The Mergers Acquisitions Review Kim Chang by alicejenny


									The Mergers &

     Second Edition

      Simon Robinson

 Law Business Research
                                      chapter	29

                        Jong Koo Park, Hyun Ho Eun and Michael Yu *

I	     OvervIew	Of	2007-2008	ActIvIty

M&A activity in the Asia-Pacific region has continued to grow from a level of $780
billion in 2007 to $551 billion for just the first half of 2008. M&A activity across the
Asia-Pacific region was also marked by three major transactions (BHP Billiton, China
Unicom, Westpac Banking) which accounted for a full one-third of total deal volume
for the first half of 2008. While there were deals of significant volume in Australia
and China, Korea was a strong performer in terms of deal count, reflecting a 22 per
cent increase in the number of announced transactions from the same period in 2007.
During the same period, quarterly deal volume rose from a level of approximately $8
billion in the first quarter of 2007 to $14 billion in the first quarter of 2008.1
        Significant deals that were announced in 2007 and 2008 include:
a       the sale of Homever Co, Ltd, a large-scale retailer by E-Land Ltd to Tesco Plc,
        valued at $2.2 billion (May 2008);
b       the acquisition of cable company C&M Co, Ltd by MBK Partners and Macquarie
        Group, valued at $2.3 billion (March 2008);
c       Kumho Asiana’s acquisition of logistics company Korea Express, valued at $4.3
        billion (January 2008);
d       the sale of equity stake in Hanaro Telecom Inc by a consortium led by American
        International Group, Inc to SK Telecom, valued at $1.2 billion (December
e       the acquisition of Korea Exchange Bank by HSBC Holdings Plc from Lone Star
        Funds, valued at $6.3 billion (September 2007);

*      Jong Koo Park, Hyun Ho Eun and Michael Yu are attorneys at Kim & Chang.
1      Bloomberg, ‘2008 Q2 Asia Pacific M&A Legal Advisory League Table’, 1 July 2008.


f      the acquisition of Bobcat utility equipment and attachments business units by
       Doosan Infracore Co, Ltd and Doosan Engine Co, Ltd from Ingersoll rand Co,
       Ltd, valued at $4.9 billion (July 2007); and
g      the acquisition of equity interest in S-oil Corporation by Hanjin Energy, valued
       at $2.3 billion (March 2007).

II	    G
       	 enerAl	IntrOductIOn	On	the	leGIslAtIve	M&A	

The Korean Commercial Code (‘KCC’) provides for the general business and corporate
laws governing Korean companies, including laws relating to the incorporation of a
company, the acquisition of shares, business transfers, mergers, spin-offs, corporate
splits and other transaction structures. If the acquisition involves shares of a company
listed on the Securities Market Division (‘the KoSPI market’) or the KoSDAQ Market
Division of the Korea Exchange, the Securities Exchange Law (‘SEL’) and other related
rules and regulations will apply. M&A transactions are also subject to the business
combination reporting requirement under the Monopoly regulation and Fair Trade Law,
which is enforced by the Korea Fair Trade Commission.
        Foreign investment in Korean companies are also regulated and subject to certain
reporting requirements under the Foreign Investment Promotion Law (governing foreign
direct investments) and the Foreign Exchange Transaction Law (governing portfolio
        Acquisition in particular industries such as finance, telecommunications, and
defence may also be subject to certain industry-specific laws and regulations. For
example, an acquisition of a bank would be subject to approval by the Financial Services
Commission under the Banking Law. Also, acquisitions of companies under corporate
restructuring proceedings will be subject to the Corporate restructuring Act and
supervised by the court and the court-appointed receiver.
        As noted in Section III, infra, there are pending proposals that are expected to
be reviewed in the next session of the National Assembly for amendments to both the
KCC and SEL.

III	   	 evelOpMents	In	cOrpOrAte	And	tAkeOver	lAw	And	
       theIr	IMpAct

The primary development which will impact the conduct of mergers and acquisitions in
the near future is the proposed amendment of the KCC.
       In recent years, the Ministry of Justice had proposed several amendments to
the KCC. The first set of revisions were proposed in 2007 and a second set has been
proposed following from a separate legislative effort to replace the existing Securities
Exchange Law with the provisions of the Law on Capital Markets and Financial
Investment Industries (effective as of February 2009).
       on the expiry of the 18th session of the National Assembly, the two
aforementioned proposals for revisions (‘the revisions’) expired, as they were not


adopted. However, the Ministry of Justice is widely expected to resubmit the revisions
in September 2008.
        The following are the key features of the revisions that would affect M&A
activity in Korea.

i	     Diversification	of 	forms	of 	merger	consideration
Under Article 523, Item 4 and Article 523-2 of the revisions, in the case of a merger,
the shareholders of the merging company may receive shares of the surviving entity
or other monetary consideration or the shares in the parent company of the surviving
entity, thereby allowing for greater flexibility in the choice of consideration for a merger.
Under the current KCC, the only recognised form of consideration is shares of the
surviving entity itself. With increased flexibility in terms of consideration, more diverse
forms of merger structures (including triangular mergers) are expected to be used in
future under the revisions.
         In addition, the revisions change the applicable thresholds for a ‘small-scale’
merger, which is a structure that does not require approval by the shareholders of the
surviving entity. Under Article 527-3, Section 1 of the revisions, if the shares issued in
connection with the merger amount to no more than 10 (previously 5) per cent of the
issued shares of the surviving entity, and the amount of merger consideration amounts
to no more than 5 (previously 3) per cent of net asset value, then only the approval
of the board of directors of the surviving entity will be required (unless provided
otherwise in the applicable articles of incorporation). By enlarging the scope of the
‘small-scale’ merger exception, the intent is to save both time and effort by doing away
with the shareholder meeting requirement in case of mergers that are deemed not to be
a significant transaction to the surviving entity.

ii	    Exception	from	complex	in-kind	contribution	procedures
Under the current KCC, an in-kind contribution is required to undergo a relatively
complex set of procedures including certification of the value of the contributed assets
by the court. Under Article 299, Section 2 of the revisions, where (i) the amount of
contributed assets is less than 20 per cent of the total capital and less than an absolute
value to be provided in the Presidential Decree promulgated under the revisions; (ii) the
contributed assets consist of listed securities for which a market price is available and
for which the market value does not exceed a certain limit determined in accordance
with the Presidential Decree; or (iii) other exceptions based on the above exceptions as
determined in the Presidential Decree, then the certification procedures may not apply.

iii	   R
       	 ecognition	of 	‘squeeze-out’	procedure	to	obligate	sale	of 	shares	by	minority	shareholders
To avoid unnecessary expenses in conducting shareholders’ meetings as well as to
provide a means by which minority shareholders can redeem their shares, Article 360-24
to 360-26 of the revisions now provide for ‘squeeze-out’ provisions allowing the major
shareholder (with at least 95 per cent of the outstanding shares) to oblige the minority
shareholders to sell their shares as well as providing a right for minority shareholders to
cause the major shareholder to purchase their shares. In each case, the applicable price


will be determined in the first instance by negotiation between the parties, and, in the
absence of such agreement, by the courts.
       Through the above types of changes, the Ministry of Justice intends to allow for
greater flexibility in structuring M&A transactions.

Iv	    fOreIGn	InvOlveMent	In	M&A	trAnsActIOns

The following is a general review of trends in foreign direct investment (‘FDI’) in Korea
comparing the first half of 2008 against the first half of 2007.2

i	     General	summary
During the first half of 2008, FDI in Korea increased by 35 per cent compared with the
first half of 2007 ($3.4 billion in 2007; $4.5 billion in 2008). This increase follows a sharp
decline in FDI experienced during 2007.
        Specifically, FDI in Korea during the first quarter of 2008 increased 61.8 per cent
from the same period in 2007. Also, during the first half of 2008, FDI from foreign
investors with $100 million or more invested in Korea amounted to $1.451 billion – an
increase of 478 per cent from the same period in 2007.

ii	    Industry	breakdown
FDI in service industries totalled $2.807 billion during the first half of 2008, representing
the biggest share (61.8 per cent) of total FDI in Korea during the foregoing period from
any single industry and representing an increase of 29.9 per cent from the first half of
2007. Within the service industry, investments in finance and insurance market and real
estate rental market during the first half of 2008 increased by 151.1 and 33.5 per cent
respectively from the first half of 2007.
        FDI in Korea’s manufacturing industry during the first half of 2008 totalled
$1.652 billion, an increase of 41.8 per cent from the same period a year ago. Within
manufacturing industry, investments in chemical and non-metallic mineral sectors
increased by 157.4 and 833.6 per cent respectively, whereas investments in the metal
sector and the appliances and equipment sector decreased in comparison with the first
half of 2007.
iii	    Investors	
In the first half of 2008, FDI in Korea by investors in the US and Japan increased by
100.4 and 124.1 per cent respectively from the same period a year ago. In addition, FDI
from investors in the EU increased by 35.2 per cent from the first half of 2007.
       FDI from US investors in the Korean service industry during the first half of
2008 amounted to $519 million, an increase of 163 per cent from the same period in
the previous year. Japanese FDI in the Korean parts and accessories sector and materials

2       Data in Section IV is based on figures cited in a press release of the Ministry of Knowledge
        and Economy dated 4 July 2008, entitled ‘Trends in FDI for First Half of 2008’.


sector during the first half of 2008 totalled $386 million, an increase of 208.7 per cent
from the first half of 2007. European FDI in the Korean chemicals, electronics/electric
equipment and finance/insurance sectors during the first half of 2008 increased by
847.1, 173.3, and 323.6 per cent respectively from the first half of the previous year.
iv	    Greenfield	and	M&A	investments
During the first half of 2008, foreign investors made $3.2 billion in the form of
greenfield investments (investment in new assets) in Korea, an increase of 36.1 per cent
from the same period in 2007.
       Due to an increased FDI in the non-metallic minerals sector, chemicals sector,
and electronics/electric equipment sector, foreign greenfield investments in the
manufacturing industry during the first half of 2008 increased by 31.9 per cent from the
same period in 2007, totalling $1.082 billion. Additionally, foreign Greenfield investments
in the Korean service industry during the first half of 2008 amounted to $2.11 billion,
an increase of 38.8 per cent from the same period a year ago.
       In comparison to foreign greenfield investments, during the first half of 2008,
$1.3 billion of foreign M&A investments (investment in existing assets) were made in
Korea, an increase of 38.8 per cent from the first half of 2007, which is remarkable
considering that worldwide M&A investments during the same period decreased by 35
per cent from the previous year.

v	     New	enterprise	investments	and	current	enterprise	investments		
FDI in Korea may be categorised into those undertaken with respect to new enterprises
and those undertaken in an existing enterprise (established by a prior FDI).
        FDI in new enterprises in Korea during the first half of 2008 amounted to $1.609
billion, an increase of 15.9 per cent from the same period a year ago. Within FDI in new
enterprises during the same period, investments in the manufacturing industry increased
by 54.9 per cent, whereas investments in the service industry decreased by 8.4 per cent
from the first half of 2007. Investments in new enterprises in Korea made by investors
from Canada, Germany, the UK, Singapore, Hong Kong and Taiwan during the first
half of 2008 increased from the same period in 2007. To the contrary, such investments
made by investors from the US, Japan, France and the Netherlands during the first half
of 2008 decreased from the same period in 2007.
        FDI in Korea channelled to those enterprises previously established by FDI
increased by 51.7 per cent from the same period of the previous year, totalling $2.469
billion. Within such FDI, investments in the service industry during the first half of
2008 increased by 73.7 per cent, whereas investments in manufacturing industry during
the said period increased by 2.3 per cent from the same period of the previous year.

vi	    Pending	government	regulations,	activities	and	outlook
Because of high oil prices and global economic downturn, FDI in most nations are
expected to slow down during the second half of 2008. However, the Korean government
is currently in the midst of its Three-Year Comprehensive Plan to Improve Conditions
for Foreign Investors’ and believes that successful execution of such plan would allow it
to achieve its goal of $12 billion total FDI during 2008.


v	     fInAncInG	Of	M&A	:	MAIn	sOurces	And	develOpMents

i	     Recent	trends	of 	acquisition	financing	transactions
In 2007, the total deal volume of announced acquisition financing transactions in Korea
was approximately 15 trillion Korean won, out of which approximately $8.8 billion
was funded by syndicated foreign currency loans. Most of the lead arrangers for such
syndicated foreign currency loans were domestic banks. In this respect, it seems that
foreign banks were affected by the recent liquidity crunch in the international banking
system that started in the second half of 2007 which consequently led to a sharp fall in
foreign banks’ willingness to lend in Korea. For instance, the government-owned Korea
Development Bank had a 55 per cent market share in the syndicated foreign currency
loan market for M&A transactions. This recent trend of domestic financial institutions
dominating the acquisition financing market applied not only for the domestic M&A
market, but also for the cross-border M&A market, i.e., Korean companies acquiring
companies overseas. In November 2007, The Korea Development Bank acted as the
lead arranger for the financing of the acquisition of US company Ingersoll-rand by a
Korean company. In terms of deal volume and in all other respects, this is by far the
largest cross-border M&A deal in Korea.
        In 2008, the total deal volume of acquisition-financing transactions by domestic
and foreign financial institutions decreased drastically. This is because domestic banks
faced increasing difficulties in syndicating their participation in foreign-currency loans,
and it also became more difficult for Korean companies to borrow funds in Korean won
due to the recent increase in interest rates and consequently, all-in costs. Another reason
for a decrease in the number of M&A in Korea seems to be the concern over the flow
of excess capital into the market through domestic acquisition financing, which may
result in higher inflation.

ii	    Major	issues	in	acquisition	financing
The most controversial issue concerning the transaction structure and legal issues of
acquisition financing in Korea is the legality of LBo financing. In 2006, the Supreme
Court of Korea held for the first time that, on the grounds of various specific facts, an
officer of a target company breached his fiduciary duty towards the target company in
an LBo transaction; however, ever since the ruling, there has been controversy over
whether it could be construed as addressing the legality of the LBo transaction itself.
However, in a recent judgment of February 2008, the Supreme Court gave a clearer
standard for the legality of LBo financing by holding that in a case where a target
company assumes certain risks because its assets are provided as collateral in the LBo
financing to acquire such target company, the target company must receive in return
certain counter-consideration relating thereto, such as compensation for the provision
of collateral, etc. In this respect, the issue of whether such standard applies to the
method of establishing special purpose companies for the purpose of LBo financing
is still controversial.
          In any case, it appears that it was the principal intention of the Supreme Court of
Korea to make it clear that the target company’s own benefits should also be considered
in LBo financing.


vI	    eMplOyMent

Under Korean labour and employment laws, if a company is deemed to have selectively
purchased specific assets, it is not deemed to have assumed any liabilities in connection
with employee claims against the transferor except pursuant to an express agreement
executed between the parties. If a company is deemed to have acquired the business
of another entity, it will be bound by the terms of the existing employment agreements
and other commitments to the employees of the transferor by operation of law (unless
the employees voluntarily agree otherwise). In this respect, the result on terms of
employment relationships of a business transfer is similar to the result of a merger.
        Whether a transaction will be viewed as a business transfer depends upon the
totality of the circumstances. As a general principle, the term ‘business transfer’ means
the transfer to the purchaser of all assets, liabilities and employees of a business. For
labour law purposes, however, a business transfer may be deemed to have occurred even
without the transfer of all assets, liabilities and employees, if:
a       the key assets of the business are transferred;
b       the transferor ceases its business;
c       the transferee is thereafter engaged in the same business in which the transferor
        was engaged in prior to the transfer; and
d       most or all employees are transferred as a result of the company’s decision to
        transfer such employees.

With respect to labour and employment-related issues, the trend in the courts has been
to broaden the scope of the definition of a ‘business transfer’, beyond that used for
tax and other purposes. Even where the transfer relates only to a single department or
division, such transfer may be deemed to be a ‘partial business transfer’. For labour law
purposes, a partial business transfer has virtually the same legal implications as an entire
business transfer as far as the affected employees (and employee claims) are concerned.

vII	 tAx

recently, the Korean tax authorities have taken an increasingly aggressive approach to
tax audits, placing significant emphasis on applying the ‘beneficial ownership’ test based
on the substance-over-form principle in connection with capital gains of or dividends to
the foreign entities from the foreign countries with a favourable tax treaty with Korea, and
thereby, leading to assessment of significant amounts of tax. Such aggressive measures
taken by the Korean tax authorities are demonstrated by the increased number of audits
they have been conducted in the past two to three years on various foreign private equity
funds and securities companies operating in Korea. one of the biggest and frequently
raised issues of such audits was that of beneficial ownership.
        In cases of beneficial ownership challenges, the Korean tax authorities found that
there was no material substance in the immediate foreign entity holding assets located in
Korea to the extent such foreign entity is found to have little or no substantial business
operation or purpose. The resulting consequences were the denial of the foreign entity
as the beneficial owner of the assets for tax purposes and finding an alternate beneficial


owner located in a less favourable tax jurisdiction or even in jurisdictions with no double
tax treaty with Korea, in which case taxes were assessed based on domestic tax law.
        However, while there have recently been an increasing number of beneficial
ownership challenges by the Korean tax authorities, we are not aware of any Korean
Supreme Court precedent on the beneficial ownership issue yet and the relevant tax
appeals are currently in process.
        The following is a summary of the most recent revisions to existing tax laws.

i	     Indirect	foreign	tax	credit
To reduce the tax burden of domestic corporations that own foreign subsidiaries, the
scope of indirect foreign tax credit was expanded. If a domestic corporation receives
dividends from an overseas subsidiary, any corporate income tax paid by the foreign
subsidiary in the foreign country would be deducted from the corporate income tax paid
by the domestic corporation as indirect foreign tax credit.
        If a relevant tax treaty does not provide for indirect foreign tax credit or no tax
treaty is applicable, the domestic ownership threshold for an indirect foreign tax credit
has been lowered from 25 to 20 per cent. Thus, if the ownership ratio in the foreign
subsidiary by the Korean parent company is 20 per cent or more, taxes paid by the
foreign subsidiary in the foreign country can be deducted from the corporate income tax
of domestic parent according to a specified formula.
        In addition, an indirect foreign tax credit shall also be applied to the corporate
income tax paid by the foreign ‘grandchild’ company from 2008, according to the
Corporation Tax Law.

ii	    New	partnership	taxation	regime	(Tax	Incentives	Limitation	Law)
In an effort to eliminate double taxation, the Ministry of Strategy and Finance revealed
its plans to adopt a partnership taxation system for general partnerships (Hapmyung-
Hoesa), limited partnerships (Hapja-Hoesa) and limited liability companies (Yuhan Hoesa).
The newly introduced partnership taxation system allows qualified partnerships to be
viewed as pass-through entities for income-tax purposes and does not impose income
tax on the income of a partnership but does impose tax on the income at the level of
each partner.
        The conditions to or procedures related to the partnership taxation system have
not been published yet; however, the system is expected to be effective for partnerships
with taxable years on or after 1 January 2009 upon amending the related laws such as the
Korean Commercial Code and various tax laws within this year.

iii	   Step-transactions	doctrine	(National	Tax	Basic	Law)
Step-transaction doctrine is expressly incorporated into the law, which states that
economic substance prevails when identifying the proper taxpayer or determining
appropriate taxable income with regard to the transaction using an indirect third party
or two or more steps or transactions to obtain unfair tax benefits. This rule should be
carefully considered regarding the beneficial ownership issue.


iv	    Change	of 	tax	base	(Securities	Transaction	Tax	Law)
Previously, the tax base of the securities transaction tax for a share transfer between
foreign related parties was the greater of (i) the actual share transaction price, and (ii) the
share value that is stipulated by the Inheritance and Gift Tax Law. According to a recent
amendment, the latter was changed to the share value that is stipulated by the Individual
Income Tax Law in order to be consistent with analogous provisions applicable to the
corporate income tax and individual income tax.

v	     Deemed	acquisition	tax	(Local	Tax	Law)
A majority shareholder, together with the shares held or acquired by its related parties,
of an unlisted Korean must pay a deemed acquisition tax at the rate of 2.2 per cent (2
per cent in case of vehicles) of the net book value of certain assets of the company
(e.g., real properties, vehicles, golf club memberships, health club memberships) whose
shares are being acquired multiplied by the shareholding ratio. The 2.2 per cent tax rate
is increased to 11 per cent if the assets subject to the deemed acquisition tax are luxury
         The definition of majority shareholder was a shareholder that owns 51 per cent or
more of shares. According to a recent amendment, however, the definition was changed
into ‘more than 50 per cent’.

vi	    Possible/planned	changes	to	tax	laws
Possible or planned changes to tax laws include the following:
a      according to the Ministry of Strategy and Finance (‘MoSF’), the corporate
       income tax rate (including 10 per cent surtax) shall be changed (from the current
       14.3 per cent tax rate for taxable income of 100 million won or less and 27.5 per
       cent for taxable income of over 100 million won) to the following:
       •      from 2008, 12.1 per cent (11 per cent from 2010) for a taxable income of
              200 million won or less; and
       •      from 2008, 24.2 per cent (22 per cent from 2010) for a taxable income of
              over 200 million won;
b      introduction of consolidated corporate income tax system – currently, the net
       operating losses of affiliates cannot be offset against the taxable income of the
       company for corporate income tax purposes. According to the MoSF, changes
       that would enable a consolidated corporate income tax system are being carefully
       considered to increase the flexibility of corporate structuring and to reduce
       the tax burden. According to the latest announcements, taxable income or net
       operating loss of subsidiary can be consolidated with the parent company only
       when the ownership ratio in the subsidiary is 100 per cent ownership; and
c      more business-friendly environment – in various pronouncements, the tax
       authorities have indicated that they will decrease the frequency of tax audits on
       companies and, in an effort to reduce regulatory uncertainty, they may adopt an
       advance ruling system similar to the private letter ruling system in the US.


vIII	 cOMpetItIOn	lAw

Under the new chairmanship of the Korea Fair Trade Commission (‘KFTC’), there has
been some shift in focus of the KFTC’s efforts to enforce the Monopoly regulation and
Fair Trade Law (‘MrFTL’), the main legislation governing antitrust matters in Korea.
More specifically, Chairman Yong-Ho Baek in his inauguration speech in early 2008
indicated that the KFTC would create a market-friendly environment and facilitate the
nation’s economy by relieving market players, especially conglomerates, of excessive
restrictions and regulations.
        At the same time, Chairman Baek expressed his view that regulations on unfair
subcontracting contracts and standardised contracts would be strengthened to protect
the interests of small and medium-sized companies. In addition, in line with global
trends and standards, enforcement of the MrFTL against both global and domestic
cartels and abuse of market dominance has been continuing.
        In relation to its review of business combinations, further summarised below, the
KFTC since late 2007 has amended the filing rules for a business combination report
and the review standards set forth under the MrFTL and the regulations thereunder for
the purposes of narrowing the scope of the business combinations that would trigger
a filing obligation, while requiring a more in-depth review on those filings which do
trigger the relevant thresholds and are submitted for the KFTC’s review.
        recent changes in business combination report filing rules are as follows.

i	     	 Overview	of 	filing	rules
Under Korean law, business combination activities, such as an acquisition of shares or
assets, establishment of a joint venture, or merger, between two offshore (non-Korean)
companies are subject to the business combination filing requirement in Korea if:
a       one party’s total assets or sales are 200 billion won or more (as determined by
        total affiliated companies’ assets or sales on a worldwide basis) and those of the
        other party are 20 billion won or more; and
b       the sales of the acquirer and the acquired in or into the Korean market, in each
        case (as determined by total affiliated companies’ sales in or into the Korean
        market), is 20 billion won or more.

In determining the acquirer’s (and the acquired’s) affiliated companies’ sales in the Korean
market, the sales by a company who was an affiliated company of the acquirer (or the
acquired) prior to the business combination and remains to be an affiliated company
after the business combination are counted.
        The filing of a business combination report shall be made, in principle, within 30
days from the closing of the transactions, i.e., the transfer of assets, transfer of shares,
establishment of the joint venture or consummation of the merger, as the case may be.
However, depending on the size of the parties involved and the details of the structure
of the transaction, the business combination report may need to be filed within 30 days
of execution of a definitive agreement and clearance must be obtained prior to the
closing. The KFTC has initially a 30-day review period, which may be extended for an
additional 90 days at its discretion.


ii	    	 Amendment	to	the	filing	rules	and	review	standard
The Enforcement Decree of the MrFTL has been amended twice since late 2007 to
provide new thresholds for the size and Korean sales test in determining whether the
business combination report filing obligation is triggered. First, the threshold for the
total assets or sales of the larger party was increased from 100 billion to 200 billion
won, effective from 1 July 2008. Second, the threshold for the total assets or sales of the
smaller party was increased from 3 billion to 20 billion won, effective from 4 November
2007. Further, the threshold for the Korean sales for both parties was increased from 3
billion to 20 billion won, effective from 4 November 2007. The consequence of these
changes is that now a smaller number of business combinations fall under the KFTC’s
        on the other hand, for the purpose of making the review standard more in
line with the global standards, the KFTC switched from a market concentration
approach to the Herfindahl-Hirschman Index (‘HHI’) by amending the Merger review
Guidelines effective from 20 December 2007. Further, if a transaction falls within a
newly created safe harbour based on the HHI, the transaction would be deemed to have
no anti-competitive effect and accordingly subject to a simplified review process, while
transactions which fall outside the safe harbour would be subject to in-depth review by
the KFTC.
        Under the amended Merger review Guidelines, in the case of a horizontal
combination, a transaction will be considered to be in a safe harbour if:
a       the HHI is lower than 1,200;
b       the HHI is between 1,200 and 2,500 and the increased HHI by the concerned
        combination is 250 or less; or
c       the HHI is higher than 2,500 and the increased HHI by the concerned combination
        is 150 or lower.

In the case of a vertical or conglomerate combination, the safe-harbour rule applies if:
a      with respect to each party:
       •      the HHI in the particular area of trade participated by the party is less than
              2,500; and
       •      the market share is less than 25 per cent; or
b      the rank of each party in its particular area of trade is fourth or lower.

iii	   	 Pending	amendment	to	the	MRFTL
The latest proposal to further amend the MrFTL was submitted to the National
Assembly on 24 July 2008 for its deliberation. one of the major amendments, which
relates to the business combination filing, is abolition of the deadline of the filing for
the pre-closing obligation, which is currently 30 days from execution of a definitive
agreement. Accordingly, under the amended MrFTL, the submission of a pre-closing
filing can be made at any time before the closing, provided that the KFTC’s clearance is
obtained before the closing.
        other major amendments to the MrFTL proposed at this time include relaxation
of regulations of holding companies, abolishment of restriction on the total investment
amount by conglomerates and introduction of the consent decree system.


Ix	    future	develOpMents	And	OutlOOk

While there are several factors that would point to a downturn in overall global M&A
activity, including the consequences of the US subprime crisis as well as the general
liquidity crunch in the international banking system, and the general negative economic
outlook brought upon by higher oil and commodity prices, it remains to be seen what
long-term effects these factors will have on the Korean M&A market. Major transactions
that took place in 2007 and 2008 showed continued growth in the M&A market, including
a pioneering transaction involving an outbound investment by a Korean company with
respect to an overseas target, as well as a major transaction by a ‘home-grown’ private
equity fund. Another factor which may affect the long-term outlook of the local M&A
market will be the effect of the economic policies implemented by the newly elected
administration of President Myung-bak Lee and whether he will be able to follow
through on his initial promise of a ‘business-friendly’ regulatory environment tending to
foster privatisation, market competition and foreign direct investment.


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