CONTENTS
- 1. Corporate Acquisition and Transfer | The Controversy over Succession of Administrative Dispositions in Pharmaceutical Company Acquisitions
- - Succession of the Effects of Administrative Dispositions
- 2. Corporate Acquisition and Transfer | The Structure of Succession of Administrative Dispositions and Legal Issues
- - Key Contents of the Proposed Amendment
- 3. Corporate Acquisition and Transfer | Matters That Must Be Verified When Acquiring a Pharmaceutical Company
- - Key Items for Due Diligence
- - Comprehensive Legal Advisory for Pharmaceutical Company Acquisition Transactions
1. Corporate Acquisition and Transfer | The Controversy over Succession of Administrative Dispositions in Pharmaceutical Company Acquisitions
In corporate acquisition and transfer transactions, the fact that not only a company's assets but also its regulatory risks and history of administrative dispositions may be succeeded to operates as an important legal issue.
In particular, in the course of acquiring a pharmaceutical company, it has repeatedly been pointed out that a history of administrative dispositions, such as business suspensions, cannot be directly verified, making it difficult to identify regulatory risks in advance.
Recently, in order to address this problem, the National Assembly saw the introduction of a proposed amendment to the Pharmaceutical Affairs Act that would grant the authority to verify administrative disposition records in the course of acquiring a pharmaceutical company.
The proposed partial amendment to the Pharmaceutical Affairs Act, introduced by Representative Park Hyeong-su, contains provisions that would allow a company seeking to acquire a pharmaceutical company to request records of a pharmaceutical company's administrative dispositions from the Ministry of Health and Welfare, the Ministry of Food and Drug Safety, local governments, and others.
Under the current legal framework, it has repeatedly been pointed out that there is no clear procedure by which a transferee can directly verify a history of administrative dispositions during the acquisition of a pharmaceutical company, making it a structure in which regulatory risks are difficult to identify in advance.
In particular, because the pharmaceutical industry is heavily regulated with respect to the manufacture and distribution of drugs, and administrative dispositions can directly affect business operations, this problem of information asymmetry carries even greater weight.
Succession of the Effects of Administrative Dispositions
Under the current Pharmaceutical Affairs Act, the effects of an administrative disposition may be succeeded to by the transferee in the following cases.
- Transfer of business
- Inheritance
- Merger of corporations
In these cases, the new operator succeeds to the status of the former operator, and the effects of an administrative sanction imposed on the former operator may also be succeeded to, together, for a certain period.
Representatively, the following situations may arise.
The problem is that, if a company is acquired without prior knowledge of these administrative dispositions, a situation may arise in which the transferee must carry out the disposition as it stands.
2. Corporate Acquisition and Transfer | The Structure of Succession of Administrative Dispositions and Legal Issues
Article 89-2 of the Pharmaceutical Affairs Act (Succession to the Effects of Administrative Sanctions) Where status is succeeded to pursuant to Article 89, the effects of an administrative disposition against the former manufacturer, etc. or the drug sales promoter and importer shall, for one year from the date of such disposition, be succeeded to by the transferee or the corporation surviving the merger or the corporation established through the merger, and where administrative disposition proceedings are in progress, the administrative sanction proceedings may be continued against the transferee or the corporation surviving the merger or the corporation established through the merger.
The current Article 89-2 of the Pharmaceutical Affairs Act provides that, where status is succeeded to through a transfer of business, a merger, or the like, the effects of an administrative sanction against the former operator may be succeeded to by the transferee for a certain period.
However, the law allows, as an exception, that the succession of the effects of an administrative disposition may be limited where the transferee is a "bona fide transferee."
Nevertheless, in corporate acquisition and transfer practice, the following problems arise.
- The means of verifying in advance whether an administrative disposition exists are limited
- It is difficult to prove whether one is a bona fide transferee
- Where administrative disposition proceedings are in progress, problems arise after the transaction
For this reason, cases may arise in which, after acquiring a pharmaceutical company, the transferee belatedly bears regulatory risks such as a business suspension or a manufacturing suspension.
Key Contents of the Proposed Amendment
This proposed amendment to the Pharmaceutical Affairs Act, in order to resolve this problem, contains provisions that codify a procedure for verifying administrative disposition information.
According to the proposed amendment, a company seeking to acquire a pharmaceutical company would be able to obtain the consent of the relevant manufacturer and request the following information from administrative agencies.
- Records of administrative sanctions against the existing manufacturer
- Records of administrative sanction proceedings in progress
In addition, a provision would be newly established allowing the Minister of Health and Welfare, the Commissioner of the Ministry of Food and Drug Safety, or the head of a local government to issue documents containing such information.
If the bill passes, it is anticipated that an institutional basis for verifying regulatory risks in advance in the course of a corporate acquisition and transfer will be established.
3. Corporate Acquisition and Transfer | Matters That Must Be Verified When Acquiring a Pharmaceutical Company
This discussion of the amendment to the Pharmaceutical Affairs Act shows how important the review of regulatory risks is in the course of acquiring a pharmaceutical company.
In particular, the pharmaceutical industry is one in which the influence of licensing and permit regulations and administrative dispositions related to the manufacture and distribution of drugs is very large.
Therefore, verifying financial condition or revenue structure alone is not sufficient, and a history of administrative dispositions, the status of licenses and permits, compliance with GMP, and any regulatory proceedings in progress must be comprehensively reviewed.
When acquiring a pharmaceutical company, if such corporate acquisition and transfer elements are not sufficiently verified, the effects of administrative dispositions such as a business suspension, a manufacturing suspension, or revocation of approval may pass directly to the transferee, which can have a significant impact on management.
Key Items for Due Diligence
The main items that must be verified in the course of acquiring a pharmaceutical company are as follows.
Strategies for Managing Pharmaceutical Company Acquisition Risks
Area of Management | Main Management Methods | Points to Note |
Management of regulatory risks | Verify the history of dispositions by the Ministry of Food and Drug Safety and administrative agencies | Review the possibility of succession to dispositions such as manufacturing suspensions and business suspensions |
Inspection of license and permit status | Verify drug manufacturing licenses and product approvals | Examine the possibility of changes to or revocation of approvals |
Quality control risks | Review whether GMP has been violated and examine the quality control system | Inspect manufacturing facilities and check for quality problems |
Review of contractual structure | Verify key contracts such as raw material supply and distribution contracts | Review the scope of obligations and liabilities upon succession to contracts |
Analysis of litigation risks | Verify whether there are drug-related disputes and administrative litigation | Examine the possibility that regulatory disputes may arise |
Design of the transaction structure | Review a share acquisition versus a transfer of business structure | The scope of succession to administrative liability varies depending on the transaction method |
Comprehensive Legal Advisory for Pharmaceutical Company Acquisition Transactions
A corporate acquisition and transfer is not a simple sale of a company but a complex transaction that combines regulatory risks, administrative dispositions, licensing and permit issues, contractual relationships, and debt structure.
In the pharmaceutical industry in particular, because a history of administrative dispositions or GMP regulatory issues can directly affect business operations after the acquisition, thorough legal review is needed from the stage before the acquisition.
At Daeryun, attorneys handling medical and corporate matters review in advance the administrative risks and regulatory issues that may arise in the course of acquiring a pharmaceutical company, and provide comprehensive legal advisory covering the design of the acquisition structure, the handling of due diligence, and the contracting process.
They also present practical approaches to issues that may arise after the acquisition of a pharmaceutical company, including the succession of administrative dispositions, the transfer of licenses and permits, and regulatory response strategies.
If you are considering a pharmaceutical company acquisition or a corporate acquisition and transfer transaction, you are welcome to review the transaction structure and regulatory risks in advance through a 🔗medical attorney legal consultation booking.
