Procedures for Withdrawing a Company Established in Korea

The process of withdrawing a company established in Korea involves multi-layered, complex legal and financial considerations. Foreign investors planning to withdraw from the Korean market must take into account various options, each with its own distinct advantages and disadvantages. This paper explores three primary exit strategies—equity transfer, liquidation, and bankruptcy—in depth. Each of these exit strategies involves different legal requirements, financial burdens, and social implications, necessitating a comprehensive evaluation.

1. Equity Transfer Method

Equity transfer is one of the most efficient and expedited methods for withdrawing from a company, involving the transfer of ownership to a third party while maintaining the company as a legal entity. The key benefit of equity transfer is that it allows for procedural simplification and cost savings, as there is no need for additional disposal of assets or personnel. Equity transfer presents an attractive opportunity for new investors or companies seeking expansion within the same industry, ensuring business continuity while facilitating a swift exit.

However, this approach requires the identification of a potential buyer, which is a significant prerequisite. If the company possesses a viable business model or valuable assets (e.g., production facilities, real estate), it may be easier to find a buyer, but in the absence of such features, equity transfer may not be a realistic alternative. If a business is in a downturn or suffering from significant losses, persuading potential buyers could prove challenging, and the sale price may fall significantly below initial expectations. In such cases, strategic negotiation and thorough due diligence using non-disclosure agreements (NDAs) are essential to secure an appropriate buyer.

Equity transfer may also involve negotiations concerning employee succession. If a buyer agrees to retain all existing employees, the deal can be positively viewed from the perspective of employment continuity; however, if the buyer demands workforce reduction or restructuring, it could lead to social conflicts. Therefore, it is crucial to meticulously review and prepare for the legal risks associated with employment issues during the equity transfer process.

2. Liquidation Method

Liquidation is the process of disposing of all assets, settling debts, and ultimately dissolving the corporate entity. It involves ceasing all commercial activities, disposing of residual assets to distribute to creditors, and thereby extinguishing the company’s legal status. Liquidation is generally considered when a company's sustainability is in doubt and continued business operations are no longer economically feasible.

In the liquidation process, the parent company often injects additional capital to pay off liabilities, thereby avoiding the negative perception associated with bankruptcy. This approach helps maintain the company’s reputation and has a positive impact on future investment activities in other markets. However, this additional capital injection can create financial burdens, and the process of asset disposal may involve various practical issues. For instance, unforeseen tax complications and delays in asset sales beyond the liquidation plan pose significant risks.

A competent liquidation team is crucial for successful liquidation. The team should consist of both internal and external experts, including tax and legal professionals. Their role is to ensure all procedures, such as asset sales and negotiations with creditors, comply with legal standards. Moreover, an analysis of potential risks and corresponding response plans should be systematically conducted beforehand to ensure smooth liquidation. It is particularly important to anticipate and prepare for penalties related to the termination of leases, employment contracts, and other commercial agreements.

3. Bankruptcy Method

Bankruptcy is an option when a company cannot settle its debts with its available assets. In the bankruptcy process, a court-appointed bankruptcy administrator manages the company’s assets, which are then liquidated and distributed to creditors. This process minimizes conflicts between stakeholders and ensures fair distribution through judicial intervention. Bankruptcy is considered the final resort for terminating corporate responsibility in cases where the company has no economic recovery prospects.

The court manages the asset disposal and debt repayment in bankruptcy proceedings, ensuring creditor protection. However, bankruptcy often results in the assets being sold at a depreciated value and can negatively impact the company’s image. Loss of trust among business partners and existing clients can also occur, potentially affecting business operations in other countries. Hence, bankruptcy should be considered a last resort, with liquidation or equity transfer being preferred alternatives whenever feasible.

Nevertheless, the principle of limited liability under the Korean legal system means that shareholders are not required to bear additional responsibility for the company’s debts. This makes bankruptcy a practical and effective option in situations where recovery is not possible. Additionally, through the bankruptcy process, transparency and fairness are secured from a creditor protection perspective, as creditors are able to receive distributions according to judicial procedures. Even during bankruptcy proceedings, it is crucial to seek appropriate legal advice to maximize the value of assets and minimize legal risks.

Criteria for Selecting an Exit Method

Selecting the optimal method for withdrawing from a company in Korea depends on the company’s unique financial and legal circumstances. Factors such as business outlook, asset and liability status, market demand, employment considerations, and legal issues should all be comprehensively considered. If a buyer can be found, equity transfer is often the quickest and most effective option. Equity transfer is particularly suitable when maintaining existing assets and employee continuity is a priority.

In cases where no buyer can be found, liquidation or bankruptcy may be considered. Liquidation is the preferred method when the company has sufficient assets to cover its liabilities and enables a more controlled process to terminate its legal status. In contrast, bankruptcy is advantageous in limiting legal liabilities and providing transparency for creditor protection, making it an ideal option for companies with no prospect of financial recovery.

Conclusion

The process of withdrawing a company from Korea involves numerous legal and financial risks; however, with thorough preparation and careful strategic planning, it can be successfully completed. Each exit strategy has its unique advantages and disadvantages, and selecting the most suitable option requires a close examination of the company’s specific situation. For foreign investors planning to exit from Korea, obtaining professional legal and financial consultation and conducting detailed simulations are essential. This approach helps minimize unnecessary risks and ensures a smooth withdrawal.

When selecting an exit strategy, the legal, financial, and social impacts of each method should be comprehensively considered, and close communication with stakeholders is vital to prepare for any potential issues. The optimal exit strategy must be carefully determined through a detailed analysis of both the company’s status and the external environment, supported by meticulous pre-planning and expert guidance. This ensures that risks during the withdrawal process are minimized, assets are maximized, and legal liabilities are reduced, thereby achieving a smooth and effective withdrawal.

For Further Assistance:

Siwoo Law Firm International Investment and Transaction Team
Ryu Seungho, South Korean Attorney
Email: [ryu@siwoo-law.com](mailto:ryu@siwoo-law.com)