Kim & Chang successfully represented the purchaser in an indemnification claim against the seller for a breach of representations and warranties and covenants under an asset purchase agreement (the “Agreement”).

In December 2016, the purchaser and the seller entered into the Agreement for the sale and purchase of certain assets pertaining to a certain business segment of the seller, including the inventory of certain products.  In the Agreement, the seller represented and warranted that its business practices had been conducted for a specific period, and covenanted to conduct its business until the closing, and provided an indemnity to the purchaser for damages arising from a breach of the seller’s representations and warranties and covenants.   However, prior to the closing of the Agreement, the seller sold a large volume of certain products it had previously ordered and purchased from its supplier to a certain customer, which ordinarily would have been sold and delivered to such customer in the spring of 2017.  In accordance with the purchase price determination mechanism agreed to between the parties, the  increased sale of the seller inflated the relevant business’ sales revenue for 2016, which  in turn resulted in an artificial increase of the purchase price for the assets purchased and sold between the parties.

Kim & Chang acted on behalf of the purchaser to seek and litigate a damage claim against the seller arising from the seller’s business activities, which essentially amounted to “channel stuffing,” in violation of the ordinary-course-of-business based representations and warranties and covenants set forth in the Agreement.

Following a lengthy trial, the Seoul Central District Court accepted most of Kim & Chang’s arguments and found that the seller had conducted its operations outside the ordinary course of business and was liable to indemnify the purchaser for its damages arising from the seller’s breach of its representations and warranties and covenants.  The Court limited the purchaser’s recovery to a portion of the damages amount claimed by the purchaser.  However, upon the seller’s appeal of the case to the Seoul High Court, the Seoul High Court recognized and awarded damages to the purchaser in the full amount originally claimed by the purchaser.  The Supreme Court of Korea ultimately affirmed the High Court’s decision, dismissing the case without a Supreme Court trial.

Kim & Chang acted for the purchaser in the asset purchase transaction, participating in the negotiations of the Agreement.  Following the closing of the asset purchase, Kim & Chang actively assisted the purchaser in developing arguments and establishing that the seller had artificially inflated its revenue and, as a result, the purchase price of the actual transaction.  A forensic review was also conducted for the purpose of collecting evidence.  More specifically, through a forensic review, Kim & Chang could identify certain evidence that were instrumental in establishing that the seller sold its inventories to a certain customer ahead of ordinary course of business timeline.  Subsequently, Kim & Chang successfully proved the damages to the purchaser by establishing a link between such channel stuffing and the increased asset purchase and sale price.

This case illustrates the importance of a seamless and continuous service not only until the closing of an M&A transaction, but also after the closing to potentially review, develop, frame and implement a dispute strategy associated with the M&A transaction.  The purchaser’s desired outcome would not have been achievable without an interdisciplinary collaboration among Kim & Chang’s M&A, litigation, and forensic practices.