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Korea M&A: 2020 Review and Outlook



In 2020, there were 391 M&A transactions in Korea with a total transaction value of approximately USD 44.4 billion, representing an 18% decrease from total transaction value of USD 54 billion (and 458 transactions) in 2019.  The decline in Korea was similar to decreases in M&A activity experienced in other jurisdictions.  Kim & Chang continued to be the top M&A legal advisor in Korea in 2020 both in terms of deal volume and deal value, having advised on 86 transactions accounting for approximately USD 35.3 billion in total deal value (based on Mergermarket statistics). 

As COVID-19 became a global pandemic in early 2020, there was a drastic downturn in Korean M&A activity in the first half of the year, with total transaction value of USD 5.1 billion in Q1, a 56% decrease from the USD 11.7 billion recorded in Q1 2019.  Likewise, Q2 saw a total transaction value of USD 10.9 billion compared to USD 14.4 billion in 2019.  In contrast to the first half of 2020, there was a sustained recovery in Korean M&A activity in the second half.  In Q3, the Korean M&A market recorded total transaction value of approximately USD 8.5 billion, representing a 39% increase from the USD 6.1 billion recorded for the same period in 2019, and in Q4, the total recorded transaction value was USD 20 billion, compared to USD 22.1 billion for the same period in 2019, representing a 10% decrease.

The strong recovery in the second half of 2020 was due in part to the relatively less pronounced impact of COVID-19 on major Korean corporations, many of which maintained strong balance sheets.  The increase in M&A activity in the second-half of 2020 was also partly due to the COVID-19 pandemic having a disproportionally negative impact on certain industries such as airlines, restaurants, oil and gas and leisure, which led to restructuring M&A transactions. 

Continuing the trend from 2019, there were several significant outbound investments by major Korean corporations in 2020, notably in the form of joint ventures.  Following LG Chem's announcement in late 2019 of its USD 2.3 billion joint venture with General Motors for the production of battery cells, in March 2020, Hyundai Motor Group completed its joint venture with Aptiv PLC valued at USD 4 billion for the development of production-ready autonomous driving technologies.  In October 2020, SK Hynix announced its USD 9 billion acquisition of Intel's NAND memory storage business.  In addition, in December 2020, LG Electronics and Magna International announced their entry into a joint venture valued at USD 1 billion for the manufacture of components for electric vehicles, such as e-motors, inverters and onboard chargers.  Finally, Hyundai Motor Group announced in December 2020 of its agreement to acquire a controlling interest in Boston Dynamics from Softbank Group.  

The second half of 2020 also saw a steady flow of mid-sized transactions.  The waste management industry was particularly active, with SK Engineering & Construction Co. acquiring EMC Holdings Co., from Affirma Capital for USD 886 million, a record in the industry.  A consortium of E&F Private Equity and IS Dongseo also acquired Koentec and Saehan Environment from Macquarie Private Equity for approximately USD 417 million, and Kohlberg Kravis Roberts & Co., acquired ESG Co., Ltd. and ESG Cheongwon Co., Ltd., from Anchor Equity Partners for USD 739 million.

In terms of acquisition financing, an increasing number of Korean financial institutions participated in overseas acquisition financing projects to service their clients' outbound investment objectives and to expand their market reach.  We expect this trend to continue. 

Domestic M&A activity was highlighted by large restructuring-driven M&A transactions.  Doosan Group divested large stakes in various affiliates to strengthen its financial position, including its sale of a 53% stake in Doosan Solus to Skylake Investment and the sale of Mottrol BG to a consortium of private equity buyers.  In November 2020, Korean Air announced its USD 1.3 billion acquisition of a 63.9% stake in long-time rival, Asiana Airlines, which had been struggling financially in past years, a situation made significantly worse due to global travel restrictions in connection with COVID-19.  

Finally, private equity sponsors were active in the second half of 2020.  In August, Hahn & Company announced its proposed USD 835 million acquisition of the inflight meals and duty free business of Korean Air.  In September, Affinity Equity Partners and Baring Private Equity Asia announced their USD 974 million investment in Shinhan Financial Group.  Several other private equity deals were also announced in the second half of 2020, including Anchor Equity Partners' proposed USD 226 million investment in KakaoBank. 


The COVID-19 pandemic led to global uncertainty and acute concerns of a recession, which led M&A participants to delay ongoing transactions and their review of M&A opportunities.  However, the continuing ultra-low interest rate environment, combined with record-levels of dry powder and a potential easing of the COVID-19 pandemic through the widespread distribution of vaccines, may very well be ingredients for a robust M&A market in 2021. 

Many Korean companies were able to continue operating their businesses in the ordinary course through the pandemic relatively unaffected, generating stable and consistent cash flows.  According to FnGuide, Korean companies listed on the Korean Exchange held a record USD 493.3 billion in cash reserves as of September 2020, which represented a four-fold increase from 2019.  Private equity sponsors also amassed significant cash resources – according to industry reports, as of Q3 2020, global private equity sponsors were holding a record-high of USD 2.7 trillion in unspent capital.  Korean and Korea-focused private equity sponsors were no exception, with many completing successful fundraising efforts in 2020.  

In 2021, we expect major Korean corporations to continue seeking investment opportunities abroad in diverse industries, in both mature and emerging markets.  Korean corporations continue to actively evaluate investment opportunities in the technology sector in particular and are showing great interest in better understanding IP-related topics such as IP due diligence, licensing and valuation.  Domestically, similar to 2020, we expect a significant number of restructuring and divestiture transactions.  Smaller Korean companies, particularly those involved in heavily impacted industries such as retail, hospitality and tourism, may be subject to voluntary or involuntary restructuring initiatives, which may drive additional M&A activity.  

We also expect a considerable number of previously delayed exit transactions by private equity and venture capital funds.  On February 2021, Coupang, Inc. made its S-1 filing with the SEC to list its Class A common stock on the NYSE.  An IPO by one of the largest e-commerce companies in Korea (with its operations predominantly in Korea) attracted significant investor and media attention.  This IPO, if launched successfully, would result in an attractive exit for its pre-IPO investors, showcasing a success story of venture capital and growth capital investments in a Korean company.  Given the strength of the equity markets, we expect continuing interest in pre-IPO and PIPEs investments by various investors, including traditional buyout funds.  Along with successful exits, however, we also expect to see disputes in connection with significant minority investments by private equity sponsors due to failed or delayed exit transactions.  Private equity sponsors seeking to undertake minority investments will need to carefully consider their rights in compelling exit transactions. 

The COVID-19 pandemic imposed many practical limitations on how M&A deals were conducted.  Travel restrictions, quarantine measures, social distancing rules and the occasional COVID-19 office shutdowns forced adaptations and remote working arrangements.  In-person meetings became far less prevalent, especially for cross-border transactions, and on-site due diligence, management presentations and negotiation sessions were often substituted with virtual solutions.  Overall, Korean M&A participants adapted quickly to the COVID-19 landscape and found novel ways to continue their M&A activities.  As elsewhere, the most significant challenges in 2020 related to valuation and bridging the gap between buyer and seller expectations.  While much market and commercial uncertainty remains, one year into the COVID-19 pandemic, we expect both buyers and sellers to have better visibility into market and industry dynamics, consumer purchasing patterns, supply chain and distribution channels and general business viability, leading to more informed valuation discussions. 

The influence of ESG considerations continue to expand in Korean board rooms, as environmental, social and governance factors are increasingly viewed as key components of corporate strategy, long-term sustainable growth and risk management.  Korean lawmakers have promulgated new laws mandating greater corporate accountability and minority shareholder protections, while tasking regulatory agencies and enforcement arms to aggressively investigate and sanction (including criminal sanctions) employees and companies that are viewed as engaging in behavior harmful to their shareholders, employees, the environment and society as a whole.  ESG will also be an important deal theme for many M&A participants, including pension funds and public companies, which have explicit ESG mandates required by investors and other stakeholders. 

2020 was a remarkable year for special purpose acquisition companies ("SPACs").  Of the record-setting 450 IPOs in the US, SPACs accounted for an astonishing 55.1% of all listings, and 46% of the USD 1.672 trillion raised in the capital markets.  Korea is no stranger to SPACs.  The first SPAC in Korea was formed in December 2009, and SPACs currently account for approximately 45% of all listings on the KOSDAQ market of the Korea Exchange.  Of the 180 SPAC-listings as of May 2020, 85 SPACs successfully completed mergers and collectively experienced an average stock price increase of 45.6%, whereas 43 SPACs failed to find merger partners and were subsequently delisted.  Also, ACE Convergence Acquisition, a SPAC held by Korean private equity firm ACE Equity Partners, priced an IPO valued at USD 200 million on the NASDAQ exchange in July 2020.  Skepticism remains, however, over the use of SPACs.  Difficulties such as identifying suitable acquisition targets and corporate governance requirements lead many market participants to continue to seek traditional forms of capital raises and liquidity. 


In 2020, in-depth econometric analysis (e.g., critical loss analysis, upward pricing pressure), in addition to qualitative assessments, played a significant role in the merger control review by the Korea Fair Trade Commission (the "KFTC") of a number of significant transactions such as Binggrae's acquisition of Haitai Ice Cream and Delivery Hero's acquisition of Woowa Brothers.  In the case of transactions involving rapidly growing markets, the KFTC is expected to place greater emphasis on innovation, whereas traditional anticompetitive effects will continue to be a major consideration in the review of transactions in core materials industries.  

In response to COVID-19 and the urgency of restructuring transactions by struggling corporations, the KFTC has implemented an expedited review of restructuring-driven M&A transactions, such as Jeju Air's acquisition of Eastar and Hyundai Oilbank's acquisition of SK Networks' gas station business.  This practice is expected to continue throughout 2021.  

In 2021, the KFTC will introduce a "size of transaction" test for M&A transactions, which will require notification when the transaction size exceeds a specific threshold, even if the traditional purchaser/target assets or turnover thresholds are not met.  The KFTC will implement updates to its enforcement decrees, filing requirements and review guidelines for such transaction-based test, including the applicable thresholds and other requirements.  This is expected to have a particularly direct impact on M&A involving innovative companies, which often see higher valuations relative to their assets or revenues.  


Recent amendments to the Korean Commercial Code, enacted as of December 29, 2020, have strengthened the rights and interests of minority shareholders.  Minority shareholders who hold more than one percent of the issued and outstanding shares in a publicly listed company may bring a derivative action for breach of fiduciary duty claims against directors of a subsidiary in which the company holds 50% or more voting shares, as well as against subsidiaries one-level beneath such subsidiary.  With the increased risk of multi-level derivative suits, directors of a joint venture company, where there is a Korean partner with minority shareholders, are exposed to an increased risk of derivative suits by the minority shareholders of such Korean partner company.  Accordingly, this places greater emphasis on the need to maintain adequate internal controls and to implement reasonable information and reporting systems.  

In addition, for listed companies, a separate election must be held for at least one director who will become an audit committee member.  In such election, each shareholder may exercise its voting rights only up to three percent of the total issued and outstanding shares of the company.  As a result, minority shareholders have greater rights to appoint a director, and is a factor to be considered for transactions. 


Historically, the possibility of invoking material adverse effect ("MAE") to terminate a transaction was viewed as unlikely to withstand court challenge (although the courts have recognized one MAE case in the past).  2020 saw an increasing number of litigation by Korean companies in Korean courts alleging the occurrence of an MAE or otherwise exploring the possibility of invoking an MAE as a viable termination strategy.  

On October 15, 2020, the Supreme Court of Korea rendered a highly anticipated decision on the case commonly known as the "Hi-Mart case."  In connection with a leveraged buyout ("LBO") of the target, the investor established a special purpose company ("SPC"), which was funded through a combination of debt and equity.  The target also borrowed funds from the same debt financing sources as the SPC for its own purposes, under the same loan agreement and pledged its real estate assets as collateral.  The SPC eventually merged with the target, and the target assumed the SPC's indebtedness by operation of law.  The issue was whether the largest shareholder of the target, an individual who served as a director of the target's board, breached his fiduciary duties in approving the loan arrangement, and in particular the provision of target assets as collateral.  The appellate court held that the defendant did not breach his fiduciary duties owed to the target, but the Supreme Court overturned, finding that the lien (kun-mortgage) on the target's real property provided to the lenders also secured the indebtedness of the SPC and gave rise to a breach of fiduciary duty on the part of the defendant, as a director of the target.  Further, although not serving as the basis for its determination, the Supreme Court noted that the merger did not confer any value or benefit to the target, as the target did not receive any meaningful merger consideration.  M&A practitioners are advised to closely review LBO transactions in its structuring considerations.  

In September 2020, the Ministry of Justice introduced a bill for a new class action law which allows for class action lawsuits involving 50 or more plaintiffs, as well as a bill allowing punitive damages up to five times of actual damages.  These bills are currently pending legislative review and are expected to be presented to the National Assembly in February or March 2021.  The new laws, if enacted, may have implications on M&A transactions, particularly in the assessment of contingent liabilities and the risk of consumer class action claims.  


Many Korean businesses in industries heavily impacted by COVID-19 continue to face challenging business prospects and increasing labor management costs.  In response, businesses have employed a variety of strategies to manage their labor costs, including pursuing enhanced workplace efficiency, reductions in benefits, personnel transfers, unpaid leave and voluntary resignation initiatives.  In more drastic circumstances, companies have turned to M&A or workforce reductions, including statutory layoffs (layoffs under the Labor Standards Act where an urgent managerial necessity exists and the employer has otherwise exerted its best efforts to avoid or minimize such layoffs). 

In response, Korean labor tribunals and courts have employed strict scrutiny with respect to the requirement that employers make every effort to avoid conducting a statutory layoff.  This generally involves measures such as implementing a leave of absence program, reduction of overtime work, salary or hiring freezes.  This had led to an increasing number of cases in which the courts have nullified statutory layoff schemes by financially distressed businesses as wrongful dismissal.  This trend highlights the need for businesses to engage in careful advance planning to ensure that applicable legal requirements are adequately addressed prior to implementing statutory layoffs, even in the case of substantial financial distress and business difficulties. 


The Korean government enters 2021 from a record revenue budget deficit in 2020 due in large part to COVID-19.  As a result, the Korean government is expected to pursue a more improved revenue outcome in 2021, which may come in the form of increased tax audits.  As such, potential purchasers of Korean companies should pay particular attention to tax due diligence, with a focus on past or ongoing tax audits or the likelihood of such audits.

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