1. Introduction

Confronted with the 1997 IMF crisis and the 2008 financial crisis originating in the United States, many companies in the Republic of Korea ("Korea") were forced to file for rehabilitation procedures. Companies under rehabilitation often fail to revive and go bankrupt as they cannot raise operating funds due to credit deterioration, which makes it difficult for them to maintain their business practices. The most feasible and efficient financing method to overcome such difficulties is to pursue rehabilitation M&A. M&As allow companies undergoing rehabilitation to revitalize their business and escape the pressure of debt repayment by soliciting external funds to use as operating funds and for debt repayment. M&A transactions for rehabilitation are more likely to succeed when initiated as early as possible to preserve the corporate value.

Due to the COVID-19 pandemic that has been sweeping across the world since early 2020, many companies in the manufacturing and service sectors where face-to-face interaction is inevitable are facing financial crises. As a result, many companies, not excluding those of Korea, filed for rehabilitation proceedings or bankruptcy. The exemplary cases of Eastar Jet and SsangYong Motor, two companies seeking to overcome their financial crises through M&A transactions within the rehabilitation proceedings, shall be introduced, then the prospects of rehabilitation M&As will be examined.

2. Eastar Jet Case

Eastar Jet, a Korean low-cost carrier, had no choice but to suspend all flight operations due to a 99% drop in the demand for global air travel after the outbreak of COVID-19 in March 2020. In February 2021, the Seoul Rehabilitation Court decided to initiate rehabilitation proceedings for Eastar Jet upon the judgment that the company could not overcome the debt burden from capitalizing on accumulating aircraft lease expenses and labor costs. Eastar Jet proceeded M&A in the form of a Stalking Horse bid, selecting Seongjeong Co., Ltd. as its stalking horseㅡthe preliminary preferred buyerㅡin May 2021. Through an open auction, Eastar Jet confirmed Seongjeong as the final acquirer in June 2021. After negotiating with aircraft leasing companies to settle the debt repayment rate, Eastar Jet submitted a rehabilitation plan to the court in November 2021. The carrier plans to finalize its M&A proceedings by obtaining approval from the court after going through an agreement procedure with relevant creditors. Eastar Jet received the court's approval on its rehabilitation plan on November 12, 2021, successfully completing the rehabilitation M&A, and is aiming to resume its flight operations in the Spring of next year.

However, in a Stalking Horse M&A, which values the certainty of the acquisition, issues of procedural fairness may arise in such cases where the pre-determined buyer is informed of the bidding price of other candidates, then offers a higher bid. Such a problem has also been raised in the M&A of Eastar Jet. Accordingly, the court plans to improve fairness by amending the rules of M&A so that other bidders are also informed of the bid price proposed by the preliminary preferred bidder for review.

3. SsangYong Motor Case

SsangYong Motor, a Korean manufacturer of ICE automobiles, also fell into financial distress due to a decrease in vehicle purchases resulting from the COVID-19 pandemic and an increase in the demand for alternative fuel vehicles following the implementation of environmental policies. After the bankruptcy court decided to initiate rehabilitation proceedings for the company in April 2021, SsangYong Motor proceeded with M&A in the form of open competitive bidding in July 2021, and SM Group and Edison Motors were strong candidates for the acquisition. However, SM Group, superior in size and financial power, gave up the acquisition after due diligence for reasons including potential contingent liabilities. Edison Motors was therefore confirmed as the acquirer, and the M&A process is underway after the Memorandum of Understanding was signed in November 2021.

However, while Edison Motors' 2020 sales amounted to KRW 90 billion, SsangYong Motors' 2020 sales recorded about KRW 3 trillion, which shows a near 33 times difference. Such a situation is often referred to as "a minnow swallowing a whale." The key to the success of this M&A is whether Edison Motors would be able to fully finance the acquisition in the future. Edison Motors has been seeking loans for the acquisition from the financial sector, but it only has been receiving negative responses. In Korea, since a "leveraged buyout (LBO)," which refers to using assets of the company being acquired as collateral for the loans, is illegal, it is not easy for a company with insufficient internal assets to complete a successful M&A with a large-scale company.

4. Prospects

Having experienced the COVID-19 pandemic, countries including Korea have implemented a wide range of quantitative easing policies and made efforts to prevent successive bankruptcies of individuals and companies; however, unexpected side effects like the surge in asset prices followed. Governments around the world have been reviewing various measures to take; among them are attempts to raise interest rates, yet there exists concern that the number of bankruptcy filings may increase. Moreover, the overall change in the industrial structure in the post-COVID-19 era could lead to the restructuring of traditional industries based on face-to-face contacts, and thus rehabilitation M&As could be more frequently practiced.

In a court-supervised rehabilitation M&A proceeding, both the selection of buyers through a fair process and the selection of buyers with solid financial capacity are crucial, as illustrated in the respective cases of Eastar Jet and SsangYong Motor. Since the 1997 IMF crisis, there have been an increasing number of success cases for rehabilitation M&As. If successful, the cases of Eastar Jet and SsangYong Motor will bring significant progress in the legal principles of M&A.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.