What Legal Due Diligence Should a Foreign Buyer Conduct Before Acquiring a Korean Company?

Short Answer

Before acquiring a Korean company, a foreign buyer should conduct legal due diligence tailored to the target company and the proposed transaction.

A Korean legal due diligence review commonly covers:

• Corporate structure and share ownership
• Material contracts
• Assets, debt, guarantees, and security interests
• Employment and labor matters
• Intellectual property
• Licenses and regulatory compliance
• Litigation and government investigations
• Related-party transactions
• Data protection and other material compliance issues

For foreign buyers, the review should also address Korean foreign investment and foreign exchange requirements, merger control, and industry-specific approvals that may affect the transaction.

Legal due diligence is not simply a document review. Its findings may directly affect the purchase price, transaction structure, representations and warranties, indemnities, closing conditions, or even the decision whether to proceed with the acquisition.

Why Is Legal Due Diligence Important?

In a share acquisition, the buyer acquires the target company with its existing contractual relationships, assets, liabilities, employees, regulatory history, and potential disputes.

Problems identified after closing can therefore become the buyer's problems.

For example, due diligence may reveal:

• A material contract that can be terminated upon a change of control
• Undisclosed debt, guarantees, or security interests
• Pending or threatened litigation
• Labor or severance liabilities
• Regulatory violations or licensing problems
• Intellectual property that is not properly owned by the target
• Significant related-party transactions
• Compliance issues that may result in future liability

Identifying these issues before closing allows the buyer to decide whether the risk should be remedied before closing, reflected in the purchase price, allocated to the seller under the transaction documents, or treated as a reason not to proceed.

What Corporate and Ownership Matters Should Be Reviewed?

The buyer should first confirm what company is being acquired and who legally owns its shares.

The review may include:

• Articles of incorporation
• Corporate registry records
• Shareholder registers
• Share certificates, where applicable
• Shareholders' agreements
• Board and shareholder resolutions
• Capital increases and reductions
• Options, convertible securities, or other rights to acquire shares
• Share transfer restrictions
• Pledges or other encumbrances over shares

This review may identify discrepancies in ownership, restrictions on the proposed transfer, third-party rights, or corporate approvals required for the transaction.

Which Material Contracts Should Be Reviewed?

Material contracts are often among the most important areas of due diligence.

Depending on the target's business, these may include:

• Major customer and supplier agreements
• Distribution and agency agreements
• Loan and financing agreements
• Leases
• Licensing and technology agreements
• Joint venture agreements
• Outsourcing and service agreements
• Agreements with affiliates or related parties

Particular attention should be paid to change-of-control clauses, termination rights, exclusivity provisions, non-compete obligations, indemnities, guarantees, and third-party consent requirements.

An acquisition may become significantly less valuable if an important customer, lender, supplier, landlord, or licensor can terminate its relationship with the target because ownership has changed.

What Assets and Liabilities Should Be Checked?

The buyer should determine whether the target owns or has valid rights to use the assets necessary to operate its business.

Depending on the company, this may include:

• Real estate and leased premises
• Equipment and other major assets
• Intellectual property
• Software and technology
• Permits and licenses
• Material receivables and contractual rights

The review should also identify material liabilities, including borrowings, guarantees, security interests, contingent liabilities, and obligations involving affiliates or related parties.

Where the target belongs to a Korean corporate group, additional attention may be appropriate for intra-group transactions, guarantees, collateral arrangements, and other related-party dealings.

What Employment and Labor Issues Should Be Reviewed?

Employment liabilities can materially affect a Korean acquisition.

The review may cover:

• Employment agreements
• Work rules
• Wages and overtime
• Severance obligations
• Bonuses and incentive arrangements
• Executive compensation
• Employee benefits
• Labor-management issues
• Pending or threatened employment disputes

Additional planning may be necessary if the buyer expects to restructure the business, reduce the workforce, or replace senior management following closing.

What About Intellectual Property?

Where the target's value depends on technology, software, brands, designs, or proprietary information, ownership and use of intellectual property should be carefully verified.

The buyer should consider:

• Whether important IP is actually owned by the target
• Whether registrations are valid and maintained
• Whether important technology is licensed from third parties
• Whether employees and contractors have properly assigned relevant rights
• Whether infringement claims or disputes exist
• Whether important licenses are affected by a change of control

A company's commercial use of technology does not necessarily mean that the company legally owns all rights to it.

What Regulatory Issues Should a Foreign Buyer Consider?

Regulatory review should address both the target company's existing compliance and the acquisition itself.

Depending on the business and transaction, relevant issues may include:

• Industry-specific licenses and approvals
• Competition law
• Merger control
• Data protection
• Consumer protection
• Environmental regulation
• Product regulation
• Financial regulation

In particular, acquisitions of Korean companies may require analysis under Korea's merger control regime. Depending on the transaction structure and applicable thresholds, a share acquisition or other business combination may require a filing with the Korea Fair Trade Commission.

This should be considered early because regulatory requirements may affect the transaction timetable and closing conditions.

What Foreign Investment Requirements Apply?

A foreign buyer should determine whether the proposed acquisition qualifies as foreign investment under Korea's Foreign Investment Promotion Act (FIPA) or is instead subject to another foreign exchange reporting framework.

For an investment through the acquisition of shares or equity interests, FIPA generally requires an investment amount of at least KRW 100 million and either:

• Ownership of at least 10% of the voting shares or total equity interest; or
• Ownership of shares or equity interests together with the dispatch or appointment of an executive who can participate in important management decisions.

Foreign investment subject to FIPA is generally required to be reported in advance. However, the Act permits certain transactions to be reported within 60 days after acquisition, including specified acquisitions of existing shares of listed companies and several other statutory categories.

After the investment or acquisition is completed, the foreign investor or foreign-invested company may also be required to complete foreign-invested company registration or related post-investment procedures.

Accordingly, foreign investment reporting should be reviewed as part of the transaction structure before closing, while recognizing that the exact filing procedure and timing depend on the particular acquisition.

Does Data Protection Matter During Due Diligence?

Yes.

Data protection should be considered not only as part of the target's compliance history but also in determining what information can appropriately be disclosed during the due diligence process.

A data room may contain information relating to employees, customers, counterparties, or other individuals. The parties should therefore consider whether personal information should be excluded, anonymized, redacted, aggregated, or otherwise handled in accordance with applicable Korean data protection requirements.

The treatment of personal data at closing may also require separate analysis where customer, employee, or other personal information will be transferred or otherwise affected by the transaction.

How Does Due Diligence Affect the SPA?

The purpose of due diligence is not simply to produce a list of problems. The findings should be reflected in the share purchase agreement (SPA) and the overall transaction structure.

Depending on the issues identified, the buyer may seek:

• Additional representations and warranties
• Specific indemnities
• Pre-closing corrective actions
• Third-party consents
• Regulatory approvals
• Conditions precedent to closing
• Purchase price adjustments
• Escrow or other contractual protections

For example, if due diligence identifies a material undisclosed liability, the appropriate response may be a specific indemnity or price adjustment rather than relying solely on a general representation and warranty.

Legal due diligence and negotiation of the SPA should therefore be coordinated as parts of the same transaction.

What Should a Foreign Buyer Confirm Before Closing?

Before completing the acquisition, the buyer should be able to answer several fundamental questions:

1. Does the seller legally own the shares being sold?
2. What material liabilities will remain in the target after closing?
3. Will key contracts, licenses, assets, and intellectual property remain available after the acquisition?
4. Are corporate or third-party approvals required?
5. Are foreign investment, foreign exchange, merger control, or industry-specific filings required?
6. Have material legal and regulatory risks been properly addressed in the SPA?
7. What must occur before the purchase price is paid and ownership is transferred?

The appropriate scope of due diligence should ultimately reflect the target's business, transaction value, industry, ownership structure, and the risks that matter most to the buyer.

Conclusion

A foreign buyer acquiring a Korean company should conduct legal due diligence before becoming legally and economically committed to the transaction.

The review should cover the target's corporate structure, ownership, material contracts, assets and liabilities, employees, intellectual property, regulatory compliance, disputes, and other material legal risks, while also addressing Korea-specific requirements such as foreign investment procedures and merger control.

Most importantly, the results of due diligence should be used to structure the transaction and negotiate appropriate protections in the SPA and closing process.

Early coordination between the buyer, its Korean legal counsel, and other transaction advisers can help identify material risks before they become post-closing problems.