M&A emerges as last hope for companies in rehabilitation — and cases have doubled in a decade

Dongsung Pharmaceutical, which filed for corporate rehabilitation last May, was acquired by a consortium of Taekwang Industrial and UAMCO for 160 billion won ($115 million), completing its rehabilitation process. [Yonhap]

Pre-approval mergers and acquisitions — deals that bring in new owners for companies already under court-supervised rehabilitation — have become a central tool in corporate turnaround practice in South Korea.

Yet the path from intent to a completed deal is rarely smooth. Prospective buyers must submit bid terms before a rehabilitation plan is finalized, effectively investing blind. Compounding the problem is a structural conflict of interest that arises when incumbent managers are appointed as rehabilitation administrators.

Industry insiders say the solution lies in improving investors' access to information while strengthening the oversight role of creditors' committees and third-party administrators.

M&A cases double in a decade — a last lifeline for struggling firms

An analysis of M&A notices posted on the Supreme Court's website found that the number of such notices for companies under rehabilitation jumped from 17 in 2015 to 30 in 2024 and 39 in 2025 — more than doubling over the decade. From January through Aug. 14 this year, 23 notices had already been posted. Given that corporate rehabilitation filings have risen compared with last year, the total for this year is likely to surpass 2025's figure.

The vast majority of these transactions are pre-approval M&A deals — a process in which a new acquirer is sought after rehabilitation proceedings begin but before a rehabilitation plan receives court approval.

In the past, companies sometimes finalized a rehabilitation plan first to settle debt obligations before pursuing M&A. That approach has largely fallen out of use, however, as courts have moved toward early termination of proceedings following plan approval, making post-approval M&A increasingly rare.

The chief advantage of pre-approval M&A is that it secures an investor and fresh capital at an early stage of rehabilitation, minimizing erosion of company value while using the acquisition proceeds to repay creditors and raise repayment rates. Because the new owner's turnaround plan can be incorporated directly into the rehabilitation proposal, the practical success rate of the overall process also improves.

The approach becomes particularly important when a court-appointed examiner determines that a company's going-concern value is lower than its liquidation value. When going-concern value is higher, a company can pursue a standalone rehabilitation plan — selling non-core assets, cutting costs and restructuring operations, then using operating cash flow to repay debt.

When liquidation value is higher, however, disposing of assets and distributing the proceeds to creditors is economically preferable to continuing operations. In such cases, a rehabilitation plan premised on keeping the business running is unlikely to win creditor committee approval, raising the risk that proceedings will be terminated and the company pushed into bankruptcy.

That is where capital from a new acquirer becomes the way out. M&A can unlock repayment resources the company could never generate through its own operations, allowing the rehabilitation plan to be redesigned around a promise to repay creditors more than they would receive in liquidation.

Bidding blind: the risk burden of pre-approval deals

Despite the growing number of attempts, the market's assessment is that only a small fraction of pre-approval M&A processes result in completed deals. Uncertain debt and ownership structures, compressed due-diligence windows and rigid procedural requirements are the most commonly cited obstacles.

For investors, the first hurdle is a lack of information. Bidders must submit an acquisition price before final repayment rates and creditor relationships have been settled. An official at a private equity fund that has acquired companies through rehabilitation said the challenge is having to make investment decisions under time pressure, with unresolved questions around creditor claims, administrative claims, litigation and tax issues, and future repayment terms. "The higher the uncertainty, the higher the bar for making an investment decision," the official said.

When the scale of administrative claims or contingent liabilities is unclear, unexpected cash outflows can materialize after an acquisition closes. Investors price that risk into their bids, and lower bid prices mean less money available to repay creditors. The gap between what investors are willing to pay and what companies and creditors expect widens, increasing the likelihood that a deal collapses entirely. It is a vicious cycle: information gaps inflate investment risk, depressed prices kill deals, and failed deals derail rehabilitation.

Industry insiders say the key is making risks more predictable. They argue that standardized disclosures should be provided to investors covering six categories: administrative claims and anticipated administrative claims; unpaid wages and severance; tax liabilities; ongoing contracts; pending litigation; and secured and contingent liabilities. Examiners and administrators should present not only current obligations but also the range of potential future changes, reducing investment risk.

The head of a private equity fund with experience investing in companies under rehabilitation said that revitalizing pre-approval M&A ultimately comes down to attracting investors. "The groundwork needs to be laid so that investors can actively evaluate these opportunities," he said.

There are also complaints that pre-approval M&A procedures are too rigid. In a conventional M&A process, acquirers are selected based on a comprehensive assessment of factors beyond price — including the buyer's ability to complete the transaction, potential industry synergies and future investment plans. In rehabilitation M&A, however, the emphasis on creditor repayment and procedural fairness has tilted the process heavily toward price and standardized procedures, insiders said.

The stalking horse process is a prime example. Under this approach, the company enters a conditional investment agreement with a prospective acquirer and then runs an open auction to see whether any other bidder will offer better terms. For the court and the company under rehabilitation, it is advantageous because a minimum acquisition price and a committed buyer are already in place before competitive bidding begins.

But the mechanism cuts both ways. Procedures designed to benefit the company can end up discouraging investor participation. The initial bidder may invest considerable time and money in due diligence only to lose the company to a later entrant. Because subsequent bidders effectively compete from the baseline the initial bidder established, the incentive to be the first to evaluate a rehabilitation candidate is diminished. Conversely, if the protections afforded to the initial bidder — such as a right of first refusal or a breakup fee — are too generous, they become a barrier to later bidders.

Experts say flexible, deal-specific application is needed. They recommend selecting whether to use the stalking horse structure based on the number of potential bidders and the urgency of the sale, and calibrating initial-bidder protections more precisely to maintain a fair balance with later entrants.

'Selling means losing control' — the dilemma of incumbent-manager administrators

Another obstacle to pre-approval M&A is the incumbent-manager administrator system. The Debtor Rehabilitation and Bankruptcy Act, enacted in 2006, requires courts to appoint the existing representative of a company as its rehabilitation administrator unless there are special circumstances — such as the person bearing significant responsibility for the company's fiscal collapse or a request from the creditors' committee. The administrator manages the company and oversees the disposition of its assets.

The rationale was twofold: to preserve operational continuity by keeping management in the hands of people who know the business, and to prevent distressed companies from delaying rehabilitation filings out of fear of immediately losing control. In practice today, courts rarely appoint a third-party administrator unless the incumbent has committed a crime such as embezzlement or breach of fiduciary duty.

The incumbent-manager administrator system carries a structural conflict of interest, however. A completed M&A deal requires the existing controlling shareholders and managers to relinquish control. Even when M&A would better serve the company's long-term survival and improve creditor repayment rates, incumbent manager-administrators have little incentive to actively seek a new owner.

In practice, companies that still have competitive business operations — and are therefore attractive to investors — are the least likely to pursue M&A. The result is that only companies whose business value has already been substantially eroded tend to come to market, insiders said.

Controlling shareholders and managers who adopt a standalone rehabilitation plan can recover control even after their stakes are diluted through capital reduction and debt-to-equity conversions, by buying shares at low prices or participating in rights offerings once the company stabilizes. Critics say this turns rehabilitation proceedings into a debt write-off scheme that benefits those responsible for the company's failure: creditors accept low repayment rates under court order, while the people who ran the company into the ground use the process to shed debt and hold on to control.

An official at an accounting firm with deep expertise in corporate rehabilitation said there are quite a few companies where M&A would be better for both the company and its creditors even when going-concern value exceeds liquidation value. "We need to ask whether it is right to give the existing owner and major shareholders another chance, or whether it is better to bring in a new investor and design a rehabilitation plan that repays creditors more," the official said. "Right now, the system is not set up to properly compare the two options."

Standalone or M&A? 'The market should decide first'

Experts say the answer is not to abolish the incumbent-manager administrator system but to strengthen checks that prevent incumbent management from having sole discretion over whether to pursue M&A. Proposals include appointing a third-party administrator as a co-administrator, or expanding the role of a chief restructuring officer to provide an objective assessment of whether a standalone rehabilitation plan or M&A is the better path.

Under current law, the creditors' committee may submit opinions during the administrator appointment process, recommend candidates and even propose its own rehabilitation plan. In practice, however, the committee's role at creditor meetings is largely passive — typically limited to voting for or against the administrator's plan.

A capital markets professional with extensive experience as a third-party administrator said the mechanisms for creditors to exert influence over rehabilitation proceedings exist on paper but are largely toothless in practice. "When incumbent managers are serving as administrators, there needs to be a mechanism that can provide real oversight," the person said.

One proposal gaining traction is to expand the appointment of third-party administrators while limiting the role of incumbent manager-administrators. Under this model, the incumbent would handle day-to-day operations — sales, production and personnel management — while a third-party administrator would be responsible for developing the rehabilitation strategy, attracting outside investors and managing M&A. The idea is to have an experienced third-party administrator review a range of rehabilitation options and serve as the primary liaison with the court.

The accounting firm official said a third-party administrator can assess a company's situation objectively and move quickly to determine whether M&A is necessary or whether the company should be liquidated because recovery is not feasible. "If a company cannot be turned around no matter what, it is better to liquidate quickly and return the remaining assets to creditors than to drag out rehabilitation proceedings and burn through whatever cash is left," the official said.

Another option is for the creditors' committee to appoint an independent advisory firm or sale manager to compare standalone rehabilitation against M&A. The idea is to gauge market demand among potential investors from the outset of rehabilitation planning, then compare the expected creditor repayment rate under M&A against the rate projected under the incumbent management's standalone plan.

The goal of rehabilitation proceedings is neither to protect existing shareholders and management nor to force a sale at any cost. The core objective is to preserve limited company value, restore the business to health and minimize creditor losses. That is why industry insiders emphasize the need for market validation at the earliest stage of rehabilitation — to determine whether a standalone plan or M&A better serves the purpose of the process.

park.jiyeong@heraldcorp.com
an@heraldcorp.com