyer can select the assets and liabilities to be transferred and can leave others with the target company, though this ability can be practically limited when acquiring an entire business as a going concern.

Inability to exclude contingent liabilities. In a share transfer, all liabilities of the target company (including any contingent liabilities that the parties are not aware of at the time of the transfer) remain unchanged with the target company after the transaction. While the buyer is protected by limited liability as a shareholder and the representations/warranties and indemnification obligations of the seller, these do not eliminate the buyer's indirect exposure to these contingent liabilities. In contrast, in an asset deal, all liabilities that the buyer does not assume remain with the target company, and the buyer is not exposed to any unknown liabilities.

 
4. Are sales of companies by auction common? Briefly outline the procedure and regulations that apply.

Sale of a company by auction is quite common. When the seller is a government authority or government-owned enterprise, an open bidding process is mandatory under the Act on Contracts to which the State is a Party. Auctions are also fairly common in private transactions.

Typical auction sale procedures in Korea are similar to those in the US and English law jurisdictions. While each auction has its own features, the typical process in many private deals consists of:

  • Preliminary bid.

  • Due diligence by short-listed bidders.

  • Binding bid.

  • Selection of and negotiation with preferred bidder(s) and execution of the final sale/purchase agreement.

Auctions by public entities are subject to certain regulations and procedural requirements under the Act on Contracts to which the State is a Party. Auctions by private parties are not subject to any specific regulations, except the principle of fairness.

 

Preliminary agreements

5. What preliminary agreements are commonly made between the buyer and the seller before contract?

Letter of intent

A letter of intent is commonly made between the buyer and the seller at the early stage of the transaction, but not always. Although the contents of a letter of intent vary on a case-by-case basis, it is typically not binding, and generally sets out the intent to sell/purchase the target and basic structure of the transaction, and the expected price or valuation method.

Depending on the circumstances, a letter of intent can include confidentiality, exclusivity, and applicable law/jurisdiction clauses, and make them binding. It can also include clauses relating to due diligence and major terms and conditions for the underlying transaction. However, this level of detail is uncommon for a letter of intent. A memorandum of understanding is more commonly executed instead if a detailed preliminary agreement is required before the main sale/purchase agreement.

Exclusivity agreement

It is rare for an exclusivity agreement to be entered into on its own. An exclusivity clause is usually included in a memorandum of understanding/letter of intent or in a non-disclosure agreement. There are no formalities or other requirements under Korean law to make an exclusivity clause binding, other than the parties' intent to make it binding. The remedies available for breach of an exclusivity clause can be an injunction and/or damages.

Non-disclosure agreement

Unlike a memorandum of understanding/letter of intent, a non-disclosure agreement is entered into in almost all private acquisitions before the main sale/purchase agreement, and is similar to non-disclosure agreements in the US and English law jurisdictions.

There are no formalities or other requirements under Korean law to make a confidentiality clause binding.

The remedies available for breach of a confidentiality clause can be an injunction and/or damages. Since it can be difficult to assess the amount of damages caused by breach of a confidentiality clause, the parties (mainly the seller) sometimes specify liquidated damages or a liquidated penalty, but a non-disclosure agreement rarely contains such a clause.

 

Asset sales

6. Are any assets or liabilities automatically transferred in an asset sale that cannot be excluded from the purchase?

In an asset purchase, the parties can generally freely exclude certain assets/liabilities from the transaction. However, when purchasing a business unit, relevant employees cannot be excluded on a discretionary basis. Unless the employees elect not to be transferred, they will automatically transfer from the seller to the buyer as part of the business unit. Further, by operation of law, the buyer is bound by the existing employment agreements and other commitments in relation to those employees.

In addition, while it is not prohibited for the parties to exclude the following liabilities, the buyer can, by operation of law, be liable as follows:

  • The buyer is jointly and severally liable for compensation due to the transferred employees, for work done before the transfer.

  • Except where the buyer can prove no knowledge/no fault, the buyer is secondarily liable for cleaning up contaminated land included in the transfer (see Question 35).

  • The buyer is secondarily liable for the seller's overdue taxes relating to the transferred business.

 
7. Do creditors have to be notified or their consent obtained to the transfer in an asset sale?

Neither notifications to nor consents from creditors are necessary for an asset purchase. However, if certain business contracts or liabilities are transferred as part of an asset purchase, consents from the relevant counterparties or creditors are required for their transfer, unless otherwise provided in the relevant contracts. In addition, the seller or the buyer might have to notify or obtain consent from its creditors, where any relevant financing or other applicable agreement requires.

 

Share sales

8. What common conditions precedent are typically included in a share sale agreement?

Although exact conditions precedent depend on the context and negotiation of each deal, common conditions precedent include:

  • The seller's representations/warranties must be true and accurate (in all material respects).

  • The seller must have performed its pre-closing covenants and obligations (in all material respects).

  • No law or government/court order barring the transaction exists.

  • Any required governmental approvals must be obtained, including anti-trust approvals, if applicable.

  • No material adverse change exists (this relates to deal certainty and is usually subject to intense negotiation, and if the seller's bargaining power is relatively strong, this is usually omitted).

 

Seller's title and liability

9. Are there any terms implied by law as to the seller's title to the shares in a share sale? Is any specific wording necessary and do buyers normally impose a higher standard than is implied by law?

Under the Commercial Code, a holder of a share certificate is presumed to be the owner of the shares represented by the certificate. However, even if the seller holds the share certificates for the shares to be transferred, the seller's ownership of the shares is not completely guaranteed by operation of law. Therefore, the buyer normally requires representations/warranties from the seller that:

  • The seller is the registered legal and beneficial owner of the transferred shares, free and clear of all encumbrances.

  • On closing, the buyer will acquire from the seller good and valid title to the transferred shares, free and clear of all encumbrances.

 
10. Can a seller and its advisers be liable for pre-contractual misrepresentation, misleading statements or similar matters?

Seller

The seller and its advisers can be liable for a pre-contractual misrepresentation if the misleading statement constitutes a tort and causes damage to the buyer. However, if the main sale/purchase agreement provides for a disclaimer of reliance on extra-contractual representations/warranties, it would be difficult to establish such a tort claim.

Advisers

See above, Seller.

 

Main documents

11. What are the main documents in an acquisition and who generally prepares the first draft?

The main documents in a share transfer are the:

  • Share purchase agreement.

  • Account pledge agreement (if there is an advance deposit, and a pledge is created over it).

  • Escrow agreement (if the parties agree to an escrow arrangement).

The major documents in asset deal are largely similar, except that there is an asset/business transfer agreement instead of a share purchase agreement.

Who provides the initial draft is usually negotiated on a case-by-case basis. The seller typically provides the initial draft in auctions, and the buyer more frequently provides the initial draft in one-to-one transactions.

 

Acquisition agreements

12. What are the main substantive clauses in an acquisition agreement?

A share purchase agreement typically includes:

  • Agreement to sell and purchase.

  • Purchase price and advance deposit. An advance deposit is usually required, although there are many cases where it is not required. When it is required, the general practice is to create a pledge over the bank account holding the deposit.

  • Confirmatory due diligence and price adjustment mechanism (although many transactions do not have these).

  • Closing and closing deliverables.

  • Conditions precedent to closing.

  • Covenants.

  • Representations/warranties.

  • Indemnifications.

  • Termination.

  • Miscellaneous clauses, including confidentiality, notice, assignment, governing law, jurisdiction and dispute resolution.

A typical asset/business transfer agreement includes most of the above, and also includes:

  • Identification of the assets, liabilities, contracts, and so on to be transferred (and those excluded from the transfer).

  • Specific transfer method for the assets, liabilities, contracts, and so on to be transferred.

  • Post-closing price adjustment mechanism.

 

Acquisition agreements

13. Can a share purchase agreement provide for a foreign governing law? If so, are there any provisions of national law that would still automatically apply?

Although very uncommon, a share purchase agreement can provide for a foreign governing law. Even in this case, mandatory provisions of Korean law still apply, such as the method of share transfer, formalities for replacement of directors and requirements for governmental approvals.

 

Warranties and indemnities

14. Are seller warranties/indemnities typically included in acquisition agreements and what main areas do they cover?

Share purchase agreements and asset purchase agreements typically contain seller representations/warranties and indemnities. Representations/warranties are tailored for each transaction. Generally, the main areas that seller representations/warranties usually cover are:

  • The seller's authority and no conflict.

  • Ownership of the shares (share purchase) or ownership of the assets, liabilities, business contracts, and so on (asset purchase).

  • The target company's operations, for example:

    • financial statements;

    • no undisclosed liabilities;

    • compliance with law;

    • no litigation;

    • employees;

    • real estate and other major assets;

    • intellectual property;

    • material contracts;

    • tax;

    • insurance; and

    • environmental issues.

The scope and details of the coverage are subject to negotiation between the seller and the buyer.

 
15. What are the main limitations on warranties?

Limitations on warranties

Typical limitations on representations/warranties are similar to those in the US and English law jurisdictions. They include:

  • Knowledge and materiality qualifiers on the representations/warranties (if the seller has a stronger bargaining power, a material adverse effect qualifier may be used instead of materiality qualifiers).

  • Use of materiality/material adverse effect qualifiers on references to the representations/warranties in conditions precedent or termination events.

  • Time limits on the representations/warranties.

  • A de minimis, basket and/or cap on indemnification for breach of the representations/warranties.

Qualifying warranties by disclosure

Qualifying representations/warranties by disclosure is common in both share purchases and asset purchases. The scope of disclosure is typically subject to intense negotiation between the buyer and the seller. There has been an increased trend towards seller legal due diligence (through its external legal counsel) to ensure the accuracy of disclosure.

While the format and contents of disclosure differ on a case-by-case basis, general disclosure (deeming that facts in public records or due diligence materials are included in the disclosure) is not typical. Instead, specific disclosures are usually prepared for each representation/warranty. These specific disclosures commonly cross-refer to other representations/warranties to which they relate. However, the manner in which such cross-referencing is used (whether general or specific) and the specific language of the cross-referencing is usually subject to intense negotiation between the buyer and the seller. Permitting the seller to update the disclosures at its discretion is not common.

 
16. What are the remedies for breach of a warranty? What are the time limits for bringing claims under warranties?

Remedies

Usual remedies for breach of representations/warranties are, subject to the terms and conditions of the main sale/purchase agreement:

  • Claims for damages.

  • Termination of the agreement and/or refusal to close the transaction, due to non-satisfaction of conditions precedent.

Time limits for claims under warranties

This depends highly on the negotiation between the parties and varies widely. Generally, the time limit for:

  • Breach of representations/warranties relating to the target company's operations ranges from six months to three years in many cases.

  • Breach of tax, employment, environment or related party transaction representations/warranties is at times longer than the general time limit set out above.

  • Breach of fundamental warranties, such as title to shares, usually extends indefinitely.

 

Consideration and acquisition financing

17. What forms of consideration are commonly offered in a share sale?

Forms of consideration

The most common form of consideration is cash. Non-cash consideration, such as promissory notes, stocks or bonds, is rarely used.

Factors in choice of consideration

Although non-cash consideration is rarely used, it might be used where:

  • The parties want to maintain a co-operative relationship after the transaction, in which case the buyer or its affiliate's shares may be used as consideration.

  • The buyer's cash reserve is not sufficient to pay all the consideration, in which case promissory notes may be used to pay all or part of it.

 
18. If a buyer listed in your jurisdiction raises cash to fund an acquisition by an issue of shares, how is the issue typically structured? What consents and regulatory approvals are likely to be required?

Structure

Under the Commercial Code, shareholders have default pre-emptive rights in relation to a new issue of shares. Therefore, in principle, when a company issues new shares, they have to be allocated to the existing shareholders in accordance with their shareholding ratios. However, if the articles of incorporation allow for the issue of new shares to a third party rather than existing shareholders in specified circumstances, and the managerial need for the third party allocation is recognised, new shares can be issued to the third party, despite the shareholders' pre-emptive rights.

Under the Financial Investment Services and Capital Markets Act, a listed company can issue new shares by a public offering (to 50 or more persons) or a private placement (to less than 50 persons). Issuing new shares by a public offering requires filing of a registration statement, and takes two to three months to complete. This filing requirement can be waived for an issue of new shares by private placement (see below, Requirements for a prospectus), which can be completed in a shorter time period.

The issue of new shares to existing shareholders by a listed company must be done by a public offering (which takes a long time) since a listed company always has more than 50 shareholders. To raise funds for an acquisition, issuing new shares to existing shareholders by a public offering is used when there is a sufficient time. An issue of new shares to a third party by a private placement is used when faster fundraising is required, and the requirements for a third party allocation can be met.

Consents and approvals

Under the Commercial Code, an issue of new shares only requires a resolution of the board of directors, unless the articles of incorporation provide otherwise. Shareholder approval or other third party approval is not needed in principle. However, regulatory reporting or approval may be required under specific laws (for example, for financial institutions) and third party consents may be required under contracts to which the company is a party.

Requirements for a prospectus

When a listed company issues new shares by a public offering, a registration statement must be filed (see above, Structure). An offer to 50 or more persons is a public offering, and even an offer to fewer persons can be regarded as a public offering if it involves a risk of resale. To qualify as a private placement, it is necessary to offer to fewer than 50 persons and have subscribers of new shares agree to a lock up of one year or longer, in which case the registration statement filing requirement is waived.

 
19. Can a company give financial assistance to a potential buyer of shares in that company?

Restrictions

Under Korean law, financial assistance, such as providing collateral, a loan or guarantee by the target company to the buyer is not permitted in principle. Directors of the target company owe fiduciary duties to the target, and even if the target has only one shareholder holding 100%, the shareholder's interests and the company's interests are deemed separate. If directors act for the benefit of the shareholder to the detriment of the company, they can be exposed to criminal and civil liabilities for breach of their fiduciary duties.

There is a Supreme Court precedent (issued 9 November 2006 in 2004Do7027) where the target provided its assets as collateral to the lenders providing acquisition financing to the buyer (typically called a leveraged buyout or LBO, more specifically a collateral-type LBO). In this case, the Supreme Court ruled that the target was exposed to the risk of losing its assets provided as collateral if the buyer failed to repay the loan, and such provision of collateral can only be justified if the target receives appropriate consideration for undertaking the risk. Since in that case the directors provided collateral without any consideration, they were found criminally liable for breaching their fiduciary duties. Since this ruling, providing the target company's assets as collateral for an LBO is rare, due to the perceived risk of potential criminal liability.

Exemptions

The target directly providing financial assistance is not permitted in principle (see above, Restrictions). However, the following are permitted if circumstances allow:

  • The target merges with the buyer after the acquisition, and uses the target's assets to pay off the financing for the acquisition (merger-type LBO).

  • The target makes a distribution to the buyer by way of dividends or capital reduction, and the buyer uses the distribution to pay off the financing for the acquisition (distribution-type LBO).

 

Signing and closing

20. What documents are commonly produced and executed at signing and closing meetings in a private company share sale?

Signing

Documents commonly produced, executed or delivered for a share/asset purchase include:

  • A share purchase agreement or asset/business transfer agreement.

  • Both parties' internal approval documents, such as board of directors' meeting minutes endorsing the transaction and authorising a particular individual to sign the agreement.

  • Account pledge agreement (if there is an advance deposit).

  • Escrow agreement (if applicable).

  • Corporate seal certificate (if the agreement is to be executed by affixation of the corporate seal).

Closing

Documents commonly produced, executed or delivered at closing include, for a share purchase:

  • Share certificates representing the shares.

  • Register of shareholders issued by the target (by affixing the corporate seal) reflecting that ownership of the shares has been transferred to the buyer as of the closing date.

  • If board approval is required by the target's articles of incorporation for the share transfer, a copy of the minutes of the board of directors' meeting approving the transaction.

  • Letters of resignation, stipulating the intention of the existing registered directors and statutory auditor(s) to resign from their offices as of the closing date, and the waiver of claims and their personal seal certificates for court registration.

  • Minutes of the shareholders' meeting for the target (for example, adopting new articles of incorporation and appointing the directors and/or statutory auditor(s) nominated by the buyer).

  • The seller's written receipt for the purchase price and the buyer's written receipt for the shares.

For an asset purchase:

  • Minutes of the shareholders' meeting for the seller approving the asset/business transfer (the buyer also needs to provide this if the asset/business transfer will have a significant impact on its business).

  • Documents required for registration of the transfer of title to transferred real properties or other registered assets.

  • Consents from counterparties to transferred business contracts and creditors for transferred debts.

  • With respect to transferred receivables, written notices to or consents from the debtors with a fixed date stamp affixed.

  • Written consent from each transferred employee.

  • Documents required for the reporting or application for approval of a change of licence/permit of the target.

  • The seller's written receipt for the purchase price, and the buyer's written receipt for the above documents.

 
21. Do different types of document have different legal formalities? What are the formalities for the execution of documents by companies incorporated in your jurisdiction?

There are no different execution formalities for different types of documents in private acquisitions. When executing a document, the representative director(s) of the company generally signs or affixes the company's registered corporate seal on the document (in general, the seal is preferred).

If the registered corporate seal is used, an authentic copy of the corporate seal certificate issued by the court registry is almost always provided to the other party, to verify the registered corporate seal.

In addition, depending on the nature and size of the transaction, the minutes of the board of directors' meeting (for an asset/business transfer, the minutes of the shareholders' meeting) may be required by law or the company's articles of incorporation, or bye-laws of the board of directors.

 
22. What are the formalities for the execution of documents by foreign companies?

There are no additional formalities in Korea for the execution of documents by foreign companies. Foreign companies can simply execute documents in accordance with their own laws.

 
23. Are digital signatures binding and enforceable as evidence of execution?

Digital signatures are binding and enforceable as evidence of execution in the same way as physical signatures if they satisfy the Digital Signature Act, such as using the registered digital authentication certificate. However in practice, digital signatures are rarely used in a private acquisition. Instead, the parties often exchange the signature pages in portable document format (pdf) by e-mail on the signing date, and have the original copies exchanged by courier afterwards.

 
24. What formalities are required to transfer title to shares in a private limited company?

To effect a transfer of shares of a stock company, the following formalities are required:

  • An agreement between the seller and the buyer for the share purchase.

  • Delivery of the share certificates to the buyer. If the share certificates have not yet been issued, the seller's written notification of the share transfer to the target with a fixed-date stamp, or the target's written consent with a fixed-date stamp, is needed.

  • Approval by the board of directors' meeting (if required by the target's articles of incorporation).

 

Tax

25. What transfer taxes are payable on a share sale and an asset sale? What are the applicable rates?

Share sale

In a share sale, securities transaction tax (normally at 0.5% of the transfer price) is imposed on the seller. If the seller is a foreign entity with no permanent establishment in Korea, the buyer must withhold and pay the securities transaction tax on behalf of the seller.

Asset sale

Acquisition tax is imposed on the buyer on the acquisition of certain properties (including real estate and vehicles), normally at 4.6% of the purchase price. An increased rate of 9.4% applies if the real estate is in the Seoul Metropolitan Area, subject to certain exceptions. In addition, the buyer can be required to purchase a certain amount of housing bonds in respect of the acquired real property, depending on the government published value of the real property.

If an asset/business sale is a comprehensive business transfer, no value-added tax (VAT) is imposed. Otherwise, the seller must collect and pay VAT at 10% of the purchase price allocated to the assets subject to VAT, which include inventories, machinery and equipment, buildings and goodwill. However, land and accounts receivable are not subject to VAT. The buyer is generally able to credit VAT paid against its VAT payable (or obtain a refund if there is a shortfall) when it files a VAT return.

 
26. What are the main transfer tax exemptions and reliefs in a share sale and an asset sale? Are there any common ways used to mitigate tax liability?

Share sale

There are no exemptions to securities transaction tax.

Asset sale

If asset sale is treated as a comprehensive business transfer, no VAT is imposed (see Question 25, Asset sale).

 
27. What corporate taxes are payable on a share sale and an asset sale? What are the applicable rates?

Share sale

When a company sells shares or an asset/business, the gains realised by the seller from the sale are added to its other profits/losses at the end of its fiscal year, and are subject to corporate income tax at:

  • 11%, including surtax, for taxable income up to KRW200 million.

  • 22%, for taxable income between KRW200 million and KRW20 billion.

  • 24.2%, for taxable income exceeding KRW20 billion.

Alternatively, in a share sale, if the seller is a foreign entity with no permanent establishment in Korea, the seller is subject to capital gains tax (at the lower of 11% of the transfer price and 22% of the capital gains, in each case including surtax). The buyer must withhold and pay this capital gains tax on the seller's behalf, unless the seller is exempt under an applicable tax treaty (see Question 28).

Asset sale

See above, Share sale.

 
28. What are the main corporate tax exemptions and reliefs in a share sale and an asset sale? Are there any common ways used to mitigate tax liability?

Share sale

If the seller is a foreign entity, tax on capital gains may be exempted under a tax treaty between Korea and the country of residence of the seller. To apply for the exemption, the seller must submit an application for tax-exemption under the procedures prescribed by the relevant tax laws. Given this, a foreign buyer acquiring shares of a Korea company occasionally incorporates an acquisition vehicle in a jurisdiction that has a tax treaty with Korea that exempts capital gains tax in Korea. However, if such an acquisition vehicle does not have any substance it may be considered a conduit, and the Korean tax authority will determine the exemption on the basis of the beneficial owner, such as its parent, that has substance.

Asset sale

In an asset sale, corporate income tax on gains generally cannot be exempted. However, in an asset sale where 100% of the business is transferred, it is common to have a follow-up distribution of the sale proceeds to the seller's shareholders. In this case, depending on the type of distribution (for example, dividend or liquidation), an exemption or reduction may be available under an applicable tax treaty.

 
29. Are other taxes potentially payable on a share sale and an asset sale?

In a share transfer, a deemed acquisition tax may be imposed on the buyer (equal to the net book value of certain properties (such as real estate and vehicles) of the target multiplied by the buyer's shareholding ratio of the target) when the buyer becomes a majority shareholder with more than 50% of the target's shares.

 
30. Are companies in the same group able to surrender losses to each other for tax purposes? For example, can interest expenses incurred by a bid vehicle incorporated in your country be set off against profits of the target before tax?

Korean companies with a 100% parent-subsidiary relationship (simply being in the same group is not sufficient) can file and pay corporate income tax on a consolidated basis, which allows losses of one party to offset income of the other party. In this case, interest expenses incurred by an acquisition vehicle incorporated in Korea can, in principle, be set off against profits of the target, when calculating taxable income.

 

Employees

31. Are there obligations to inform or consult employees or their representatives or obtain employee consent to a share sale or asset sale?

Asset sale

Under labour law, in principle, an employer is not obliged to inform or consult with employees, their representatives or their labour union, or obtain their consent to an asset sale. However, these obligations are sometimes set out in employment contracts, employment rules or collective bargaining agreements, and if so the employer must fulfil these obligations.

In addition, under the current case law, if a comprehensive business is transferred, employment relationships relating to the business automatically transfer to the buyer, but employees can object to the transfer and remain with the seller. For this reason, obtaining written consents from all relevant employees is in practice needed for the business transfer.

Share sale

Unless there is an obligation in the employment contracts, employment rules or collective bargaining agreement, an employer is not obliged to inform or consult employees, their representatives or their labour union, or obtain their prior consent to a share sale. In contrast to an asset sale, there is no practical need to obtain written consent from the employees, because they remain with the target after the transaction.

 
32. What protection do employees have against dismissal in the context of a share or asset sale? Are employees automatically transferred to the buyer in a business sale?

Asset/business sale

Under the Labour Standards Act, an employer must not terminate employment without just cause. Neither a share sale nor an asset/business sale is recognised as just cause, unless it is undertaken to prevent further business deterioration in urgent circumstances.

If an employee's employment is terminated without just cause, the termination is void and the employer can incur criminal liability. Generally, an employee whose employment is terminated without just cause can challenge the termination by either:

  • Requesting a corrective order and/or criminal penalties for wrongful termination from the District Labour Committee.

  • Filing a civil lawsuit with the courts to confirm the invalidity of the termination, and/or to demand wages for the terminated period.

Share sale

See above, Business sale.

Transfer on a business sale

In a business sale, each employment relationship relating to the business is transferred to the buyer by operation of law, unless the employee refuses to be transferred (see Question 31, Asset sale). Therefore, an employee who is excluded from the transfer against his/her will has the right to be deemed an employee of the buyer.

 

Pensions

33. Do employees commonly participate in private pension schemes established by their employer? If an employee is transferred as part of a business acquisition, is the transferee obliged to honour existing pension rights or provide equivalent rights?

Private pension schemes

Under the Employee Retirement Benefit Security Act, a company with one or more employees must pay a statutory severance to any departing employee who has worked at the company for at least one year. The legal minimum amount is 30 days' worth of the employee's average wage for each consecutive year of service. To calculate severance pay, average wage includes all wages paid by the employer to the employee for the three-month period before termination of employment, divided by the total number of days during the same period. This statutory severance obligation can be replaced by a retirement pension plan, in the form of a defined benefit pension plan or defined contribution pension plan under the Employee Retirement Benefit Security Act.

Pensions on a business transfer

In a business transfer, all employment terms/conditions and employee benefits (including severance pay or pension scheme) applicable to the transferred employees automatically become binding on the buyer. The buyer comprehensively assumes all employment obligations, including severance payment obligations, on transfer of the employees.

If the buyer wants to change the severance pay or pension scheme in a way disadvantageous to the employees after the transfer, the buyer must obtain the consent of the majority of the transferred employees (if most of the transferred employees are members of a trade union, consent from the trade union is required instead).

 

Competition/anti-trust issues

34. Outline the regulatory competition law framework that can apply to private acquisitions.

Triggering events/thresholds

In private acquisitions, transactions that meet certain thresholds are subject to merger filing obligations under the Monopoly Regulations and Fair Trade Act, and must be notified to and cleared by the Korea Fair Trade Commission (KFTC) (http://eng.ftc.go.kr).

In a share purchase, a filing is required if both of the below conditions are met (assets or revenues below are based on the combined assets or revenues of the relevant party and its affiliates that will remain affiliates after the transaction):

  • The buyer or the target has assets or annual revenues of at least KRW200 billion, and the other party has assets or annual revenues of at least KRW20 billion.

  • The buyer acquires at least 20% (15%, if the target company is a listed company) or more of the target's voting shares.

In an asset purchase, a filing is required if both of the below conditions are met:

  • The buyer or the seller has assets or annual revenues of at least KRW200 billion, and the other party has assets or annual revenues of at least KRW20 billion (for an asset purchase, assets or revenues of the seller are calculated on a stand-alone basis, and do not include assets or revenues of its affiliates).

  • The buyer acquires (or assumes control of) all or a major part of the business or business assets of the seller. Major part means:

    • a part that can be operated as an independent business unit, or can cause a significant decrease in the seller's revenue following the transfer; and

    • the transfer price is at least 10% of the seller's total assets, or at least KRW5 billion.

Notification and regulatory authorities

If a transaction meets the thresholds (see above, Triggering events/thresholds), a merger filing with the KFTC is mandatory, and in principle must be made within 30 days from the date of closing. However, a pre-closing filing with and clearance from the KFTC is required if the buyer or the target, together with their respective affiliates, has combined assets or annual revenues of at least KRW2 trillion.

Substantive test

The substantive test is whether a transaction has an anti-competitive effect in the relevant market in Korea. The KFTC uses information provided by the applicant (the buyer) to define the relevant market, including:

  • Market participants.

  • Market share.

  • Interchangeability of products or services.

  • Any potential market participants.

  • Sales amounts.

In practice, the KFTC uses market share as a starting point and examines the transaction on a product-by-product basis for each relevant market.

 

Environment

35. Who is liable for clean-up of contaminated land? In what circumstances can a buyer inherit and a seller retain liability in an asset sale and a share sale?

Under the Soil Environment Conservation Act, the following persons are liable, in order of priority, for cleaning up soil contamination:

  • A person who generates soil contamination, or the person who comprehensively succeeds to that person's rights and obligations.

  • A person who owns, occupies, and/or operates the facility that is the source of the soil pollution at the time when the pollution occurs, or the person who comprehensively succeeds to that person's rights and obligations.

  • A person who owns or currently owns or occupies the land where soil contamination occurs. If a subsequent buyer of the contaminated land had, without negligence, no awareness of the soil contamination at the time of the purchase, the buyer does not have any liability for clean-up.

Therefore, in an asset sale, while primary environmental liability is with the seller (and is not extinguished, even if the contaminated land is transferred), the buyer has secondary environmental liability if it knows or should have known about the soil contamination at the time of the transaction.

In a share sale, since the environmental liability does not extend to the company's shareholders, both the seller and the buyer do not have direct environmental liability.

Who ultimately bears environmental liability for soil contamination is decided by the parties, through negotiating representations/warranties and indemnification clauses in the share purchase agreement or the asset/business transfer agreement.

 

Online resources

Ministry of Government Legislation, South Korea

W www.moleg.go.kr/english/

Description. This is the official website maintained by the Ministry of Government Legislation. It provides up-to-date legislative information, including full texts of statutes together with notable case law in Korean.

Statutes of the Republic of Korea

W http://elaw.klri.re.kr/eng_service/main.do

Description. Translations into English of Korean legislation are available here but are not official and are for reference only.



Contributor profiles

Yong Joon Yoon, Partner

Lee & Ko

T +82 2 772 4390
F +82 2 772 4001
E yjy@leeko.com
W www.leeko.com

Professional qualifications. Admitted to bar, Korea, 2002; New York, 2008

Areas of practice. Mergers and acquisitions; corporate governance; foreign investment; cross-border and overseas investment.

Languages. Korean, English

Publications.

  • The International Comparative Legal Guide to International Arbitration (Global Legal Group, 2006).
  • Studies on Practical Issues relating to Injunction against Issuance of New Shares (BFL, vol. 23, May 2007).
  • Textbook for Korea Judicial Research and Training Institute (Lectures on Corporate Law – M&A Practice, 2011).
  • Studies on Practical Issues relating to Creditor Protection in a Spin Off (BFL, vol. 49, September 2011).

Daehoon Koo, Partner

Lee & Ko

T +82 2 772 4805
F +82 2 772 4001
E koo@leeko.com
W www.leeko.com

Professional qualifications. Admitted to bar, Korea, 2006; California, 2014

Areas of practice. Mergers and acquisitions; corporate governance; foreign investment; private equity; anti-corruption and regulatory compliance.

Languages. Korean, English

Bryan Shin, Partner

Lee & Ko

T +82 2 772 4761
F +82 2 772 4001
E bryan.shin@leeko.com
W www.leeko.com

Professional qualifications. Admitted to bar, New York, 2009

Areas of practice. Mergers and acquisitions; corporate governance; foreign investment; private equity; capital markets.

Languages. English, Korean


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