Risks of Acquiring a Korean Corporation under Korean Tax, Employment, Accounting & Corporate Compliance Laws

The acquisition of a Korean corporation involves substantial risks that are, regrettably, often not fully vetted or understood, thus, leading to unknown risks, litigation, fines, and sometimes even criminal prosecutions. Acquiring an existing corporation in Korea involves several critical considerations, a nuanced understanding of the unique risks, pragmatic risk mitigation techniques, and unconflicted due diligence.

Please hire an experienced lawyer and accountant in Korea with significant experience in risk assessment and please make sure you have a law firm that is not conflicted (serious issue in many parts of Asia). For additional articles on Korean Corporate Law and Korean Compliance please see: IPG Legal’s Korean Corporate Law Archive and IPG Legal’s Korean Compliance Archive.

Risk of Acquiring a Korean Company: Tax, Employment, Accounting, and Compliance Risks in Korea

Major Risks of Acquiring a Non-Listed Korean Corporation

The following is not intended to be an exhaustive list. The following are the major risks observed by our accounting and M&A team over the last decade that have been missed in whole or part by others vetting deals. Thus, the following list does not include many of the most obvious risks. Please see: IPG Legal’s M & A Due Diligence Checklist for more information on acquisition risks.

1. Tax Liabilities of Major Shareholders
   In Korea, if a corporation registered under the laws of Korea or a foreign company “doing business in Korea” fails to meet its Korean tax obligations, major shareholders may be held secondarily liable for the unpaid taxes owed to the Korean government. We have seen due diligence reports that have excluded this from reports. The major realized risk is, typically, seen by a “quasi-major shareholder,” which is defined as an individual or legal entity (along with “related parties”) that collectively hold more than 50% of the shares of the company and that exercises “substantial control” over the operation of the company. Thus, if this definition is met and the company is unable to pay the tax debt of the company, the shareholders may be held personally liable in proportion to their equity stake in the company.
2. Employee Risks & Liabilities

• Accrued Employee Obligations under Korean Law and Contracts: The acquiring and even in some cases of merely acquiring the assets of the company, all accrued retirement benefits and other obligations are owed by the acquiring company. These liabilities may include accrued severance benefits, unpaid salaries, unpaid 4 Major Insurances, and other obligations owed to the employee under law or contract. In many cases, non-payment of these requirements is a violation of Korea’s Criminal Laws.
• Employment Tenure: Most employees after working two years for a company are permanent employees that may only be terminated for cause attributable to the employee or an urgent managerial need. Employees may, also, be guaranteed employment security under contract or via the employment rules of the company.
• Violations of Korean Labor & Employment Laws: Violations of labor laws may lead to fines and even criminal sanctions including jail sentences. Past acts may accrue to the acquiring management and even major shareholders and fines for acts before acquiring of the Korean company are still a liability of the company.

3. Off-Balance Sheet Liabilities & Shareholder/Director Loans

Off-balance-sheet liabilities are obligations not recorded on the company’s balance sheet. In many cases, “personal guarantees” and hold-harmless clauses shall not fully mitigate the risks, thus, an outside proactive and full legal and accounting audit that is more than just a desk audit is usually advisable. IPG Legal attorneys found some less than scrupulous off-balance sheet risks that led to significant and costly litigation including “temporary payments” (Gajigeun) and unverifiable shareholder loans.

by Sean Hayes

Sean Hayes is the first non-Korean attorney to have worked for the Korean court system (Constitutional Court of Korea) and one of the first non-Koreans to be a regular member of a Korean law faculty. Sean is ranked, for Korea, as one of only a few non-Korean lawyers as a Top Attorney by AsiaLaw. Sean is regularly quoted by leading international media sources, including the Wall Street Journal, New York Times, France 24, and Bloomberg.

IPG Legal is consistently ranked a Top Dispute Resolution Law Firm for our litigation, arbitration, and mediation services, and IPG Legal is consistently rated a top-tier law firm in corporate law, litigation, arbitration, franchise law, distribution law, estate law, family law, employment & labor law, and criminal defense.

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