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General structuring of financing
Choice of law
What territory’s law typically governs the transaction agreements? Will courts in your jurisdiction recognise a choice of foreign law or a judgment from a foreign jurisdiction?
Facility agreements are typically governed by Korean law, especially in the case of purely domestic transactions, but parties are free to agree on the governing law of facility agreements. In case the syndication of lenders comprises foreign financial institutions, the facility agreements are often governed by English or New York law. With respect to the security agreements, in the case of assets located in Korea, as the perfection procedure must be completed in accordance with the requirements of Korean law, the collateral or security agreements are always governed by Korean law.
With respect to a choice of law other than Korean law, Korean courts generally uphold choice of law provisions in transaction documents governed by a foreign law unless the application of such law would contravene the principles of public order and good morals of Korea.
In addition, the courts of Korea would recognise as a valid judgment and would enforce any civil judgment for a monetary claim obtained in a foreign court, without re-examination of the merits of the case, provided that the following applies:
- the judgment was finally and conclusively given by a court having valid jurisdiction in accordance with the international jurisdiction principles under Korean law or applicable treaties;
- the defendant was duly served with service of process (otherwise than by publication or similar means) in sufficient time to enable the defendant to prepare its defence in conformity with the applicable laws, or responded to the action without being served with process;
- recognition of the judgment is not contrary to the public policy of Korea; and
- judgments of the courts of Korea are accorded reciprocal treatment in the jurisdiction of the court that had given the judgment, or in recognising the judgment, the foreign jurisdiction does not treat judgments of the courts of Korea in a manner that is considerably prejudicial and the requirements for recognition of the judgments of the courts of Korea in the relevant foreign jurisdiction are substantially the same as those of judgments of the foreign court in Korea in material respects.
Restrictions on cross-border acquisitions and lending
Does the legal and regulatory regime in your jurisdiction restrict acquisitions by foreign entities? Are there any restrictions on cross-border lending?
Generally, Korea does not restrict foreign acquisitions, but any investment in Korean companies by foreign entities in excess of 100 million won, and acquisitions of 10 per cent or more ownership interest in the Korean companies constitutes ‘foreign investment’ under the Foreign Investment Promotion Act. In such a case, foreign investment is subject to prior authorisation by the Ministry of Trade, Industry and Energy (which has delegated the reviewing authority to the Korea Trade-Investment Promotion Agency and foreign exchange banks) and foreign investment in certain industries is restricted.
For instance, foreign investment in industries such as public administration, diplomacy, postal services, and national defence is not permitted, while foreign investment is partially permitted in sectors such as the cultivation of certain crops, farming of beef cattle, inshore and coastal fishing, publication of newspapers, transportation business and broadcasting.
In case of short-term portfolio investments that are not subject to the Foreign Investment Promotion Act, acquisition of securities, including foreign acquisition of the stocks or shares of a Korean company, is subject to a prior authorisation of the Korean foreign exchange authorities under Foreign Exchange Transaction Regulations. In case the subject shares are listed on the Korea Exchange, unless the acquisition qualifies for an exception under the Financial Investment Services and Capital Markets Act (FSCMA), the sale and purchase must be made on the market.
There are no restrictions on cross-border lending between a non-resident lender and Korean-resident borrower, except that according to the Foreign Exchange Transaction Regulations, if the amount of loan or note is equal to, or exceeds US$30 million, the financing must be reported to the Ministry of Strategy and Finance, while any financing in a lower amount is subject to filing of a report with a foreign exchange bank.
In case of cross-border lending involving a non-resident borrower and Korean-resident lender, if the loan is borrowed from a Korean financial institution that is regularly engaged in the foreign exchange business, no authorisation is required. However, if the loan is guaranteed by a resident guarantor or security is provided by a Korean resident, or if the loan amount exceeds 1 billion won, the non-resident borrower must file a prior report with the Bank of Korea. However, if the non-resident intends to issue a won-denominated bond or won-linked foreign currency bond, a prior report must be filed with the Ministry of Strategy and Finance.
Types of debt
What are the typical debt components of acquisition financing in your jurisdiction? Does acquisition financing typically include subordinated debt or just senior debt?
The components of debt financing vary depending on the size of the deal in Korea. Large acquisition financings are generally composed of, not only a senior secured term loan facility and a senior secured revolving credit facility, but also a senior-secured notes offering (especially where foreign financial institutions are involved) and a subordinated mezzanine notes facility. In case of notes denominated in foreign currency, which are placed outside of Korea, interest income on the notes is exempt from withholding tax (see question 7). As a result, foreign financial institutions tend to prefer participating in acquisition financing by subscribing for privately placed, often US dollar-denominated, notes outside of Korea. Further, securities companies or funds that are not authorised to directly advance loans under Korean law (for an exception pursuant to which securities companies can directly advance loans to the borrower, see question 6) may participate in acquisition financing transactions by subscribing for bonds or notes issued by the issuer or by purchasing loans from the initial lender. We have recently experienced an increasing number of subordinated bond subscriptions and loan purchases by securities companies and funds. Although mezzanine debt is usually secured on the same assets as senior debt, by way of intercreditor arrangements, the mezzanine debt is subordinated to the senior debt.
Are there rules requiring certainty of financing for acquisitions of public companies? Have ‘certain funds’ provisions become market practice in other transactions where not required?
In Korea, there is no rule requiring certainty of financing for acquisition of public companies, other than the requirement that an acquirer discloses details of its funds for acquisition when it submits a tender offer report with the Korean regulatory authorities in connection with the proposed tender offer for shares in a public company. However, where the seller of shares or assets is a foreign entity, a ‘certain funds’ provision is often adopted in the acquisition financing document entered into in relation to the target companies existing in Korea. Another requirement for evidence of lenders’ full commitment in Korea is particularly prevalent in the context of an auction where the bidder is typically required to attach a fully underwritten commitment letter issued by the lenders to the bidding package.
Restrictions on use of proceeds
Are there any restrictions on the borrower’s use of proceeds from loans or debt securities?
There is no statutory restriction on the borrower’s use of proceeds from loans or debt securities, but term sheets as well as facility agreements for acquisition financing in Korea usually include a purpose clause specifying how the loan proceeds are to be used and such purpose clause must conform to the use of proceeds reported to the authorities in the foreign exchange report filed pursuant to Foreign Exchange Transaction Regulations where such report needs to be filed.
Licensing requirements for financing
What are the licensing requirements for financial institutions to provide financing to a company organised in your jurisdiction?
Banks licensed under the Banking Act are generally authorised to engage in any lending activity. In the case of life insurance companies, specialised credit financial business operators, mutual savings banks and private lending business operators, they can also engage in such lending activity as authorised under the Insurance Business Act, Specialised Credit Financial Business Act, Mutual Savings Banks Act and the Act on Registration of Credit Business and Protection of Finance Users, respectively, upon obtaining the necessary approval or satisfying the registration requirement prescribed in the laws. Securities companies licensed as a comprehensive financial investment business operator under the FSCMA can directly advance loans to corporates, but if not licensed as such, securities companies can directly advance loans only on certain exceptional cases prescribed under the FSCMA, including in a loan transaction where the securities company in question is acting as the lead arranger in the relevant acquisition transaction. Hedge funds registered with the Financial Services Commission under the FSCMA are permitted to directly advance loan but non-hedge funds are not permitted to directly advance any loan under the FSCMA. In such cases, funds can participate in acquisition financing by subscribing for notes or bonds issued by the same borrower or issuer or purchasing loan claims from the original lender. No foreign lender is required to obtain the relevant licence under the Banking Act or any other finance business related law unless it is engaged in any solicitation activities for borrowing of loans by any resident of Korea.
Withholding tax on debt repayments
Are principal or interest payments or other fees related to indebtedness subject to withholding tax? Is the borrower responsible for withholding tax? Must the borrower indemnify the lenders for such taxes?
Interest payments and other fees payable to non-resident lenders are subject to withholding tax at a rate of 22 per cent (15.4 per cent in the case of interest on the bonds) under the Korean tax law. The tax rates may be reduced by an applicable tax treaty between Korea and the country of the lender. However, interest and fees on the notes paid to non-residents or foreign companies without business premises in Korea is exempt from tax pursuant to the Special Tax Treatment Control Law, if they qualify as foreign currency denominated bonds and if issued outside Korea.
Where there is no exemption available to the withholding tax obligations, the borrower will be responsible for such withholding tax. The facility agreement usually requires the borrower to gross-up in case the withholding tax obligation arises.
Restrictions on interest
Are there usury laws or other rules limiting the amount of interest that can be charged?
According to the Interest Rate Limitation Act, charging interest of more than 24 per cent annually is considered usury. While such limitation generally does not apply to financial institutions and private lending business operators authorised or registered under other laws, according to the Act on Registration of Credit Business, etc and Protection of Finance Users (Credit Business Act), financial institutions defined as ‘credit financial institutions’ under the Credit Business Act (including banks, securities firms, insurance companies, specialised credit financial business operators and mutual savings banks) and private lending business operators (in case of private lending business operators, only applicable when they advance loans to individuals or small corporations under the Framework Act on Small and Medium Enterprises), are not allowed to charge interest of more than 27.9 per cent per annum. This limitation under the Credit Business Act is scheduled to expire on 31 December 2018 but as in the past, the limitation on interest rate may continue to remain effective by way of amendment of the relevant laws or regulations.
What kind of indemnities would customarily be provided by the borrower to lenders in connection with a financing?
Numerous indemnities are available in Korean-law governed acquisition finance documents. Credit agreements almost always include a tax indemnity provision stipulating a tax gross-up and a currency indemnity provision providing for indemnification of the costs of conversion of a payment from one currency into the currency payable under the credit agreement. In addition, the lenders and agents are generally indemnified against all losses, costs or expenses arising out of the negotiation, execution, delivery, performance or enforcement of the transactions contemplated under the finance documents.
Assigning debt interests among lenders
Can interests in debt be freely assigned among lenders?
Any restriction on assignment or transfer of loan can be imposed by way of contractual agreement between the borrower and the syndicate lenders, but in acquisition financing, an assignment or transfer of the debt is often subject to consent or consultation with the borrower, unless a default has occurred under the financing document or the assignment or transfer is to existing lenders or their affiliates, or to a pre-approved list of institutions. In the case of securities offered or sold outside of Korea to a non-resident of Korea (unless the issuer intends to file a securities registration statement with the Financial Services Commission), in order to avoid the burdensome task of filing the securities registration statement, which requires significant levels of disclosure pertaining to the issuer, the issuers generally opt to be bound by a one-year selling restriction and include in the notes and bonds certificates, subscription agreements and offering circulars, a legend to the effect that the notes or bonds may not be offered or sold, or offered or sold to any person for re-offering or resale, to any resident of Korea for one year from the date of issuance.
Requirements to act as agent or trustee
Do rules in your jurisdiction govern whether an entity can act as an administrative agent, trustee or collateral agent?
Under Korean law, there are no rules or regulations that govern whether an entity can act as an administrative agent or collateral agent for acquisition financing. The administrative agent is an attorney-in-fact of the lenders and a collateral agent is an attorney-in-fact of the security holders, and the relationship between such agent and its principals is governed by the agreement between the relevant parties.
A trustee, however, must be qualified under the FSCMA as a trustee. The trustee under the FSCMA does not need to be a bank, and different qualification requirements apply, depending on the type of entrusted assets and the entity entrusting the assets.
May a borrower or financial sponsor conduct a debt buy-back?
There is no statutory prohibition on debt buy-back by a borrower or sponsor. Under Korean law, in the case of buy-back of loans by a borrower, the debt will be deemed to be automatically extinguished as a matter of law. However, in the case of repurchase of securities by the issuer, the debt will not be automatically extinguished and the issuer may, at its election, sell the debt to a third party by transferring the relevant securities or extinguishing the debt by cancelling the relevant securities unless otherwise restricted by the existing financing documents. In the case of debt buy-back by a sponsor, whether the debt takes the form of loans or securities, such debt will not be automatically extinguished and the sponsor may, at its election, retain the debt or sell the debt to a third party by transferring the relevant debt to a third party, unless otherwise restricted by the existing financing documents.
Is it permissible in a buy-back to solicit a majority of lenders to agree to amend covenants in the outstanding debt agreements?
While there is no Korean law restriction or rule on whether covenants in the outstanding debt agreements may be amended by a majority lender approval or whether it is possible to impose minority dissenting lenders who vote against the buy-back to exit, the parties to the financing transaction may agree to provide for such restriction. It is up to the borrower to agree with the lenders on amendment of covenants in the outstanding debt agreements, but it is uncommon in Korea to provide for the right of debt buy-back or exit arrangement for dissenting minority lenders.
Guarantees and collateral
Related company guarantees
Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?
The Monopoly Regulation and Fair Trade Act (the Fair Trade Act) prohibits unfair trade practices. Unfair trading includes providing advanced payments, loans, manpower, guarantee or otherwise providing assistance on substantially favourable conditions to another entity (including a related party), but such unfair trade practices refer to trading conducted unfairly or unjustly, which may limit free competition in the Korean market. If guarantees by foreign-registered related companies would not interfere with orderly competition in the Korean market, such guarantees would be permissible.
Under the Fair Trade Act, there are companies designated by the Fair Trade Commission as corporations subject to limitations on mutual investment and cross-guarantee. A company belonging to such group is prohibited from guaranteeing obligations of affiliates, but such guarantees prohibited under the Fair Trade Act are limited to guarantees, by a company belonging to a certain designated group (excluding financial institutions and insurance companies), of obligation of its domestic affiliates in connection with loans advanced by domestic financial institutions. Therefore, foreign-registered related companies’ guarantees would not be subject to the foregoing restriction on cross-guarantees in respect of the loans extended by financial institutions.
Assistance by the target
Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?
The pledge of a target subsidiary’s assets as security for the parent’s repayment of acquisition debt obligations, or the target company’s guarantee of its parent’s repayment obligations without obtaining ‘adequate’ consideration from the parent constitutes criminal and civil breach of fiduciary duty by the directors of the target toward the target, the corporate entity, under Korean law. In other words, under Korean law, if the target’s directors fail to procure such adequate consideration at the time they approve the provision of collateral or upstream guarantee, the directors will be regarded as having caused economic harm to the target and breached their fiduciary duty to the target company. The consideration the directors are required to obtain in return is one equivalent to the exposure risks the target has to bear of forfeiting its assets in case the parent defaults on the loans.
Types of security
What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?
While there are several kinds of security available in debt financing in Korea, lenders in acquisition finance generally take security over only the target’s shares owned by the acquiring company by way of share pledge and the acquiring company’s bank accounts by way of account pledge due to financial assistance concerns discussed above. Following merger of the acquirer and the target, lenders take security over all assets of the target and often the target’s wholly owned subsidiaries, as long as the merger is conducted in compliance with the applicable legal requirements and the commercial viability of such merger can be justified in view of the business judgement rule. In addition to pledge over shares and bank accounts, the security package includes pledge or assignment over movable assets, pledge over securities, intellectual property rights, and contractual rights such as account receivables and mortgage over real property.
The concept of ‘kun-security’ under Korean law is similar to a floating charge in that it is an ongoing security interest in a particular property to secure all of the present or future debt obligations of the debtor. As kun-security can secure various types of present and future debt obligations of the debtor and the amount of such debt is not required to be determined at the time of its creation, it is the most frequently used form of security in Korea and all of the securities mentioned above can be created in the form of a kun-security. In creating the kun-security, financial institutions in Korea customarily require 120-130 per cent of the underlying obligation as the maximum secured amount (ie, the maximum amount that a secured party can recover from enforcement of the security).
For kun-security that requires registration with the governmental office to be enforceable against third parties (such as real estate kun-mortgages, kun-mortgage over ship, automobile, aircraft, construction equipment and factory, kun-pledge over intellectual property rights, kun-pledge under the Act on Security on Movable Property and Receivables), the maximum-security amount must also be registered at the time of registration. In all other cases, it is not necessary to specify the maximum-security amount.
In Korea, a blanket lien cannot be granted on all assets of a company.
Requirements for perfecting a security interest
Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?
For assignment of contractual rights or accounts receivable, under Korean law, the assignee and assignor must enter into an assignment agreement, and the assignor must give notice to or obtain consent from the relevant obligor with respect to the assignment of such contractual rights or accounts receivable with a fixed date stamp. In this regard, upon simply providing notice of assignment to the obligor, the assignor has perfected rights against such obligor. However, in order to have perfected rights against other third parties, the notice to or consent from the obligor must be affixed with a fixed date stamp. The same rule applies to a pledge of cash or deposit accounts.
For security interest over inventory and equipment, the title and possession of the pertinent inventory and equipment (unless equipment constitutes a part of the assets located in a factory, in which case it can be mortgaged by registering with the registry office within the district court) should be transferred to the assignee. However, in commercial practice, the debtor (ie, the original owner of the inventory) can maintain his or her direct possession of the inventory so that he or she can keep running the business, whereby the assignee consigns the custody of the inventory to the debtor.
For pledges of intellectual property rights, the security over patents, trademarks and copyrights can be pledged by registering with relevant government offices.
Insurance can generally be assigned by providing notice of assignment to the insurance companies with the fixed date stamp, although some insurance policies require the consent of the insurer.
Real property can be mortgaged by registering with the registry office within the district court.
Shares can be pledged by delivery of share certificates representing the pledged shares to the pledgee. In order to perfect the pledge on the shares against the issuer, the pledgee’s name and address need to be recorded in the shareholders’ registry and the pledgee’s name needs to be recorded on the share certificates.
The security interest over movable assets created pursuant to the Act on Security over Movable Property and Receivables must be registered on the asset registry of the competent registry office.
Renewing a security interest
Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?
There is no statutory requirement on renewal procedure that must be taken to keep the perfected lien valid and recorded. Of course, the registration or recordation that has been made to perfect the security interests must be kept intact to maintain such perfected security interests.
Stakeholder consent for guarantees
Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?
In the absence of any express collective agreements with unions or other employee representative bodies requiring the employer to obtain employee consent, there is no obligation to obtain consents from or consult with a works council, trade union or other employee representative body for the provision of guarantee or security by a Korean company.
Granting collateral through an agent
Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?
Under Korean law, except for security created under the Secured Bond Trust Act, the security trustee does not have a security right to the secured assets unless the underlying secured claim is owned by the security trustee, and thus, each of the lenders and noteholders has to hold the collateral individually and the assignment of security must be accompanied by the assignment of underlying claims.
Assignment of security, together with its underlying claim, does not require any amendment to the existing financing documents unless such assignment is explicitly prohibited under the relevant documents. However, the assignment of the whole contractual status, including rights and obligations under the existing financing documents, requires the amendment to such documents or all the other contract parties’ consent as it changes the contract party under these documents. In practice, an assignment of contractual status is more common than a simple assignment of security with an underlying claim. In an effort to avoid any possible dispute or risk of failure to obtain consents from other contract parties, it is market practice to include in the financing documents provisions under which all contract parties, including lenders, agent and borrower, explicitly consent to any lender’s future assignment of the contractual status, including claims and collateral.
In Korea, security interest is valid and binding only if it is tied to the underlying debt (ie, security interest cannot be entrusted unless the underlying debt is also transferred to the relevant trustee). While it is possible to create and register security pursuant to the Secured Bond Trust Act, in which case the security interest is entrusted to a trustee separate from the underlying debt (being the bonds issued pursuant to the Secured Bond Trust Act) and the security right passes with the transfer of the underlying debt, there are rather onerous restrictions for creating security under the Secured Bond Trust Act, which include limitations on the eligibility of collateral permitted under the Act and the requirement to obtain approval of the Financial Services Commission for offshore offering of the underlying bonds. Therefore, rather than pursuing the Secured Bond Trust Act route, it is market practice in Korea to provide for all lenders or noteholders as the holders of the security interest in the relevant security agreements and registries, even if it would not be practically feasible to update the list of security holders following subsequent transfer of security interests together with underlying loan claims.
Creditor protection before collateral release
What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?
The circumstances under which collateral may be released are specified in the credit agreement, and there is no statutory protection afforded to creditors in connection with the release of collateral. The terms for the release of collateral vary and are subject to negotiation between the lenders and the borrower, and rather than permitting the automatic release of collateral, the consent of the lenders is often required to release the collateral, especially considering the ‘kun’ nature that Korean security often adopts.
Describe the fraudulent transfer laws in your jurisdiction.
According to the Korean Civil Code, a creditor may ask the court to rescind any action taken by the obligor if the obligor performed such legal action against the proprietary interest of the creditors, knowing such action would impair the creditors. To be voidable as an action that impairs the interest of the creditors, the obligor must be in a state of insolvency or must become insolvent as a result of taking such action, and the action must result in the decrease of the assets of the obligor. The creation of a security interest on behalf of only some of the existing creditors of a company, without receiving any new financing, generally constitutes an action subject to fraudulent transfer, and if a new lending arrangement accompanies the creation of such security interest, it will not be rescinded in most cases. Any action for fraudulent transfer must be initiated within one year of the date the creditor becomes aware of the fact that the action in question is voidable, but, in any event, within five years of the fraudulent action.
Debt commitment letters and acquisition agreements
Types of documentation
What documentation is typically used in your jurisdiction for acquisition financing? Are short form or long form debt commitment letters used and when is full documentation required?
In the case of an auction for the sale of a target company, the bidders will typically submit a set of commitment documents usually consisting of a full commitment letter signed by the lenders, attaching the term sheet as one of the documents on which the seller will rely to determine whether the bidder is capable of funding the acquisition. The bidders will also be required to submit a mark-up of the form share purchase agreement. In the case of a private transaction, the commitment letter and the term sheet are often signed at the time of or immediately prior to the signing of the acquisition agreement. The principal acquisition finance documents are often not executed at the time of signing of the acquisition agreement, but will generally be signed at the time of, or immediately prior to, the closing of the acquisition, and typically include the following:
- credit and security agreements in the case of a bank financing;
- a note purchase agreement, or an indenture, and notes evidencing the securities and security agreements in the case of a notes financing; or
- an intercreditor agreement where there is a junior lender or mezzanine lender involved.
Level of commitment
What levels of commitment are given by parties in debt commitment letters and acquisition agreements in your jurisdiction? Fully underwritten, best efforts or other types of commitments?
Fully underwritten commitment is market practice in the commitment letters for acquisition financing in Korea, especially in the case of a competitive bidding transaction.
Conditions precedent for funding
What are the typical conditions precedent to funding contained in the commitment letter in your jurisdiction?
The typical conditions precedent to funding contained in the commitment letter are as follows:
- completion of the equity investment, equal to a certain prescribed amount where the borrower (ie, the purchaser) of the target shares is a company (in most cases, a paper company) that is established specifically for the purpose of the relevant acquisition transaction;
- absence of any material adverse change in the target’s business;
- execution of the acquisition agreement;
- accuracy of information provided by the borrower, including the representations and warranties made in the acquisition agreement and other basic corporate and legal representations made by the borrower in the credit agreement;
- perfection of security interests, except for the pledge over the target shares to be acquired;
- execution of all ancillary agreements for acquisition in a form and substance satisfactory to the lenders;
- completion of all reports, filings, approvals and authorisations under applicable laws required for the acquisition and acquisition financing transactions; and
- compliance with all of the conditions precedent to funding set forth in the term sheet.
Are flex provisions used in commitment letters in your jurisdiction? Which provisions are usually subject to such flex?
Market flex provisions are typically included in commitment letters when the acquisition financing involves syndication of a group of lenders so that the lenders may change certain negotiated terms in the term sheet. Market flex provisions are highly negotiated and there is significant variation in terms, but the most common flex provision in Korea is the adjustment of margins and fees and the creation or adjustment of the amount of a subordinated facility.
Are securities demands a key feature in acquisition financing in your jurisdiction? Give details of the notable features of securities demands in your jurisdiction.
While securities demands can be included in commitment letters where lenders are providing a bridge facility that will be refinanced shortly after the closing of the acquisition, securities demands are not a key feature in acquisition financing transactions in Korea.
Key terms for lenders
What are the key elements in the acquisition agreement that are relevant to the lenders in your jurisdiction? What liability protections are typically afforded to lenders in the acquisition agreement?
The lenders will be sensitive to provisions in the acquisition agreement related to the buyer’s right to adjust the acquisition price, the closing, or the conditions to closing, of the acquisition. The lenders will also want to benefit from any material adverse change in the business of the target or the indemnity provisions in the acquisition agreement, which would generally result in mandatory prepayment of the loan or the note under the financing document. The lenders may also require security over the contractual rights (such as indemnity rights) in the acquisition agreement by entering into an assignment agreement that enables the lenders to seek recourse against the seller.
Public filing of commitment papers
Are commitment letters and acquisition agreements publicly filed in your jurisdiction? At what point in the process are the commitment papers made public?
Borrowers and sellers that are subject to reporting obligations under the FSCMA (eg, companies whose shares are listed on the Korea Exchange) will need to file a public notice of their board resolutions to enter into acquisition agreements where the amount of target shares they acquire or sell is 10 per cent or more of the total amount of their assets.
If the borrower, by itself or together with its affiliates, acquires 5 per cent or more of the total issued and outstanding shares in the target, which is a listed company in Korea, the borrower is required to make a public notice of its engagement in the acquisition agreement under the FSCMA. In such case, the borrower is further required to make a public notice when it enters into a security agreement pledging the target shares in favour of the lenders.
If the borrower or the seller is a listed company in Korea, such company is further subject to reporting obligations under the regulations of the Korea Exchange. Under the regulations on public notice of the Korea Exchange, a listed company may need to file a public notice of its board resolution to acquire or dispose of the target shares where the amount of such target shares is equal to or greater than a certain threshold amount. Furthermore, if the target is a listed company in Korea, the target must file a public notice of any change in its largest shareholder, upon the closing of the acquisition transaction, under the regulations on public notice of the Korea Exchange.
As a result, major terms of acquisition agreements may be filed with the Korean regulatory authorities by either the buyer or the seller. However, there is no statutory basis for requiring the borrower or lender to make a public disclosure with the regulatory authorities when the parties enter into the commitment letter.
Enforcement of claims and insolvency
Restrictions on lenders’ enforcement
What restrictions are there on the ability of lenders to enforce against collateral?
Upon the filing of a petition for rehabilitation proceedings under Korean insolvency law, the company’s assets will be preserved for distribution under the rehabilitation plan. The court’s grant of a stay order in relation to the bankruptcy as well as the rehabilitation proceeding generally prohibits the debtor from taking certain steps or actions without the approval of the court, including repaying debts, disposing of property or obtaining new loans. As a result, the lenders will only be able to enforce against collateral pursuant to the court’s authorisation.
If the lender is a financial institution such as banking corporations, securities companies, asset management companies, insurance companies and mutual savings banks, the lender will be subject to limitations in acquiring the shares of the target by enforcing the collateral. According to the Act on the Structural Improvement of the Financial Industry, if a financial institution acquires shares of 20 per cent or more of another company by enforcing security, or if it acquires 5 per cent or more shares of another company as a result of which the lender (or the business group that includes the lender) may be deemed to be exercising de facto control over such company, an approval of the Financial Services Commission is required. In such a case, unless the target is a company also engaged in the financial business or a company engaged in a business closely related to financial business, the application for approval of the Financial Services Commission could be denied, in which case the lender will be unable to exercise any voting rights in respect of the enforced shares and will be required to sell the shares to a third party. The limitation on acquiring shares in a company by a bank is further restricted to 15 per cent of total issued and outstanding shares of the company under the Banking Act except in special circumstances such as upon obtaining the approval of the Financial Services Commission.
Does your jurisdiction allow for debtor-in-possession (DIP) financing?
DIP financing that allows priority payment of new debt advanced after the commencement of the rehabilitation proceeding to enable the company to continue business is recognised under Korean insolvency law. As a common benefit claim (or ‘super-priority’ ranking claim over common benefit claims in case the debtor company’s assets are not sufficient to satisfy the entire amount of common benefit claims), such new debt ranks senior to both secured and unsecured rehabilitation claim and will be paid periodically outside of the rehabilitation proceeding whenever cash is available for distribution.
Stays and adequate protection against creditors
During an insolvency proceeding is there a general stay enforceable against creditors? Is there a concept of adequate protection for existing lien holders who become subject to superior claims?
The filing for corporate rehabilitation in Korea does not itself trigger the official commencement of corporate rehabilitation proceedings. The Debtor Rehabilitation and Bankruptcy Act (DRBA) provides for an interim period between the filing of the application and the official commencement of the proceedings, where the company’s assets are ‘preserved’ for rehabilitation and distribution under the rehabilitation plan.
The court must decide whether to grant a stay order within seven days of the filing of the application. This order generally prohibits the debtor from taking certain steps or actions without the approval of the court noted above. In certain exceptional cases, the court will appoint one or more interim receivers to manage the debtor during the preservation period.
The court may also, at its discretion or by application of an interested party, issue a stay order or a comprehensive stay order. The stay order will suspend compulsory execution, preliminary attachment or preliminary injunction, or any pending lawsuit against the debtor’s assets at the time of the stay order. The comprehensive stay order will, in addition to the suspension of the above-mentioned existing proceedings, bar creditors from enforcing their claims in respect of the debtor’s assets through compulsory execution, preliminary attachment or preliminary injunction in the future.
Once a stay order has been issued, the debtor company may only raise additional financing with the approval of the court. Any financing raised by the debtor company after the issuance of a stay order, or any money borrowed by the receiver after the initiation of rehabilitation proceedings with the approval of the court, is characterised as a common benefit claim. Common benefit claims rank senior to both unsecured rehabilitation claims and secured rehabilitation claims (but does not rank senior to the security created over any specific asset of the debtor company) and may be repaid when due with available cash. If the debtor company’s assets are insufficient to repay the entire common benefit claim, any new debt is given a ‘super-priority’ ranking over other common benefit claims, and the common benefit claims are repaid pro rata after the new debt has been paid in full. It is questionable, however, whether such super-priority ranking may be given to new debt in the case of bankruptcy proceedings that follow rehabilitation proceedings. In the case of bankruptcy, the court can always decide to order a stay prior to the declaration of bankruptcy upon application of preliminary injunction or preliminary attachment by an interested party. However, a stay order is not often issued in practice because the bankruptcy declaration is generally issued swiftly.
In the course of an insolvency, describe preference periods or other reasons for which a court or other authority could claw back previous payments to lenders? What are the rules for such clawbacks and what period is covered?
Under the DRBA, a rehabilitation receiver or a bankruptcy administrator may void certain actions of the debtor company that constitute a preference. Actions subject to clawback on the grounds of preference include the following:
- an act performed by the debtor with knowledge that it will harm the interests of unsecured or secured rehabilitation creditors (but it is not subject to clawback if the beneficiary of the act did not have knowledge that the act caused harm to the interests of the unsecured or secured rehabilitation creditor at the time of performance of the act);
- the provision of security or the repayment of debt obligations by the debtor that causes harm to the interests of unsecured or secured rehabilitation creditors after the debtor’s payment obligations have been suspended or the filing of an application for commencement of rehabilitation proceedings or bankruptcy proceedings, provided that the provision of security or the repayment of debt obligations is voided only if the beneficiary of the security or repayment was aware of either:
- the payment suspension or the filing of an application; or
- the fact that such act could harm any unsecured or secured rehabilitation creditor at the time of performance of such act (in connection with the proviso, knowledge is imputed in case the beneficiary is a ‘specially related person’);
- the provision of security or the repayment of debt obligations by the debtor where the debtor is not under an obligation to provide security or repay debt obligations (including where the debtor repays its debts prior to the due date), which is performed within 60 days before or after the debtor’s payment obligations have been suspended or the filing of an application for the commencement of rehabilitation or bankruptcy proceedings (provided that such act is not voided if the creditor was not aware of the fact that such act harms other unsecured or secured rehabilitation creditors), in connection with the proviso, knowledge is imputed in case the beneficiary is a specially related person and the 60-day period is extended to one year for such specially related person; and
- any gratuitous act or act for valuable consideration that may be deemed identical to a gratuitous act, which is performed by the debtor before or after six months from the date that the debtor’s payment obligations are suspended (six months is extended to one year in case the beneficiary is a specially related person) or the filing of an application for the commencement of rehabilitation or bankruptcy proceedings.
Under the DRBA, unlike independent third parties, specially related persons are presumed to have knowledge that the debtor company has applied for rehabilitation or bankruptcy and committed actions that cause harm to creditors.
Furthermore, the look-back period for the provision of collateral or release from indebtedness increases from 60 days to one year (from the suspension of payment, or the filing for rehabilitation or bankruptcy) for a specially related person of the debtor company.
Ranking of creditors and voting on reorganisation
In an insolvency, are creditors ranked? What votes are required to approve a plan of reorganisation?
In a bankruptcy proceeding, creditors’ claims generally rank as follows:
- separation claims representing pre-bankruptcy security interests;
- common benefit claims; and
- unsecured bankruptcy claims.
Separation claims representing pre-bankruptcy security interests
A creditor with a secured claim, such as a lien, pledge or mortgage, or a lessee of real property with a perfected security right, may exercise its rights outside of bankruptcy. Furthermore, a lessee of residential or commercial property with a perfected right to the security deposit, where such security deposit is below the legal threshold, holds a preferential right of payment over other holders of a separation claim up to the amount of the security deposit. If the proceeds from the enforcement of the collateral are insufficient to satisfy the secured creditor’s claim, it may claim the remainder as an unsecured creditor in the bankruptcy proceedings.
Common benefit claims
A common benefit claim covers administrative expenses that serve the common benefit of all parties to the bankruptcy proceedings. It generally includes the costs related to the management, disposition and distribution of the bankruptcy estate and generally covers claims that arise after the declaration of bankruptcy. Certain claims, however, such as tax, wages or severance claims are recognised as a common benefit claim, regardless of whether they arise before or after the declaration of bankruptcy, for reasons of public policy. A common benefit claim may be paid periodically outside of the bankruptcy proceeding whenever cash is available for distribution, and it ranks senior to an unsecured bankruptcy claim.
Unsecured bankruptcy claims
Unsecured bankruptcy claims relate to events that occur prior to the declaration of bankruptcy and are not secured by collateral. Such claims may be repaid during the bankruptcy proceedings. They comprise of the following:
- bankruptcy claims with preferential rights;
- general bankruptcy claims; and
- subordinated bankruptcy claims.
Preferential bankruptcy claims include, without limitation, those prescribed in the Korean Civil Code, the Korean Commercial Code, the Insurance Business Act and Mutual Savings Bank Act, and these claims have priority over other general bankruptcy claims.
Subordinated bankruptcy claims are those claims prescribed in the DRBA. These include interest accruing after the declaration of bankruptcy, costs for participation in the bankruptcy proceedings, penalties and fines or claims stated to be subordinated to other claims by agreement between the debtor and the creditor. Subordinated bankruptcy claims may be repaid only after full repayment of other unsecured bankruptcy claims.
In a rehabilitation proceeding, priority of claims ranks as follows:
(i) common benefit claims;
(ii) secured rehabilitation claims;
(iii) unsecured rehabilitation claims with preferential rights;
(iv) unsecured rehabilitation claims other than those specified in (iii);
(v) rights of shareholders and equity holders with preferential agreement on distribution of remaining assets of the debtor; and
(vi) rights of share- and equity holders other than those specified in (v).
In a rehabilitation proceeding, the draft rehabilitation plan is subject to approval by a requisite amount of each class of shareholder and secured and unsecured rehabilitation creditors. The shareholders, however, have voting rights only when the total value of the assets of the debtor exceeds the total value of the debts. The voting requirement for the adoption of a rehabilitation plan by the interested parties is approval by creditors constituting three-quarters of secured rehabilitation claims, two-thirds of unsecured rehabilitation claims and a majority vote of the shareholders present at the meeting. Creditors belonging to the same class will vote together to determine whether such class has approved the draft rehabilitation plan. To the extent that the value of the secured assets is insufficient to satisfy the repayment of claims, the excess amount of loan or debt claim over the value of the secured assets will be treated as an unsecured claim. The value of the secured assets will be determined by the examiner after the commencement of the rehabilitation proceedings.
Intercreditor agreements on liens
Will courts recognise contractual agreements between creditors providing for lien subordination or otherwise addressing lien priorities?
Under Korean law, the creation of a second priority security interest is permitted and the ranking of such security interest is recognised by the Korean courts. Therefore, in practice, a first priority security interest can be created for senior lenders and a second priority security interest can be created for subordinated lenders.
In addition, claims that the borrower and the creditor agree to treat as subordinated claims prior to the commencement of insolvency proceedings will be treated in insolvency proceedings as junior to the senior claims pursuant to the terms of the relevant agreement between the borrower and the creditor.
Discounted securities in insolvencies
How is the claim of an original issue discount (OID) or discount debt instrument treated in an insolvency proceeding in your jurisdiction?
The face value amount of a claim relating to an original issue discount or discount debt instrument will generally be recognised as the rehabilitation claim amount or bankruptcy claim amount in a Korean insolvency proceeding. However, in a rehabilitation procedure, there is a possibility that the Korean court may recharacterise the claim such that the face value of the claim is recognised or an adjustment to the claim amount is made. Such adjustment is generally not made in a bankruptcy procedure.
Liability of secured creditors after enforcement
Discuss potential liabilities for a secured creditor that enforces against collateral.
Unless the borrower specifically waives, in the security document, any claims against the secured creditor that the price at which the collateral has been sold at a private sale may be less than the price at which it could have been sold, in order to avoid any challenge by the borrower regarding the sale, the secured creditor must ensure that the sale is conducted in a reasonable manner and the sale price is commercially reasonable. The secured creditor may opt to bid for and become the purchaser of (by paying all or any portion of the purchase price by crediting the secured amount against the purchase price) the collateral. In the case of there being surplus funds remaining after the sale, the secured creditor must return such funds to the security provider.
In the event a secured creditor forecloses or enforces on the collateral outside of the bankruptcy or rehabilitation proceeding in violation of the DRBA, the sale can be voided or nullified upon petition of the receiver of the rehabilitation or the administrator of the bankruptcy proceeding.