Share Swap Transactions for Korean Acquisitions
by Brendon Carr
Thanks to a 2001 amendment of the Korean Commercial Code, a Korean corporation (the “Acquiror") can acquire the stock of another company (the “Target") by issuing new shares or transferring treasury shares to the shareholders of Target. As a result of the transaction, Target becomes a wholly-owned subsidiary of Acquiror while the former shareholders of Target end up as shareholders of Acquiror.
For the protection of minority shareholders, share swap transactions are subject to an “Art. 434 special resolution” (ordinarily a 2/3 approval majority except as a higher threshold has been adopted by prior amendment of the company’s Articles of Incorporation) at a General Meeting of the Shareholders of the Acquiror and the Target. But the first step in a share swap is the execution of a Share Swap Agreement between Acquiror and Target which must be approved by the special resolution. Such an agreement must provide for:
- Amendment of the Acquiror’s Articles of Incorporation;
- the number and kind of newly-issued or treasury shares of Acquiror;
- increased capital and capital reserve of Acquiror; and
- any cash payment to the shareholders of Target
The amount of Acquiror’s capital cannot increase beyond the amount of Target’s net assets, less the cash payment to shareholders of Target and the book value of treasury shares to be transferred to shareholders of Target. As in the case of a merger, shareholders of Target are entitled to receive at least one share of Acquiror and cash stock for stock exchange would not be allowed under the Commercial Code.
In the case of “short-form” share swap and “small-scale” share swap (definitions which would depend on the value of the proposed transaction in relation to the value of each company), a board approval instead of resolutions at a Shareholders Meeting would be sufficient.
Even after the approval by a Board or Shareholders Meeting, directors of Acquiror and Target are also required to preserve a copy of the Share Swap Agreement, a statement on the reason for distributing shares of Acquiror to the shareholders of Target and the most recent balance sheet and profit and loss statements of Acquiror and Target for the six (6) months following the share swap.
Under the Commercial Code, after a share swap transaction, any shareholder of Acquiror and Target shall have a “right of appraisal” to demand the company buy-out the disaffected shareholder’s shares. Within 20 days of the shareholders’ meeting at which the transaction is approved, such shareholders may exercise the appraisal right upon written notice to the company. Even after the share swap is completed, for up to six (6) months after the transaction an unhappy shareholder shall also have the right to file suit seeking to invalidate the exchange.
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