SOUTH KOREA Law and Practice Contributed by: Kyu Seok Park, Dahye Cho and Justin Kim, Lee & Ko
• no litigation prohibiting the consummation of the transaction; and • in the case of a standalone “no material adverse effect” provision, the condition becomes a key point of negotiation. Limiting conditions to regulatory conditions is not typi - cal, and financing conditions are rarely found in acqui - sition documentation. Third-party consent conditions are included on a case-by-case basis, but infrequent - ly, and in the case of a change of control provision in contracts with key customers, the deal may be condi - tional upon procuring the relevant consents. Termina - tion of these contracts may otherwise be deemed to be a material adverse effect. Shareholder approval is included as a condition (only) when legally mandated (eg, transfer of all or a material part of a business). 6.5 “Hell or High Water” Undertakings It is not common for a private equity-backed buyer to accept a “hell or high water” undertaking in deals with a regulatory condition. However, it is sometimes accepted in the bidding process by a fund investor that has no specific competing business in its portfolio to gain an advantage over the other bidders. There is often a distinction between merger-control and foreign investment conditions where, unless the underlying target’s assets consist of national core technology resulting in greater foreign investment scrutiny, the “hell or high water” undertaking typically relates to matters of merger control. 6.6 Break Fees In private equity deals, break fees or reverse break fees are not ordinarily used. If break fees are prescribed in the acquisition documentation, however, reverse break fees are generally also prescribed therein. When prescribing break fees, the Korean Civil Code estimates the fees to be the liquidated damages and if the court finds that the amount is excessive in comparison to the actual damages, the fees can be reduced. Therefore, most documentation deems the break fee to be a monetary penalty because although the Korean Supreme Court has held that even in the case of a monetary penalty, the courts can partially invalidate the amount, the monetary penalty must be
“in contravention of public order and standards of public decency” to qualify for the reduction. The triggers and amounts of break fees vary greatly from one deal to another, but a common trigger in deals involving private equity funds is when a party fails to consummate closing despite all closing condi - tions having been satisfied. 6.7 Termination Rights in Acquisition Documentation Apart from termination by mutual agreement, the typical circumstances of termination in private equity transactions are mainly as follows and do not differ from those of general M&A: • if either party (materially) breached the representa - tions and warranties or did not perform (in material respects) the covenants prior to closing and failed to cure this within a certain period; or • if the closing has not occurred on, or prior to, the long-stop date, which is typically three to six months following signing (or in a deal with antitrust concerns, nine to 12 months). 6.8 Allocation of Risk In transactions where a private equity fund is the seller, and, in particular, where the fund was solely established to invest in the target company, the sell - er’s interest lies in prompt distribution and liquidation, and, as such, it typically rejects any additional allo - cation of risk post-closing (ie, clean exit). Previously, funds achieved this purpose by bearing liability and providing an escrow for breach of representations and warranties on a short-term basis. More recently, it has become common practice for private equity sellers to limit their liability by demanding the buyer subscribe to W&I insurance and only bearing liability in the case of fraud. In transactions where a private equity fund is the buy - er, there are no notable differences with transactions involving general corporate buyers. 6.9 Warranty and Indemnity Protection As explained in 6.8 Allocation of Risk , private equi - ty sellers normally provide general warranties in the same manner as corporate sellers but attempt to lim -
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