I. Introduction

T he Korean Government recently announced its intention to adopt measures designed to stimulate mergers and acquisitions ("M&As") of domestic companies by foreigners. The adoption of these measures, which were already being considered in early 1997, have received added impetus as a result of the on-going financial recovery package that the IMF brokered with the Korean government in December 1997. The most important laws relating to M&A activities by foreigners, such as the Foreign Investment and Foreign Capital Inducement Act ("FCIA"), the Securities Transaction Act ("STA") and the Monopoly Regulation and Fair Trade Act ("MRFTA") are currently in the process of undergoing extensive amendment. The Korean National Assembly passed amendments in February 1998 to the FCIA, the STA and other related laws, designed to dramatically liberalize the government restrictions. By the time of publication of this article, we expect that such new or amended provisions of the FCIA and STA will have become effective.

In response to the demand for information about the proposed changes to the Korean laws and regulations governing M&A activities, this article seeks to provide general information on certain key aspects of Korean M&A laws, with a focus on potential stock-deal type acquisitions of Korean companies by foreigners. This article, however, does not discuss the details of specific characteristics and structure that may be involved in any particular M&A transaction. Thus, the following is intended as a general guide only and should not be considered as formal legal advice or a substitute there of with respect to specific inquiries or issues involving Korean law.

In this article, it is assumed that the targeted Korean company is a joint stock company (chusik hoesa), the most commonly used form of incorporated business enterprise in Korea, and which is the equivalent of a U.S. corporation. Such a targeted company may have its shares listed on the Korea Stock Exchange ("KSE") or a company registered with the Korea Securities Dealers Association for the purpose of trading its shares on the association's OTC market, known as KOSDAQ. These companies will be referred to herein as "public companies". Other closely-held companies will be referred to as "private companies".

II. Acquisition of a Private Company

A foreign individual or corporation wishing to acquire a Korean company ("Acquirer") may acquire an equity interest in the targeted Korean company ("Target") that is a private company by purchasing shares from existing shareholders, subscribing to newly-issued shares from the Target, or a combination of the two.

a. Acquisition of Existing Shares

The first issue is whether the FCIA and its related regulations restrict or prohibit foreign investment in the business activities of Target. Though most activities are fully open to foreign investment, certain business areas (classified according to the Korean Standard Industry Classification System) are partially or completely closed to foreign investment. If foreign investment in a business activity is restricted, then such restrictions may require that Acquirer obtain additional governmental approval which may then affect the amount of the investment, among other factors. In this regard, during the past few years, the Korean Government has significantly reduced the number of business areas that are partially or completely closed to foreign investment, and has accelerated its schedule for further liberalization of foreign investment, including investment in the capital market.

Second, for acquisitions of existing shares by foreigners, the FCIA currently requires the approval of the board of directors of Target for such share transfer, if the foreign shareholding ratio would exceed a certain threshold amount as a result of the attempted transaction. Given that this requirement for a board resolution gives Target time to prepare against a hostile takeover, it has attracted considerable criticism. As a result, under the amended FCIA, the threshold level for triggering the requirement for board approval of share acquisition by a foreigner under the FCIA was raised from 10 percent to one-third of the total issued shares.

Upon the board resolution mentioned above, Target must issue a public notice in a newspaper disclosing the contemplated share transfer within seven days of the date thereof, and notify the Ministry of Finance and Economy ("MOFE") within 10 days. As far as certain procedural requirements are met, the MOFE will routinely accept such notification.

In the past, if the assets of Target equaled or exceeded two trillion won, the acquisition was subject to stricter MOFE review and required its approval. Under the amended FCIA, this requirement for MOFE approval was abolished, except in the case of the acquisition of shares of certain industries such as the defense industry or certain other essential national industries.

b. Subscription to New Shares

As in the case of acquiring existing shares, Acquirer must first examine if foreign investment in the business activities of Target is prohibited or otherwise restricted under the FCIA and its related regulations. Unlike the above case, however, depending upon the structure of the transaction, the acquisition of new shares will not normally require MOFE approval; such foreign investment will only need to be reported to a foreign exchange bank to which the MOFE has delegated authority pursuant to the FCIA. The following points, however, should be considered.

Under the Korean Commercial Code, the board of directors of Target has the authority to issue new shares up to the authorized share capital amount, as stipulated in its articles of incorporation. If the authorized share capital amount needs to be increased, the articles of incorporation will need to be amended by special resolution of the shareholders. In order to do so, under the Korean Commercial Code, such amendment must be adopted by affirmative votes representing at least two-thirds of the shares present and at least one-third of the total issued and outstanding shares. In practice, however, the articles of incorporation of many companies require that a majority of the total issued and outstanding shares constitute a quorum and that the special resolution be adopted by the affirmative votes representing two-thirds of the shares present.

Under the Korean Commercial Code, existing shareholders of Target will have pre-emptive rights to newly issued shares, subject to special provisions in its articles of incorporation. Therefore, if newly-issued shares are to be allocated to Acquirer, the existing shareholders of Target will need to waive their pre-emptive rights to such shares, unless the articles of incorporation provide that new shares may, by a board resolution, be issued to parties other than shareholders.


III. Acquisition of a Public Company

a. Portfolio Investment

In early 1997, individual foreign investors and foreign investors in the aggregate were allowed to acquire beneficial ownership of up to five percent and 20 percent, respectively, of any class of shares in a company listed on the KSE. These ceilings were gradually increased to seven percent and 26 percent, respectively, as of November 1997, and then to 50 percent and 55 percent for individual and aggregate foreign shareholdings, respectively, as of the end of 1997. For a few companies listed on the KSE that have been specially designated as having public importance (e.g., POSCO, KEPCO, etc.), the individual and aggregate foreign shareholding limits have been raised to 25 percent. Where Target is listed on the KOSDAQ, the limits are 50 percent for individual, and 55 percent for aggregate, foreign shareholdings since April 1.

For companies qualifying as venture enterprises under the Venture Enterprises Promotion Act, the maximum limit on their foreign ownership may be fixed in their articles of incorporation, regardless of the requirements of the KSE or KOSDAQ. Most venture enterprises are registered as KOSDAQ companies rather than listed on the KSE.

After allowing a single foreigner to purchase through the KSE up to 50 percent of the shares in a listed Korean company, the question of whether the requirements of a board resolution, public notice and MOFE notification under the FCIA would still be applicable became an issue. The amended FCIA makes it clear that the answer in relation to that issue is in the affirmative.

b. Direct Investment

The above rules apply to portfolio investments as opposed to direct investments. Where Acquirer obtains shares outside the KSE or KOSDAQ through direct contacts with certain pre-existing Korean shareholders and gains partial or entire management control over Target, the transaction should comply with the requirements set forth in the FCIA. Thus, the rules set forth in II.a above are applicable here, provided, however, that Target is a company listed on the KSE, then Target must: (i) file a public notice with the KSE within one day of the resolution of the board of directors; (ii) report the proposed transaction to the KSEC within three days thereof; and (iii) notify the MOFE within five days thereof. If Target is a registered KOSDAQ company, then Target must issue a public notice in a newspaper within three days of the resolution of the board of directors and notify the MOFE within 10 days thereof. In the case of such direct investment, an exception to the above 55 percent limitation will apply.

c. Procedural Restrictions under the STA

Under the STA, any shareholder who acquires in excess of five percent of the shares of a listed company must file a report with the KSE and the KSEC. Thereafter, any change involving one percent or more of the shares in the company must be reported. The above five percent reporting requirement is calculated by aggregating the shares (including convertible securities, such as convertible bonds and bonds with warrants) held by all affiliated groups (which include parties holding special interest and any group "acting in concert" as defined in the STA).

In the past, if Acquirer contemplated acquiring 25 percent or more shares in a listed company, Acquirer had to acquire at least 50 percent plus one share of Target by public tender offer. No matter what the underlying legislative considerations might be, this mandatory public tender offer requirement discouraged hostile takeovers. Consequently, under the amended STA, this requirement for a public tender offer is abolished.
Lastly, there has, hitherto, been relatively limited regulation of proxy solicitations. This, however, is set to change, although the precise details of the relevant amendments are yet to be worked out.


IV. Other Related Issues

a. Hostile Acquisitions

Power to appoint new directors means control over the management of Target, because all important business matters are determined by the board of directors except for certain fundamental matters that are required by law or by the articles of incorporation to be resolved at the general shareholders' meeting.

In the case of a public company, the shares of which are dispersed among numerous small investors, the holding of one-third of the total issued shares may give power effectively to appoint new directors. Further, Acquirer may make a bid for a hostile takeover of Target through an alliance with third-party Korean individuals or companies. In addition, Acquirer may have a third party acquire Target and then pursue a friendly acquisition of Target from such third party.

b. Foreign-Invested Korean Company as Acquirer

Acquirer may consider establishing or using an existing subsidiary in Korea to acquire Target. In such case, the Acquirer may need to amend the initial foreign investment approval that it obtained pursuant to the FCIA to establish its Korean subsidiary. Pursuant to the FCIA, such amendment will either need to be approved by the MOFE or reported to a foreign exchange bank, depending on the business activities of Target. Under the current regulations promulgated under the FCIA, a foreign-invested Korean company may not invest more than 40 percent of its net assets to acquire Target, unless the percentage of its foreign ownership is less than 10 percent.

c. Monopoly Regulation and Fair Trade Act

The MRFTA regulates anti-competitive and unfair trade practices, including mergers and acquisitions. In the past, the Korean Fair Trade Commission (FTC), the governmental authority charged with overseeing the implementation of the MRFTA, rarely investigated mergers and acquisitions of domestic companies by foreigners. The FTC, however, has recently changed its policy so that mergers and acquisitions of domestic companies by foreigners will be subject to the requirements of the MRFTA. In this regard, the pertinent provisions of the MRFTA and the regulations promulgated thereunder require, among other things, that Acquirer submit a "business combination report" to the FTC if either Acquirer or Target has total assets or total annual gross revenue of at least 100 billion won. In addition, the MRFTA prohibits any business combination that will have an anti-competitive effect in the relevant market.

d. Special Laws and Regulations

In addition, Acquirer should also consider the special laws relating to the business of Target may contain provisions that affect the contemplated M&A transaction involving Target (such as qualifications of major shareholders, ceilings on each shareholder's shareholding ratio, restrictions on foreign ownership, etc.).

by Yang Ho OH L.L.M. (Harvard 1994)
Member of Korean & New York Bars

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