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The Industrial Technology Protection Act In Cross-border M&A

Recently, we reported about the broadening of CFIUS’s jurisdiction here. This trend has happened not only in the U.S. but also in Korea.

Like CFIUS in the U.S., there is the Act on Prevention of Divulgence and Protection of Industrial Technology (the “Industrial Technology Protection Act”) in Korea. The Industrial Technology Protection Act applies when a foreign entity (a buyer) obtains control over a Korean company (a target) which holds national core technology (the “Triggering Deal”). This Act was revised recently, which expanded the scope of application and strengthened on sanctions.

When the Industrial Technology Protection Act applies, the Korean company (a target) must obtain a pre-approval or complete a pre-reporting procedure prior to closing the Triggering Deal. For the pre-approval or the pre-reporting procedure, the Ministry of Trade, Industry and Energy will review the Triggering Deal and the Triggering Deal may be suspended, banned, or unwind depending on the results of the review.

When (1) the Triggering Deal is closed without pre-approval or pre-reporting procedure or (2) a pre-approval or a pre-reporting procedure is completed through improper means, the Industrial Technology Protection Act impose a criminal penalty of imprisonment up to 15 years or fine up to Korean Won 1.5 billion (about US Dollar 1.3 million).

The obligations under the Industrial Technology Protection Act is borne by the Korean company (a target), but the Triggering Deal can be closed only when the pre-approval or pre-reporting is completed, and the Triggering Deal can be suspended, banned or unwind according to the results of the review, so the foreign entity (a buyer) also must consider this Industrial Technology Protection Act seriously.

Particularly, in cross-border M&A deals in which Korean tech companies are targeted, the Industrial Technology Protection Act’s jurisdiction must be reviewed very carefully. Of the many cross-border M&A deals I have conducted, in some deals the buyer was changed due to the issue of the Industrial Technology Protection Act.

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