SOUTH KOREA Law and Practice Contributed by: Ki Wook Kang, Kyung Chun Kim, Junghae Kang and Do Kyeom Kim, Lee & Ko
text because, following the recent amendment to the Commercial Code, a director owes its fiduciary duties to the company and all shareholders, not to certain shareholders. 9.3 Common Defensive Measures Common defensive measures that directors of a target company may take against a hostile takeover can be categorised into proactive and reactive measures. Proactive measures include adoption of defensive strategies such as staggered board elections, lim - its on the number of directors, acquisition of treas - ury shares and requiring supermajority shareholder approval. Reactive measures include third-party allot - ment of new shares, third-party allotment of convert - ible bonds and bonds with warrants, disposition of treasury shares and public offering of new shares. The directors of the target company must comply with rel - evant laws and regulations and satisfy their fiduciary duties when adopting such defensive measures. Defensive measures such as the use of poison pills, multiple voting shares or golden shares are not per - missible defensive measures under Korean law. 9.4 Directors’ Duties When adopting defensive measures, directors must comply with the relevant laws and regulations, the company’s articles of incorporation, as well as sat - isfy their fiduciary duties owed to the company and all shareholders. Any breach of the rules and/or their duties would subject the director to civil liability and/ or criminal sanctions if such breach causes losses or damages to the company. With respect to defensive measure enactments, whether or not issuing new shares or convertible bonds or selling treasury shares to non-hostile par - ties in the context of a hostile takeover infringes upon the pre-emptive rights of existing shareholders and is therefore illegal has been the subject of constant debate. If the issuance lacks a valid business rea - son and therefore it is clear that the main purpose of issuing new shares to a third party is to maintain the current controlling shareholder’s control over a company, the issuance may be found to infringe on
the pre-emptive rights of the existing shareholders in violation of the KCC. 9.5 Directors’ Ability to “Just Say No” The board of the target company is allowed, but not required, to express its opinion on a tender offer. If the transaction involves the issuance of new shares or a merger to which the target company is a party, such transaction cannot be implemented without board approval. Both civil and criminal litigations are common in hos - tile takeover situations, although it should be noted that hostile takeover situations are quite rare in Korea. Litigation (including injunctive relief proceedings) is usually a part of the hostile takeover process. In other non-hostile transactions, minority shareholders rarely bring claims or initiate lawsuits. However, in recent years, minority shareholders have increasingly com - plained about merger ratios or share exchange ratios in the case of mergers involving listed companies or comprehensive share exchanges. Furthermore, law - suits have occasionally arisen in private M&A deals in connection with the return of deposits or breach of representations and warranties. 10.2 Stage of Deal 10. Litigation 10.1 Frequency of Litigation In the case of a hostile takeover, a lawsuit is often brought at the very first stage of determining the inten - tion of the hostile company and the ownership of the shares of the company. It is often the case that the hostile company engages in litigation at the start of the process to grasp the scope or size of the problems of existing management by requesting access to the book of accounts. In friendly deals, the deposit will often be asked to be returned if the deal is terminated midway and com - pensation for damages will be claimed in the case of a breach of representations and warranties. How - ever, in such cases, it is more common for the parties to come to a settlement. In the case of high-profile corporate reorganisations, injunctions contesting the unfair merger or share exchange ratio are generally
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