New regulations were recently enacted in Korea that may have a substantial impact on M&A transactions involving foreign investment.  On August 24, 2022, the Ministry of Trade, Industry and Energy (“MOTIE”) enacted and put into effect the Regulations on Operation of Security Review Procedures for Foreign Investment (MOTIE Ruling No. 2022-115; the “Regulations”).  Previously, the Foreign Investment Promotion Act (“FIPA”) Enforcement Decree provided that if a foreigner would acquire de facto control of a company, then that foreign investment may be prohibited or allowed only conditionally (e.g., on the condition that a particular part of the business is separated from the investment or certain security compliance measures are agreed to), after the transaction is reviewed for harm to national security.  So far, there has been no known M&A case that has been reviewed under this provision.  In light of the new Regulations, however, we expect that these foreign investment security reviews will begin to take place in earnest.

FIPA does not limit foreign investment per se, but instead establishes exceptions in cases where national safety and public order would be hindered.  Specifically, where foreign investment would acquire de facto control of an already-established domestic company by, e.g., stock acquisition (Regulations on Foreign Investment, Article 6), the relevant minister or the head of the intelligence investigation agency may request review by the Foreign Investment Committee in the following cases (FIPA Enforcement Decree, Article 5(1)2):

①    There are concerns that production of defense materials may be hindered;
②    It is highly likely under Article 19 of the Foreign Trade Act that goods will be subject to export approvals or licenses, or technologies will be diverted for military purposes;
③    There are concerns regarding public disclosure of state secrets that are subject to Article 4(1)2 of the National Intelligence Service Act, such as the details of certain contracts;
④    There are concerns that international efforts by the United Nations or other organizations to maintain international peace and security may be severely and substantially hindered; or
⑤    It is highly likely that national core technology will be divulged.

The Regulations do not alter this basic system, but additionally provide that when a foreign investor files a report for foreign investment or application for approval, the investor must indicate whether it is acquiring de facto control of the company and whether the transaction results in one of the five cases above.  If the foreign investment is subject to security review on the face of the report/application, then the certificate of report on foreign investment will be withheld and foreign investment security review must commence (Regulations, Article 3). 

We have provided a more detailed breakdown of the Regulations below.

Overeview of the Regulations

1.   Subject of Foreign Investment Security Review

 

• The Regulations define the subject of foreign investment security review to be consistent with the prior regulations (Regulations, Article 2(3)):  any foreign investment that files a foreign investment report (under FIPA, Article 5) that both indicates (1) “acquiring de facto control” and (2) “subject to Enforcement Decree, Article 5(1)2 in relation to target domestic company.”  The difference, however, is that the Regulations place the burden on the foreign investor to make the initial determination on whether it is subject to security review, and if the report shows it is subject to security review, then the certificate of report on foreign investment will be withheld and foreign investment security review must commence.

• On the other hand, the Regulations do not apply to greenfield foreign direct investments that establish a new factory or place of business in Korea.
   

2.   Procedures for Foreign Investment Security Review
 

• Previously, the security review proceeded as follows: first, the foreign investment report is filed; then the competent minister or the head of intelligence investigation agency requests review; and finally, the Foreign Investment Committee determines whether to approve or limit the transaction.

• The Regulations provide more detailed procedures as described below, including establishing a new Security Review Expert Committee (the “Expert Committee”) to conduct preliminary review.

• Notice by delegate institution and commencement: Foreign investment reports that are subject to foreign investment security review will be filed with certain delegate institutions (including Korea Trade-Investment Promotion Agency (KOTRA) or foreign exchange banks).  The delegate institution must then immediately notify the competent minster or the MOTIE Minster (Regulations, Article 3(1)) and withhold the certificate of report on foreign investment (Regulations, Article 3(2)).  The MOTIE Minister must then commence foreign investment security review (Regulations, Article 3(3)).

• Preliminary review by the Expert Committee: The Expert Committee will prepare an Evaluation Chart (Regulations, Article 13(6)) based on the Evaluation Standards (Regulations, Annex Table), and make a determination on whether the investment should be allowed (Regulations, Article 13(8)).  The Expert Committee may consult various expert institutions to analyze national security risks in each relevant field (Regulations, Article 12).

• Hearings: If the chairman of the Expert Committee finds it necessary, hearings may be held to summon and obtain input from parties such as the foreign investor, the target company, interested parties, witnesses, or relevant experts (Regulations, Article 14).

• Expert Committee Report: The Expert Committee will provide the results of the expert institution analyses, its Evaluation Chart and its written determination to the Foreign Investment Committee and the competent minister/head of intelligence investigation agency (Regulations, Article 15).

• Foreign Investment Committee Resolution and MOTIE Minister Decision: The competent minister or head of intelligence investigation agency can request review from the Foreign Investment Committee (Regulations, Article 16(1)) and the Foreign Investment Committee will make a determination on whether the investment should be allowed (Regulations, Article 16(4)).  The MOTIE Minister will then make a final decision (Article 17).
   

3.   Composition of the Expert Committee
 

• The Expert Committee will be composed of 20 members including the chairman, plus an assistant administrator; the chairman is the head of MOTIE’s trade and investment office and the assistant administrator is the director general for investment policy.

• The members will be ex officio members (director-general levels at the Ministry of Strategy and Finance, the Ministry of Foreign Affairs, the Ministry of National Defense, the Financial Services Commission, or other relevant central administrative agencies, or at the National Intelligence Service, KOTRA, or the Korean Security Agency of Trade and Industry) and commissioned members (experts in fields such as national defense, technology, industry, supply chain, security, and law).

• Members will serve terms of two years and may serve consecutive terms, but ex officio members will serve for the term of their office.
   

4.   Evaluation Standards for National Security Risk
 

The Regulations prescribe the specific Evaluation Standards in the Annex Table.  In sum, the following factors are considered:
 

• Threats: e.g., any prior violations of domestic laws by the foreign investor; the foreign investor’s technology and cyber security measures; or risk that domestic industry may become controlled by the foreign investor or foreign government;

• Vulnerabilities: e.g., whether the target company owns or produces core technologies or materials; whether there are alternative Korean companies; or the target company’s technology and cyber security measures;

• Impact on national security: impact of the foreign investment on national defense, technology, supply chain, industry, trade, investment and commerce.
   

Next Steps

As of August 31, 2022, the form for the foreign investment report does not include a section in which the investor can indicate that the investment is subject to security review.  The MOTIE announced on April 20, 2022 that it would revise the form through an amendment of the FIPA Enforcement Rules, but the amendment is still under review.  Accordingly, we expect that the security review system under the new Regulations may take considerable time to become fully operational.  

Further, the Regulations leave open several substantial practical issues that need additional clarification, including the specific scope of review, what happens if the foreign investor fails to indicate that it is subject to security review because the domestic target company provides incorrect information, details on available sanctions, and the specific scope of who is subject to the review.  These issues will become clearer over time as the security reviews are conducted and we see how the relevant agencies interpret the regulations. 

[Korean Version]