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Newsletter | December 2013
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CORPORATE |
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Recent Korean Supreme Court Case involving an LBO |
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Recently, the Supreme Court of Korea (the “Supreme Court”) rendered a judgment involving the issue of fiduciary duty under Korean criminal law in a case where cash is upstreamed from the target to a special purpose company via capital reduction and/or dividend.
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The following methods are commonly used in connection with the financing of a leverage buyout (“LBO”): (i) the target company’s assets are provided as collateral for the acquirer’s acquisition financing (asset-backed type), (ii) the acquiring company and the target company are merged post-acquisition so that the target company’s assets can be used as security for the acquisition financing (merger type) or (iii) the target company’s assets are distributed to the acquirer through capital reduction, dividend-out, or share buyback so that they can be used to repay the acquisition financing (capital reduction / dividend type). While LBOs have been utilized in Korea since the early-2000s, the Supreme Court decision in 2006 that an asset-backed type LBO could result in a breach of fiduciary duty triggering criminal liabilities under Korean criminal law has led to many debates on the legitimacy / risks of an LBO transaction in Korea. |
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Related to this matter, the Supreme Court recently held that it was not unlawful for the acquirer to utilize a special purpose company to finance an LBO, and post-closing, to upstream cash from the target to the special purpose company via capital reduction and dividend-out of the target company in order to repay the acquisition financing. In this case, the Supreme Court reasoned that (i) even though the target company’s asset was reduced due to capital reduction and dividend-out, such an undertaking was the shareholder(s)’ due exercise of their rights granted under the law; (ii) given the size / scale of the operating profits and assets of the target company at the time of capital reduction, it could not be said that the creditors of the target company suffered losses from minor flaw in the capital reduction process; and (iii) considering the per share capital reduction amount and the target’s distributable retained earnings at the time, it could not be said that capital reduction and dividend-out resulted in damages to the target company. |
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This decision is the first Supreme Court decision where a capital reduction / dividend type LBO was squarely at issue and the directors were found not guilty of a breach of their fiduciary duty. However, it is worth noting the Supreme Court’s statement that this decision should not be interpreted to legitimizing LBOs in its entirety as a case / facts-specific decision should be made, and that this case only relates to capital reduction / dividend type LBO and therefore, different decisions may be made for asset-backed or merger type LBOs. |
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