Private Equity Funds (PEFs) were introduced in Korea on October 5, 2004 by adding related provisions to the Act on Business of Operating Indirect Investment and Assets. According to the announcement of the Financial Supervisory Service (FSS) there were 15 PEFs registered at the end of 2005 with a total subscription value of KRW2,895.52 billion, of which only KRW338.79 billion (11.7%) was executed. The main reason why investors have negative attitudes toward PEFs is that they often lack experiences in managing investment funds in order to raise the value of the target companies and finding attractive opportunities. Furthermore, some of the regulatory provisions on PEFs are viewed as either excessive or lack transparency. Structures of PEFs PEFs shall be set up as a Hap-Ja Whay-Sa, a Korean business structure, which is structured in a manner similar to a limited partnership with at lease one general partner (unlimited liability partner) and one limited liability partner respectively. Only general partners are qualified and permitted to be managing partners of PEFs. Registration of PEFs PEFs shall be registered with the FSS within two weeks of the registration of the establishment of the business. FSS must review the registration filings and decide to either accept or reject within thirty days. Documents such as Articles of Incorporation and business organization information are required to be filed with the registration. The "60% Rule" A minimum of 60% of the total subscription money of the PEF shall be invested, within one year of the first subscription day, in the target company by way of acquiring at least 10% of the target's outstanding shares, or other interests, to obtain managerial control over the company. However, the 60% Rule shall not be applied, subject to the approval of FSS, where (i) PEFs encounter difficulty in selecting the target company to invest in; (ii) PEFs' assets are not sufficient to acquire the desired shares or interest in the target company; (iii) PEFs are in the process of concluding managerial participation in the target company; or (iv) PEFs propose a tender offer for the target company or participate in a capital increase of the target company. Minimum Holding Period A PEF must hold the acquired shares, or other interests, for not less than six months after the date of acquisition of the shares or interests and disposal of shares or interests are prohibited during this period. However, where disposal of the shares or interests of the target company is essential to protect the interests of the PEF members, such as when the invested company's business activities are suspended or the company has ceased its business operations for three months or longer, a PEF may dispose of the shares or interest within the period with the approval of the FSS. Obligation to Obtain Managerial Control The main purpose of a PEF is to obtain managerial control over the target company and thus raise its value. To achieve this purpose, PEFs are obligated to obtain managerial control over the target company within six months after the date of the initial acquisition of the shares or interests and, if the PEF fails, all of the shares or interests acquired shall be disposed within one month from the end of the six-month period. Exceptions may be granted when (i) the invested company is delisted; (ii) the shares or interests acquired are less than 5% of a PEF¢®?s total assets; or (iii) immediate disposition of the shares or interests is not likely because of a merger, business liquidation or other similar causes. Merger and Disposal of Equity A PEF may not merge or be merged with other companies including other PEFs. Equities of the PEF which are owned by general members may not be assigned to others unless permitted by the Articles of Incorporation. Equities of the PEF which are owned by the limited liability members may be assigned to others with all general members' approvals. Obligation to Report Acquisitions of Shares General members and limited members owning over 30% of outstanding equities in the PEF are deemed related parties to that PEF. Hence, shares or other interests in the target company that any of the aforementioned members acquire outside of the PEF are to be reported to the FSS on an aggregated basis. In the same manner, when a PEF acquires shares or other interests in the company that has been already been invested in by the PEF members, the acquisition is to be reported to the FSS.