Hello, I am Attorney Kim Kwang-sik of Cheongchul Law Firm.

Recently, the main bidding for the sale of Watcha, Korea's first-generation OTT platform, was declared unsuccessful, and the Seoul Bankruptcy Court extended the rehabilitation plan submission deadline once again to June, drawing renewed attention to Watcha's future direction. The fact that the rehabilitation proceedings were initiated upon the application of a creditor (Inlight Ventures) rather than the debtor itself, that an attempt at rehabilitation through pre-approval M&A failed at the main bidding stage, and that the deadline for submitting the rehabilitation plan has been repeatedly extended as the case shifted to a private contract approach, compactly illustrate the difficulties of current rehabilitation M&A practice and the realities of operating a rehabilitation plan.

Rehabilitation M&A differs from ordinary M&A in that a transaction is concluded only after passing both the court's oversight and the consent of a majority of creditors. Therefore, it is difficult to assume that an acquisition will succeed merely because there are reports of acquisition interest, and the rehabilitation plan submission deadline is not an absolute deadline but is operated flexibly by the court depending on the circumstances. However, there are limits to such flexibility, and exceeding them may lead to the dismissal of rehabilitation proceedings or to bankruptcy.

Today, focusing on the Watcha case, I will summarize the mechanisms by which acquisitions are frustrated in rehabilitation M&A, the meaning of the rehabilitation plan and the limits of extending its submission deadline, and the step-by-step options remaining for a rehabilitating company after a failed main bidding.

[Question]

What are the reasons why an acquisition may fail in rehabilitation M&A, as in Watcha's failed main bidding? Is it permissible to keep extending the rehabilitation plan submission deadline? And what stages remain for the rehabilitating company after the acquisition is called off?

[Answer]

1. Overview of Corporate Rehabilitation Proceedings

Corporate rehabilitation proceedings are an insolvency process under the Debtor Rehabilitation and Bankruptcy Act (채무자회생법), allowing a company facing bankruptcy to continue operations while adjusting the rights of stakeholders such as creditors and shareholders to pursue rehabilitation. It is significant in practice that not only the debtor itself but also creditors holding claims equivalent to at least one-tenth of the capital may file the application independently.

When the court issues a decision to commence rehabilitation proceedings, a custodian is appointed and creditors file their claims within the prescribed period. The custodian then prepares a rehabilitation plan, submits it to the court, and upon approval at the meeting of interested parties and confirmation by the court, repayment under the rehabilitation plan begins. The repayment period may not, in principle, exceed ten years.

In Watcha's case, pursuant to the application by creditor Inlight Ventures, the Seoul Bankruptcy Court Rehabilitation Division 17 issued a decision to commence rehabilitation proceedings on August 4, 2025, and under the Debtor-In-Possession (DIP) system, CEO Park Tae-hoon was appointed as custodian. The initial deadline for submitting the rehabilitation plan was January 7, 2026.

2. Why Did Watcha Fail to Be Acquired — Background of the Failed Main Bidding

In 2021, Watcha issued convertible bonds (CB) of approximately KRW 49 billion, but upon maturity in 2024, neither repayment of principal and interest nor an extension of maturity was achieved. The external auditor issued a disclaimer of opinion on going concern, and as of the end of 2024, total equity stood at –KRW 87.5 billion, reflecting a state of complete capital impairment. Ultimately, Inlight Ventures, one of the CB creditors, filed for the commencement of rehabilitation proceedings as a creditor, and the court accepted the application.

After the commencement of rehabilitation proceedings, Watcha retained a sale manager and attempted to find a new owner through pre-approval M&A. CJ ENM and Kinolights submitted letters of intent (LOI) at the preliminary bidding stage, but neither company participated in the main bidding that closed on April 22, 2026, resulting in a failed main bidding.

The background factors evaluated as contributing to the failed main bidding include the following. First, even after the commencement of rehabilitation proceedings, subscribers (MAU) continued to decline, eroding the value of the core asset—the user base. Second, the burden of poor financial structure including complete capital impairment and accumulated deficits. Third, concerns about the debt structure that may remain even after the rehabilitation plan is approved. Fourth, the assessment that the structural limits of Korea's OTT market, reshaped around Netflix, make the post-acquisition exit path uncertain.

3. Why Reports of "Acquisition Interest" Alone Cannot Determine the Outcome

Rehabilitation M&A, unlike ordinary M&A, is a procedure that requires obtaining the consent of a majority of creditors under court oversight. Even companies that submitted an LOI at the preliminary bidding stage often withdraw before the main bidding, primarily for the following reasons.

First, the scale of debts and contingent liabilities revealed by due diligence. When debts confirmed through claim filing and admission/denial processes after the commencement of rehabilitation are larger than expected, or when additional contingent liabilities such as guarantees, litigation, or taxes are identified, the burden on the acquisition price rises sharply.

Second, the time-related loss of core asset value. In businesses where the subscriber base, content library, and brand are core assets, as in OTT, the longer the rehabilitation proceedings continue, the more subscribers churn and content contracts terminate, causing the business value at the time of acquisition to decline rapidly.

Third, insufficient creditor consensus on repayment rates and the remaining debt structure. Buyers wish to acquire a "clean company" with debts resolved through the rehabilitation plan, but if disagreements among creditors regarding repayment priorities or rates are significant, they may withdraw out of concern that disputes will continue after acquisition.

Fourth, structural limits of the market environment. In industries where revenue recovery or exit paths within a certain period after acquisition are uncertain, financial investors (FI) have little incentive to participate, and strategic investors (SI) tend to participate in main bidding only when they can clearly explain synergies.

Therefore, the mere fact that "there are interested parties" at the LOI stage does not determine the success of an acquisition, and only after passing all the gateways of due diligence → creditor consultation → repayment rate negotiation → main bidding → court approval does it become a meaningful transaction. Watcha's failed main bidding can be viewed as a case occurring within this general risk structure of rehabilitation M&A.

4. What Is a Rehabilitation Plan, and Is It Permissible to Keep Extending the Submission Deadline?

The rehabilitation plan is the core output of rehabilitation proceedings, a document that contains repayment methods and periods for creditors, the content of changes in rights, fund procurement and business plans, M&A or debt-to-equity conversion structures, and more. It must be approved by class voting at the meeting of interested parties and confirmed by the court before repayment under the rehabilitation plan begins. In other words, the content of the rehabilitation plan determines the amount and timing of what creditors receive, the company's business structure, and even its equity structure—effectively a document that decides the company's fate.

The submission deadline for the rehabilitation plan is not an absolute deadline under the Debtor Rehabilitation and Bankruptcy Act. The court may extend the submission deadline upon the custodian's application or ex officio, and operates the deadline relatively flexibly in practice, considering the progress of rehabilitation M&A, the degree of creditor consultations, the feasibility of fund procurement, and other factors comprehensively. In Watcha's case, the initial deadline of January 7, 2026 was extended once to May 20, and after the failed main bidding, extended again to June.

However, extensions are not permitted indefinitely. As extensions accumulate, ① the burden on creditors from delayed repayment increases, ② the risk of further decline in business value accumulates, and ③ the feasibility of executing the rehabilitation plan itself may become questionable. The court considers these circumstances comprehensively in deciding whether to continue the proceedings. If the rehabilitation plan is ultimately not submitted, or if it is submitted but does not reach approval and confirmation, it may lead to the dismissal of rehabilitation proceedings, which in turn may proceed to bankruptcy. Ultimately, "deadline extension" is a double-edged sword that buys time while simultaneously eroding the effectiveness of rehabilitation.

5. What Is Contained in a Rehabilitation Plan — Where Will Watcha's Fate Be Decided?

A rehabilitation plan typically includes repayment rates and schedules for each creditor, debt-to-equity conversion ratios, the ratios of free retirement or capital reduction of existing shares, the structure for issuing new shares, the use of M&A proceeds, and commitments by the acquirer for additional fund injections. Voting rights and repayment conditions are designed differently for each class of rehabilitation secured creditors, rehabilitation creditors, shareholders, and equity holders, and compliance with mandatory provisions such as the principle of guaranteeing liquidation value, the principle of fairness and equity, and the principle of equality becomes the key issue at the confirmation stage.

For a company in a state of complete capital impairment like Watcha, the structure of "free retirement of existing shares or large-scale capital reduction → acquirer's subscription to new shares → repayment of rehabilitation debt with proceeds from paid-in capital increase" is generally considered. Under this structure, the equity value of existing shareholders effectively disappears, the acquirer emerges as the new controlling shareholder, and creditors recover claims according to the repayment rates and schedules in the rehabilitation plan.

Therefore, whether Watcha's rehabilitation is confirmed and whether the company survives ultimately depends on ① whether a trustworthy buyer (or self-financing plan) can be secured, ② whether a repayment rate acceptable to creditors can be presented, and ③ whether the "feasibility" of repayment under the rehabilitation plan can be clearly demonstrated as superior to liquidation value. These three axes must be settled for the rehabilitation plan to be approved and confirmed; otherwise, the likelihood of proceeding from rehabilitation dismissal to bankruptcy increases.

6. Step-by-Step Options Remaining for Watcha After the Failed Main Bidding

In rehabilitation M&A, a failed main bidding is not the end of the proceedings but rather another inflection point. The following options are typically considered, either alone or in combination.

First, re-bidding with adjusted acquisition conditions. This is a method of redesigning the acquisition price, debt repayment conditions, and treatment of remaining debt, and conducting open bidding again, with the key being to adjust burdensome aspects identified in due diligence to attract potential buyers.

Second, limited competitive bidding restricted to qualified candidates. This is a method of attempting another sale limited to candidates meeting certain qualifications, suitable for transactions centered on strategic investors (SI).

Third, the Stalking Horse method. This is a structure in which a preferred negotiating partner is set in advance, and transaction terms are updated when subsequent bidders offering better terms appear. It is highly utilized in rehabilitation M&A as it combines the advantages of rapid sale and price competition.

Fourth, sale by private contract. This is a method of arranging the acquisition structure through negotiations with a specific investor when open competition is difficult, and Watcha is reported to have turned in this direction after the failed main bidding. While transaction flexibility is high, ensuring objectivity in price formation and obtaining the consent of a majority of creditors become key challenges.

Fifth, submission of a self-rehabilitation plan without M&A. This is a method of submitting a rehabilitation plan that includes debt-to-equity conversion and installment repayment without an external acquirer, and a repayment plan through internal operating cash flow. However, considering complete capital impairment and debt structure, it is often difficult to meet the principle of guaranteeing liquidation value through self-rehabilitation alone.

Sixth, dismissal of rehabilitation proceedings and transition to bankruptcy proceedings. If the rehabilitation plan is not submitted, or if it is submitted but does not reach approval and confirmation, the court may issue a decision to dismiss rehabilitation proceedings, in which case the case typically proceeds to bankruptcy and asset realization and distribution follow. It should also be considered that in businesses with a large proportion of intangible assets such as subscribers, content libraries, and data, asset value may decline even more rapidly upon bankruptcy.

The Watcha case is not simply "the failure of one OTT company" but a case in which key issues of rehabilitation M&A practice—creditor-initiated application for rehabilitation, pursuit of pre-approval M&A and the failed main bidding, repeated extensions of the rehabilitation plan submission deadline, and a turn toward private contract methods—have surfaced all at once.

In rehabilitation proceedings, the mere existence of acquisition interest cannot determine the outcome, and extensions of the rehabilitation plan submission deadline simultaneously bring the risks of declining business value and accumulating creditor burden. Ultimately, the success or failure of rehabilitation depends on the realism of repayment rates and fund procurement, the M&A structure to be included in the rehabilitation plan, the possibility of obtaining the consent of a majority of creditors, and how the superiority of business value over liquidation value can be demonstrated.

Cheongchul Law Firm provides comprehensive legal advisory services covering the entire rehabilitation process, including advice at the application stage of rehabilitation proceedings, design of pre-approval and post-approval M&A structures, preparation of rehabilitation plans and creditor negotiations, advisory on sales through Stalking Horse and private contract methods, and review of due diligence and acquisition structures for acquiring companies in rehabilitation M&A. If you need to consider rehabilitation or rehabilitation M&A, we recommend systematically organizing the facts and materials from the early stages to design a response strategy.