SOUTH KOREA Law and Practice Contributed by: Kyu Seok Park, Dahye Cho and Justin Kim, Lee & Ko
10. Exits 10.1 Types of Exit
between private equity and a strategic investor, the private equity fund often seeks drag rights that can force the strategic investor to sell its shares at the time of the fund’s sale of its shares carrying manage - ment rights. Conversely, where the fund makes a minority invest- ment, it often seeks drag rights against the controlling shareholder in preparation of any potential failures to exit via an IPO or other primary exit mechanisms (eg, failed put option). In the scenarios presented in 8.1 Equity Incentivisa- tion and Ownership where the founder remains as a controlling shareholder, or where the private equity fund makes a minority investment, it is typical prac - tice for the minority shareholder to hold tag rights in the case of the controlling shareholder’s disposition of shares that carry management rights. Although thresholds are not typically prescribed for tag rights (ie, prorated tag-along), change of control is a com - mon threshold (eg, where 50% or more of the shares of the target are disposed by the controlling share - holder). 10.3 IPO Under the KRX regulations, a mandatory lock-up obli - gation is imposed for six months where shares were acquired from a company conducting an IPO, or the largest shareholder and its affiliates thereof, within one year from the date of the company’s application for preliminary examination for listing. However, if the relevant market is the KOSDAQ mar - ket, not the KRX market, the mandatory lock-up peri - od is shortened to one month for private equity funds even if the relevant acquisition was made as above. As discussed under 10.1 Types of Exit , until several years ago the KRX did not allow the listing of com - panies in which the largest shareholder was a private equity fund, but today, the KRX allows IPOs of these companies, and private equity-led IPOs are no dif - ferent.
Until several years ago, while there were no explicit regulations, the KRX did not allow the listing of com - panies in which the largest shareholder was a private equity fund and, accordingly, the exit strategy of pri - vate equity funds was limited to a private sale. How - ever, today, the KRX allows IPOs of these companies and IPO precedents are building, with a growing num - ber of funds targeting an IPO as their key exit strategy. This is most applicable to investments to obtain con - trol of the target because, for minority investments in a target expected to conduct an IPO in the near future, the exit strategy becomes more complex, with: • partial sales of shares pre-IPO; • sale during the IPO; and • sale of the remaining shares in a post-IPO block deal. Although infrequent in practice, there are instances where a partial exit is accommodated through recapi - talisation prior to the final sale and/or IPO of the target. Subject to individual circumstances of the target and the relevant private equity funds involved, it is often the case that the most preferred exit strategy will be employed, whether that be in the form of a private sale, IPO or recapitalisation, and it is uncommon to concurrently pursue a dual or triple track exit. Reinvestment Upon Exit Generally, private equity sellers incorporated under Korean law do not reinvest upon exit. 10.2 Drag and Tag Rights It is not typical for a private equity fund holding a con - trolling stake of 50% or greater to also hold drag rights against the minority shareholders for its exit. However, where the existing largest shareholder or management remains as a minority shareholder, there are instances of the fund seeking drag rights and, in turn, the minor - ity shareholders seeking tag rights. On a separate note, in an M&A transaction involving a consortium
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