The Private Equity Review: South Korea

I Overview

i Deal activity2

In recent years, growth in the South Korean M&A market has been driven by both domestic and cross-border M&A transactions. This trend has continued throughout 2020. Although the expansion of the South Korean M&A market has been dampened somewhat by the covid-19 pandemic in 2020, domestic transactions have taken place at a similar level as in 2019, and the value of outbound transactions has actually increased compared with the previous year. This demonstrates the continued importance of outbound M&A transactions to South Korean companies and private equity sponsors.

The volume of outbound M&A transactions in 2019 was at a similar level as in 2018 with 80 total transactions. The combined value of all outbound M&A transactions in 2019 was US$15.57 billion. There was an increase in the volume of inbound transactions in 2019 by 4.2 per cent compared with 2018, with 50 total transactions, and a value increase of 46.5 per cent to US$14.5 billion. A small reduction of 1.7 per cent was recorded for 2019 domestic transactions compared to 2018, with 405 total transactions for a total value of US$45.5 billion, representing an increase of 8.5 per cent. The key takeaway is that, like in 2018, while domestic M&A transactions in 2019 continued to account for the largest slice of the M&A market in South Korea for now, cross-border M&A transactions are on the rise.

The number of outbound M&A transactions fell in 2020 to 56 transactions from 80 in 2019, but the value of 2020's transactions has increased by 18.1 per cent to US$17.2 billion. Inbound M&A transaction volumes have reduced by 42 per cent year on year to 29 total transactions, with a corresponding decrease in overall transaction value of 66.9 per cent to US$4.8 billion. While domestic M&A transaction volume dropped by 11.3 per cent to 362 transactions compared with 2019, overall value remained approximately the same at US$39.6 billion, a 0.1 per cent reduction.

In 2019, there was a total volume of 456 M&A transactions, with a total deal value of US$60 billion. This represents the highest recorded volume of transactions, with overall value constituting an increase on 2018 of 13.8 per cent. There were several noteworthy cross-border transactions in 2019, including 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 from Linde AG for a total of US$1.17 billion. On the domestic side, Korea Shipbuilding & Offshore Engineering's acquisition of Daewoo Shipbuilding & Marine Engineering for US$4.5 billion is considered one of the most notable transactions of 2019.

The Korean outbound M&A transaction space continues to draw attention in 2020, with transactions of note including SK Hynix's acquisition of Intel's NAND memory and storage business valued at US$9 billion, Hyundai Motor Group's acquisition of an 80 per cent stake in US robotics and mobility company Boston Dynamics for US$880 million, and MBK Partners' strategic takeover of Chinese rental car company Car Inc through a purchase of the remaining 20.86 per cent of Car Inc's total issued shares for US$2.175 billion. Substantial domestic transactions include Korean Air's acquisition of a 63.88 per cent stake in Asiana Airlines for US$8.358 billion, KB Financial Group's acquisition of Prudential Life Insurance for US$1.949 billion, and Baring Private Equity and Affinity Private Equity's joint purchase of 7.33 per cent of the total shareholding of Shinhan Financial Group for US$974 million.

Overview of private equity fund 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, demonstrate that PEFs have a robust presence in Korea that is continuing to grow. The current administration is also seeking to alleviate regulatory burden of PEF registration and investment requirements by amending the FSCMA, and 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 2020, there were 90 acquisition deals sponsored by PEFs worth US$11.9 billion in value, and 45 exit deals by PEFs worth US$6.74 billion. The table below shows the annual aggregate deal volume and deal count for acquisitions and exits by PEFs in 2019 and 2020, as compared with 2007.

YearAcquisitionsExits (excluding IPOs)
Deal value (US$ billion)Deal volumeDeal value (US$ billion)Deal volume
202011.9906.7445
20191511113.337
20074.86134.3317

A breakdown of PEF-driven acquisitions by transaction volume according to price bracket shows that in 2019 there were 26 acquisitions in the US$100 million to US$500 million range, accounting for 76.5 per cent of all PEF-driven acquisitions; five acquisitions in the US$500 million to US$1 billion range, reflecting 14.7 per cent of all PEF-driven acquisitions; and three acquisitions at or above US$1 billion, thus accounting for 8.8 per cent of all PEF-driven acquisitions. In 2020, there were 28 acquisitions in the US$100 million to US$500 million range, accounting for 82.4 per cent of all PEF-driven acquisitions; and six acquisitions in the US$500 million to US$1 billion range, reflecting 17.6 per cent of all PEF-driven acquisitions.

As for PEF-driven exits (excluding IPOs) by transaction number in 2019, there were 14 exits in the US$100 million to US$500 million range, accounting for 70 per cent of all PEF-driven exits, three exits in the US$500 million to US$1 billion range, accounting for 15 per cent of the total PEF-driven exits, and three exits at or above the US$1 billion mark, accounting for a further 15 per cent of all PEF-driven exits. In 2020, there were 12 exits in the US$100 million to US$500 million range, accounting for 75 per cent of all PEF-driven exits, three exits in the US$500 million to US$1 billion range, accounting for 18.8 per cent of all PEF-driven exits, and one exit at or above the US$1 billion mark, accounting for 6.3 per cent of all PEF-driven exits.

PE fund acquisition trends

Buyout, majority stake and minority stake deals slightly decreased in 2020 compared with 2019 in terms of deal value and deal volume. Buyout transactions in 2020 decreased by 18.7 per cent in deal value compared with 2019, while the deal value of majority stake and minority stake deals remained at a similar level. In terms of deal volume, buyouts actually increased by three transactions, while majority stake and minority deals decreased by 22.8 per cent and 45.4 per cent, respectively. Much like in 2019, buyout and majority stake deals constituted the majority of total transaction value for 2020. The value of buyout deals suffered from the largest decline in value, resulting in minority stake deals occupying a larger proportion of overall value in 2020, with 17.3 per cent (compared with the 16.4 per cent that minority stake deals held in 2019).

YearBuyout (100%)Majority stake (50% or more)Minority stake (up to 50%)Undisclosed
Deal value (US$ billion)Deal volumeDeal value (US$ billion)Deal volumeDeal value (US$ billion)Deal volumeDeal value (US$ billion)Deal volume
20205.76544.74272.2112
20197.09515.44352.4622
20070.2131.9112.739

PE fund exit trends

Trade sales have traditionally been the main exit channel for PEFs. However, secondary sale exits are becoming more common, and in 2020, approximately 29 per cent of all PE fund exits took place as secondary sales. There was a decrease of IPO exits in 2020 compared with 2019, and as in previous years, IPO exits did not constitute a significant exit channel in 2020 compared to trade sales and secondary sales.

YearTrade salesSecondary salesIPO
Deal value (US$ billion)Deal volumeDeal value (US$ billion)Deal volumeDeal value (US$ billion)Deal volume
20204.72272.02180.122
201910.7232.63140.8515
20073.07111.2440.082

Trend of public-to-private transactions

There were no public-to-private deals in 2018, 2019 and 2020, with a single public-to-private transaction worth US$360 million recorded in 2017. In general, public-to-private deals are not common in Korea, with only four public-to-private transactions recorded from 2007 to 2020.

Registered private equity funds

As at September 2020, a total of 797 PEFs were registered with the Financial Supervisory Service (FSS).3 In 2019, there were 206 newly registered PEFs, which is a similar number as 2018. Despite the total number of newly registered PEFs being higher in 2019, the actual combined value of capital invested in these PEFs (i.e., the total commitment amount) of 15.6 trillion won is 0.8 trillion won lower than the equivalent figure of 16.4 trillion won from 2018. This indicates there were a substantial number of PEFs registered to participate in smaller-sized deals. The total commitment amount increased from 83.4 trillion won in 2019 to 92.1 trillion won in the first three quarters of 2020.

Year20202019201820172015
Newly registered PEFs13620619813576

Registered general partners of private equity funds

As at December 2019, a total of 304 general partners (GPs) were registered with the FSS, 210 of which being full-time GPs. The remaining 94 GPs are comprised of existing financial institutions, start-up investment companies and new technology companies. This constitutes an increase in overall GP registration compared with 2018 of 50 registrations, 42 of which being full-time GPs. Full-time GPs account for 69.1 per cent of all newly registered GPs (66.1 per cent in the case of 2018), which shows an increase in the proportion of full-time GPs.

Year2019201820172015
Full-time GPs21017013894
Financial institution GPs38373541
Start-up GPs56493632
Total GPs304256209167
Newly registered GPs5015195
Newly registered full-time GPs42322312

The largest private equity funds set up by major GPs in Korea in terms of committed capital are as follows: a 3.018 trillion won fund set up by MBK Partners called MBK V; a 2.540 trillion won fund set up by MBK Partners called MBK III; a 1.827 trillion won fund set up by Hahn & Company called Hahn & Company III-1; and a 1.581 trillion won fund set up by IMM Private Equity called IMM Rose Gold 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. 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, these regulatory authorisations are not especially onerous or far-reaching in terms of scope and depth of regulatory review, and are therefore 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 these 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

Subject of fiduciary duties

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.4 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.

Directors do owe fiduciary duties towards the company under the Korean Commercial Code (KCC) 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-nominated director would also be subject to fiduciary duties and liabilities to the target company.

Fiduciary duties in leveraged buyout transactions

Another point of note regarding fiduciary duties concerns 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, where 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, in 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 any criminal breach of fiduciary duties by the directors involved in debt push-down mergers of this type, as long as the merger ratio is reasonably set and the merger procedures are taken in accordance with statutory requirements. 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).

Korean courts will consider the factual matrix to determine whether any particular LBO constitutes a collateralised LBO or a merger LBO, and whether directors of a target have complied with their fiduciary duties will depend on this distinction. In October 2020, in a case concerning potential fiduciary breaches in the LBO of Himart, an electronics distribution company, the Korean Supreme Court found that the Seoul High Court's interpretation of the factual matrix was incorrect.5 The Seoul High Court had held that the transaction constituted a merger LBO, and accordingly the directors of Himart had not breached their fiduciary duties. The Korean Supreme Court overruled this judgment to find that the transaction was in fact a collateralised LBO, after considering factors such as the transaction agreement and the fact that the purchaser of Himart intended to use Himart's assets as collateral for its acquisition financing.6 The Korean Supreme Court accordingly found the Himart directors guilty of breach of fiduciary duty. Prospective investors must therefore be aware of the potential liability of target company directors resulting from M&A transactions that utilise LBOs.

III Year in review

i Recent deal activity

The year 2020 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. SK Hynix's acquired Intel's NAND memory and storage business for US$9 billion in one such mega-sized, cross-border acquisition deal. Hyundai Motor Group's acquisition of an 80 per cent stake in US robotics and mobility company Boston Dynamics for US$880 million represented another significant cross-border deal.

Noteworthy domestic M&A transactions include Korean Air's acquisition of a 63.88 per cent stake in Asiana Airlines for US$8.358 billion, KB Financial Group's acquisition of Prudential Life Insurance for US$1.949 billion, and GS Energy's acquisition of a 50 per cent stake holding in GS Power for US$1.598 billion.

Notable past transactions

Notable M&A deals led by PEFs in recent years are as follows.

In September 2020, Baring Private Equity and Affinity Private Equity acquired 7.33 per cent stake in Shinhan Financial Group, with a deal value of approximately US$970 million.

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.

The above shows a trend of PEFs participating in large M&A deals as co-investors or consortium partners.

ii Financing

As mentioned in Section II.ii, there is uncertainty as to whether obtaining acquisition financing through LBOs constitutes a breach of directors' fiduciary duties. 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 the 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

Closing certainty and clean-exit mechanisms

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. Because 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.

The 2020 covid-19 pandemic prompted interest in interpretation of definitions of MAC clauses in M&A agreements. Sellers are incentivised to reducing the scope of a MAC clause to the greatest extent possible to ensure closing certainty and push for covid-19-related matters to be explicitly carved out from the definition of a MAC. Contrastingly, purchasers attempt to expand MAC definitions as broadly as possible and include the occurrence of a MAC as a ground to terminate the agreement. A relevant dispute involved the aborted acquisition of Asiana Airlines by HDC Hyundai Development, because of the financial deterioration of Asiana Airlines caused by business-environment and economic changes in the aftermath of the covid-19 pandemic. The parties are currently engaged in a dispute in the Korean court as to whether Asiana Airlines' financial deterioration constituted a MAC entitling termination of the agreement. There are few historical instances of Korean courts enforcing MAC clauses, and prospective investors would be wise to monitor the development of this case as to whether Korean courts are agreeable to covid-19-induced financial distress entitling cancellation under MAC clauses.

Additionally, 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. The use of representations and warranties insurance is increasing among PEFs, who require a clean exit when divesting portfolio companies that transfers all liability for damages away from the seller. This is also increasingly common in tender sales, which are often used for large-scale M&A deals, as bidders can enhance their bids by including in their offer a representations and warranties insurance policy that guarantees the seller a clean exit.

Purchase price adjustment mechanisms

Purchase price adjustment mechanisms are fairly common in Korea, with the following options available: (1) a price adjustment mechanism based on net working capital, whereby the risk of value fluctuation between the valuation date and the closing date is borne by the seller;7 (2) the 'locked-box' method, whereby the risk of value fluctuation between the valuation date and the closing date is borne by the buyer; 8 and (3) the earn-out method, 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.9 In South Korea, it is common for parties to either opt for the locked-box method or forgo a purchase price adjustment mechanism altogether.

Confidentiality

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, as 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.

iv Exits

Recent notable exits

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. In 2019, KKR successfully exited by selling 100 per cent of its shares in KCF Technologies to SKC for approximately US$1.02 billion. 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 2018, the Carlyle Group sold its 100 per cent stake in Siren Holdings, a company engaged in security solutions through its subsidiary ADT Caps, to a consortium of SK Telecom, Daishin PE and Keistone Partners 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.

Drag-along rights

PEFs divesting investments through the exercise of drag-along rights to compel other shareholders to sell all shares in a company is fairly common practice. The usage of drag-along rights was put under the spotlight by the Korean Supreme Court in January 2021.10 In that case, IMM and a number of other investors purchased shares in Doosan Infracore China Corporation (DICC). The investors entered into a shareholders' agreement with Doosan Infracore (Doosan), the largest shareholder of DICC, which provided that if DICC did not complete an IPO within a specified period, the investors would be entitled to exercise a drag-along right against Doosan. This drag-along provision contained an option that Doosan may opt to purchase all shares of the company at the same price as offered by a third party rather than being forced to sell.

DICC failed to complete an IPO within the required time period, and the investors exercised their drag-along right. However, Doosan and DICC did not cooperate with the investors in the drag-along sales process including due diligence, claiming confidentiality concerns prevented them from disclosing this information until a certain buyer was located. As a result, all prospective purchases declined to commit to a purchase of DICC. The investors asserted (1) this constituted a breach of the Doosan's obligation to act in good faith; (2) Doosan was therefore deemed to have exercised its option to purchase the investors' shares at the price offered by the highest prospective purchaser; and (3) a corresponding sale and purchase agreement between Doosan and the investors was deemed to exist. The investors demanded payment of the sale price for their shares pursuant to the purported sale and purchase agreement.

The Korean Supreme Court ruled in favour of Doosan and held that in order for an agreement to be deemed to exist pursuant to the drag-along clause, the initial prospective purchaser needed to have been specified at the time of exercise of the drag-along right, and that the investors had no right to compel Doosan to purchase their shares.

This demonstrates the importance of setting out in clear language the procedure for exercise of a drag-along right, and expressly stating that both parties must do all things necessary to procure successful completion of the drag-along transaction. The parties must also clearly state the penalties for non-cooperation. Failure to include this clear language may result in a drag-along right being legally or practically unenforceable in Korea.

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. Similarly, 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

On 27 September 2018, the FSS announced its plans to reform the regulations governing PEFs and hedge funds. While these measures are still at the discussion stage, it is anticipated that reform of PEF regulations will have a positive impact on the legal framework for PEFs, and will facilitate investment activity by PEFs within the Korean market. 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, with both instead being re-categorised 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.

The M&A landscape in 2021 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.

V Outlook

The South Korean M&A market has seen varying degrees of ups and downs in the past few years. Nonetheless, the South Korean M&A market continues to show resilient deal making and continued growth. Despite the covid-19 pandemic's substantial impact on the M&A market in 2020, positive factors such as the upward trend of the government's pro-M&A regulatory stance, various pre-emptive restructuring attempts by South Korean companies, and the ongoing development of PEFs have helped to create cautious optimism that the M&A market will continue to remain robust in 2021.

In terms of challenges in 2021, PEFs will have to grapple with the ever-changing economic situation in South Korea, as well as with competition from strategic investors. Uncertainties arising from the covid-19 pandemic and the related social and economic disruption and the ongoing trade war between the United States and China are also projected to impact South Korea's M&A market in 2021. Nonetheless, the positive factors noted above may offset these negative influences, and considering the financial constraints of corporate and strategic investors at this juncture, there is significant dealmaking potential for both domestic and foreign PEFs in 2021.


Footnotes

1 Chris Chang-Hyun Song and Tong-Gun Lee are partners, Brandon Ryu is a senior foreign attorney, Dong Il Shin is an associate and Tom Henderson is a foreign attorney at Shin & Kim LLC.

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 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).

4 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. Additionally, the court may pierce the corporate veil in rare cases when the corporate entity is only used for avoidance of shareholder's debt or liability, in which case the shareholder will also be subject to liability with regard to the company.

5 Seoul High Court decision on 24 July 2016, case number 15No478 (S. Kor.).

6 Korean Supreme Court decision on 15 October 2020, case number 16Do10654 (S. Kor.).

7 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.

8 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.

9 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.

10 Korea Supreme Court decision on 14 January 2021, case number 18Da223054 (S. Kor.)

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