SOUTH KOREA Law and Practice Contributed by: Kyu Seok Park, Dahye Cho and Justin Kim, Lee & Ko
4.2 Vendor Due Diligence Although vendor due diligence is generally not a com - mon feature, in comparison to transactions involving a typical corporate seller, transactions involving private equity sellers are more likely to feature vendor due diligence or fact-books, particularly in the context of an auction sale. While there may be instances where advisers attach a liability cap to the vendor due dili - gence reports upon providing credence thereto, the status quo is non-reliance. This also applies to buy- side diligence reports. Most private equity funds are acquired through pri - vate treaty sale and purchase agreements. Although auction sales are often held for larger-scale M&A, privately negotiated transactions are more common across the board. Tender offers, on the other hand, are rarely carried out in Korea. However, from 2023 there have been several high-profile tender offers involv - ing private equity buyers such as MBK and Unison Capital Korea (UCK) Partners’ tender offer for Oss - tem Implant, IMM PE’s tender offer for Hanssem, and Hahn & Company’s tender offer for Lutronic. 5. Structure of Transactions 5.1 Structure of the Acquisition There are no notable differences between the terms of a privately negotiated transaction and the terms of an auction sale. However, it is often the case in auction sales that seller-friendly terms (eg, material adverse effect bring-down, warranty and indemnity (W&I) insurance) are agreed upon from a closing cer - tainty or seller’s clean exit perspective. 5.2 Structure of the Buyer In Korea, although private equity funds sometimes become party to the transaction, it is more often the case that a special-purpose company that the fund incorporated for such purpose (investment purpose company, or IPC) becomes involved in the acquisi - tion documentation. In order to limit liability exposure, funds are expected to maintain the current deal prac - tice of utilising IPCs for acquisition documentation purposes. Inbound investments by overseas funds are also structured in the same way by utilising IPCs.
5.3 Funding Structure of Private Equity Transactions Financing of Private Equity Deals For private equity funds under the FISCMA, the deals are normally financed by contributions from the inves - tors of the fund. For funds that apply a leverage strat - egy, the IPC may additionally secure financing, but under the current FISCMA, the leverage ratio thereof is restricted at 400%. As there is judicial precedent holding that providing assets of the target as secu - rity for the acquisition financing of the IPC may be deemed to be a breach of fiduciary duty of the target’s directors, acquisition financing is not secured by the target’s assets under Korean law. Acquisition financ - ing is instead secured by the assets of the borrower, the IPC, such as the target shares that the IPC is to acquire through the deal. Equity Commitment Letters Private equity funds that are blind funds in posses - sion of considerable assets under management or dry powder are not often required to furnish equity or debt commitment letters. Apart from such instances – particularly if project funds or other debt financing sources are employed – equity or debt commitment letters are more likely to be requested from these blind funds. Furthermore, in the Korean M&A market, a con - tract deposit representing 5% to 10% of the purchase price is commonly requested by the sell side, in which case private equity buyers often satisfy this require - ment by furnishing equity or debt commitment letters. For overseas funds, equity commitment letters and debt commitment letters are provided in most instanc - es. Typical Private Equity Deals In the past, private equity funds favoured control deals (eg, buyouts), but minority-stake investments have become more frequent as of late. In particular, large- scale private equity funds and overseas funds have been very active in conducting pre-IPO investments and other minority investments. 5.4 Multiple Investors In buyout investments, it is uncommon for a consor - tium of private equity sponsors to collectively enter into a transaction, while in minority investments, it is
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