Материал: Amy C Kläsener

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Japan

request the enforcement of specific performance from the court; provided, however, that this shall not apply to the cases where the nature of the obligation does not permit such enforcement.’

Request for specific performance does not preclude the request for compensation by way of monetary damages.19 Article 415 of the Civil Code further provides that ‘if an obligor fails to perform consistent with the purpose of its obligation, the obligee shall be entitled to demand damages arising from such failure.’ In practice, the most common remedy requested by parties and granted in M&A arbitrations and Japanese courts are damages.

Measure of damages

Obligee shall be entitled to demand the compensation for (1) the damage which would ordinarily arise from the breach and (2) the special damages which arise from the circumstances which the party could foresee or should have foreseen.20

Punitive damages are not permitted under the public policy and good-morals principle set out in Article 90 of the Civil Code.Therefore, even if punitive damages are awarded in foreign arbitration, they would not be enforceable in a Japanese court.21

The law does not prescribe any specific method for calculation of damages and it would be largely at the decision maker’s discretion and dependent on the circumstances of the case. Given the difficulty in proving the exact amount of damages suffered, some statutes provide presumption of amount of damages, such as in patent infringement cases22 or security fraud cases.23 In other cases where proving the amount of damages is extremely difficult, the court may exercise its discretion and decide the appropriate amount of damages, pursuant to Article 248 of the Civil Procedure Code.

Special substantive issues

Synergy effect arising out of M&A

Under the Companies Act, where the court determines the ‘fair price’ of the share held by the dissenting shareholders, it should include the future synergy effects (if any) arising out of the merger.

Liquidated damages

In certain M&A agreements, parties provide for liquidated damages to be a fair determination of losses that may be suffered by a party. Currently, under the Civil Code, liquidated damages are generally permissible even if characterised as a penalty, and the court cannot discretionally decrease or increase the agreed amount of liquidated damages even if the

19Article 414(4) of the Civil Code.

20Article 416(1) of the Civil Code provides that ‘the purpose of the demand for the damages for failure to perform an obligation shall be to demand the compensation for damages which would ordinarily arise from such failure.’Article 416(2) further provides that ‘the obligee may also demand the compensation for damages which arise from any special circumstances if the party did foresee, or should have foreseen, such circumstances.’

21Supreme Court Decision dated 11 July 1997, Minshu 51, p. 2573.

22Article 102 of the Patent Act.

23Article 21-1 of the Financial Instruments and Exchange Act.

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actual damages differ substantially.24 That said, there may be a case that such liquidated damages provision becomes null and void in full or in part if the amount is considered to be extremely excessive in light of the circumstances, pursuant to the public policy and good-morals doctrine contained in Article 90 of the Civil Code.25

Special procedural issues

Exclusive jurisdiction of Japanese court

An action concerning the organisation of a company (which includes an action seeking invalidation of issued shares or stock options, seeking invalidation of merger of a company, seeking revocation of a resolution of a shareholder meeting, seeking dissolution of a company, etc.) are under the exclusive jurisdiction of the district court having jurisdiction over the location of the head office of the defendant company.26 Therefore, these claims are not arbitrable.

No parol evidence rule

Although entire-agreement clauses are popular in Japanese M&A practice, there is no rule under the Japanese law corresponding to the parol evidence rule in common law jurisdictions.The effect of entire-agreement clauses depends on the exact wording of the provision and the circumstances. For robustly drafted entire-agreement clauses that expressly prohibit the parties from seeking to rely on any extrinsic evidence other than the contract itself in any legal proceedings, a court precedent has found the entire-agreement clause to be effective. It accepted the clause’s exact literal effect and excluded the extrinsic evidence when construing the disputed contractual clause in question.27 On the other hand, there is a court precedent in which the court did take into account external circumstances when construing the meaning of a contractual provision even where there was an entire-agreement clause that provided that ‘The basic agreement is the only agreement which constitutes the entire agreement between the parties relating to the purpose of this basic agreement and supersedes all prior or present negotiations or understandings.’28

Attorney–client privilege

Attorney–client privilege as a concept is not clearly recognised under the Japanese law, while a concept similar to attorney–client privilege exists under the Civil Procedure Code in the context of document disclosure and evidence production during court proceedings.

24Article 420(1) of the Civil Code.This clause shall be deleted under the new Civil Code, which is planned to enter into force by 2 June 2020.

25Supreme Court Decision dated 14 March 1944, Minshu 23 p. 147.

26Article 835 of the Companies Act.

27The Decision of Tokyo District Court dated 13 July 1995, Hanta 938, p. 160.

28The Decision of Nagoya District Court dated 12 November 2007, Kinyu-Shoji Hanrei 1319, p. 50.

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Korea

Chul Won Lee, Una Cho and Hye Won Chin1

Frequency of M&A disputes

The number and value of Korean M&A deals have been continuously increasing since the 1997 Asian financial crisis. In particular, the years 2014 to 2016 broke records, with sharp increases in M&A activity in the Korean market resulting from a significant number of inbound deals and many domestic transactions, partly driven by internal restructuring of Korean conglomerates and global and local private equity funds.While there are no published statistics on how many M&A transactions result in litigation or arbitration, market trends show that the number of disputes has grown in proportion to the M&A market.

With the increasing sophistication of the Korean M&A market during the past 20 years, deal structures and contractual arrangements have become more complex and highly customised to meet the various needs of the parties. As a result, the nature of the claims and disputes have also become more varied, leading the courts and arbitral tribunals to address new and complex issues, and bringing more clarity in some previously ambiguous areas of law in the M&A context.

Notably in 2017, deal volume and value fell by 8.5 per cent and 19 per cent, respectively, compared with 2016, which is by far the biggest drop in the past 10 years.2 Whether this is the beginning of a downward spiral remains to be seen, but we foresee the number, complexity and variety of disputes related to M&A transactions will continue to increase in the foreseeable future.

1Chul Won Lee is a partner, Una Cho is a senior foreign attorney and Hye Won Chin is an associate at Kim & Chang.

2Bloomberg Korea M&A Legal Ranking FY 2017.

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Form of dispute resolution

While the majority of M&A disputes that involve domestic parties are still predominantly resolved through Korean court proceedings, disputes arising out of cross-border transactions are much more frequently resolved through arbitration. ‘Phased’ dispute resolution, which requires mediation or expert determination prior to litigation or arbitration, is less frequently found in M&A contracts.

Data published by the Korea Fair Trade Commission indicates that the percentage of M&A deals in Korea involving at least one foreign party between 2014 and 2016 was around 22 per cent,3 which is roughly consistent with our view on the ratio of contracts with arbitration clauses (involving one or more foreign parties) versus contracts selecting court litigation in M&A disputes.

Grounds for M&A arbitrations

The most frequently cited bases for M&A arbitrations are misrepresentations and breach of warranties. As misrepresentation and breach of warranty claims are provided for in most M&A contracts, parties are likely to be familiar with and comfortable raising such claims. Given that most of the operative representations and warranties are provided by the seller, the majority of the claims are asserted by the buyer. Nonetheless, indemnity escrow arrangements are frequently used in Korea, and the seller at times will be the first to initiate a claim for release of the escrow amount, or raise it as a counterclaim.

Claims based on misrepresentation and breach of warranty are often accompanied by claims for breach of covenant. Claims regarding pre-closing covenants are closely aligned with misrepresentation and warranties claims (e.g., continuing obligation on the accuracy of representations and warranties, absence of material adverse change, notice or approval provisions). In situations where the buyer or target company are in the same industry as the seller, claims for breach of post-closing covenants (e.g., non-compete, non-solicitation, intellectual property issues) are also not infrequent.

Claims of tort related to pre-contractual failure to disclose and fraud claims are possible under the Korean Civil Code, but as of yet are rare in Korea. As various limitations on liability for breaches in M&A contracts are increasingly common, claimants are starting to consider ways around the limitation by raising tort and fraud claims either in arbitration together with other contractual breach claims or through parallel litigation.

The post-closing price-adjustment mechanism through use of closing accounts has been a common pricing method in Korea, but claims related to price adjustments (often involving requirements for expert determinations) have been rare and are more generally raised as breach of representations and warranties claims. In cases where buyers retain a holdback as indemnity for price adjustments, sellers have initiated claims or counterclaims for release of the holdback.

3M&A Trend Report issued by Korean Fair Trade Commission for years 2014 to 2016. See www.ftc.go.kr/ www/selectReportUserView.do?key=10&rpttype=1&report_data_no=7199, www.ftc.go.kr/www/ selectReportUserView.do?key=10&rpttype=1&report_data_no=6583, www.ftc.go.kr/www/ selectReportUserView.do?key=10&rpttype=1&report_data_no=6116.

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Claims related to earn-outs are rare in Korea but not unheard of, as earn-out mechanisms are not frequently used in sizable Korean transactions, other than from time to time in transactions involving start-up companies or where the parties are unable to resolve their differences in valuation.

Disputes regarding failure to complete the transaction, especially related to break-up fees, are frequent in Korea, but the majority have been raised in litigation, as most of the operative agreements did not contain arbitration clauses.We expect to see an increase in arbitration relating to failure to complete in the future; for example, a high-profile dispute between two private equity funds regarding the cancellation of the acquisition of a parcel delivery company was reported to be in arbitration.4

Disputes regarding the rights of minority shareholders to exit under shareholder agreements,such as a put option or a drag along,have been on the rise recently.Several high profile arbitration cases filed by financial investors in relation to their put option execution against the controlling shareholder are currently pending. In an appellate decision in 2018, the court ordered a company to purchase the shares of the investors who were unable to exit using their drag-along rights when the company failed to cooperate in the drag-along process.

Fraud and failure to disclose

Claims related to failure to disclose or fraudulent misrepresentation in M&A transactions are generally raised by the buyer in connection with the information or representations provided by the seller during due diligence or contract negotiations.These claims are often brought for breach of representations and warranties terms in the contract, and the substantive standards tend to follow the requirements provided in the language of the relevant provisions.

Separately from contractual claims, a tort claim based on fraudulent misrepresentation or failure to disclose could be brought by the buyer. According to general statutes on tort under Korean Civil Code, the party claiming tort would be required to prove four elements to establish tort liability: (1) unlawfulness of the act, (2) wilfulness or negligence, (3) damage and (4) a causal connection between the act and the damage. However, a tort claim based on fraud is less frequently raised in M&A disputes as it would require an exceptional situation where the failure to disclose amounted to fraud, wilful concealment or deception.

A frequent defence raised by the sellers in responding to claims related to failure to disclose or misrepresentation is that the buyer had actual knowledge of the allegedly undisclosed or misrepresented facts and should not be allowed to claim damages based on the good-faith principle. In 2015, the Korean Supreme Court rendered a notable decision regarding the ‘knowledge’ defence.The Supreme Court held that the buyer’s prior knowledge of the seller’s misrepresentations and breach of warranties at the time of the execution of the agreement should not affect the buyer’s right to seek a remedy, unless the parties expressly agreed to exclude matters known to the buyer from the scope of representations and warranties.The Supreme Court added that limitation of contractual right by the application of the good-faith principle should only be made in extremely exceptional cases. This decision sets a clear precedent in favour of sandbagging in M&A disputes where the underlying M&A contract does not contain an anti-sandbagging clause.

4 www.theinvestor.co.kr/view.php?ud=20170125000698.

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