JUNE, 1999 KOREA: Liberalization of M&A David A. Laverty Foreign direct investment in Korea has continued at a brisk pace, despite reports of a relaxation of efforts among some chaebol and other Korean companies to sell all or part of their operations in the face of an improving Korean economy. For the first quarter of 1999, foreign direct investment in Korea rose 250% as compared with the first quarter of 1998, increasing from US$572 million to over US$2 billion. Korea's Ministry of Commerce, Industry and Energy had earlier reported that foreign investment in Korea reached a yearly record of nearly US$8.9 billion in 1998, with mergers and acquisitions by foreign companies through purchases of existing shares amounting to about 19% of this total, and perhaps over 50% if other forms of acquisition, such as asset purchases, are taken into consideration. Examples of buy-outs include Motorola's acquisition in October 1998, of 51% of telecommunications component maker Appeal Telecom, and Volvo's acquisition in May 1998, of 100% of Samsung Heavy Industry's construction equipment division. Not all acquisitions have progressed smoothly - witness Newbridge Capital's ongoing struggle to complete its 51% purchase of Korea First Bank, a deal still mired in valuation disputes as of the start of June 1999. Much of such foreign M&A activity has only recently been permitted through changes in Korea's foreign investment laws. Prior to 1997, foreign investors in Korea could purchase only newly-issued shares of an unlisted Korean company, and not shares which were already issued and outstanding (the focus here is on the chusik hoesa, Korea's popular form of joint stock company). In early 1997, Korea's Foreign Investment and Foreign Capital Inducement Act (which instituted major changes in the former Foreign Capital Inducement Act) for the first time permitted foreign investors to purchase previously issued and outstanding shares of an unlisted company directly from a shareholder. However, approval of the target company's board of directors was required for such a purchase of outstanding shares. In addition, the share purchase was subject to a stricter review and approval of the Ministry of Finance and Economy (MOFE) if the target company was very large. Moreover, under a former Korean securities law provision, an intended purchase by either a domestic or foreign investor of 25% or more of a listed Korean company's shares required the investor to purchase more than 50% of such company's shares. Such restrictions on M&A activity were further liberalised in Korea's post-December 1997, crisis environment. In early 1998, the government eliminated both the requirement of MOFE approval for very large target companies (though continued to require MOFE approval for targets in defence and certain other sensitive industries) and the requirement of a mandatory purchase of a majority of shares of a listed company once a 25% threshold was reached. Of particular significance to foreign investors, board approval for the purchase of existing shares in most companies ceased to be required as of May 1998. While at that time such board approval had been necessary to purchase more than one-third of a Korean target company's shares, the change allowed a 100% takeover of most companies without board approval. In November, 1998, the Foreign Investment Promotion Act superseded aspects of the Foreign Investment and Foreign Capital Inducement Act which govern foreign investment and certain other matters. As part of the changes designed to benefit all foreign investors in Korea, including those engaged in M&A activity, the new Act further simplified foreign investment procedures by: (1) requiring in most cases only a simple notification of an investment to a foreign exchange bank or the Korea Trade and Investment Promotion Agency (KOTRA); (2) seeking to improve previous 'one-stop shop' efforts by designating KOTRA to provide guidance and support to foreign investors; and (3) adding tax exemption and reduction incentives for foreign direct investment in certain target industries and certain activities in designated foreign investment zones. A key question among long-time participants in the Korean investment scene now is whether the improved openness shown toward foreign investors will survive if the Korean economy continues on its path of recovery. Jason Ha at Chin, Ha & Seo in Seoul contributed to this update back to top | update index | home © Copyright 1997-2006, InternationalCounsel. All rights reserved. Disclaimer.