i Deal activity2
In recent years, growth in the South Korean M&A market has been primarily driven by cross-border M&A transactions; in particular, there has been a significant surge in outbound M&A transactions. 2018 saw 86 outbound M&A transactions, which was a 153.4 per cent increase on 2017. Likewise, there was a total of 48 inbound M&A transactions in 2018, reflecting a 33 per cent increase on 2017. There were 401 domestic M&A transactions in 2018; while domestic M&A transactions occupied the lion's share of all M&A transactions for that year, the growth rate compared with 2017 was relatively low at 6.7 per cent. For 2019, there were a total of 44 outbound M&A transactions for the first three quarters of the year; this figure represents a 10.6 per cent increase compared with the same period in 2018. Inbound M&A transactions for the first three quarters of 2019 also increased by 11.1 per cent compared with the same period in 2018. Domestic M&A transactions still accounted for the largest number of M&A transactions for the first three quarters of 2019; however, with 262 transactions on record, these saw a 21.3 per cent decrease compared with the same period in 2018. The takeaway here is that while domestic M&A transactions continue to account for the largest slice of the M&A market in South Korea for now, cross-border M&A transactions, especially outbound M&A transactions, are on the rise.
Compared with 2018, which was a record year in terms of transaction volume as well as transaction value, the M&A market slowed down in 2019. The first three quarters of 2019 saw a 17.2 per cent decrease in terms of transaction value and an 8.4 per cent decrease in terms of transaction volume compared with the same period in 2018.3 Noteworthy cross-border transactions for 2019 include SKC's sale of its chemical division to Kuwait's state-owned PIC for a total of US$442 million, as well as IMM Private Equity's acquisition of Linde Korea Co Ltd from Linde AG for a total of US$1.17 billion. On the domestic side, Korea Shipbuilding & Offshore Engineering Co Ltd's acquisition of Daewoo Shipbuilding & Marine Engineering Co Ltd for US$4.5 billion is considered one of the most notable transactions of 2019.
In 2018, there were 535 M&A transactions in terms of volume, with the total deal value amounting to US$68.7 billion; these figures represent a substantial increase compared with 2018, for which, in terms of volume, 360 deals were recorded, with a total deal value of US$41.6 billion.4 There were several large-scale deals that boosted the total deal value in 2018, with a noteworthy example being the KCC consortium's US$3.1 billion acquisition of US-based Momentive Performance Materials. This deal was also ranked as the most highly valued outbound deal of 2018 by Korean entities. The technology, media and telecommunications sector also saw a noticeable increase in M&A activity in 2018 on the back of a US$4 billion intra-group merger deal between CJ O Shopping and CJ E&M. Likewise, the financial services sector saw a remarkable increase in M&A deal value following the announcement of Shinhan Financial Group's acquisition of a 59.15 per cent stake in Orange Life Insurance from MBK Partners for US$2.2 billion.
Overview of private equity funds activity
Offshore private equity funds (foreign PEFs) became active in Korea during the immediate aftermath of the Asian financial crisis of 1997. They were followed by the emergence of onshore private equity funds (Korean PEFs) a decade later, with the introduction of the Financial Investment Services and Capital Markets Act (FSCMA) in 2007. Currently, all aspects of PEF activities, ranging from fundraising and investment, to exits, are robust and continuing to increase in Korea. Furthermore, the current administration is also seeking to alleviate PEF registration and investment requirements by amending the FSCMA; in addition, a significant amount of fresh policy-driven capital in the form of the Growth Ladder Fund as well as the Corporate Structure Innovation Fund promises to further fuel PEF activities. Based on these factors, the growth trend of PEF activity in South Korea is expected to continue in the coming years.
In 2019,5 there were 66 acquisition deals worth US$8.92 billion in value sponsored by PEFs. With respect to exit deals by PEFs, there were 23 deals worth US$3.86 billion (excluding initial public offerings (IPOs)). The table below shows the annual aggregate deal volume and deal count for acquisitions and exits by PEFs in 2007, 2018 and 2019.
|Year||Acquisitions||Exits (excluding IPOs)|
|Deal value (US$ billion)||Deal volume||Deal value (US$ billion)||Deal volume|
A breakdown of PEF-driven acquisitions in terms of transaction numbers according to price bracket shows that in 2018, there were 18 acquisitions in the US$100 million to US$500 million range, accounting for 19.8 per cent of the total PEF-driven acquisitions; there were two acquisitions in the US$500 million to US$1 billion range, reflecting 2.2 per cent of the total PEF-driven acquisitions, while there was only one acquisition at or above US$1 billion, thus accounting for 1.1 per cent of the total PEF-driven acquisitions. In 2019, there were 16 acquisitions in the US$100 million to US$500 million range, accounting for 24.2 per cent of the total PEF-driven acquisitions, and three acquisitions in the US$500 million to US$1 billion range, reflecting 4.5 per cent of the total PEF-driven acquisitions. 2019 also saw two acquisitions at or above the US$1 billion mark, thus accounting for 3 per cent of the total PEF-driven acquisitions.
As for PEF-driven exits (excluding IPOs) in terms of transaction numbers in 2018, there were 10 exits in the US$100 million to US$500 million range, accounting for 83.3 per cent of the total PEF-driven exits, and two exits at or above the US$1 billion mark, accounting for 16.7 per cent of the total PEF-driven exits. In 2019, there were eight exits in the US$100 million to US$500 million range, accounting for 34.8 per cent of the total PEF-driven exits, one exit in the US$500 million to US$1 billion range, accounting for 4.3 per cent of the total PEF-driven exits, and one exit at or above the US$1 billion mark, also accounting for 4.3 per cent of the total PEF-driven exits.
PE fund acquisition trends
Buyout and majority stake deals evidently increased 6.2 times in 2019 compared with 2018 in terms of deal value, and deal volume also increased from 28 to 52. On the other hand, minority stake deals decreased compared with 2018. As a result, buyout and majority stake deals accounted for 79 per cent of all acquisitions (in terms of transaction volume) and 88 per cent in terms of transaction value. Taking into account that the data for 2019 has yet to be compiled, the increase of buyout and majority stake deals and the decrease of minority stake deals is a noteworthy change that took place in 2019.
|Year||Buyout (100%)||Majority stake (50% or more)||Minority stake (up to 50%)||Undisclosed|
|Deal value (US$ billion)||Deal volume||Deal value (US$ billion)||Deal volume||Deal value (US$ billion)||Deal volume||Deal value (US$ billion)||Deal volume|
PE fund exit trends
Up until 2018, trade sales were the main exit channel for PEFs; however, secondary sale exits became more common, and in 2019, there was roughly the same percentage of trade sales and secondary sales (each around 45 per cent in terms of transaction value). As at the third quarter of 2019, there was a relative increase of IPO exits compared with 2018; however, IPO exits remained around 10 per cent of the total market in terms of transaction value, and, therefore, do not constitute a significant exit channel compared to trade sales and secondary sales.
|Year||Trade sales||Secondary sales||IPO|
|Deal value (US$ billion)||Deal volume||Deal value (US$ billion)||Deal volume||Deal value (US$ billion)||Deal volume|
Trend of public-to-private transactions
There were no public-to-private deals in 2018 and 2019, compared with the single public-to-private transaction worth US$0.36 billion in 2017. In general, public-to-private deals are not common in Korea, with only four public-to-private transactions recorded from 2007 to 2018.
Registered private equity funds
As at September 2019, a total of 676 PEFs were registered with the Financial Supervisory Service (FSS).6 In 2018, there was a significant increase to 198 newly registered PEFs, while there were only 93 newly registered PEFs in the first three quarters 2019. The total commitment amount increased from 74.5 trillion won in 2018 to 81.54 trillion won in 2019 (first three quarters of 2019).
|Newly registered PEFs||93||198||135||109||76|
Registered general partners of private equity funds
As at December 2018, a total of 256 general partners (GPs) were registered with the FSS; among these, 170 are full-time GPs. The remaining 86 GPs are comprised of existing financial institutions, start-up investment companies and new technology companies. The number of GPs for newly established PEFs decreased from 19 in 2017 to 15 in 2018; on the other hand, the number of full-time GPs newly registered with the FSS increased from 23 in 2017 to 32 in 2018.
|Financial institution GPs||37||35||41||41|
|Newly registered GPs||15||19||23||5|
|Newly registered full-time GPs||32||23||21||12|
The largest private equity funds set up by major GPs in Korea in terms of committed capital are as follows: a 2,540 billion won fund set up by MBK Partners called MBK III; a 1,827 billion won fund set up by Hahn & Company called Hahn & Company III-1; and a 1,581 billion won fund set up by IMM Private Equity called IMM Rosegold IV.
ii Operation of the market
Market standard management equity incentive arrangements
There are certain precedents wherein a PEF with a controlling stake grants stock options or a small percentage of shares (either through transfer or issuance of new shares) to management with the aim of aligning the interests of the PEF with management; however, sophisticated forms of management equity incentive arrangements remain relatively uncommon in South Korea.
Standard sales process
As is the case in other jurisdictions, the investment process for private equity funds in South Korea usually takes place across the following stages: (1) deal structuring, (2) due diligence checks of investment target, (3) negotiation of deal terms, and (4) closing. To explain in further detail, in a standard share purchase transaction, the parties would first determine a due diligence cut-off date or valuation date, followed by the buyer conducting due diligence on the target. After due diligence, the parties would negotiate the terms and execute a share purchase agreement reflecting such terms. Subject to the fulfilment of conditions precedent to the closing date, the buyer would pay the purchase price to the seller and the seller would transfer its shares to the buyer. The final step usually involves a shareholders' meeting or a board meeting to effect the replacement of the existing directors and officers of the target.
The overall process can take around six to seven months on average; however, this timeline can vary depending on the particular nature and complexity of each deal. If regulatory authorisations are required to complete the deal (e.g., because of foreign capital investment, industry-specific licensing requirements, or market dominance or competition-related issues), the process can be further delayed. Generally, the aforementioned regulatory authorisations are not especially onerous or far-reaching in terms of scope and depth of regulatory review, and, therefore, are not considered significant obstacles in most South Korean M&A deals.
II LEGAL FRAMEWORK
i Acquisition of control and minority interests
Pursuant to the FSCMA, Korean PEFs are required to either acquire de facto control over the target company or otherwise acquire a minimum of 10 per cent or more of the target company's voting shares. Because of these regulatory restrictions, Korean PEFs must either engage in a buyout, acquire a majority stake in the target company, or otherwise acquire a minority stake of 10 per cent or higher. If a Korean PEF acquires a minority stake in a company, it can still influence the management or governance of the target company by means of a shareholders' agreement with the controlling shareholder or major shareholders.
Unlike Korean PEFs, foreign PEFs are not subject to the aforementioned regulatory restrictions under the FSCMA, and thus Korean PEFs have been pressing for regulatory change to secure a level playing field between Korean PEFs and foreign PEFs.
ii Fiduciary duties and liabilities
The Korean Commercial Code does not impose fiduciary duties on a shareholder towards the company; furthermore, a shareholder is not liable for the debts of the company aside from the shareholder's investment contribution.7 Therefore, a PEF (or its GP) shareholder does not owe any fiduciary duty towards the company and is not liable for the company's debts beyond its investment contribution.
On the other hand, the KCC states that directors owe fiduciary duties towards the company and can be held both civilly and criminally liable for actions that result in harm to the company. These fiduciary duties and liabilities apply to all directors of the company, whether inside or outside directors, as well as to non-executive directors. Furthermore, individuals who do not officially hold director titles but nonetheless exert control over the company's management can be treated as 'de facto directors' pursuant to the KCC and will be subject to the same fiduciary duties and liabilities as directors. It is common practice for personnel from a PEF investor to serve on the board of directors of a target company; therefore, by extension, the PEF director would also be subject to the aforementioned fiduciary duties and liabilities.
Another point of concern regarding fiduciary duties pertains to leveraged buyout transactions (LBOs); currently, there are differing opinions as to whether company directors can be held civilly and criminally liable for LBOs. The court precedents from the Korean judiciary distinguish between 'collateralised LBOs' and 'merger LBOs'; in relation to the former, wherein the target company's assets are used as collateral to obtain acquisition financing without giving any benefit to a target company, the Korean courts have ruled that the directors responsible are in criminal breach of their fiduciary duties. In contrast, with regard to merger-LBO scenarios, where the acquiring party sets up a special purpose company (SPC) and merges the target company with the SPC (thereby having the target company succeed to the liabilities of the SPC), the South Korean courts have not found criminal breach of fiduciary duties by the directors involved in debt push-down mergers of this type. Note, however, that these court rulings do not necessarily imply a bright-line rule with regard to criminal breach of fiduciary duties in an LBO context; for each transaction, the courts will decide based on the totality of circumstances (e.g., whether the LBO will enhance managerial efficiency, financial conditions and company value).
III YEAR IN REVIEW
i Recent deal activity
The year 2019 saw a diverse range of M&A deals in South Korea in terms of deal size, ranging from small and medium-sized deals to mega deals worth US$1 billion and above. One mega-sized cross-border acquisition deal, Linde AG's sale of Linde Korea to IMM Private Equity, had a deal value of approximately US$1.17 billion. Another significant cross-border deal is Hyundai Heavy Industries Holdings' 17 per cent stake sale in Hyundai Oilbank to Saudi Arabian Oil for US$1.21 billion.
For noteworthy domestic M&A transactions, Korea Development Bank's sale of Daewoo Shipbuilding & Marine Engineering to Korea Shipbuilding & Offshore Engineering had a deal value of approximately US$4.5 billion. Other significant transactions include CJ ENM's sale of its 50 per cent stake in CJ Hello to LG Uplus for a value of approximately US$1.26 billion, as well as Lotte Corporation's sale of its 79.83 per cent stake in Lotte Card to the consortium of MBK Partners and Woori Bank for US$1.17 billion.
Notable past transactions
There have notable M&A deals led by PEFs in recent years, and PEFs have been involved in large M&A deals as a co-investor or a consortium partner.
In April 2019, IMM Private Equity acquired a 100 per cent stake in Linde Korea, with a deal value of approximately US$1.17 billion.
In February 2017, MBK Partners acquired a 100 per cent stake in DaeSung Industrial Gases, with a deal value of approximately US$1.5 billion.
In December 2016, the consortium of Hanhwa Life Insurance, Korea Investment & Securities, TongYang Life Insurance, Kiwoom Securities, Mirae Asset Global Investment, IMM Private Equity and Eugene Asset Management acquired a 29.7 per cent stake in Woori Bank, the fourth-largest commercial bank in Korea, with a deal value exceeding US$2 billion.
In September 2015, the consortium of Temasek Holdings, Canada Pension Plan Investment Board, MBK Partners, Public Sector Pension Investment Board and Chengdong Investment acquired a 100 per cent stake in Homeplus, a large hypermarket store chain, from Tesco, with a deal value of approximately US$6.4 billion.
As mentioned in Section II.ii, there is uncertainty over whether obtaining acquisition financing through LBOs constitutes a breach of directors' fiduciary duty. Because of this restriction on LBOs, PEFs in South Korea tend to raise acquisition financing through loans from financial institutions. The amount and terms of such loans are determined based on the financial health and business operations of a target company. If a target company holds existing liabilities, it is market practice for PEFs to have the target company pay off the existing liabilities through refinancing from the financial institution simultaneously with the completion of the acquisition of the target company by PEFs. In large M&A deals, a syndicate of financial institutions provides loans often consisting of term loans and revolving facilities. Though it is not common, vendor financing has been provided in some M&A deals.
iii Key terms of recent control transactions
Before proceeding with a transaction, it is usual practice for PEFs to impose confidentiality obligations on the counterparties with regard to the transaction by way of a non-disclosure agreement. Such confidentiality obligations are particularly important with regard to publicly listed companies, since news of a potential acquisition may have a substantial effect on share prices and, by extension, result in a higher acquisition price. A related issue is that publicly listed companies may have limited capacity to enter into confidentiality obligations because of disclosure requirements; when faced with a disclosure request from the Korea Exchange, parties sometimes opt to disclose that a potential acquisition is being contemplated.
In acquisition transactions, certainty of closing and break-up (termination) flexibility are key concerns for PEFs, so they tend to request strict representations and warranties, indemnification obligations and material-adverse-change (MAC) clauses from the seller, while objecting to contractual language that undermines closing certainty or restricts their break-up flexibility. In recent years, insolvent companies have started to comprise a significant portion of M&A targets in Korea; since sales and purchases of insolvent companies are supervised by the courts, the courts will sometimes impose various restrictions or conditions, such as purchase price adjustment restrictions and MAC clause prohibitions, from the onset of the bid process.
Furthermore, with the rising popularity of representations and warranties insurance, an increasing number of transaction documents include provisions to the effect that damages incurred as a result of a breach of representations and warranties shall be handled by the coverage amount of the relevant representations and warranties insurance policy.
With regard to purchase price adjustment mechanisms, the following options are available: (1) price adjustment based on net working capital,8 whereby the risk of value fluctuation between the valuation date and the closing date is borne by the seller; (2) the 'locked-box' method,9 whereby the risk of value fluctuation between the valuation date and the closing date is borne by the buyer; and (3) the earn-out method,10 whereby the buyer potentially pays an additional purchase price amount based on the target company's earnings before interest, tax, depreciation and amortisation, business profits, net profits, cash flow, turnover, etc. In South Korea, it is common for parties to either opt for the locked-box method or forgo a purchase price adjustment mechanism altogether.
The joint sale of Oriental Brewery by KKR and Affinity Equity Partners with a deal value of approximately US$6.2 billion was both the largest and the most highly publicised exit by a PEF in Korea. The 2012 sale by Lone Star of its 51.02 per cent stake in Korea Exchange Bank with a deal value of approximately US$3.4 billion remains the second-largest private equity fund exit transaction in Korea. In 2019, KKR successfully exited by selling 100 per cent of its shares in KCF Technologies to SKC for approximately US$1.02 billion. In 2018, the Carlyle Group sold its 100 per cent stake in Siren Holdings, a company engaged in security solutions business through its subsidiary ADT Caps to the SK Telecom, Daishin PE and Keistone Partners consortium with a value of approximately US$2.7 billion. In 2017, Goldman Sachs and Bain Capital sold a 95.39 per cent stake in Carver Korea, a cosmetic manufacturer, to Unilever, with a value of approximately US$2.5 billion.
IV REGULATORY DEVELOPMENTS
i Regulatory landscape
Following the entry of foreign PEFs into the South Korean M&A market, the South Korean legislature went on to provide a legal framework for onshore private equity funds (Korean PEFs) by implementing the Indirect Investment Asset Management Business Act of 2004 and its successor, the FSCMA. The FSCMA requires all Korean PEFs to be registered with the FSS. Furthermore, as stated in Section II.i, Korean PEFs are required either to acquire de facto control over the target company or otherwise acquire a minimum of 10 per cent or more of the target company's voting shares, whether directly or through an SPC.
There is no general legal framework that governs PEF M&A transactions; likewise, M&A transactions by PEFs are not subject to approval by a designated regulatory body. Nonetheless, each transaction can have differing regulatory requirements depending on the nature of the target company's business and industry.
ii Recent regulatory measures
The government has recently taken certain regulatory measures that are expected to stimulate the M&A regulatory landscape in Korea. While these measures are still at the discussion stage, it is anticipated that reform of the PEF regulations and extension of the One-Shot Law discussed below will have a positive impact on the legal framework for PEFs, and will facilitate investment activity by PEFs within the Korean market.
Reform of PEF regulations
On 27 September 2018, the FSS announced its plans to reform the regulations governing PEFs and hedge funds. Specifically, the FSS is seeking to implement the following: (1) removal of the minimum 10 per cent stake rule that currently governs PEFs; (2) removal of the distinction between PEFs and hedge funds, and instead recategorising as general PEFs (PEFs that raise financing from retail, professional and institutional investors) and institutional PEFs (PEFs that raise financing exclusively from institutional investors), pursuant to which only institutional PEFs with the capacity to supervise their GPs will be permitted to make investments as limited partners; and (3) permitting PEFs to have up to 100 investors, an increase to the current limit of 49 investors.
Extension of One-Shot Law
Under the current laws, corporate restructuring requires the company to follow the procedures and authorisation requirements set out under the KCC. With the aim of facilitating corporate restructuring for companies in over-saturated industries, in August 2016 the Korean government announced the Special Act on Corporate Revitalization, colloquially known as the 'One-Shot Law'. Under this One-Shot Law, a company whose corporate restructuring plan has been approved will be eligible for various benefits, including the simplification of the restructuring process, as well as tax incentives and financial support benefits. Amendments to the One-Shot Law (which extended the effective period of the One-Shot Law by another five years to August 2024 and expanded the applicability of the One Shot Law to companies in newly emerging industries and those located in industrial crisis areas) were passed by the National Assembly on 12 August 2019 and have been in effect since 13 November 2019.
The M&A landscape in 2020 will depend on the regulatory reform efforts of the South Korean government and geopolitical factors such as South Korea's relationship with neighbouring countries and the denuclearisation of North Korea.
After hitting historic peaks in 2014 and 2015, the South Korean M&A market has seen a temporary slowdown in the past few years; however, this downward trend is once again being reversed, with the South Korean M&A market continuing to show strong signs of recovery and continued growth. The combination of this upward trend with the government's pro-M&A regulatory stance, various pre-emptive restructuring attempts by South Korean companies, and the ongoing development of PEFs means there is cautious optimism that the M&A market will continue to expand in 2020.
In terms of challenges in 2020, PEFs will have to grapple with the worsening economic situation in South Korea, as well as with competition from strategic investors. Minimum wage rises and shortened working hours are likely to have a negative impact on corporate bottom lines in 2020; furthermore, key industries such as the automobile and semiconductor sectors are showing signs of slowing down, while the global economic slump is also projected to impact South Korea's M&A market in 2020. Nonetheless, there are various factors to offset these negative influences, including the pre-emptive restructuring of various South Korean companies and the improved regulatory landscape for PEFs. Furthermore, considering the financial constraints of corporate and strategic investors at this juncture, there is significant dealmaking potential for both Korean and foreign PEFs in 2020.
1 Chris Chang-Hyun Song, Tong-Gun Lee, Brandon Ryu and Joon Hyug Chung are partners and Alex Kim and Dong Il Shin are associates at Shin & Kim.
2 All statistics on the value and volume of M&A deals in Korea involving private equity funds were retrieved from Mergermarket. They are based on M&A deals announced for the given year (the announcement is based on the signing date), some of which have not disclosed the size of investment; the statistics take into account only direct investments by private equity funds and not those done through special purpose vehicles.
3 Mergermarket, South Korea M&A activity, Q1–Q3 2019 trend report.
4 Mergermarket, South Korea M&A activity, Q1–Q4 2018 trend report.
5 The figures for 2019 are based on data compiled in the first three quarters of 2019.
6 The vast majority of these were registered under the FSCMA, but the total number includes those registered under the Industrial Development Act and the Overseas Resources Development Business Act, Financial Supervisory Service, Status of Private Equity Funds in September 2019 (30 September 2019).
7 As an exception, a majority shareholder holding 51 per cent or more of a company's total issued shares can be subject to secondary tax liability; also, if a majority shareholder is deemed to have pierced the corporate veil, the shareholder will also be subject to shareholder liability.
8 A potential downside of this option is that the parties have to come to an agreement on which accounts should be included to determine net working capital.
9 Under this option, the buyer will pay interest on the purchase price accumulated from the locked-box date up until the closing date, provided, however, that the transaction document clearly states that certain leakage from the target company is prohibited, and if leakage should occur, the buyer shall be indemnified accordingly.
10 The earn-out period is usually set at two to three years; a potential downside is that the buyer must continue to closely monitor the operations and earnings of the target company during this period.