Merger Filing
When a foreign investor acquires securities in a Korean corporation or forms a joint venture in Korea, and if such transaction or activity meets certain thresholds set out under Article 11 of the Monopoly Regulation and Fair Trade Act (“MRFTA”), such foreign investor must complete a merger filing with the Korea Fair Trade Commission. Broadly, such thresholds are:
a. the foreign investor (including affiliates) and the domestic (i.e., Korean) corporation (including affiliates) have total assets or turnover of KRW 300 billion or more and KRW 30 billion or more (respectively), or vice versa; and if the transactions conducted by persons triggering the above threshold involve;
b. in case of share acquisitions, if the amount of shares in a domestic corporation acquired by the foreign investor is 20% or more (in case of publicly listed corporations, 15% or more), or if a person who owned 20% or more in a domestic corporation (15% or more for publicly-listed corporations) acquires additional shares in such company and becomes the largest shareholder; or
c. if forming a new corporation, when becoming the largest shareholder.
Involved parties should complete a merger filing within thirty days after the completion of the merger. However, if any party involved in the merger transaction has total assets or turnover of KRW 2 trillion or more, parties will be required to complete the merger filing before the completion. A pre-closing report generally requires about two months to complete.
Foreign Exchange Report
When a foreign investor acquires shares in a privately held domestic corporation (including the acquisition of shares through the formation of a joint venture corporation), such foreign investor must complete a securities acquisition report with a competent foreign exchange bank before the acquisition.
The above foreign exchange report obligation does not arise when a foreign investor acquires shares in a publicly listed domestic corporation. However, in such cases, the foreign investor must establish a dedicated investment account at a competent foreign exchange bank and must conduct the transaction through such a dedicated investment account.
Fundamental Considerations in Avoiding Shareholder Disputes
Any corporation with a capital of KRW 1 billion or more must form a board of directors by appointing three or more registered directors and nominating one of the directors as the representative director. As the representative wielding chief authority on behalf of the corporation, the representative director has decision-making authority on all matters not reserved for the board or the shareholders and the authority to convene board and shareholder meetings.
However, even where a foreign investor holds a significant portion of the equity in a Korean corporation, and even when such a foreign investor has control over the majority of the board, there are many cases in which the representative director is left to be appointed by a Korean shareholder, citing various reasons.
Under such conditions, if the Korean-appointed representative director fails to convene a board or shareholders meeting despite a request from the foreign investor, even when the foreign investor has the majority of the voting shares and the board, the foreign investor is often prevented from causing the board or the general meeting of shareholders to render necessary resolutions properly, and must usually resort to lengthy litigation to enforce its will. This creates immense frustration and distress on the part of the foreign investor.
The following measures should be diligently considered to minimize such risks:
a. Directly appoint the representative director.
b. If a) is not possible, have the company appoint two representative directors with equal representative authority and grant the foreign investor the right to appoint one of such representative directors.
c. Amend the articles of incorporation (constitution) of the company to grant one of the directors, separately empowered at a board meeting, the authority to convene board meetings.
d. Amend the articles of incorporation (constitution) of the company to grant the authority to convene general meetings of shareholders to the director separately empowered to convene board meetings as noted in c).
e. Stipulate specific penalties in the shareholders’ agreement or the joint venture agreement for the counterparty-shareholder if such counterparty-shareholder does not cooperate with the convocation of a board meeting or a general meeting.
A discerning knowledge of such procedural requirements and governance considerations will be highly beneficial for foreign investors investing in Korea.
