SOUTH KOREA Law and Practice Contributed by: Kyu Seok Park, Dahye Cho and Justin Kim, Lee & Ko
responding to the non-compete undertaking can be proved and the undertaking is not in place for an excessive duration. Although this undertaking is determined on a case-by-case basis, it is under - stood that the validity thereof is likely recognised for six months to one year and the validity of any period exceeding one year may not be so readily recognised. Such undertakings are often stipulated in employment contracts. 8.5 Minority Protection for Manager Shareholders For the reasons provided in 8.1 Equity Incentivisa- tion and Ownership , manager shareholders generally do not enjoy any protection other than tag rights nor carry any substantive influence over the exit or con - trol of the private equity fund. However, depending on the equity ratio and importance in company business of the manager shareholders, matters of protection or influence can be settled differently. If the manager shareholder holds a high equity ratio and is key to the company business, rights akin to a minority share - holder’s rights in a joint venture could be negotiated for the manager shareholder, including anti-dilution protections. 9. Portfolio Company Oversight 9.1 Shareholder Control and Information Rights Private equity fund shareholders with majority shares tend to exercise de facto control over the portfolio companies by appointing directors. On the other hand, where a fund invests as a minority shareholder, it is typical for the fund to enter into a shareholders’ agreement with the controlling share - holder and obtain the right to appoint at least one per - son to the board of directors, veto rights over major management matters, and information rights. With respect to the veto rights, while they vary on a case-by-case basis, funds tend to demand veto rights over change to capital or governance structure or transactions concerning assets, capital expenditure or loans, or related-party transactions, over a certain monetary threshold. However, if the largest sharehold -
er seeks to consolidate its accounts with those of the target company, the consultation on veto rights tends to centre on pure minority protection rights, exclud - ing matters on business plans, budgets, the appoint - ment of representative directors and other ordinary business activities (as veto rights on such operational matters granted to the fund could be seen as stripping control of the largest shareholder, thereby undercut - ting its efforts to consolidate accounts with the target company). 9.2 Shareholder Liability The Korean Supreme Court interprets the circum - stances where the corporate veil may be pierced very narrowly, and where the portfolio company is operated in compliance with the general procedural require - ments of corporate governance, the courts are very hesitant to do so. In one case, the court held that it is natural for over - laps to exist between the personnel of a parent com - pany and those of its subsidiaries. The mere fact that the executive management team of the parent company holds similar positions in its subsidiaries, or that the parent company exercises control by virtue of owning all of the issued shares of its subsidiaries (or even that the subsidiaries’ businesses and operations have expanded without their capital being increased), is not sufficient reason to view such relationships as abuse of separate legal personalities (ie, corporate veil) in relation to obligations owed by subsidiaries to creditors. Something more fundamental is required for such abuse to be seen, like the total absence of a subsidiary’s independent existence or will to operate whereby its operations are essentially run by the par - ent company one and the same as part of the parent company’s own business. In particular, it must be objectively apparent that the business and assets of the parent company and those of its subsidiaries, including as to external commercial transactions, cannot be distinguished or clearly sepa - rated. In addition, there must be a subjective element present, namely an intention to avoid the application of law to the parent company or the intention to abuse the corporate veil by utilising the subsidiaries as a purely credit-proofing measure in dealing with credi - tors.
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