General overview

What legislation governs M&A activity in South Korea?

The Korean Commercial Code (the KCC) provides for the general business and corporate laws governing Korean companies, including laws relating to the incorporation of a company, the acquisition of shares, business transfers, mergers, spin-offs and other transaction structures. If the acquisition involves shares of a Korean company listed on the Stock Market Division of the Korea Exchange (the KSE) or registered on the Kosdaq Market Division of the Korea Exchange (Kosdaq), the Securities Exchange Law (SEL) and other related rules and regulations will apply. M&A transactions are also subject to the business combination reporting requirements to the Korean Fair Trade Commission (the FTC) under the Monopoly Regulation and Fair Trade Law.

Foreign investment in Korean companies can be categorised as either a foreign direct investment under the Foreign Investment Promotion Law (the FIPL), or a portfolio investment under the Foreign Exchange Transaction Law. If a foreign investor either acquires 10% or more of the total outstanding voting shares or units of a Korean company or acquires a smaller percentage (but participates in the management of the company – generally evidenced by its right to appoint a director), the investment will be considered as a foreign direct investment, which is subject to the Foreign Investment Promotion Law. Investments that do not qualify as foreign direct investments under the Foreign Investment Promotion Law are treated as portfolio securities investments under the Foreign Exchange Transaction Law, which basically regulates the exchange rate system, foreign exchange operations and payment and receipt of foreign exchange.

Acquisitions in particular industries such as finance, telecommunication and defence may also be subject to certain laws and restrictions. For example, acquisition of a bank is subject to approval by the Financial Services Commission (the FSC) under the Bank Act, and acquisitions in a telecommunication company may be subject to approval by the Broadcasting and Communication Commission. Also, acquisitions of companies under corporate restructuring proceedings will be subject to the Corporate Restructuring Act and supervised by the court and court appointed receiver.

What impact have recent legislative changes had on the nature and amount of M&A activity?

Following the amendment to the Investment Asset Management Business Law in 2004 to facilitate the formation of private equity funds (PEFs), domestic PEFs have expanded their participation in the Korean M&A market. The amendment to the FIPL effective from October 27 2007 changed the reporting obligation for transactions on the Kosdaq market from a pre-closing to a post-closing reporting requirement. Further, in February 2008, the amendment to the Presidential Decree of the FIPL was promulgated (effective from May 2008), which aims to provide more clarity on the grounds and procedures for restricting foreign investment based on national security concerns (as further discussed in Item 5 below).

The Financial Investment Services and Capital Market Act (the FCA), which becomes effective from February 2009, consolidates various capital market laws and allows a financial service company to expand its business areas. While different views exist on the impact of the FCA on the M&A market, it is generally considered that the FCA has contributed to an increase of M&A activity in Korea.

What legal innovation, if any, has there been in recent takeovers and mergers?

Sales conducted through the bid auction process has gained in popularity over the past several years, particularly as the Korean M&A market has moved from being a buyer's to a seller's market. In the current seller's market, sellers and their advisers have readily adopted the bid auction process to maximise the purchase price.

Sellers tend to request bidders to submit a markup to their draft definitive agreement at the time the bid is submitted. In addition, it is not uncommon for the seller to place requirements as a part of the bid process. These may include an earnest money deposit, limited scope of preliminary due diligence before the submission of the bid, a price adjustment limit based on the findings from confirmatory due diligence and an indemnity cap of a certain percentage of the transaction amount.

With respect to LBO structures for acquisitions, such structures have received more attention in the M&A market despite the fact that legal risks and lack of clear precedent on aspects of the LBO structure remain.

Lastly, there has yet to be an effective structural defensive measure against a hostile M&A under Korean law. For example, the poison pill – popular in many other jurisdictions – is not allowed in Korea at this time. We note, however, that the landscape may change under the new administration, inaugurated in February of 2008. Given the pro-business stance of the new administration, industry specialists are expecting measures to promote greater levels of foreign investments and vitalisation of the M&A market.

What have been the most significant M&A transactions in South Korea over the past year?

Significant M&A transactions over the past year include: (i) Kumho's acquisition of shares in Daewoo Construction, (ii) Eugene Group's acquisition of shares in Himart (Korea's largest electronics retailer), (iii) Halla Group's acquisition of shares in Mando (one of leading auto parts supplier; the transaction is still continuing), (iv) Kumho's acquisition of Korea Express (which transaction is still on-going) and (v) SK Telecom's acquisition of shares in Hanaro Telecom (the transaction continues). As for outbound M&A, the most high-profile transaction over the past year was Doosan Infracore's acquisition of Ingersoll-Rand Company.

How, and to what extent, is foreign involvement in M&A transactions in South Korea regulated or restricted?

By virtue of the Korean government's liberalisation policy, the number of restricted or prohibited business activities has been reduced so that almost all areas of Korean business are open to foreign investment. Korea uses a negative list system, which means that a business is open to foreign investment unless it is specifically restricted. Only a handful of business areas are still restricted. For example, a foreign investor's ownership of shares in a domestic periodical publication business must comprise less than 50% of the total share issuance. With respect to certain telecommunications companies, the aggregate foreign ownership cannot exceed 49% of the total outstanding shares (the restriction is expected to be relaxed once the Korean-US Free Trade Agreement that is currently pending). With respect to power generation companies operated by government-invested institutions, the aggregate foreign ownership must be less than 50% of the total outstanding shares, and the largest shareholder cannot be a foreign investor.

Further, one provision of the FIPL restricts foreign investments in the interest of national security. In this connection, the amended Presidential Decree of the FIPL provides certain guideline as to what types of businesses can invest, or how they may be restricted. For instance, such restrictions can be applied in cases where there are concerns that the investment could impede the production of goods in the defence industry, or where there is a high possibility that the invested strategic product or technology could be appropriated for military use.

Due diligence

What are the principal disclosure requirements in a typical M&A transaction?

Under the SEL, once an investor (including specially related persons) holds 5% of the voting shares and/or certain other equity securities issued by a listed company, the investor will be required to file a report with the FSC within five business days. For the purpose of this report, the foreign investor is deemed to hold the shares upon entering into a definitive purchase agreement. A follow-up report should be filed within five business days of any change of 1% or more in such holdings.

This reporting requirement has a bifurcated reporting system based on investment purpose. The investor must indicate whether the investment is a passive portfolio investment or whether the investor has any intention to exert influence over the management of the company. A filing obligation is also triggered if the purpose of the investment changes. There is a five-day cooling-off period after the filing of a 5% report, during which period the investor indicates whether or not it intends to influence the management of the company. During this cooling-off period, the investor cannot exercise voting rights for shares or purchase additional shares.

When the holdings of the investor reach 10% or more of the issued and outstanding voting shares of the Korean company, a separate report should be filed within 10 days. Any change in shareholding must be reported on a monthly basis.

The foregoing applies only to listed companies (including Kosdaq registered companies). In case of non-public companies, aside from certain filing requirements with the relevant agencies, there is no public disclosure requirement.

To what extent do disclosure requirements achieve market transparency?

The disclosure requirements have been modelled on laws in other jurisdictions. In addition, listed companies are generally required to submit annual, semi-annual and quarterly business reports to relevant agencies; the reports are publicly available. Further, there are certain non-periodic reporting obligations, such as the 5% report and 10% report discussed above. For example, a listed company is required to promptly report to the relevant agencies certain events or board of directors' resolutions that are enumerated in the SEL; the general guideline being that such events or resolutions may affect the investors' decision. Such reports are posted on each agency's internet website.

How has the growth in private equity buying in the past few years affected due diligence?

The process for due diligence has not been significantly affected by the growth in private equity buying. Rather, the popularity of the bid process has shaped due diligence, generally splitting it into preliminary diligence before submission of the bid followed by confirmatory diligence by the winning bidder.

Has the issue of material adverse change clauses become more important with the recent failure of some large M&A deals around the world?

Material adverse change clauses remain a matter of contract. As far as the Korean M&A market is concerned, we do not see a significant change in the use or importance of material adverse change clauses as a result of the recent failure of some large M&A deals. In general, absence of a material adverse change remains a popular condition precedent to closing and is commonly found in acquisition contracts.

Takeovers

Are there any specific regulations and/or regulatory bodies governing takeovers in South Korea? How do they compare to other international regulators?

The SEL requires a tender offer statement to be filed in order to launch a takeover bid. The SEL also provides for a mandatory tender offer rule. Under this rule, any person (together with specially related persons, including "affiliated persons" and "persons acting in concert" as defined under the SEL) intending to acquire 5% or more of the total issued and outstanding shares of a company listed on the KRX outside the exchange from 10 or more persons during a six-month period, must make a public tender offer. This so-called 5% mandatory tender offer rule also applies to additional purchases of any number of shares by the person that already holds 5% or more shares from 10 or more persons outside the exchange during a six-month period.

The FSC and the Financial Supervisory Service are the regulatory bodies overseeing these rules.

What are the various methods by which a takeover can be achieved?

Many of the methods for takeover, including a tender offer process, remain available in the Korean M&A market. As in many jurisdictions, a tender offer can be settled with cash or stock. Korean companies tend to have a controlling shareholder, so acquisitions of listed companies are often privately negotiated and have tender offer components. Of course, an investor can also acquire listed company shares through private negotiations as long as the acquisition does not trigger the mandatory tender offer rule.

How differently are hostile and voluntary takeover bids treated?

Korean law does not distinguish between hostile and voluntary takeover bids. They are both subject to the same takeover laws and regulations. The target company has the right, but not an obligation, to express its opinions with regard to the proposed tender offer. However, the public perception of hostile takeovers remains negative.

What penalties are imposed for parties that violate takeover regulations (or equivalent)?

Violation of the tender offer rule can result in criminal sanctions and/or an administrative penalty. In addition, the offeror is subject to the loss of voting rights in the shares purchased in violation of the tender offer rule; the FSC is authorised to issue an order requiring the investor to sell such shares. The SEL also has a special provision on the civil liability of a tender offeror that makes material misrepresentations or omissions in the tender offer statement.

What are the thresholds for disclosing bids and offers?

The person who intends or is required to conduct tender offer (that is, a mandatory tender offer) must (i) post a public notice in at least two newspapers with a national circulation, setting forth certain information describing the purpose for the offer, details regarding the source of purchase monies and terms of the tender offer (such as the tender offer's period, price and payment date); and (ii) file a tender offer statement with the FSC consisting of information similar to that prescribed with respect to the public notice. The offeror should immediately send a copy of the statement to the target company that issued the shares and submit another copy to the KRX. In addition, tender offer circular must be available to the public at the main office and branches of the tender offer agent.

There are also the 5% and 10% reporting requirements as described above.

How do you think M&A will develop next year? Do you think there will be more industry takeovers or purchases from emerging economies such as China and the Middle East?

It is generally understood that Korean M&A market will expand in 2008 given the following factors. First, a number of big sale of companies are expected in 2008. Second, Korean companies are increasingly considering strategic M&A investments in both domestic and overseas markets as drivers of growth. Third, the new government plans to accelerate privatisation of certain government-owned entities.

Historically, most M&A investors in Korea have been US and European companies. But more and more investors during the recent past years have been from other jurisdictions. For example, Chinese companies have been active investors in the Korean market over the past few years.

Competition/antitrust

What have been the major recent developments in competition policy and legislation as they relate to an M&A transaction in South Korea?

Various developments took place in this area last year, the most notable being changes to the regulations on merger notification filings. For instance, under the previous law, in the case of a joint venture, all partners whose shareholding was 20% or more were subject to a filing obligation. The amended law requires only the joint venture partner acquiring the largest shareholding in the joint venture to make a filing, regardless of the level of shareholding. Further, the regulations have been amended to provide new thresholds for the size and Korean turnover test in determining whether the Korean filing obligation is triggered. Before the amendment, the threshold for the size of the parties was: (i) total assets or sales of either party of W100 billion ($107 million) or more and (ii) total assets or sales of the other company of W3 billion or more. Under the amendment, the W3 billion threshold has been increased to W20 billion. In addition and before the amendment, the threshold for the Korean turnover in the case of an overseas merger was sales into Korea of W3 billion or more for each of the parties. Under the amendment, the W3 billion threshold has been increased to W20 billion.

The review guideline for merger notifications has also been amended. This is effective as of December 20 2007. Among the major features of the amendment is that the indicator of market concentration has been changed from a market share ratio (CRk) to the Herfindahl-Hirschman Index (HHI), which is the sum of the square of the market share of each company competing in the market. Further, if a transaction falls within a newly created safe harbour based on the HHI, the transaction would be deemed to have no anti-competitive effect and accordingly would be subject to a simplified review process.

How are the competition/antitrust regulations enforced in South Korea?

The FTC is the regulatory authority that oversees the competition and antitrust regulations. These laws can also be enforced by the prosecutor's office, which handles criminal prosecution.

How do legislation and regulation approach the issue of abuse of dominant position?

Although the FTC no longer designates market dominant companies because the relevant regulations were revised in 1999 and 2000, the Monopoly Regulation and Fair Trade Law still provides that certain companies can have a statutory presumption of market dominance. Such companies are subject to greater scrutiny by the FTC and are prohibited from engaging in unreasonable business practices, such as control of the sale of goods or services, interruption of business activities of others, interference with competitors and other activities harmful to consumers.

To what extent are the parties to an M&A transaction subject to prior notification requirements?

The antitrust clearance filing should be made when the transaction involves: (i) the acquisition of all (or a major portion of) the business or assets of a target company, where the acquiror or the target company (including affiliates) has assets or revenues equal to or exceeding W100 billion; (ii) the purchase of shares of an existing company, where the acquiror or the target company (including affiliates) has assets or revenues equal to or exceeding W100 billion, and as a result of such a transaction, the acquiror becomes a shareholder holding 20% (15% if a KSE-listed or Kosdaq company) or more of the voting shares of the target company; or (iii) a merger between companies, one of which (including affiliates) has assets or revenues equal to or exceeding W100 billion. If the transferor, transferee, merging company or merged company (including affiliates) has assets or revenues equal to or exceeding W2 trillion, the antitrust filing should be made with the FTC within 30 days of the execution date of the business transfer agreement, the merger agreement or the share purchase agreement, as the case may be. The transaction should not be closed during the review period of the FTC. The FTC's 30-day review period can be extended by an additional 90 days.

Author biographies

Jong Koo Park Kim & Chang Jong Koo Park is one of the leading partners in the corporate department at Kim & Chang. He focuses primarily on domestic and cross-border mergers and acquisitions. Park has wide experience representing financial investors, including top tier buy-out firms, as well as domestic and multinational corporations. He has been recommended as a distinguished M&A lawyer in several international publications, including Chamber's Global and Expert Guides. Park received his law degree from Seoul National University (1985) and his LLM from the University of Michigan Law School (1996). He is a member of the Korean Bar and the Bar of the State of New York. Luke Shin Kim & Chang Luke Shin is a US qualified partner in the corporate department of Kim & Chang. His primary areas of focus are cross-border acquisitions, joint ventures, and other forms of foreign direct investment, as well as antitrust cases involving multinational corporations. Since joining Kim & Chang in 1997, Shin has advised on numerous cross-border acquisitions, divestitures and joint ventures, including a number of headline deals. Shin has extensive experience in negotiating transaction documentation and advising clients in the areas of corporate, securities, governance, regulatory filings (with a focus on antitrust filings under the Monopoly Regulation and Fair Trade Act) and structuring issues. Shin was recognised in Asialaw: Leading Lawyers 2007 as a leader in the field of M&A in Korea. Before joining Kim & Chang, Shin was an associate in the corporate department at Dewey Ballantine (now Dewey & LeBoeuf) in New York. Shin received his law degree from New York University School of Law (1993) and his undergraduate degree from Columbia College in New York (1990). He is a member of the Bar of the State of New York. Gene Oh Kim Kim & Chang Gene Oh Kim is a partner at Kim & Chang. He represents clients in Korean and international M&A transactions and advises on corporate governance, general corporate and commercial law issues. Kim has advised many companies around the world, including industrial, banking and insurance and private equity clients in a wide variety of cross-border and domestic M&A transactions and various areas of commercial practice. Many of his clients are the market leaders in their industries. Kim received his LLB from the College of Law of Seoul National University in 1995, and continued his legal training at the Judicial Research and Training Institute of the Supreme Court of Korea. After serving in the Korean Army as a judge advocate, he joined the firm in 2000. In 1997, Kim earned his LLM from the Harvard Law School. He worked at Davis Polk and Wardwell in their New York office before returning to Kim & Chang. Kim speaks Korean and English.