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LBO court decision

On June 4 2008, the Seoul High Court (Court) handed down a decision on a criminal case brought by the Prosecutor's Office concerning a leveraged buyout (LBO) transaction. This was the third and final decision after the case was taken to the Court by the Korean Supreme Court on two occasions. The heart of the issue was the question of when a director may be held liable for a breach of fiduciary duty in the context of approving financial arrangements commonly used in LBO transactions.

In its decision, the Court affirmed the decision handed down by the Supreme Court and found the defendant (being the representative director of a target company (Target) liable for a breach of fiduciary duty in approving a transaction whereby Target pledged certain of its assets (real property and cash deposits) to the lenders of an acquiring company (Holdco) as collateral for the repayment by Holdco of its loans, in the absence of any consideration being paid to Target for providing such collateral.

Despite the improvement in Target's business, which is attributable to the sound management of Target by Holdco after the consummation of the LBO transaction, the fact remains that the defendant acted improperly in approving the provision of benefits to Holdco with no clear or direct consideration being paid to Target, thereby exposing Target to the risk of losing assets provided as collateral for the repayment of Holdco's loans.

Although the proceeds of the Holdco loans were ultimately invested by the defendant in Target and later used to repay a portion of Target's outstanding debt, the purpose of the loans was to benefit Holdco rather than Target.

Although Holdco may have provided its shares in Target and other debt claims of Target to either Target or a financial institution as collateral until the full repayment of its loans to ensure that such assets would not be disposed of by Holdco to the detriment of Target, the fact remains that the defendant breached a fiduciary duty.

The Court ruled that, despite the fact that the value of the collateral provided by Holdco (other than the assets of Target) exceeded the total amount of the Holdco loans, Target provided the collateral for the repayment the Holdco loans in the absence of adequate consideration.

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