SOUTH KOREA Law and Practice Contributed by: Ho Joon Moon, Sung Min Kim, Allen Hyungi Ryu and Joon Sung Hong, Lee & Ko
9. Exit Strategies and Termination 9.1 Termination of a JV JV arrangements typically start with an indefinite term, and termination of a JV occurs when: • there is a material breach of the JV agreement(s); • a deadlock event occurs; or • a JV partner sells its shares to the other JV partner or to a third-party purchaser. JV arrangements usually come to an end in one of the following ways: • the JV entity is dissolved and liquidated, with the residual assets being distributed to the JV part - ners; or • a JV partner acquires the shares in the JV held by the other JV partner (either through the exercise of a put/call option, or by mutual agreement). The following matters should be carefully considered for termination of a JV. • The scope and duration of the non-compete/non- solicitation obligations. • Where a put/call arrangement is contemplated in (b) if fair market value will be used, whether it will be determined by a third-party appraiser or by mutual agreement, etc. • Where the JV is being liquidated and if there is any IP assigned to the JV by one of the JV partners, whether the JV partner will be able to acquire back such IP (including any derivative IPs). The same applies if there is any important asset that was leased/transferred to the JV by one of the JV partners. • Where one JV partner acquires the shares in the JV held by the other JV partner, and if there is any IP assigned/licensed or key assets loaned/transferred connection with termination of the JV: (a) the applicable exercise price; and to the JV by the exiting JV partner, whether the JV will continue to be able to use such IP or key assets in its business operations (and if so, under what terms). • Furthermore, where the JV will continue with a JV partner as the sole shareholder, the allocation of
risks regarding liabilities that have or will accrue as a result of the JV’s actions prior to its termination. 9.2 Asset Redistribution and Transfers If a JV participant will contribute assets to the JV by way of in-kind contribution, an appraisal by an inde - pendent appraiser (typically an accounting firm or appraisal firm) must be obtained, and the appraisal will be subject to the court’s approval. If the JV will transfer its assets (regardless of whether they are contributed to the JV or originate from the JV) with cash consideration, no such appraisal/court approval (as described in the foregoing) is necessary. However, if the transferee holds at least 10% or more of the total issued and outstanding shares of the JV, the transfer of assets will constitute a “self-dealing” under the KCC, and such transfer will be subject to two-thirds approval of the board of directors. Particular caution is necessary to ensure that transfer of assets between a JV and JV partners is made under arm’s length terms and conditions. If the transfer is carried out at a price (or under the terms and condi - tions) that is not at arm’s length, such transfer could constitute a breach of fiduciary duty issues for direc - tors and/or have tax implications for both the JV and the JV partner. 9.3 Exit Strategy Share Transfer Restriction Under the KCC, transfer of shares may only be restricted by requiring prior approval of the board of directors. The company’s articles of incorporation must expressly provide for such requirement and any other form of restriction (other than board approval) is not permitted. To ensure the shareholders’ ability to recover invested capital, the KCC also provides that if the board refuses to approve a proposed transfer, the shareholder who receives the notice of refusal may demand that the company designate an alternative transferee or purchase the shares. Restrictions on the transfer of shares may also be agreed upon among shareholders through a JV agree - ment or shareholders’ agreement (rather than through the company’s articles of incorporation). A restriction on share transfer imposed under agreements among
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