Why the Target’s legal form matters in Korean M&A

While uncommon, we have encountered a transaction where, during the kick-off meeting for a foreign client’s acquisition of control of a small Korean business, we confirmed that the Target was not a joint-stock company but operated as a sole proprietorship. Because the Target’s legal form can materially affect transaction structure, due diligence scope, and key risk areas, it was important to promptly inform the client and recalibrate the deal approach.

Confirming the Target’s legal form is a critical early-stage checkpoint. Even if a business appears to be a “company” in practice, it may not be incorporated. Where the Target is a sole proprietorship, a conventional share deal may need to be restructured into an asset/business transfer (asset transfer or business transfer).

Structural differences: corporations vs. sole proprietorships

A corporation is a separate legal entity with equity interests, and acquisitions are typically structured as a share deal. By contrast, a sole proprietorship does not issue shares, and the acquisition is commonly structured as an asset transfer or business transfer, requiring the parties to define the scope of assets, contracts, employees, and licenses/permits to be transferred.

Key considerations when acquiring a sole proprietorship

1. Transaction structure and scope (assets and liabilities in scope / out of scope)

Because the deal may be structured as an asset transfer or business transfer, the acquisition perimeter must be clearly defined—distinguishing assets to be transferred and liabilities to be assumed or excluded (including contingencies)—and reflected in the transaction agreement. Even in a business transfer, the transfer of contracts, licenses/permits, and employees may be restricted by law and/or require third-party consents.

2. Transferability of key contracts (assignment/consent)

Key contracts may include transfer restrictions or require prior consent and/or notice upon a change in the contracting party. These requirements should be identified early and reflected in the transaction timeline and Conditions Precedent (CP).

3. Licenses/permits and transfer requirements

Where a change in the license/permit holder (or registered name) occurs, transfer may be restricted, and amendment filings or re-application may be required. Because this can affect business continuity, related actions are commonly included as CPs.

4. Reliability of financial information

Sole proprietorships often rely heavily on external bookkeeping providers, and their accounting records may be maintained on a tax-invoice issuance basis or a cash-basis approach, which can result in material differences from GAAP. Diligence may therefore require cross-checks using VAT filings and bank transaction data. Accrual items and employee-related provisions and expenses (e.g., retirement benefit provisions and unused annual leave accruals) may be incomplete or subject to cut-off issues.

Where material uncertainty exists, investors should address it through appropriate contractual protections, including representations and warranties and indemnities, and, where appropriate, payment timing mechanisms such as escrow, holdback, or deferred payments.

5. Employee transfer and employment arrangements

Employee continuity may not be automatic, and the approach (transfer vs. re-hiring) may require agreement. Retention of key personnel, settlement of employee-related items, and terms of new employment arrangements can affect both timetable and post-closing integration and should be addressed early, including through CPs where needed.

Key takeaways

Because transaction structure may vary depending on the Target’s legal form, investors should confirm the Target’s legal form early to minimize cost and timeline risk, and identify transfer requirements for critical contracts and licenses/permits—including third-party consent needs. In sole proprietorship acquisitions, a clear definition of the acquisition perimeter, robust contractual protections (R&Ws and indemnities), and an appropriately structured payment mechanism can reduce uncertainty during due diligence and improve overall deal executability.