The Korean Commercial Code (KCC) is the key set of laws that governs M&A activity in Korea. The KCC governs the acquisition of shares, business transfers, mergers, spin-offs, stock swaps and other transaction structures. If an acquisition involves a Korean company listed on the Korea Exchange (KRX), the Financial Investment Services and Capital Markets Act (FSCMA) will also apply. The Monopoly Regulation and Fair Trade Act (MRFTA), the primary competition statute of Korea, provides for a merger control system enforced by the Korean Fair Trade Commission (KFTC).
In addition, acquisitions in companies operating in certain regulated industries, such as banking, telecommunication and defence, may also be subject to certain laws and restrictions. For example, the acquisition of shares in a bank may be subject to filing and approval requirements by the Financial Services Commission (FSC) under the Bank Act. Similarly, the acquisition of shares in a telecommunications service provider may be subject to filing and approval requirements from the Korea Communications Commission under the Telecommunications Business Act.
One of the most extensive (and most debated) legislative reforms in the past decade, the FSCMA finally became effective on February 4, 2009. The FSCMA consolidated six different laws that previously governed securities, capital markets and financial investment services, including the Securities and Exchange Act and the Indirect Investment Asset Management Business Act. Although the new law does not provide for any material changes to the general M&A regime, it is expected to contribute to an increase of M&A activity in Korea in the long-run by streamlining the regulation of financial services including revamping the licensing system to make the process simpler and more transparent and providing greater flexibility to financial institutions in expanding their business lines and offering new products.
The landscape
Kumho Asiana Group's $4.3 billion acquisition of Korea Express was the largest M&A transaction in 2008. The $2.3 billion buyout of C&M by MBK Partners, Macquarie Korea Opportunities Fund and Mirae Asset Partners (completed in March 2008) marked the largest leveraged buyout by a private equity fund in Asia-Pacific (excluding Japan and Australia) and the largest media M&A transaction in Korea. SK Telecom's $1.2 billion acquisition of Hanaro Telecom, completed in March 2008, also drew considerable attention given the size and complexity of the transaction, as well as its potential to change the competitive landscape of the Korean telecommunications services market. The other significant M&A transactions in 2008 include Samsung Tesco's $2.2 billion acquisition of Homever, Halla Group's $864 million acquisition of Mando Corp and Morgan Stanley's $816 million acquisition of Norske Skog Korea.
Korean companies continued to eye significant foreign assets in 2008. In February 2008, Korea Investment Corporation closed its $2 billion investment in Merrill Lynch in the Korean sovereign wealth fund's largest investment to date. Korean shipbuilding giant STX Corp followed suit by acquiring Aker Yards (headquartered in Oslo, Norway) for a purchase price of $2 billion. In August 2008, LS Cable completed its $1.2 billion acquisition of Superior Essex (a Nasdaq-listed wire and cable manufacturer based in Atlanta, Georgia, US) in the largest cross-border tender offer ever made by a Korean company.
The global economic downturn significantly slowed down M&A activity in other parts of the world, but Korea was an exception. Late 2008 and early 2009 saw some solid M&A activity in Korea, including MBK Partners' $284 million acquisition of Techpack Solutions (closed in December 2008), Lotte Group's $383 million acquisition of Doosan Corporation's liquor business (closed in March 2009), and eBay's proposed $1.2 billion cash tender offer for all outstanding shares of Gmarket (announced in April 2009).
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. There are only a handful of business areas that are still restricted. For example, with respect to certain telecommunications companies, the aggregate foreign ownership of such companies cannot exceed 49% of the total outstanding shares. 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. Finally, there are restrictions on foreign investment in the interest of national security. The laws apply guidelines on foreign investment where there are concerns that a foreign investment could impede the production of goods in the defence industry or where there is a substantial possibility that an investment related to a strategic product or technology may have a military application.
M&A activity that involves direct foreign investment in a Korean company may be subject to the Foreign Investment Promotion Law (FIPL) or the Foreign Exchange Transaction Law (FETL). 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 judged by its right to appoint a director), such an investment will be considered a foreign direct investment which is subject to the FIPL and a straight-forward filing with the government. Investments that do not qualify as foreign direct investments under the FIPL are treated as portfolio securities investments under the FETL, which regulates the exchange rate system, foreign exchange operations and payment and receipt of foreign exchange. These investments are also subject to a simple governmental filing.
Due diligence
Under the FSCMA, once an investor holds 5% of the voting shares or certain other equity securities issued by a listed company, the investor is required to file a public ownership report with the FSC and the KRX. An investor is deemed to hold securities if the investor, together with certain specially related persons defined in the FSCMA, owns (of record or beneficially) such securities, or is entitled (by law, contract or otherwise) to exercise voting rights of such securities, or otherwise has a right (by law, contract or otherwise) to acquire or dispose of such securities.
When filing, the investor must indicate whether they have any intention to exert influence over the management of the company or whether the investment is a passive portfolio investment. In the case of management participation, the investor must file within five business days of the trade date, subject to certain exceptions. In the case of portfolio investment, the investor must file before the 10th day of the following month. A filing obligation is also triggered if there is a change in the nature of the holding such as (i) purpose of investment, (ii) changes in major terms of contracts in respect to held positions or (iii) changes in the rights to form of holding (such as ownership vs other holdings). After the initial report, any change of percentage in such holdings requires a follow-on report.
If an investor's holdings reach 10% or more of the shares and/or certain other equity securities issued by a listed company, a separate report must be filed within five business days of the triggering event, and any change in holdings must be reported within five business days of the triggering event.
A listed company is required to file a public disclosure with the FSC and the KRX in the event of a material transaction. However, such public disclosures are not required to include copies of the transaction documents. These filing requirements only apply to listed companies. For non-public companies, aside from certain filing requirements with the applicable regulatory agencies, there is no public disclosure requirement.
The disclosure requirements have been modelled on the disclosure requirements of more developed jurisdictions and it is generally agreed that they have positively contributed to market transparency.
The growth in private equity buying has fueled sophistication and efficiency in the M&A due diligence process. For instance, both buyers and sellers increasingly retain management consulting firms (in addition to financial advisers, accounting and tax advisers and legal counsel) to conduct buyer or vendor due diligence for the purpose of, among other things, identifying key value drivers of the target and potential turnaround or add-on investment opportunities. In addition, with the increased number of bidders, virtual data rooms have become the standard means to provide due diligence information to prospective buyers in a more efficient and organised manner.
With the global economic downturn and recent failure of some large M&A deals around the world, material adverse change clauses have become one of the key negotiation points in some of the recent M&A transactions (including acquisition financing transactions) in Korea. However, to date, there have been no court precedents or high-profile disputes involving material adverse change clauses.
Takeover regulations
The FSCMA requires a tender offer statement to be filed in order to launch a takeover bid for a listed company. The FSCMA also provides a mandatory tender offer rule, under which any person who, together with certain specially related persons (as defined under the FSCMA), intends to acquire 5% or more of the total issued and outstanding shares of a listed company outside the exchange from 10 or more persons during a six-month period must make a public tender offer. This so-called mandatory tender offer rule also applies to additional purchase of any number of shares by the person who 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 that oversee these rules. These rules were based, in some part, on the US tender offer rules.
In general, many methods for takeovers, including a tender offer process, are available in the Korean M&A market. Similar to other jurisdictions, a tender offer can be settled with cash or stock. However, a two-step, front-end loaded tender offer is not used as Korean law does not permit a cash-out merger.
As many Korean companies tend to have a controlling shareholder, many acquisitions of listed companies have a privately negotiated and tender offer component to the transaction. 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.
Korean law does not distinguish between hostile and voluntary takeover bids, and they are both subject to the same takeover laws and regulations. The target company is not required to publicly disclose its position with regard to the proposed tender offer, but it may do so. In terms of public perception, however, the general perception of hostile takeovers remains negative.
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, and the FSC is authorised to issue an order requiring the investor to sell such shares. The FSCMA also provides for civil liability of a tender offeror who makes material misrepresentations or omissions in the tender offer statement.
The person who intends to or is required to conduct a tender offer (i.e. a mandatory tender offer) must (i) post a public notice in at least two newspapers of national circulation setting forth certain information describing, among other things, the purpose for the offer, details regarding the source of purchase monies, and terms of the tender offer (such as the tender offer period, price and payment date), and (ii) file with the FSC and the KRX a tender offer statement consisting of certain information similar to that prescribed in relation to the public notice. The offeror should also send a copy of this statement immediately to the target company which has issued the shares it wishes to acquire. In addition, the tender offer circular must be available to the public at the main office and branches of the tender offer agent.
Competition and antitrust
There have been various developments in this area, the most notable being changes to the regulations on merger notification filings, effective from July 1 2008, to provide new thresholds for the size, and Korean turnover test, in determining whether the merger notification requirement is triggered. Prior to the amendment, the thresholds for the size of the parties were: (i) total assets or revenues of either party of W100 billion or more and (ii) total assets or revenues of the other party of W20 billion or more. Under the amendment, the W100 billion threshold has been increased to W200 billion.
In addition, the recent amendment to the MRFTA, which will take effect on June 25 2009, will abolish the 30-day filing deadline for pre-closing merger notifications. Currently, a pre-closing merger notification must be filed with the KFTC within 30 days of a triggering event (such as the signing of a definitive share purchase agreement). Under the amendment, a pre-closing merger notification may be submitted at any time prior to the closing as long as the parties do not close the transaction until the KFTC issues its clearance.
The KFTC is the regulatory authority that oversees the competition and antitrust regulations. If an acquiror fails to comply with the merger notification requirements, an administrative penalty will be imposed. The penalty can range from W2.5 million to W50 million (this increased amount will be effective from June 25 2009). If the KFTC determines that a particular M&A transaction has a substantive anti-competitive effect, the KFTC may take certain actions to unwind the transaction, including issuing an order requiring the acquiror to dispose of the relevant shares or assets and seeking a court order to invalidate the relevant merger.
Although the KFTC no longer designates market dominant companies, the MRFTA provides that certain companies may be subject to a statutory presumption of market dominance. Such companies are subject to enhanced scrutiny by the KFTC and are prohibited from engaging in unfair 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.
Antitrust clearance filings must be made when a transaction involves, among other things, (i) the purchase of shares in another company, as a result of which the acquiror will hold 20% (15% if a listed company) or more of the voting shares of that other company; (ii) the acquisition of all or a major portion of the business or assets of another company; (iii) a merger; or (iv) the formation of a joint venture. In each case, this applies to the extent that either party to the transaction has assets or revenues equal to or exceeding W200 billion and that the other party has assets or revenues equal to or exceeding W20 billion. Antitrust clearance filings are post-closing matters, except where either party to the transaction has assets or revenues equal to or exceeding W2 trillion, in which case antitrust clearance must be obtained prior to the closing of the transaction. The transaction may not be consummated while the KFTC is undergoing its 30-day review period, which can be extended by an additional 90 days.
Bright spots
Historically, most M&A investors to Korea have been US and European companies. However, more and more investors during the recent past years have been from other jurisdictions. Chinese companies have been active investors in the Korean market over the past few years.
Despite the global financial crisis, the Korean M&A market will continue to be active in 2009. Although the recent failure of Hanwha's $4.7 billion acquisition of Daewoo Shipbuilding & Marine Engineering marked a major setback, there was robust M&A activity in late 2008 and the first quarter of 2009. Many sizable M&A deals are in the pipeline, in large part due to the vigorous restructuring efforts of Korean chaebols (large conglomerates) and privatisation plans for certain government-controlled entities.
In addition, the Korean government has taken initiatives to facilitate M&A activity, including, among other things, relaxing restrictions on the ownership of banks and financial holding companies. The maximum corporate income tax rate has been reduced from 25% to 22% in 2009 and will be further reduced to 20% in 2010. The depreciation of the Korean Won relative to other major international currencies has also made Korean assets more attractive to financially strong foreign investors.
| Author biographies |
Tae Hun Park
Kim & Chang
Tae Hyun Park is a partner in the Corporate Department of Kim & Chang. He advises corporations, financial institutions and private equity funds on M&A matters, and has extensive experience in cross-border acquisitions, leveraged buyouts and private equity transactions. He has also represented a number of major multinational telecommunications and media companies in their joint venture transactions in Korea.
Mr Park received his LLB from Seoul National University in 1994 and his LLM from Georgetown University Law Center in 2004. Mr Park is admitted to practice in Korea and New York. From 2004 to 2006, he worked in the New York offices of Sullivan & Cromwell. He rejoined Kim & Chang in 2006.
Steven Hahn
Kim & Chang
Steven Hahn is a foreign attorney in the firm's M&A Practice Group and Finance Practice Group. He has represented financial services institutions on a wide range of matters including acquisitions, offerings and policies and procedures. Mr Hahn has also represented large technology companies in their acquisitions and offerings.
Mr Hahn received his BA from University of Virginia in 1995 and his JD from University of Virginia School of Law in 2000. He was admitted to practice in New York in 2001. Before joining Kim & Chang, Mr Hahn was a corporate associate at Cravath Swaine & Moore in New York from 2000 to 2004. And he also worked at Axiom Legal in New York as an associate in the corporate department from 2004 to 2008. |