Legal Guide to the Sale of a Corporation and Strategies for Corporate Valuation

This article introduces a case of comprehensive legal advisory provided across the entire process of a corporate sale, from structural design and due diligence response through contract execution and closing of the transaction.

Daeryun recently provided advisory on the financing structure of a mixed-use development project and on a transaction for the sale of a major domestic office asset.

For a mixed-use facility development project that involved project financing in the range of hundreds of millions of won, the Firm organized the contractual structure between the borrower and the financial institutions and reviewed administrative issues and potential sources of dispute relating to the project site in advance, so that the financing could be arranged in a stable manner.

In particular, it legally coordinated regulatory issues that arose during the course of the project and differences of opinion among stakeholders, helping to reduce transaction risk.

In addition, in the sale of a major domestic office asset, the Firm acted as legal advisor to the seller and supported the review of the succession of numerous lease agreements, the negotiation of contract terms with investors, and the overall closing procedures of the transaction.

The Firm's attorneys completed the transaction in a stable manner by integrating real estate finance and corporate M&A perspectives, in line with the need for contract design that takes into account licensing procedures and regulatory requirements.

The first decision that a representative who has resolved to sell a corporation faces is the question of "in what form the transaction will be carried out."

The forms of M&A are largely divided into share transfers and business transfers.

In the sale of a corporation, a share transfer is a method of selling, in a single transaction, 100% of the equity interest held by the shareholders.

In this case, all of the corporation's assets, liabilities, and contractual relationships are comprehensively succeeded to.

By contrast, a business transfer is a form in which only a specific business division, brand, or goodwill within the corporation is carved out and transferred.

Because the object of the sale differs, the entity liable for taxes also differs. In a share transfer, the "shareholder" who sold the equity interest pays capital gains tax, whereas in a business transfer the "corporation" itself pays corporate tax on the operating profit.

For a successful sale of a corporation, an objective range for the sale price that the acquirer can accept must be calculated.

Unlike large-corporation deals, the small and medium-sized enterprise M&A market has few standardized advisory institutions, so the process of adjusting the price often encounters difficulties.

As a basic matter, every corporation conducts an initial corporate valuation on the basis of the figures in its financial statements.

Once the corporate sale procedure begins in earnest, detailed due diligence by the acquiring side is conducted.

Due diligence is carried out across all areas, including financial, tax, and legal matters, and risks discovered here become grounds for a reduction in the sale price or for termination of the contract.

An internal review of risks before pursuing a sale is therefore indispensable.

The final stage of the sale of a corporation is the execution of the final contract and receipt of the balance of the price.

In this process, complex conditions beyond the purchase price come to the negotiating table, including the scope of the representative's post-closing liability, the conditions for retaining key personnel, and additional payments contingent on management performance.

The seller must represent and warrant in the contract that there is nothing false regarding the condition of the company.

If, after the sale, facts are revealed that differ from what was represented, liability for damages or an obligation to return part of the price may arise.

The key to defending against legal risk is therefore determining the extent to which the scope of liability will be limited and how the cap on indemnification and the minimum claim threshold will be set.