Hello, this is attorney Kim Kwang-sik of Cheongchul Law Firm.

When a private equity fund (PEF) uses borrowed money to acquire a company and that company later runs into distress, the question of who bears what responsibility has recently become a major issue in our society. At the center of it lies Homeplus and MBK Partners, the fund that acquired it. For reference, on July 3, 2026, the 4th Rehabilitation Division of the Seoul Rehabilitation Court declined to grant a further extension of the deadline for approving Homeplus's rehabilitation plan and decided to discontinue the rehabilitation proceedings, leaving Homeplus effectively at the brink of bankruptcy (room remains for an immediate appeal and for reconsideration if financing is secured).

On July 1, the Homeplus union and the Korea Zinc union joined forces for the first time ever, arguing that ‘rehabilitation proceedings and hostile takeover attempts are ultimately the product of the same greed,’ and called on the government to intervene and tighten regulation of private equity. The Financial Supervisory Service then convened its Sanctions Review Committee in early July to discuss the level of heavy sanctions (including suspension of duties) against MBK over the Homeplus affair, while Homeplus pursued both a sale and the closure of unprofitable stores ahead of the deadline for approving its rehabilitation plan. As regulation, supervision, and rehabilitation proceeded at once, the structure of legal liability surrounding private equity emerged as a core practical issue.

Today, taking these points into account, we will review ① why a leveraged buyout (LBO) structure can become the seed of distress, ② what legal duties a private equity fund and its general partner (GP) bear, ③ how liability such as damages, breach of trust, and regulatory sanctions is discussed when an acquired company falls into distress, ④ how creditors, minority shareholders, and workers are protected in rehabilitation proceedings and M&A, ⑤ recent legislative trends toward tighter private equity regulation, and ⑥ the points investors and business partners should check.

[Question]

When a private equity fund borrows money to acquire a company and that company then falls into distress, what legal liability does the fund or its manager bear toward the acquired company, its investors, and its workers?

[Answer]

1. What is a leveraged buyout (LBO) structure, and why can it become the seed of distress?

An LBO (Leveraged Buyout) is a method in which an acquirer finances the acquisition mostly through outside borrowing rather than with its own funds. A private equity fund combines a small amount of its own capital (equity) with large-scale acquisition financing (debt) to acquire a large company, and later recovers its investment by raising the company's value and reselling it, or through dividends, listing, and the like. The problem is that the burden of repaying the principal and interest on the debt used for the acquisition is often shifted onto the acquired company itself.

When MBK Partners acquired Homeplus in 2015, it was reported to have relied on outside borrowing for a substantial part of the purchase price, and as interest burdens, asset sales, and store closures followed, criticism arose that it had ‘bought with debt and recovered through dividends.’ While the LBO itself is a legal acquisition technique widely used around the world, if the debt burden is excessively shifted onto the acquired company, that company's financial structure weakens, and if an economic downturn or an industry change is added on top, the risk of distress and insolvency grows. The Homeplus case is cited as a representative example in which such structural risk of an LBO materialized.

📝 Card News Summary ▶ An LBO acquires a company mostly with borrowed money; when that debt burden is shifted onto the acquired company, its financial structure weakens and it can become the seed of distress.

2. What legal duties do a private equity fund (PEF) and its manager (GP) bear?

An institutional private equity fund is composed of a general partner (GP), which bears unlimited liability and operates the fund, and investors (LPs), who bear limited liability. Under the Financial Investment Services and Capital Markets Act (자본시장법), the GP, in managing the fund's assets, bears the duty of care of a good manager and a duty of loyalty, and owes a duty of care to provide investors with accurate information and to protect their interests. The Supreme Court has likewise held that a person who establishes and operates a private equity fund has a duty of care to produce and provide accurate information on important matters such as the investment target, the investment method, and the investment recovery structure, and bears liability for damages if a breach of this duty causes loss to investors.

Meanwhile, as the largest shareholder of the acquired company (the portfolio company) controlled by the fund, the GP effectively becomes involved in its management; and if, at this point, the GP unfairly harms the interests of the acquired company or its minority shareholders and creditors for the benefit of itself (or of the fund or other investors), a separate liability issue arises. In other words, the GP's duties must be examined along two axes — ‘duties toward investors (LPs)’ and ‘duties toward the acquired company and its stakeholders’ — before an accurate liability judgment is possible.

📝 Card News Summary ▶ A private equity manager (GP) owes investors (LPs) duties of accurate disclosure and prudent management, and toward the acquired company owes, as its largest shareholder, a duty not to unfairly harm the company or its minority shareholders and creditors.

3. Who bears what liability when the acquired company falls into distress — damages, breach of trust, and regulatory sanctions

First, there is civil liability for damages. If a GP breaches its duty of care in providing information, or its duties of prudent management and loyalty, and thereby causes loss to investors or to the acquired company, liability may arise to compensate for the loss having a proximate causal relationship with the breach. Second, there is the criminal issue of breach of trust. Where, in the course of an LBO, the acquired company is made to provide security for the acquirer's borrowing or is caused to suffer unjust financial loss, occupational breach of trust may become an issue depending on the structure and the relationship of consideration — this has been the traditional attitude of the case law. That said, whether breach of trust is established is judged case by case, examining whether the company suffered actual loss and whether there was reasonable consideration or a counter-benefit.

Third, there are administrative sanctions by the supervisory authorities. The Financial Supervisory Service is reported to have discussed a heavy sanction proposal, such as ‘suspension of duties,’ against MBK in its Sanctions Review Committee in early July in connection with the Homeplus affair. The issue was reportedly whether MBK, through a special purpose company (SPC) established during the acquisition, harmed the interests of investors (LPs) such as the National Pension Service in the course of changing the redemption terms of redeemable convertible preferred stock (RCPS) in favor of the acquired company. It should be noted, however, that the Sanctions Review Committee is an advisory body to the Governor of the FSS, so its deliberation result itself has no legal effect, and the content of the sanction is finalized only after a resolution of the Financial Services Commission. This matter may carry significant practical meaning as a case of heavy sanctions against the GP of an institutional private equity fund.

📝 Card News Summary ▶ Liability surrounding the distress of an acquired company divides into ① the GP's civil damages, ② breach of trust arising from the LBO structure, and ③ administrative sanctions by the supervisory authorities, each with different requirements and finalization procedures.

4. Rehabilitation proceedings and M&A — how are creditors, minority shareholders, and workers protected?

When an acquired company falls into distress and enters rehabilitation proceedings, the company's fate turns on the approval and confirmation of its rehabilitation plan and on that plan's ‘feasibility.’ An M&A within rehabilitation proceedings, unlike an ordinary M&A, must go through both court supervision and the consent of a majority of creditors, and the acquisition price becomes the source of funds for repaying creditors. Homeplus, too, pursued both a sale (distributing teasers to potential acquisition candidates) and the closure of unprofitable stores ahead of the deadline for approving its rehabilitation plan, but is reported to have failed to secure the funding needed to carry out the plan.

The protective mechanisms for stakeholders in this process are as follows. Creditors are protected by the repayment rate under the rehabilitation plan and by the principle of guaranteeing liquidation value (the principle that repayment under a rehabilitation plan must not be less favorable than the distribution upon liquidation), while whether commercial trade creditors are repaid is determined by claim priority at each stage of rehabilitation and bankruptcy. Workers' wage and severance claims are secured in part by priority repayment rights and by the state's substitute payment system for unpaid wages, and minority shareholders receive protection under the principles of fairness and equity in the process of changing rights, such as capital reduction and debt-to-equity swaps under a rehabilitation plan. Ultimately, rehabilitation proceedings can be seen as a mechanism that allocates the losses among the stakeholders of a distressed company according to the principles of law.

📝 Card News Summary ▶ When a distressed company enters rehabilitation, the plan's feasibility is decisive; creditors are protected by the liquidation-value guarantee principle, workers by wage priority repayment and substitute payments, and minority shareholders by the principles of fairness and equity.

5. Legislative trends toward tighter private equity regulation — the so-called ‘Predatory Private Equity Prevention Act’

Prompted by the Homeplus affair, numerous amendments to the Financial Investment Services and Capital Markets Act aimed at regulating private equity have been proposed and are pending in the National Assembly. Their main contents are as follows.

First, borrowing regulation. Proposals under discussion would cap a PEF's borrowing limit at a certain multiple of net assets (for example, reducing it from 400% to 200%), or require that, where a certain ratio is exceeded, the reason and a management plan be reported to the financial authorities.

Second, strengthening the GP's accountability. The proposals include tightening GP registration requirements, such as newly establishing eligibility requirements for major contributors, creating grounds to cancel unlawful GP registrations, strengthening internal controls, and mandating the appointment of a compliance officer.

Third, worker protection. This includes a proposal that, where a PEF becomes the largest shareholder of a target company, it must notify the workers' representative of the purpose of its participation in management and the impact on employment. Such legislative discussion, dubbed the ‘Predatory Private Equity Prevention Act,’ reflects a trend toward regulating the excessive borrowing of LBOs, the shifting of burdens onto acquired companies, and indiscriminate acquisitions of national key industries. That said, where to strike the balance so as not to dampen the beneficial functions of private equity (corporate restructuring and capital market vitalization) is the core legislative task, and since the final content of the amendments is not yet fixed, their progress needs to be watched closely.

📝 Card News Summary ▶ Since the Homeplus affair, numerous amendments to the Capital Markets Act in the nature of a ‘Predatory Private Equity Prevention Act’ — cutting PEF borrowing limits, tightening GP registration and internal controls, and requiring notice to workers' representatives — have been proposed and are pending.

6. In summary — distinguishing the layers of liability and checkpoints for stakeholders

First, an investor (LP) contributing to a private equity fund should check in advance the accuracy of the information provided by the GP, such as the investment proposal, the investment recovery structure, the size and repayment structure of the acquisition financing (debt), and the conflict-of-interest management system, and, if loss occurs, should specifically examine which of the GP's duties were breached.

Second, the business partners and suppliers of the acquired company should periodically check that company's financial structure and debt burden and its rehabilitation and distress risk, and should prepare in advance means of preserving their claims, such as recovering payment for goods and securing collateral.

Third, the workers of the acquired company should accurately understand and respond to the means of preserving their rights, such as priority repayment of wage and severance claims and substitute payments, at each stage of rehabilitation and bankruptcy. Fourth, a private equity fund and its manager (GP) would do well, from the stage of designing the acquisition structure, to put in place a compliance system that reflects the breach-of-trust risk of an LBO, the management of information disclosure and conflicts of interest toward LPs, and the trend of tightening regulation by the supervisory authorities.

Furthermore, the mere fact that ‘a company acquired by a private equity fund has collapsed’ does not by itself immediately establish the liability of any particular person. The Homeplus-MBK matter is a case in which the risk of the LBO structure, the GP's duties toward investors and the company, the layers of liability of damages, breach of trust, and regulatory sanctions, the protection of stakeholders in rehabilitation proceedings, and legislation to tighten private equity regulation are all entangled at once; to reach an accurate conclusion, one must distinguish, layer by layer, which duty rested with whom, whether there is a causal link between the breach and the loss, and through which procedure (civil, criminal, or administrative) the matter is to be contested.

📝 Card News Summary ▶ Liability for the distress of a private-equity-acquired company must be judged by distinguishing the civil, criminal, and administrative layers; investors should check information and recovery structures, business partners their claim preservation, workers their wage priority repayment, and managers their breach-of-trust and regulatory risks.

Drawing on its experience in advisory work and disputes relating to private equity and acquisition finance, in rehabilitation and restructuring proceedings, and in listed-company governance advisory, Cheongchul Law Firm provides comprehensive legal advice spanning finance, corporate rehabilitation, and governance — from the scope of a private equity manager's (GP's) breach of duty and damages, to review of the breach-of-trust risk of an LBO structure, to M&A within rehabilitation proceedings and the preservation of creditors' and workers' rights, and to responding to sanctions by supervisory authorities and reorganizing compliance in light of regulatory change. If you need a legal review relating to a private equity investment or the distress of an acquired company, we recommend designing your response direction by systematically analyzing the contracts, investment structure, and financial data from the earliest stage.