M&A계약에서의 진술 및 보장 조항 및 그 위반

This paper will examine the seller’s liability for compensation to the purchaser for a breach of a representation and warranty regarding the target company in a share sale and purchase agreement as opposed to a breach of a representation and warranty regarding the stock being sold. Recently, a court case arose out of Hyundai Oil Bank’s purchase of the shares of Hanwha Energy from the then-shareholders of Hanwha Energy on April 2, 1999. The issue was the breach of the sellers’ representations and warranties and their liability for compensation to the purchaser. In particular, the issue was whether the purchaser may seek compensation under the sale and purchase agreement if the purchaser already knew of the sellers’ breach of the representations and warranties or if the purchaser did not know such breach due to its negligence, despite what seemed to be the purchaser’s willful misconduct or negligence. In an M&A agreement, a ‘representation and warranty’ is a contractual provision under which each of the purchaser and the seller of a target company represents and warrants to the other party that certain matters are true. They are typically used in M&A agreements in the U.S. and Anglo-American jurisdictions, and they became commonplace in Korea after the Asian economic crisis of 1997 when foreign purchasers used the Anglo-American sale and purchase agreements in purchasing Korean companies. This Hanwha Energy case was a significant precedent in that it was the first time that a Korean court reviewed the meaning of a party’s representation and warranty and its breach from Korean law perspective. This paper analyzes how to interpret representation and warranty clauses, their roles and compensation liability in case of a breach under the current Korean law. The fundamental reason that there is a controversy over the compensation liability for breach of a representation and warranty is because this clause was developed under the Anglo-American legal system which creates difficulties in interpreting the same under the continental legal system in which a contractual liability can be construed as a warranty liability or a breach of contract liability. Under Korean law, compensation liability for the breach of a representation and warranty may seem similar to warranty liability, but there are differences. Further, if a representation and warranty relates to the target company, rather than to the stock being sold, it is difficult to view the breach of such representation and warranty as a defect in the stock. Therefore, it seems more reasonable to view the compensation liability for the breach of a representation and warranty as a breach of contract liability. The intent of the parties in including representations and warranties in the sale and purchase agreement is to guarantee, as special provisions of the contract, that the subject matter of the transaction has to have certain qualities desired by the purchaser and that the subject matter of the transaction indeed has such qualities. Therefore, if the subject matter being sold by the seller does not meet such criteria, the seller should be viewed as not having performed the contract in accordance with its terms and conditions, and hence, having breached the contract. If the nature of the compensation liability is understood in this way, the purchaser’s negligence would not affect the issue of whether the seller has the compensation liability, but would merely reduce the scope of liability. As a practical matter, it would give rise to the issue of who has the burden of proof of negligence.