International Project Finance and PPPs A Legal Guide to ... · PDF fileInternational Project Finance and PPPs A Legal Guide to Key Growth Markets Edited by Jeffrey Delmon Victoria

International Project Finance and PPPs

A Legal Guide to Key Growth Markets

Edited by

Jeffrey Delmon

Victoria Rigby Delmon

AUSTIN BOSTON CHICAGO NEW YORK THE NETHERLANDS

Law & Business

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Summary of Contents

Preface xliii

Acknowledgements xlv

General Reports

Chapter 1Introduction to Public-PrivatePartnerships Introduction to PPPs – 1

Chapter 2Introduction to Project Finance Introduction to Project Finance – 1

Chapter 3Local Legal Issues Local Legal Issues – 1

Country Reports

Chapter 4Brazil Brazil – 1Thomas Benes Felsberg, Maria da Graca deBrito Vianna Pedretti, Andrea Machado MartinsCosta & Fabrizio de Oliveira Sasdelli

Felsberg, Pedretti, Manrich e AidarAdvogados e Consultores Legais

ix

Chapter 5Chile Chile – 1F. Patricia Nunez, F. Sebastian Quijada &Carolina Benito Kelley

Nunez, Munoz & Cıa. Ltda. Abogados

Chapter 6China China – 1Matthew McKee & Aldo Settimio Boni de Nobili

Hwuason & Lehman, Lee & Xu

Chapter 7Egypt Egypt – 1Ahmed El Sharkawy & Salma Shams El-Din

Sharkawy & Sarhan Law Firm

Chapter 8India India – 1Cyril Shroff & Alice George

Amarchand & Mangaldas & Suresh A. Shroff & Co.

Chapter 9Nigeria Nigeria – 1Adedolapo Akinrele, Zelda Odidison & Jumoke Onigbogi

F.O. Akinrele & Co.

Chapter 10Romania Romania – 1Luminita Popa, Iuliana Craiciu & Marius Barladeanu

Musat & Asociatii Attorneys at Law

Chapter 11Russia Russia – 1Andrei Baev, Alexander Dolgov, Veronika Kondruseva &Elena Shishmariova

Allen & Overy LLP

x

SUMMARY OF CONTENTS

Chapter 12South Korea South Korea – 1Young Kyun Cho & Seong Soo Kim

Kim & Chang

Chapter 13Tanzania Tanzania – 1Wilbert Basilius Kapinga, Joy Hadji Alliy &Nasra Hassan

Mkono & Co.

Chapter 14Turkey Turkey – 1H. Tolga Danisman, Itir Sevim-Ciftci, Hakki Gedik,M. Kemal Mamak & Senem _Ismen

Herguner Bilgen Ozeke Attorney Partnership

Chapter 15Uganda Uganda – 1Joseph B. Luswata, Nicholas Ecimu, Julius Ojok,Munanura Andrew Kamuteera &Brenda Judith Kyokwijuka

Sebalu & Lule Advocates and Legal Consultant

Chapter 16United Arab Emirates United Arab Emirates – 1David Wadham & Mhairi Main Garcia

Ashurst Middle East

Chapter 17United States United States – 1Allan T. Marks & Eric F. Silvermanwith contributions fromAlexander K. Borisoff, Caroline Conway,Henry T. Scott & Amy E. Turner

Milbank, Tweed, Hadley & McCloy LLP

List of Country Codes Country Codes – 1

Index Index – 1

xi

SUMMARY OF CONTENTS

Chapter 12

South Korea

Young Kyun Cho

Mr. Young Kyun Cho received his LL.B from Seoul National University in1985 and his LL.M in 1987. He also received an LL.M. from the University ofPennsylvania Law School in 1994. He is admitted to the bar of Korea. Mr. Chois a partner in the Project Finance Group, Aircraft Finance Group, andBanking Group of Kim & Chang. Since joining the firm in 1988, he hasadvised numerous clients including major domestic and foreign banks andnon-bank financial investors as well as major domestic companies in the areaof project financing, aircraft financing, commercial banking, corporate finan-cing and structured financing. He has a vast amount of experience in projectfinancing in Korea and has advised banks, asset management companies, andinsurance companies as well as construction and engineering companies inmost major domestic infrastructure projects such as toll roads, railways, ports,and power plants. In addition, since the early 1990s he has advised offshorelenders and lessors including U.S. Eximbank and ECA in almost all of theaircraft financing transactions in Korea.

Seong Soo Kim

Mr. Seong Soo Kim received his LL.B from Boston College in 1987 and his JDin 1990. He went on to receive his LL.M from Boston College in 1992. He isadmitted to the New York Bar. Mr. Kim is a senior foreign attorney in Kim &Chang’s Finance Department. Having joined the firm in 1996, he has devel-oped extensive experience in international corporate and financing transac-tions, including project finance, ship finance, private and public equityofferings, and overseas infrastructure/power projects. Previously he workedfor a major US law firm. In 2007, the Asia Pacific Legal 500 recognizedMr. Kim as a leading projects lawyer in Korea.

South Korea – 1

Kim & Chang

Kim & Chang is widely recognized as Korea’s premier law firm.Established in 1973, the firm has set the standard for excellence forlegal services in every major area of practice. The principles we werefounded on and which we still adhere to today allow us to provide thehighest-quality legal advice to our clients – specialization in core practiceareas, dedication to meeting the unique needs of each client, and interna-tionalization of staff. Having advised in the majority of major transactions,projects, and cases in Korea, we have earned an unrivalled track record fordeveloping innovative solutions to the increasingly complex legal chal-lenges that our clients face, both in Korea and increasingly overseas.

Our success derives from the outstanding quality of our professionals andstaff.They include attorneys, patent attorneys, tax attorneys, economists, andsector specialists, who number more than 700 today. They are exceptionallytalented individuals who have graduated from most prestigious universitiesin Korea and around the world. They have honed their skills on challengingassignments. They are international in practice and outlook; many Koreanattorneys are also licensed to practice in the US, and our foreign attorneyshave had work experience in the US, Japan, China, and the EU countriesand speak French, German, Chinese, Japanese, Swedish and Spanish inaddition to Korean and English. But perhaps most importantly, our profes-sionals can be distinguished by their singular commitment to providing thehighest quality services to the firm’s clients as efficiently as possible.

Our clients comprise an extraordinary roster of multinational corporations,domestic companies, international and domestic financial institutions, andprivate equity funds. They include most of the companies in the Fortune500. But whether they are established industry leaders or start-ups, ourclients can be assured of receiving the highest-quality advice that isuniquely tailored to their needs.

Kim & ChangSeyang Building, 223 Naeja-dong, Jongno-Gu110-720 SeoulSouth KoreaTel.: þ82 2 3703 1114Fax: þ82 2 737 9091/3E-mail: [email protected]: www.kimchang.com

South Korea – 2

SOUTH KOREA

Chapter 12

South Korea

Young Kyun Cho & Seong Soo Kim

Kim & Chang

1. OVERVIEW OF PUBLIC-PRIVATE PARTNERSHIPSIN KOREA

1.1. MARKET CONTEXT

1.1.1. Recent Trends and Issues

After several years of robust growth, Korea has become one of the most activemarkets for infrastructure project finance transactions globally; however,many industry participants are now concerned that the private sector’s interestin PPI projects is waning in Korea. Obviously, the ongoing financial crisis hasadversely affected the PPI sector, but some allege that the financial crisis isnot the sole reason. PPI projects may now be perceived as less economicallyviable and riskier than before due to their declining investment returns causedby, among others, increasing competition among private participants, elimi-nation or reduction of governmental support, as well as, to a degree, incon-sistent policies. Consequently, the number of PPI projects, especially BTOprojects, has reduced significantly in recent years. The private sector’s declin-ing interest in PPI projects in Korea may be specifically attributed to thefollowing:

(a) For some time, critics of the PPI scheme in Korea have been trying toconvince the general public of the intrinsic inefficiency and unfair-ness of the PPI scheme, alleging that the government’s excessivepayments of the minimum revenue guarantee mean that thePPI scheme only benefits big businesses and foreign investors.

South Korea – 3

Irrespective of whether or not such allegations are justified, it seemsthat the public has sometimes taken this negative view of thePPI scheme, thereby making it more difficult for the governmentor potential investors to implement politically unpopular infrastruc-ture projects.

(b) Some industry participants believe that PPI projects have becomeunpredictable and therefore riskier due to the government’s recentpolicy changes, such as reduction of construction subsidy andtermination payments, as well as retroactive application of newlyadopted policies. Generally, pursuant to the PPI Act, participants inPPI projects invest in the concession companies through equity,equity-linked debt, corporate bonds or advance loans. The conces-sion companies operate infrastructure assets, such as toll roads,bridges, ports, tunnels, and rail, under concessions from Koreancentral and municipal governments. Until recently, a substantialnumber of the concession companies under the PPI Act benefitedfrom some form of revenue guarantee from the competent authorityunder their respective concession agreements. These revenue guar-antees have effectively ensured that the concession companiesreceive a minimum level of revenue for an agreed period of time.However, the government has been gradually decreasing the levelof the revenue guarantees provided, thereby no longer ensuring theinvestors’ return on their investment.

(c) Long-term injection of capital by financial investors is imperative formost large PPI projects; however, it seems that there are not manyincentives in Korea for financial investors to provide funding to suchPPI projects. The current BIS (Bank for International Settlements)ratio requirements have caused many financial institutions to be lesswilling to extend loans to any PPI projects the loans for which wouldbe categorized as risky assets. Without a minimum revenue guarantee,even large PPI projects might be perceived as risky. For this reason,many commercial banks and insurance companies have become veryselective in their lending to PPI projects.

1.1.2. New Governmental Measures

On 26 February 2009, the Ministry of Strategy and Finance of Koreaannounced its ‘‘Plan to Revitalize PPI Projects’’ (the ‘‘Plan’’), in line withthe current administration’s overall economic policy to stimulate the economyby implementing numerous public infrastructure projects in Korea. To attractthe private investment needed to revitalize the PPI sector, the Plan seeks togive more governmental support to concession companies. In short, the Plan

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SOUTH KOREA 1. Overview of Public-Private Partnerships in Korea

is divided into the following major categories: (i) support for funding;(ii) sharing of increased interest costs; (iii) recution of overall duration forprojects; (iv) deregulations; (v) expansion of eligible projects and search fornew projects; and (vi) closer monitoring of disbursement of government funds.More details are specified in the Basic Plan for PPI announced by the Ministryof Strategy and Finance on 26 February 2009, which sets out the Koreangovernment’s policies for participation by investors in infrastructure projects,and provides guidelines for the implementation of designated projects.

1.1.2.1. Support for Funding

For a limited period of time, a special bridge loan programme of KRW 1 trillionwill be offered by The Korea Development Bank to companies with conces-sions for infrastructure projects, especially to those concession companiesimplementing projects that will enter into the construction phase in 2009.KRW 1 trillion is roughly equivalent to one-year construction costs requiredfor those PPI projects that will enter into the construction phase in 2009.The maximum lending period for loans extended under the special programmewill be one year. Also, the loans will be guaranteed by the Infrastructure CreditGuarantee Fund (the ‘‘Fund’’).

The Fund, which is managed by the Korea Credit Guarantee Fund, guar-antees financial liabilities borne by the concession company incurred as aresult of borrowings for the project costs from financial institutions and/orinfrastructure bonds. Pursuant to the Plan, the Fund will increase its guar-antees for PPI projects in terms of both amount and scope. The Fund’smaximum guarantee amount per infrastructure project will be increasedfrom the current KRW 200 billion to KRW 300 billion. The Fund willalso provide guarantees for subordinated debt financing, so that subordi-nated debt lenders can recover their investment in case the infrastructureproject is prematurely terminated.

1.1.2.2. Sharing of Increased Interest Expenses

Competent authorities and concession companies for infrastructure projectsthat enter into the relevant loan agreements or construction phase in 2009 mayagree to adopt the measures described below.

Under the Basic Plan for PPI, for BTL projects, the competent authority mayshare a portion of the difference between the interest rate of government bonds(the ‘‘government bond rate’’) and the interest rate of corporate bonds issued bybanks (the ‘‘bank bond rate’’) having a five-year maturity and the credit ratingof AAA. If the Bank bond rate increases so that the difference between theGovernment bond rate and the Bank bond rate becomes greater than 0.5%,then 60% to 80% of such rate increase in excess of 0.5% will be shared by

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1. Overview of Public-Private Partnerships in Korea SOUTH KOREA

the competent authority. Conversely, if the Bank bond rate decreases, then thecompetent authority will become entitled to take 60% to 80% of the savingsresulting from such rate decrease in excess of 0.5%. The actual allocation of theinterest rate fluctuation risk will be set every two years during the operationphase, applying the mean value of the Government bond rate and the Bankbond rate for such two-year period.

For BTO projects, if the base rate (such as the interest rate of bank bondshaving five-year maturity and the credit rating of AAA, the ‘‘Base Rate’’)increases after the concession agreement is executed, then the competentauthority will share 60% to 70% of the rate increase in excess of 0.5%.Conversely, if the Base Rate decreases, then the government will becomeentitled to take 60% to 70% of the savings resulting from such rate decreasein excess of 0.5%. The actual allocation of the interest rate fluctuation risk willbe set: (i) at the time when the initial user fee of the project facility is determinedand (ii) thereafter, every two years applying the mean value of the Base Rate forsuch two-year period.

1.1.2.3. Reduction of Overall Duration of Projects

Under the Basic Plan for PPI, the concession company will be able to operatethe project up to a half of the time saved as a result of early completion of theproject facility. This is an incentive for concession companies because duringsuch early operation period concession companies are entitled to collect feesfrom users of the project facilities for their own account. The above-describedincentive will be available to those infrastructure projects that will enter intothe construction phase in 2009.

Pursuant to the Plan, the government will implement several measures toreduce the pre-construction phase of development. Specifically, the pre-construction phase for BTL projects, such as schools and military housingprojects, will be reduced to twelve months from the current thirty months,and that for roads and other large infrastructure facilities will be reducedto sixteen months from the current thirty-two months. To achieve this end,simplified feasibility tests for projects will be implemented, and negotiationof the concession agreement and preparation of detailed engineering willtake place simultaneously, if feasible. In addition, to expedite the negotiationof the concession agreement, competent authorities are now required toconsult with other relevant authorities and municipalities on their demandsin connection with the project facility, complaints from residents, etc., beforecommencing the negotiation of the concession agreement. Also, a draft ofthe concession agreement prepared by the competent authority, as well asdetailed requirements of the competent authority, will be provided topotential bidders at the time the competent authority announces its requestfor proposals.

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1.1.2.4. Deregulations

The minimum ratio of the equity capital of shareholders to the total privateproject cost is lowered by 5% (from 15% to 10%). For BTO projects, theminimum equity capital ratio is lowered to 20% from the current 25% (or15%, if 50% or more of the concession company’s shareholders are financialinvestors). For BTL projects, the minimum equity capital ratio is lowered to5% from the current 5% to 15% if the total project cost is less than KRW 100billion.

In general, any additional benefit gained by the concession company as aresult of refinancing of the project or change in its shareholder (e.g., increase innet income due to lower interest rate after refinancing, etc.) must be shared withthe relevant competent authority. However, under the Plan, if there is nominimum revenue guarantee provided by the competent authority, then theconcession company is not required to share with the competent authorityany benefit resulting from a change in its shareholder.

The competent authority may increase the project cost by 5% withoutimplementing a formal review by the Committee, if such increase is unavoid-able due to a reason for which the concessionaire is not responsible.

1.1.2.5. Expansion of Eligible Projects and Search for New Projects

The type of eligible infrastructure projects under the PPI Act will be expandedto include facilities for the disabled, sewage water recycle facilities, andprofessional sports facilities, such as soccer fields for professional players.

Previously, only public school projects could be implemented by the BTLmethod under the PPI Act. Starting from 2010, construction or remodeling ofprivate schools may be implemented by the BTL method under the PPI Act.

In principle, economically viable unsolicited projects (i.e., projectsinitiated by private investors, rather than the government) will be implemen-ted as PPI projects. Even for government construction projects, the feasibilityof pursuing such projects under the PPI Act will be examined from the outset.

1.1.2.6. Closer Monitoring of Disbursement of Government Funds

Disbursement of funds for PPI projects will be monitored by the government’sspecial monitoring team for fund disbursement, as is the case with governmentconstruction projects. Disbursement of funds will be continuously monitoredand problems relating to PPI projects will be resolved promptly by way of on-site review.

Each relevant department within the government will establish aPPI review team, so that any problem or suggestion can be addressedpromptly.

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1.2. LEGAL CONTEXT

1.2.1. Procedures for Private Participation in Infrastructure

Korea first adopted its legal framework for implementing Private Participationin Infrastructure (PPI) and project financing in 1994. The predecessor of the Acton Private Participation in Infrastructure (the PPI Act) was unsuccessful ingenerating any large volume of private investments in infrastructure projects,and it failed to attract foreign investment. Nevertheless, by drawing on variousforeign models in designing its PPI program, Korea was able to establish arelatively well-defined regulatory framework in a short period of time.

Under the PPI Act, there are two procedures for implementing infrastruc-ture projects: solicited (i.e., government initiated) projects and unsolicited(i.e., sponsor initiated) projects. Infrastructure projects may be implementedin the form of BTO (Build-Transfer-Operate), BTL (Build-Transfer-Lease),BOT (Build-Operate-Transfer), or BOO (Build-Own-Operate) projects. BTLmethod is permitted for solicited projects only. Additionally, the PPI Actpermits the government and sponsors to adopt certain other project structures.Among the foregoing, BTO and BTL are the two most common forms ofPPI projects used in Korea.

For solicited projects, the following procedures apply: (i) the competentauthority determines private infrastructure projects to be implemented; (ii) thecompetent authority prepares the basic plan for each project and makes a publicannouncement for each project; (iii) any interested bidder submits its projectproposal to the competent authority; and (iv) the competent authority evaluateseach project proposal and designates the concessionaire by entering into aconcession agreement. In case of a solicited project with the total project costabove a specified amount, designation of the concessionaire requires a review bythe Private Investment Project Deliberation Committee (the Committee).

For unsolicited projects, the following procedures apply: (i) a sponsorsubmits its proposal for an infrastructure project to the competent authority;(ii) the competent authority consults the Public and Private InfrastructureInvestment Management Center (the PIMAC) and requests its review of theproject proposal; (iii) once the PIMAC approves the project proposal, thecompetent authority makes a public announcement of the project and invitesthird parties to participate in the bidding process; and (iv) the competentauthority selects the concessionaire through the bidding process. The sponsorthat submitted the original project proposal may receive additional points of upto 5% of the evaluation points, and the bidder with the most points is grantedthe concession. If no other party participates, then the original sponsor will bedesignated as the concessionaire. Subsequently, the competent authority willenter into a concession agreement with the concessionaire, pursuant to whichthe project will be constructed and operated.

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1.2.2. Concession Agreement

As mentioned above, the concession agreement, which has become somewhatstandardized through time, is the instrument by which the concessionaire will beformally designated by the competent authority. It is also the most importantdocument in a project in that it regulates most major terms and procedures ofthe project, including: (i) designation of the concessionaire and basic mattersrelating to the parties’ rights, obligations, and relationships with each other;(ii) commercial matters, such as the total project cost, user fee, the internalrate of return, and operational revenue and expenses; (iii) approval of the imple-mentation plan, performance guarantee, etc.; (iv) matters relating to constructionand operation; (v) minimum revenue guarantee and other governmental support(both financial and non-financial); (vi) allocation of risk (such as force majeureevents); (vii) events of termination and dispute resolution; and (viii) mattersrelating to termination, buy-out right, and payment of the termination sum.

1.2.3. Governmental Support

To the extent its budget permits, the competent authority may, with theCommittee’s approval, provide financial assistance to the concessionaire inthe following cases: (i) the financial support is necessary to prevent the disso-lution of the concessionaire; (ii) the financial support is necessary to maintainthe fee charged to the public or users of the facilities at an appropriate level;(iii) compensation to expropriated landowners is excessive and materially pre-judices the concessionaire’s profitability of the project; (iv) the operation of theproject facilities becomes commercially unfeasible due to substantially low rev-enue to be collected from the users of the facilities (i.e., the minimum revenueguarantee); and (v) due to fluctuations in the exchange rates, the concessionairehas incurred a significant foreign exchange loss (but only with respect toforeign currency borrowings and not for any foreign exchange loss for equityinvestment). The specific terms of and procedural requirements for governmen-tal support are stipulated under the relevant concession agreement.

The government may guarantee a certain percentage (usually between 60%and 90%) of the estimated revenue (with reciprocal reversion to the govern-ment of any revenue earned in excess of a certain percentage (usually between110% and 140%) of the estimated revenue). In case of force majeure ordefault by the competent authority specified in the PPI Act, the concessionairemay exercise its buy-out right and demand the competent authority topurchase the project. Also, if the concession agreement is terminated priorto the expiration of the concession period, then the concessionaire will becomeentitled to receive a termination sum, which is calculated based on, dependingon the cause of such termination, the foregone future revenues, the privateinvestment amount (equity and debt), etc. The minimum revenue guarantee

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and the termination sum provisions are very important to financiers, as theydirectly impact the amount actually recoverable by the financiers should theconcessionaire default on the loan. Not surprisingly, however, the governmenthas been gradually reducing the scope of the minimum revenue guarantee andthe termination sum for economic as well as political reasons.

1.2.4. Tax Benefits and Others

The Korean government provides various tax benefits to the concessionaire.For BOT projects, acquisition of real estate is exempt from acquisition taxand registration tax. For BTO and BOT projects, the zero-rate VAT willapply to transfer of the project facilities to the competent authority. Also,under the PPI Act, many government clearance and approval procedures areeither simplified or exempted and the concessionaire is permitted to use certainpublic lands for construction of the project facilities. The concessionaire has theright to expropriate land under the PPI Act; alternatively, the concessionairemay request the government to expropriate land on behalf of the concessionaire.

1.2.5. The PPI Act

The PPI Act and the Enforcement Decree of the PPI Act (the ‘‘EnforcementDecree’’) are the principal components of the legal framework for PPI. Underthe PPI Act, the Ministry of Strategy and Finance establishes and constantlyrevises the Basic Plan for PPI, which stipulates policies related to PPI andprovides detailed guidelines for implementing PPI projects.

Certain amendments to the PPI Act became effective as from 1 January2009. These amendments include:

– Additional types of infrastructure may be designated as eligible by theEnforcement Decree to respond more timely to market demand.

– Competent authorities in charge of infrastructure projects must report thestatus of operation and its outcome to the Ministry of Strategy and Finance.

– A feasibility study will be included in the request for proposals for eachsolicited PPI project.

– The government may exclude certain private companies from partic-ipating in PPI projects for their misconduct in any previous PPI project.

2. LOCAL LEGAL ISSUES

2.1. PROCUREMENT RESTRICTIONS

Discussion to be provided in future updates.

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SOUTH KOREA 2. Local Legal Issues

2.2. THIRD PARTY RIGHTS TO CHALLENGE A PROJECT


2.3. ULTRA VIRES


2.4. CORPORATE LAW

2.4.1. Form of Company

Generally, a Korean subsidiary of a foreign investor is established in the formof a joint-stock company (JSC or Chusik Hoesa) or a limited liability company(LLC or Yuhan Hoesa). Some major differences between a JSC and an LLCare as follows:

– greater variety in the manner in which investments may be made in a JSC(i.e., a JSC can issue commonandpreferredstock, bonds and debentures);

– restriction on the maximum number of members of an LLC (up to fifty)versus no restriction on the number of shareholders of a JSC;

– restriction on the transfer of equity shares in an LLC – the consent of allmembers is required through a special resolution of the members whileshares of a JSC are in principle freely transferable unless restricted inthe Articles of Incorporation to require board approval; and

– possibility of passing resolutions of general meetings of the membersof an LLC in writing without convening an actual meeting, if allmembers consent to the procedure.

Generally, the JSC form is preferred for PPI projects due to the above character-istics. However, because of some of the advantages of the LLC (e.g., ability tocontrol the change of equity holders, flexibility in respect of corporate gover-nance such as no mandatory board or auditor, fewer requirements for disclosureof financial/accounting information, pass-through tax treatment for US tax pur-poses, etc.), some foreign investors do choose to use the LLC form.

2.4.2. Board of Directors

In case of the board of directors, a JSC will require the appointment of,in principle, at least three directors on the board as well as one statutory(internal) auditor. In contrast, an LLC can have as few as one (sole) director.

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2. Local Legal Issues SOUTH KOREA

There are no residency or citizenship requirements related to either a direc-tor or a statutory auditor. However, to the extent that any of the non-Koreandirectors are in Korea, the visa status of such director needs to be in order andthe appointment of such director to the Board of the company needs to be dulyreported to the relevant immigration authorities.

One of the directors should be designated as the representative director,who will act as the chief executive officer of the company and will haveauthority to enter into binding agreements on behalf of the company. Also,a statutory auditor, who will be in charge of auditing the books of thecompany, must be designated for a JSC. A statutory auditor is not requiredin an LLC unless its articles if incorporation stipulates otherwise.

2.4.3. Restrictions on Foreign Ownership

There are generally no restrictions on foreign ownership of a Koreancompany, except in the case of certain ‘‘strategic’’ industries, such as broad-casting, telecommunications, and defense. Although there are no restrictionson foreign ownership, a foreign investor investing in a Korean company willneed to comply with certain reporting requirements on an ongoing basis asprovided under the Foreign Investment Promotion Law (FIPL). For instance,at the time of incorporation, the foreign investor will be required to invest aminimum of KRW 50 million as initial capital, and will need to submit areport regarding such investment to any one of the foreign exchange banks orother entities designated by the Ministry of Knowledge and Economy.

2.4.4. Shareholder Issues

2.4.4.1 Basic Shareholder Rights

A shareholder of a Korean corporation (JSC or LLC) has the following rights:

– basic shareholder rights, such as the right to vote at a shareholders’meeting, the right to dividend distributions, preemption rights withrespect to newly issued shares, etc.;

– the right to bring a court action for revocation or nullification of aresolution passed at a general shareholders’ meeting (the actual revo-cation or nullification of a resolution will require a court judgmentbased on grounds specified under the law);

– the right to inspect the financial statements, business report and auditreport and to receive a copy or abstract of such documents;

– the right to bring a court action to nullify the issuance of new shares(the actual nullification of the issuance of new shares will require acourt judgment based on grounds specified under the law);

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– the right to demand that the company suspend the issuance of newshares;

– the right to bring a court action to nullify the incorporation of thecompany (the actual nullification of the incorporation of the companywill require a court judgment based on grounds specified under thelaw);

– the right to bring a court action to nullify a merger or consolidation (theactual nullification of a merger or consolidation will require a courtjudgment based on grounds specified under the law);

– the right to bring a court action to nullify a spin-off or spin-off merger(the actual nullification of a corporate split or merger will require acourt judgment based on grounds specified under the law);

– the right to bring a court action to nullify any reduction in paid-upcapital (the actual nullification of any reduction in paid-up capital willrequire a court judgment based on grounds specified under the law);

– the right to demand that the company suspend any unfair issuance ofconvertible bonds or bonds with warrants;

– the right to inspect the articles of incorporation, minutes of the share-holders meeting, the shareholders’ ledger, and the debenture ledger;

– the right to bring a court action to nullify a comprehensive share swap ortransfer in the context of a merger or acquisition transaction (the actualnullification of an all-inclusive share swap or transfer will require acourt judgment based on grounds specified under the law); and

– the right to request the company to purchase the shares owned by theshareholder if dissenting against the subject matter of a resolution(appraisal rights of a dissenting shareholder) in case of (i) transferof the whole or an important part of the business of the company,(ii) making, altering, or rescinding a contract for leasing the wholebusiness, for giving authority to manage such business, or for sharingwith another person all profits and losses, or other similar contracts,(iii) assuming the entire business of another company, (iv) assuming aportion of the business of another company which significantly affectsthe company’s business, (v) comprehensive share swap or transfer, (vi)merger, or (vii) spin-off / spin-off merger.

2.4.4.2. 1% Shareholder Rights

Shareholders holding in aggregate 1% or more of the total number of issuedand outstanding shares have the following rights in accordance with the KCC:

– the right to demand, on behalf of the company, that a director not takecertain actions or to discontinue certain actions that are in violation ofthe law or the articles of incorporation of the company; and

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– the right to bring a court action and/or to demand the company to bringa court action against promoters, directors, statutory auditors, share-holders who illegally receive profits from the company, those whohave colluded with the company to subscribe to shares at a consider-ably unfair price, or liquidators who liquidates the company.


Shareholders holding in aggregate 3% or more of the total number of issuedand outstanding shares have the following rights in accordance with the KCC:

– the right to demand that the company convene an extraordinary generalmeeting of shareholders or, if the company refuses to do so, the right todemand that a court issue an order to convene an extraordinary generalmeeting of shareholders;

– the right to propose the agenda for a shareholders’ meeting (non-votingshareholders excluded);

– the right to request the company to elect directors by means of cumu-lative vote (non-voting shareholders excluded);

– the right to inspect the accounting books and documents required foran understanding of the accounting books;

– the right to apply to the court for the appointment of an inspector ofaccounts or management (in case it is suspected that there are anywrongful acts or non-compliance with the relevant regulations orthe articles of incorporation); and

– the right to apply to the court for removal of directors, statutory audi-tors or liquidators.


Shareholders holding in aggregate 10% or more of the total number of issuedand outstanding shares have the following rights:

– the right to apply to the court for dissolution if:� the corporate affairs are in a continuing deadlock which prevents

the company from operating in a normal manner and significantand irreparable injury to the company is being suffered or isimpending; or� the management or disposition of the company’s property is grossly

improper and the existence of the company is thereby threatened.– the right to apply to the court for rehabilitation of the company, if the

company is deemed to be unable to pay its debts without significantdifficulty pursuant to the Debtor Rehabilitation and Bankruptcy Act(Debtor Rehabilitation and Bankruptcy Act, Article 34(2)).

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Shareholders who hold in aggregate shares representing 20% or more ofthe total number of issued and outstanding shares of the single parentcompany in a small-scale share swap or of the remaining company in asmall-scale merger can block the transaction that has been approved by theboard of directors.

2.5. LICENSES AND PERMITS


2.6. ASSETS


2.7. GOVERNMENT SUPPORT


2.8. SOVEREIGN IMMUNITY

There is no express provision in the Korean Civil Procedure Code which givesthe Korean government immunity from suit.

2.9. DISPUTE RESOLUTION


2.10. REGULATORY AND STATUTORY DUTIES


2.11. COLLECTING TARIFFS FROM CONSUMERS


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2.12. PENALTIES, SANCTIONS AND BONUSES

2.12.1. Procedures for Revocation

In order for a competent authority to revoke the operation and maintenanceright under Article 47(1)(1) of the PPI Act (the ‘‘O&M Right’’)1, it must imple-ment certain procedures required under Article 22 of the AdministrativeProcedures Act. Hearings must be held to give the concessionaire an opportu-nity to present its case. Then, officials of the competent authority must submittheir written opinion to the head of the competent authority, who determineswhether or not to approve the revocation. The concessionaire must be compen-sated according to the law, even if the revocation was made for public interestreasons.

The decision made by the head of the competent authority may beappealed to (i) the relevant court having jurisdiction over the competentauthority or (ii) the Administrative Tribunal, which is a committee underthe Prime Minister.

2.12.2. Administrative Proceeding for Revocation

Once the competent authority notifies the concessionaire of its decision torevoke the O&M Right and/or terminate the relevant concession agreementpursuant to Article 47 of the PPI Act, the Concessionaire has ninety days tofile with the relevant court its application to cancel such revocation. The first-level trial of the administrative proceeding for revocation may last six tomonths.

2.12.3. Administrative Proceeding for Stay

Under Korean law, once the competent authority issues its administrativedecision (e.g., revocation), the administrative decision becomes effectiveimmediately, and commencement of the administrative proceeding for revo-cation does not have any affect on the validity of such administrative decision.In order to prevent the revocation from divesting the rights of the concession-aire immediately, the concessionaire must obtain a stay order from the court.Thus, simultaneously with submission of the application for the administra-tive proceeding for revocation, the concessionaire should also commence theAdministrative Proceeding for Stay to prevent the competent authority fromterminating the concession agreement. The stay is issued or denied in two tothree weeks.

1. Under Art. 47(1)(1) of the PPI Act, the competent authority may revoke the operation andmaintenance right where it is necessary for public interest, such as efficient operation of theinfrastructure facilities or a change of circumstances, etc.

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2.13. TRUSTS, AGENCY AND OTHER LEGAL RELATIONSHIPS


2.14. TAKING SECURITY AND INSOLVENCY

The following is an overview of the types of security interests that may becreated under Korean law.

2.14.1. Mortgage

Mortgages are a statutory form of security interest. Mortgages providesecured creditors with priority over subsequent creditors and purchasers ofthe property. Mortgages may only be created on property that can beregistered, such as land, building, construction machinery, automobiles, etc.

2.14.1.1. Creation

To create a mortgage, the parties must first enter into a mortgage agreementand then file a joint application to record the mortgage in the court registry.A mortgage is automatically perfected upon creation (i.e., a mortgage agree-ment and a public recordation) and no further action is required for perfection.The public recordation is deemed to give constructive notice of the mortgageto all subsequent creditors and purchasers; accordingly, any future purchaserstake title to the collateral subject to the mortgage. A mortgage does notinvolve a transfer of actual possession of or title to the collateral, but onlythe establishment of a security interest.

2.14.1.2. Priority

In principle, the secured creditor has priority over all subsequent creditors andclaimants, priority being determined by the time of entry of the mortgage intothe court registry. In practice, however, the secured creditor should also con-sider statutory preferred claims which are deemed to be preferential to theregistered mortgage. For instance, such statutory preferred claims includecertain tax liens, certain employee wage and severance claims, small-sizedresidential lessee claims for security deposit refunds and certain other rights.

2.14.1.3. Foreclosure

Upon default, the secured creditor has two different options to recover thesecured amount.

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First, it may initiate a judicial foreclosure process, which typically consistsof a public auction. The amounts recovered in a public auction tend to be lessthan the fair market value of the collateral. The judicial foreclosure proceed-ing will generally consist of (i) the creditor’s filing of the application for courtauction at the court having jurisdiction over the location of the collateral,(ii) the creditor’s payment of deposit for court auction costs, (iii) the court’sattachment of the collateral and notice to the debtor, (iv) the court-appointedappraiser’s valuation of the collateral by an appraiser, (v) designation of courtauction date, (vi) holding of the court auction, and (vii) the distribution ofproceeds.

It is not necessary for the mortgagee to obtain a judgment on its claimagainst the debtor. Upon receipt of the mortgagee’s petition, the court willinitiate an auction sale of the mortgaged property. The time involved in ajudicial foreclosure proceeding may vary according to several factors, e.g.,whether a buyer is found who will meet the minimum bid price as determinedby the court (if not, a new auction is held with a lower minimum bid price asdetermined by the court), whether the debtor asserts any procedural defense,etc. In practice, the courts generally lower the minimum bid price by 20%each time the property is not sold at a particular auction and the court holdsanother auction. In the absence of complications, it generally takes approx-imately 6 to 8 months from the date the petition is filed until the distribution ofthe auction proceeds to the registered mortgagees and/or security holders. If aparticular auction is unsuccessful on the initial auction date, the court willhold the next auction in one month to one month and a half.

Once the property is sold, the court will deduct from the proceeds (i) thecosts of the auction sale and (ii) the amount of payment for statutory preferredclaims, if any, and then it will distribute the remaining auction proceeds tomortgagees and other creditors in the order of priority, which is generallydetermined based on the timing of registration. Distribution of proceeds onlyoccurs if the court auction is successful. If the sale proceeds of the courtauction fall short of the claim amount, only the portion of the claim amountthat corresponds to the amount of sale proceeds distributed to the creditor willbe deemed paid, and the creditor can continue to pursue the remaining andunsatisfied portion of the claim amount against the debtor. However, thecreditor will need to take additional action (e.g., initiation of a lawsuit) torecover the remaining amount.

Secondly, if the debtor agrees, the secured creditor can engage in a privateforeclosure, consisting of either a private auction or a privately-bargainedtransfer of title to the secured party in satisfaction of the debt. For instance,the private foreclosure may be accomplished as follows:

– the debtor (who is the owner of the property) sells the property to athird party purchaser;

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– the purchaser deducts and withholds the amount equivalent to thesecured claim from the purchase price and directly pays such withheldamount to the secured creditor at the closing of such sale and purchase;

– at the closing, the secured creditor delivers to the purchaser all docu-ments necessary to de-register the mortgage, in simultaneous exchangewith the repayment of the secured claim; and

– if there are also other claimants junior to the senior mortgage, theparties (i.e., the debtor-owner, the senior creditor, the junior claimantsand the purchaser) typically reach a mutual agreement under which thepurchaser may either assume or repay such junior debts at the closingof the sale and purchase transaction.

2.14.1.4. Costs and Fees

The recordation of mortgage is subject to a certain registration tax and surtax,and mandatory purchase of national housing bonds. In addition, there are alsoa moderate amount of expenses such as a stamp tax and fee. In practice, thefinancial institutions demand the borrower to bear such taxes, costs and fees.

2.14.1.5. Bankruptcy Events

In the event that the debtor undergoes bankruptcy-liquidation proceedings, thesecured creditor will maintain priority with respect to its security interest.However, in rehabilitation proceedings, the judicial foreclosure process couldpotentially be stayed by a preservation order of the court, and the securedcreditor’s claims could be discharged subject to the rehabilitation plan.

2.14.1.6. Kun-mortgage

A kun-mortgage is a special type of mortgage, and it can be used to secureany type of debt. It is distinct because it secures the debt up to a certainagreed maximum ceiling amount without regard to intermediate increasesor decreases in the debt within the range of the ceiling amount of suchdebt. Kun-mortgages, of course, are preferable because they require thatonly a maximum secured amount be stated in the recordation, thereby afford-ing the parties the freedom to increase or decrease the secured amount asdesired. In practice, parties use kun-mortgages rather than ordinary mortgagesin almost all cases.

If the amount of principal outstanding plus interest at any given time fallsbelow the registered maximum secured amount, the full amount of the debt,but no more, will be secured by the kun-mortgage. But if the amount ofprincipal outstanding plus interest at any given time exceeds the stated

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maximum amount, then such excess will not be secured. Accordingly, it isadvisable to fix the maximum amount at a level that exceeds the principalof the claim amount by an adequate margin. Customarily such maximumsecured amount generally ranges from 110% to 130% of the principal amount(the financial institution lenders typically set the maximum secured amount at130% of the principal amount). Since a kun-mortgage is indivisible, themortgagee may exercise its right over the whole property covered by thekun-mortgage up until its claim has been completely satisfied. Procedurally,to establish a kun-mortgage, the mortgagor and the mortgagee must execute akun-mortgage agreement. The kun-mortgage agreement should specify themaximum amount to be secured. The kun-mortgage is then registered withthe registry of the real property provided as collateral.

2.14.2. Yangdo Tambo

Unlike mortgages, yangdo tambo is not a statutory security interest, but israther a contractual security arrangement that has come to be recognized byKorean courts over time. Yangdo tambo is the security interest of choice withrespect to personal property since most personal property can not beregistered, and a mortgage interest, which requires public registration, isnot available.

2.14.2.1. Creation

In order to create a yangdo tambo, the parties must first enter into a yangdotambo agreement pursuant to which the parties agree (i) to transfer title to thecollateral to the creditor and (ii) to allow the debtor to maintain actual pos-session and continued use of the collateral while holding it ‘‘in trust’’ for thecreditor. In the case of registrable property, the parties must take the addi-tional step of jointly registering the transfer of title in the title registry.Moreover, the parties must agree that such title transfer is conditional insofaras (i) the title reverts to the debtor upon repayment of the secured amount and(ii) the secured party must dispose of the collateral upon default unlessotherwise agreed.

According to case law, during the term of the yangdo tambo, the securedcreditor can validly convey title to the collateral to a bona fide purchaser forvalue, free of the yangdo tambo. In such cases, the only remedy the debtorwould have available to it would be a claim against the secured party forbreach of the yangdo tambo contract. The courts have further held that, sincetitle to the collateral has passed to the secured creditor under yangdo tambo,other creditors of the debtor may not attach the collateral, despite the debtor’scontinued possession and use of the collateral.

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2.14.2.2. Priority

Because a creation of yangdo tambo requires the transfer of title (and thepublic recordation in the relevant court registry in case of the real prop-erty), the secured creditor has priority over all subsequent creditors andclaimants.

2.14.2.3. Foreclosure

In the event of default, the secured party, as the titleholder, is typically entitledto dispose of collateral through a private sale, although yangdo tambo requiresthat the secured creditor return any balance in excess of the secured amount tothe debtor. If agreed to by the debtor, the secured creditor may also keep titleby having the collateral appraised and paying the debtor any excess of theappraised amount over the secured amount.

2.14.2.4. Costs and Fees

If the debtor and the secured creditor agree to use yangdo tambo with respectto appreciated real property, the transferor may incur large tax liabilities forcapital gains, since Korean tax law treats the yangdo tambo as an outright sale.In addition, the registration of title transfer is also subject to substantial reg-istration tax and surtaxes (at the aggregated rate of 4.6% of the purchase price(in case of an office building and the underlying land). National housing bondsmust also be purchased (the amount of such required bond purchase variesdepending upon the location and the value of property).

In the case of real property, parties in Korea tend to favor kun-mortgagesover yangdo tambo since the public registration of a mortgage acts as con-structive notice to subsequent creditors or purchasers of the real estate andmortgages are relatively effective at protecting the priority of the claims ofsecured creditors (subject to the caveats noted above). In addition, unlikeyangdo tambo, mortgages do not trigger tax liability for capital gains underKorean tax law (pursuant to a deemed sale of the real property).

2.14.3. Insolvency Issues

Below is a brief explanation of the domestic and cross-border insolvencyregimes offered in Korea for business entities. The five parts are asfollows: (i) general overview of Korean insolvency regimes, (ii) rehabilitationproceedings, (iii) bankruptcy proceedings, (iv) cross-border insolvencyregime, and (v) out-of-court proceedings under the Corporate RestructuringPromotion Law.

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2.14.3.1. General Overview

A new consolidated insolvency law called the ‘‘Debtor Rehabilitation andBankruptcy Law’’ (DRBL) became effective on 1 April 2006. The DRBLrepealed the four previous insolvency-related laws and consolidated the pro-ceedings thereunder into the following three insolvency regimes: (i) rehabil-itation proceedings under Chapter 2 of the DRBL primarily for therehabilitation of insolvent business entities; (ii) bankruptcy proceedingsunder Chapter 3 of the DRBL for the liquidation of insolvent business entitiesand individuals; and (iii) rehabilitation proceedings for individuals underChapter 4 of the DRBL. As such, under the DRBL, there are mainly twoproceedings for the insolvency of business entities: (i) Chapter 2, RehabilitationProceedings; and (ii) Chapter 3 Bankruptcy Proceedings.

In line with the international efforts for harmonization of cross-borderinsolvency regimes, the DRBL discarded the principle of territoriality thatwas applicable under the previous insolvency laws and adopted the modifiedprinciple of universality. In addition, the DRBL includes new provisions inChapter 5, which address, among other matters, the recognition and enforce-ment of foreign insolvency proceedings in Korea, the outbound effect ofKorean insolvency proceedings on assets located in a foreign country andthe rule of payment adjustment in concurrent insolvency proceedings.

Korea offers another insolvency-related law called the ‘‘Corporate RestructuringPromotion Law’’ (CRPL). This law took effect on 4 November 2007 withcertain changes to its predecessor which expired on 31 December 2005.Generally, the CRPL applies only to debt owed by an insolvent company tocertain Korean financial institutions (including Korean branches of certainforeign financial institutions) which are rescheduled pursuant to out-of-courtworkout arrangements governed by the CRPL.

2.14.3.2. Rehabilitation Proceedings under Chapter 2 of the DRBL

(1) Petition for Rehabilitation and Commencement

The goal of rehabilitation proceedings governed by Chapter 2 of the DRBL isto rehabilitate insolvent debtors by restructuring their debt pursuant to a reha-bilitation plan approved by the creditors and the court. A debtor company,creditors holding claims amounting to 10% or more of the debtor company’spaid-up capital or shareholders holding 10% or more of the debtor company’stotal issued and outstanding shares may file for the commencement of therehabilitation proceeding against the debtor company. The rehabilitation pro-ceedings are analogous to Chapter 11 proceedings of the U.S. BankruptcyCode. However, the filing for a rehabilitation proceeding does not itself triggerthe formal commencement of the rehabilitation proceeding. A rehabilitation

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proceedingcommencesonlywhenthecourt issuesaseparatecommencementorderin response to the filing.

(2) Appointment of Receiver

Upon commencement of the rehabilitation proceeding, in principle, the courtwill appoint a receiver. Usually, the court will appoint the existing manage-ment (e.g., representative director) of the debtor company to act as thereceiver in the rehabilitation proceeding unless the insolvency of the debtorcompany was caused by the existing management, in which case the court willappoint an independent receiver. The receiver has the power to conduct all ofthe debtor’s business and manage all of its property, subject to the court’ssupervision.

(3) Preservation Order and Stay Order

When an application for the commencement of a rehabilitation proceedinghas been filed with the court, the court may issue, upon petition by aninterested party, or at the court’s discretion, a preservation order withinseven days from the filing. The court will then determine whether to com-mence the rehabilitation proceeding. During the gap period between thefiling and the commencement, the court may also issue, upon petition byan interested party or at its discretion, a comprehensive stay order or specificstay order that suspends all or specific administrative or judicial proceedingsagainst the debtor.

(4) Filing of Claims and Types of Claims

Upon commencement of the rehabilitation proceeding, the receiver will pre-pare lists of claims held by the creditors. If the claims are correctly specified inthese lists, the filing of the proof will not be required. However, if the claimsare not specified or are specified incorrectly in such lists, a creditor must filethe proof of claims within a designated period of time, and failure to do so willeither nullify its claim or fix its claim as specified in the lists.

In Chapter 2 rehabilitation proceedings, creditors are classified into threebasic categories: (i) creditors with unsecured rehabilitation claims; (ii) cred-itors with secured rehabilitation claims; and (iii) creditors with commonbenefit claims. Creditors with either secured or unsecured rehabilitationclaims are subject to rehabilitation proceedings and generally may not receivepayment or repayment of their respective claims (with certain exceptions,including set-off of claims that are exercised within certain periods permittedunder the DRBL) other than as provided for in the rehabilitation plan.However, creditors with common benefit claims are not subject to the

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rehabilitation plan, and include, inter alia, those creditors whose claims aroseafter the commencement of the rehabilitation proceeding (with certain excep-tions), and those creditors whose claims were approved by the court during thepreservation period.

(5) Rehabilitation Plan and Termination of Rehabilitation

A rehabilitation plan may call for rescheduling of the debtor’s debt over aperiod not to exceed, in principle, ten years, except when corporate debenturesare issued pursuant to the rehabilitation plan. Any secured rehabilitationclaims and unsecured rehabilitation claims that are not recognized underthe court-approved rehabilitation plan are irrevocably extinguished, even ifthe rehabilitation proceeding is subsequently terminated. If payment under thecourt-approved rehabilitation plan has commenced, the court shall, uponpetition by an interested party or at its discretion, terminate the rehabilitationproceeding early, unless there is an impediment to the implementation of therehabilitation plan.

(6) Discontinuation of Rehabilitation

If it becomes apparent, either before or after the court approves the rehabil-itation plan, that the debtor cannot be rehabilitated, the court may, in its solediscretion or upon request by the receiver or a creditor, issue an order todiscontinue the rehabilitation proceeding. Once the rehabilitation proceedingis discontinued due to the debtor’s failure to comply with the rehabilitationplan, the court may declare the debtor bankrupt and liquidate the debtor.

2.14.3.3. Bankruptcy Proceedings under Chapter 3 of the DRBL

Bankruptcy proceedings governed by Chapter 3 of the DRBL are court-administered proceedings designed to liquidate an insolvent debtor’s assets.

(1) Adjudication of Bankruptcy

The bankruptcy proceeding formally begins when the debtor company or itscreditor files a petition for the bankruptcy proceeding. The court then adju-dicates that the debtor is ‘‘bankrupt.’’ The adjudication of bankruptcy stays allcreditors that have unsecured bankruptcy claims from exercising or otherwiseenforcing their claims against the bankruptcy estate (with certain exceptions,including set-off claims that are permitted by the DRBL). Even before theformal adjudication of bankruptcy, the court is empowered to issue preser-vation orders preventing creditors that have unsecured bankruptcy claimsfrom enforcing their claims.

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(2) Bankruptcy Trustee

The bankruptcy trustee appointed by the court is vested with the exclusiveright to conduct an investigation and assessment of the bankruptcy estate, andto manage and dispose of the bankruptcy estate.

Subject to certain statutory limitations and approval by the court, the bank-ruptcy trustee has the power to liquidate the bankruptcy estate, and to deter-mine the manner and timing of such liquidation. The bankruptcy trusteedistributes the proceeds from the liquidation of the bankruptcy estate to thecreditors according to the priority of their claims and, with regard to the claimsof the same priority, in proportion to their claim amounts. When the bank-ruptcy estate has been fully liquidated, the bankruptcy trustee will make thefinal distribution.

(3) Classification of Creditors and Enforcement of Security Interest

In bankruptcy proceedings, creditors are generally divided into two groups;creditors with bankruptcy estate claims, and creditors with unsecured bank-ruptcy claims. Unsecured bankruptcy claims are subject to the bankruptcyproceedings, and repaid from the distributions made by the bankruptcytrustee. However, bankruptcy estate claims are repaid from time to timefrom the bankruptcy estate. Unlike rehabilitation proceedings, enforcementof security interests in the debtor’s assets is not subject to bankruptcy pro-ceedings, except for certain procedural limitations. Thus, the proceeds recov-ered from such enforcement may be applied to the repayment of the securedclaims regardless of the bankruptcy proceeding.

2.14.3.4. Proceedings under the Corporate Restructuring Promotion Law

The CRPL was enacted in November 2007, and it will remain in effect until31 December 2010. The purpose of the proceedings under the CRPL is torestructure the indebtedness of a debtor pursuant to an out-of-court workoutarrangement.

(1) Eligibility for CRPL Proceeding

The CRPL proceedings apply to a debtor company that has received ‘‘credit’’from financial institutions licensed under relevant Korean laws and/or certainother entities designated by the presidential decree of the CRPL (all suchcreditors are hereinafter called ‘‘Financial Institution Creditors’’).For CRPL proceeding to apply, the total amount of the outstanding credithas to be at least 50 billion Won. CRPL proceedings are initiated when thedebtor company is determined by its prime bank or the creditors council,

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which is comprised of the Financial Institution Creditors, to be unable to repayits debt without financial assistance from outside or special borrowings(excluding borrowings made in the ordinary course of its business).

(2) First Meeting of the Council and Suspension of Exercise of Creditors’Rights

The prime bank of a debtor company may or (upon request by the FinancialInstitution Creditors collectively holding more than one-fourth of the totalamount of the claims held by all Financial Institution Creditors) must call ameeting of the creditors’ council by sending out a written notice regarding thefirst meeting. At the first meeting of the creditors’ council, the FinancialInstitution Creditors must determine whether to suspend the exercise of creditors’rights (including enforcement of security interest) and the period for such sus-pension. The suspension period may be up to one month (or three months if aninvestigation of the debtor company’s financial status is necessary). This suspen-sion periodmay be extended by thecreditors’ council for an additionalone month.

(3) Approval of Workout Plan

The creditors’ council may approve a plan for rehabilitation of the debtorcompany, and enter into an agreement with the debtor company for imple-mentation of the rehabilitation plan. For such purpose, the creditors’ councilmay adopt a debt restructuring plan and/or assistance with new credit with theapproval of (i) at least three-fourth of the total amount of claims held by allFinancial Institution Creditors and (ii) at least three-fourth of the total amountof the secured claims held by all Financial Institution Creditors. A creditorwho did not participate in the creditors’ council meeting or exercised a dis-senting vote in writing against the commencement of the CRPL proceedingsor the debt restructuring (including the new credit assistance) will have theright to require the assenting Financial Institution Creditors to purchase itsclaims pursuant to the provisions of the CRPL.

2.15. CURRENCY


2.16. EXPROPRIATION


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2.17. EMPLOYMENT


2.18. CHOICE OF LAW

Korean law generally respects the parties’ agreement on a foreign law as thegoverning law, except in certain limited circumstances. More specifically, thechoice of a foreign law to govern an agreement would be recognized by theKorean courts insofar as the choice of law provisions thereof are valid undersuch foreign law; provided that in the event of any legal proceeding brought ina Korean court, the Korean court would apply: (i) the mandatory laws ofKorea which should be applied by their nature irrespective of the governinglaw; (ii) the laws of the jurisdiction of a party’s incorporation bearing upon thecapacity of such party to enter into contracts; and (iii) if all elements of thecase relate to a jurisdiction (‘‘related jurisdiction’’) other than the relevantjurisdiction, the mandatory laws of the related jurisdiction.

Further, although the formation and the substantial validity of such agree-ment are in principle to be governed by the foreign law, the Korean courtswould allow a party to establish that it did not consent to enter into the contract(including the agreement on the choice of law) or to challenge the validity ofthe agreement on the choice of law. The lack of consent or challenge tovalidity would be decided in reliance of the laws of the jurisdiction of resi-dency of such party if it is manifestly unfair under the relevant circumstancesto apply the foreign law to determine the effect of such party’s conduct.

Specifically, with respect to the law governing security interests, theKorean Private International Law provides (i) that in rem or other registrablerights (such as the title to or mortgage over real estate) should be governed bythe law of location of the relevant property and (ii) that security interest inclaims and receivables should be governed by the law governing the relevantclaims and receivables.

Also, according to the PPI Act, a concessionaire’ right to operate andmanage its project pursuant to the concession agreement is a registrable prop-erty right, which is registered with the registry maintained and administeredby the competent authority and over which a mortgage may be established.Accordingly, collateral over a concessionaire’ right to operate and manage itsproject is governed by Korean law.

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Documents

International Project Finance and PPPs A Legal Guide to ... · PDF fileInternational Project Finance and PPPs A Legal Guide to Key Growth Markets Edited by Jeffrey Delmon Victoria