Implementation of Pre-approval System for Cross-border M&A
for Companies with National Core Technology |
| The Act on Prevention of Divulgence and Protection of Industrial Technology (the “Act”) provides for the protection of national core technologies held by Korean companies, research institutes, professional institutions and universities (each a “Protected Entity”) and prevention of their leakage. The Act was revised as of February 21, 2020 and the revised Act was went into effect on the same day. The revised Act introduces hurdles for any foreign investor seeking to obtain control over a Protected Entity (whether through a direct investment, merger or joint venture) (“Triggering Transaction”) by introducing new pre-approval and pre-notification requirements. For a Protected Entity that holds any national core technology developed with national R&D funding, the pre-approval requirement applies, which in principle prohibits any Triggering Transaction and provides for limited exceptions. For a Protected Entity that holds any national core technology developed without national R&D funding, the pre-notification requirement applies, which in principle allows any Triggering Transaction with exceptional cases for blocking it. Any foreign investor or company seeking to obtain control over a Korean company with a strong technology portfolio would need to diligence on whether any such technology is classified as a national core technology and, if so, whether it was developed with national R&D funding and assess whether any exception may be applicable. |
| [Summary of Revisions] |
Type | Old Scheme | New Scheme | | Korean entity with national core technology with government R&D funding | Agreeing to
Triggering
Transaction | Pre-reporting
(allowed in principle and exceptions for blocking) | Pre-approval
(prohibited in principle and exceptions for allowing) | Becoming aware of
Triggering
Transaction | Report without delay | Report without delay | | Korean entity with national core technology without government R&D funding | Agreeing to
Triggering
Transaction | X | Pre-reporting
(allowed in principle and exceptions for blocking) | Becoming aware of
Triggering
Transaction | X | Report without delay |
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| 1. | Introduction of Pre-approval Scheme |
| | The old Act required a Protected Entity to report to the Ministry of Trade, Industry and Energy (the “MOTIE”) if it has developed a national core technology with government R&D funding and wish to carry out a Triggering Transaction. In such case, if it is determined that there is a material threat to national security from such national core technology being divulged, the MOTIE is authorized under the Act to suspend, prohibit or unwind the Triggering Transaction. Hence, the old scheme allowed Triggering Transactions in principle except in limited circumstances concerning national security. Starting February 21, 2020, the revised Act requires a Protected Entity with a national core technology with government R&D funding to obtain an approval from the MOTIE prior to proceeding with any Triggering Transaction. This new scheme provides that a Triggering Transaction in such case is in principle prohibited and will be permitted in exceptional cases (see Article 11-2(1) of the new Act and Article 18-3 of the new Act’s Enforcement Decree). In addition, when approving a Triggering Transaction, the MOTIE is authorized to impose condition(s) as it deems necessary (see Article 11-2(4) of the new Act). |
| 2. | Expansion of Protected Entities |
| | The new Act has broadened the scope of Protected Entities to include those with national core technology developed without government R&D funding. Such Protected Entities are required to report any Triggering Transaction to MOTIE prior to completing such Triggering Transaction. If it is determined there is a material threat to national security from such national core technology being divulged, MOTIE is authorized under the Act to suspend, prohibit or unwind the Triggering Transaction (see Article 11-2(5) of the new Act and Article 18-5(3) of the new Act’s Enforcement Decree). |
| 3. | Reporting Duty on Protected Entities for Unsolicited Triggering Transaction |
| | If an unsolicited Triggering Transaction comes from a foreign investor or company, the Protected Entity is required to report such Triggering Transaction to MOTIE upon becoming aware of it. This duty used to apply only to Protected Entities with national core technology with government R&D funding but is now expanded to Protected Entities with national core technology without government R&D funding (see Article 11-2(6) of the new Act and Article 18-5(2) of the new Act’s Enforcement Decree). |
| 4. | Penalty for Violation |
| | The new Act imposes a criminal penalty of imprisonment up to 15 years or fine up to KRW 1.5 billion in the event (i) a Triggering Transaction is completed for the purpose of using national core technology abroad without pre-reporting or pre-approval or (ii) a pre-reporting was made or a pre-approval was obtained through improper means (see Articles 36(2), 14(6) and 14(6-2) of the new Act). |
| 5. | Implications |
| | The new Act strengthens the protection of national core technologies. If a foreign investor or company is seeking to obtain control over a Korean company with a strong technology portfolio, it would need to diligence on whether any such technology is classified as a national core technology and, if so, whether it was developed with national R&D funding and assess whether any exception may be applicable. In addition, pre-completion covenants and conditions precedent in a definitive agreement may need to address this issue to minimize execution risk. |
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