KOREAN UPDATE – Amendments to the Korean Commercial Code To Have Far-Reaching Implications for Korean M&A and Corporate Governance
- The recently amended Korean Commercial Code (“KCC”), which will become effective April 15, 2012, includes an array of provisions that aim for more flexibility and transparency in corporate management, such as by introducing new forms of business entities and diverse types of stock, relaxing restrictions on dividend payments, and prohibiting the appropriation of business opportunities.
- These new concepts and regulations are expected to bring about fundamental and far-reaching changes in various aspects of business, including incorporation, corporate governance, corporate ownership and control structure, M&A, and corporate finance.
On March 11, 2011, the National Assembly passed a highly anticipated bill to amend the Korean Commercial Code (the “KCC”). These amendments represent the most extensive revisions to the KCC since its inception in 1962 and are the final piece in a series of amendments attempted since 2005. They were originally prepared and proposed by the Korean government to address industrial developments and to meet changing needs. The Korean government promulgated the amendments as of April 14, 2011; the amendments will become effective one year after the promulgation date.
Set forth below are the key changes in the amended KCC that affect the practice of M&A inKorea:
1. Introduction of New Forms of Business Entities (Limited Partnerships and Limited Liability Companies)
The amendments introduce limited partnerships modeled after LPs in theU.S., which consist of general partner(s) and limited partner(s). The amendments also provide for limited liability companies modeled after LLCs in theU.S., which acknowledge the limited liability of members even while granting them autonomy to establish, manage, and structure the organization of the company.
These new forms of business entities will provide investors with access to a wide range of new investment options and are expected to facilitate investments, especially by providing alternative business structures to private equity funds and start-up companies.
2. Introduction of Squeeze Outs
The amendments also permit squeeze outs – i.e., the compulsory acquisition by a controlling shareholder (with a stake of 95% or more) of shares held by minority shareholders at fair value. In exchange, minority shareholders may require a controlling shareholder to purchase their shares at a fair price.
3. Improvements to Laws Governing Mergers – Cash-Out Mergers, Etc.
It has been unclear whether the surviving company in a merger could pay only cash as consideration for the stock of the company being merged. Under the amendments, however, the surviving company in a merger may pay the shareholders of the company being absorbed in just cash or bonds, without delivering any new shares of the surviving company to such shareholders.
Also, mergers may currently be approved by a resolution of the board of directors (in lieu of obtaining approval at a general meeting of shareholders) if the new shares issued by the surviving company represent 5% or less of the total issued shares of the surviving company. The amendments increase this small-scale merger threshold, though, from 5% to 10%.
4. Diverse Stock Types
Prior to the recent amendments, companies could issue shares with no voting rights only if such shares were classified as preferred shares. However, following the amendments, companies will be able to issue shares with no voting rights or restricted voting rights regardless of whether such shares are common shares or preferred shares (provided that the collective percentage of non-voting shares and shares with restricted voting rights shall not exceed 25% of the total issued and outstanding shares). Also, conversion rights and redemption rights, which are currently permitted for preferred shares only, will be allowed for all types of shares. Further, companies (and not just shareholders) will be permitted to exercise such conversion rights and redemption rights. The added flexibility resulting from these changes will make it easier for companies to raise capital.
In addition, the amendments will allow companies to issue no-par value stock, which is currently prohibited.
5. Relaxed Restrictions on Acquisition / Disposition of Treasury Stock
The KCC strictly limits the circumstances under which companies may acquire treasury stock, in an effort to regulate companies’ capital adequacy. However, the amendments will allow companies to acquire treasury shares in an amount up to their distributable profits. According to the amendments, companies will also be able to freely dispose of their treasury stock after approval of the board of directors, as long as such disposition is not prohibited by the articles of incorporation.
6. More Flexible Use of Legal Reserves.
The disposition of legal reserves has been strictly restricted by the KCC. Following the amendments, however, the shareholders of a company can resolve to use the legal reserves exceeding 150% of the company’s capital to pay dividends or for certain other purposes. This change will allow companies to distribute excess legal reserves to shareholders without having to transfer their reserves to capital or undergo a capital reduction.
7. More Flexible Dividend Policies
Pursuant to the amendments, dividend payments can be approved by the board of directors of a company in certain cases, instead of always having to be approved at a general meeting of shareholders, which can be an extended process. The amendments also allow the payment of non-cash dividends in addition to cash dividends.
8. Improving Regulations on Bond Issuance
Ceilings on the total permitted issuance amount of bonds will be abandoned. Further, the amended KCC will provide a legal basis for issuing a variety of bonds, including participating bonds.
9. Prohibition of the Appropriation of Business Opportunities; Expanded Restrictions on Self-Dealing Transactions
A new provision will be added to the KCC that prohibits directors of a company from causing certain of their relatives or other third parties from appropriating business opportunities that would be beneficial to the company, unless it is approved by more than two-thirds of the board members of the company.
Also, following the amendments, restrictions on self-dealing transactions (which currently apply only to directors) will apply to directors and major shareholders, certain relatives of such directors and major shareholders, as well as affiliated companies. Such self-dealing transactions will have to be approved by more than two-thirds of the board members and must be on an arm’s length basis.
10. Reduced Liability for Directors
There are currently no provisions in the KCC that provide for a reduction in director liability, except for a provision that allows shareholders to unanimously resolve to exempt a director from liability. The amendments, however, limit directors’ liability to their most recent annual salary multiplied by six (6) (in the case of outside directors, the multiple is three (3)); provided that this limit will not apply to damages resulting from a director’s willful misconduct or gross negligence.
11. Elimination of Various Restrictions on Limited Companies
The amendments will eliminate the restriction on the number of members a limited company (yuhanhoesa) may have and will allow the free transfer of membership units to third parties (provided that such transfers may be subject to restrictions set forth in the articles of incorporation). The amendments will also allow limited companies to convene general meetings of members by providing notice to members through electronic documents, subject to the members’ consent. Furthermore, limited companies will be permitted to relax the current requirement to obtain approval at a general meeting of members prior to converting the company to a joint stock company (jusikhoesa), by specifying the modified approval requirements in their articles of incorporation.