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Jul 10, 2011

Squeezing-out Minority Shareholders under Korean Corporate Law

The amended Commercial Code of Korea provides for “squeeze-out” rights for shareholders holding 95% or more of the shares of a company. The law will be promulgated from April of 2012.

The law also provides for a right of minority shareholders to demand a “sell-out.” It seems possible, under the very vague wording of the amended clauses, for a sell-out to take place at the same time as a squeeze-out with the potential of conflicting appraisals and procedures. We wish the amended clauses would have been more specific, since so many holes are evident that litigation is bound to occur and the outcome of cases will be near impossible for legal counsel to predict.

For a squeeze-out the majority shareholder must establish that: 
  • The squeeze-out is “necessary” to accomplish the company’s specific "business purpose." The wording is so vague that it renders the clause meaningless without guidance from a court. We expect litigation on the meaning of this clause based on any squeeze-out where a minority shareholder disagrees with the share valuation methods. Is cost an acceptable reason? Does the majority shareholder need to establish that the minority is unable to accept the management business judgments and thus litigation is costing the company time and resources?;
  • The squeeze-out is approved by a shareholder’s meeting prior to the squeeze-out. The clause contains more details of the procedural requirements that shouldn't be difficult for a careful company secretary to meet. A careful majority shareholder should be able to satisfy the requirements with minimal litigation risk; 
  • The minority shareholders’ receives a appraisal from a certified appraiser. The appraisal will likely lead, if a settlement is not reached, to a court appointed appraiser and a lengthy appraisal process. We would love to have at least a guideline for an acceptable appraisal method;  
  • Prior to the shareholder meeting to vote on the squeeze-out, the appraisal must be sent to the shareholders with an explanation of the purpose of the squeeze-out by the majority shareholder. The clause is intended to provide the minority shareholder the opportunity to analyze the appraisal and majority's purpose prior to the shareholder meeting.
We suspect litigation on these amended provisions, thus, suggest for any majority shareholder intending to utilize the provision to consider the likely litigation situations.

In Korea, whenever a provision in corporate law is amended – litigation shortly follows. It is advisable if you are part of a company management that shuns litigation to not be the first to utilize the new squeeze-out provision in the Korean Commercial Code and be aware that a dissatisfied minority has the option of a sell-out.

Additionally, risk may be avoided through the utilizing of a “cash-out” merger instead of a “squeeze-out.”  I may deal with this in another blog post if anyone is interested.

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SeanHayes@ipglegal.com