Kirkland Ellis LLP Why do Entrepreneurship Initiatives Fail

Kirkland & Ellis LLP Why do Entrepreneurship Initiatives Fail Lessons from International Experience Cairo, Egypt 5 November 2006 Market Exit Rules - Principles Case Studies for Slovakia & Turkey Gordon W. Johnson Kirkland & Ellis LLP gwjohnson@kirkland. com

Kirkland & Ellis LLP 2 Context: Credit Environment Systems l Foster Commercial Confidence & Reliability – Markets more accurately price, manage, resolve risk – Establish reliable backdrop for negotiations – Reduce asset deterioration & promote credit access l Safety valve for corporate distress – Salvage viable businesses and preserve jobs – Efficient transfer of assets (bankruptcy) l Vital to balance in commercial relationships Encourage responsible corporate behavior & governance – Penalize owners and managers who lack financial discipline or behave irresponsibly – 2/1/2022

Kirkland & Ellis LLP Premise: The Starting Point l Credit is the lifeblood of modern commerce – Willing lenders & range of lending options – Reasonable, manageable repayment risk – Effective commercial and security laws l Increasing significance of collateral – Greater assurance of recovery – Requires broadest range of security (im) movable – Ineffective laws lead to underutilized assets Linkage to Financial System – Properly assess, price and resolve default risk – Basel II: Capital requirements based on risk weighting / loss exposures and unexpected loss (tied to legal systems) 3

Kirkland & Ellis LLP 4 Risk Assessment Continuum Increasing risk of financial distress Credit Access Risk Management Risk Evaluation Process Credit Assessment w w Information w Identify Security w Identify Options w Negotiation w pricing w Contracting w w Registry Monitoring w w Risk Assessment Resolution / Recovery w Enforcement w Formal Insolvency è Liquidation, Rescue w Security Rights w Information Amend Contracts w Negotiation (Plan) w Possible action w Implementation w Monitoring

Kirkland & Ellis LLP 5 Scope: ICR Systems Reviewed Legal Systems Governing Commercial Relationships IPG A 1 -5 Credit Access / Protection IPG B 1 -5 Credit Risk Management IPG C 1 -D 9 Enforcement / Insolvency w Compatibility of Systems w Credit Information systems w Corporate Exit Mechanisms w Collateral Systems (Im)movable w D & O Liability w Liquidation w Risk Management Practices w Rehabilitation w Quasi-formal restructuring w Implementation w Registry Systems (Transparency) w Enforcement Systems w Public Auction & Collections w Workout Framework w Enabling Framework (i. e. tax treatment of bad debts, NPLs) w AMCs & systemic corrective measures – – Institutional Systems Regulatory Systems

Kirkland & Ellis LLP 6 Systems in Action: Laws & Implementation ROSC Areas Legal Framework Institutional Framework Regulatory Framework Credit Information Credit Referencing, Credit Information & Safeguard Credit Bureaus, Agencies, Financial Institutions Central Bank, Finance, Agencies & Self-Regulation Guarantees & Setoffs Mortgage & Pledge Laws Title Transfers / Assignments Notary Publics Notice and Registry Systems Ministries of Economy, Justice, Company Affairs, Trade & Industry Company Registries Land Records / Registries Security Registries Registry Institutions Companies / Land Registrar Regulation of Practices by Government Agency or Private Entities Contract Laws Civil/Commercial Proceedings Auction Laws, AMCs Internal Systems (Banks) Courts Central Bank Supervisors Courts / Execution Quasi Formal Restructurings Alternative Dispute Resolution Tax Laws Out-of-court restructurings Bus. / Commerce Chambers Coordinating Institutions Courts ADR Network Coordinating Institutions Professional Associations Reorganizations Concordat, Schemes, etc. Reorganization Laws Fast Track Procedures Courts Company Registrar Agencies Ministry of Justice Supreme Court Regulatory Agency / Assoc Liquidations Bankruptcy Laws Auction Laws Company wind-up Courts Company Registrar Insolvency Administrators Auctioneers Experts Security & Collateral Registries Debt Resolution – Enforcement

Kirkland & Ellis LLP 7 Context for Insolvency Fiscal & Monetary Governmental & Political Bank Regulators lat gu Re l Insolvency System ga Administrative Le Professionals or y Environmental, Tariff & others State Tax & other laws Secured Creditors Mortgage laws Creditors Contract/Commercial Employees Labor laws Collateral laws Enterprise Company laws Shareholders Securities laws Directors etc Others laws ral ltu l Cu ocia &S Bankr. , Civil Commercial Accounting & Auditing Agency Ec Co ono mm mi er c & cia l Institutional Corporate Governance

Kirkland & Ellis LLP 8 Overview of Insolvency Systems Common Law countries UK, Commonwealth (53) Australia/NZ, HK, Malaysia, Singapore, South Asia, Sub. Saharan Africa, handful of Latin Am & Caribbean United States DIP Reorganization model Civil Law countries Continental Europe, Asia, Francophone Africa (OHADA), Latin America Liquidation Centrally Planned FSU, China, Vietnam Sharia law countries Islamic & Arab nations

Kirkland & Ellis LLP Recent Reform Revolution l 1979 to mid-80 s: Major reforms: US, France, UK l 1990 s to date: FSU Transition & EU integration – New Europe, CEE, and Central Asia (The Transplant Decade) l 1990 s: Rescue culture driven reforms: – Australia, Canada, Germany l Post-1997: Financial Crisis / Related Reform – Asian 5: Indon, Kor, (Mal), Phil, Thai / Japan – Post-2000: Russia, Mexico, Turkey, Brazil, Argentina, Bolivia, l Post-2000: Progressive reforms – China, India / S. Asia – EU - Spain, Portugal, Italy, others l Post-2001/2004: Age of Standards / Harmonization 9

Kirkland & Ellis LLP 10 Lessons: ICR ROSCs AFR MNA Cameroon, Kenya, Mauritius, Morocco, South Africa, Uganda ASIA India, Nepal, Philippines, Sri Lanka, Vietnam ECA Czech Republic, Kyrgyz Republic, Lithuania, Romania, Russia, Slovak Republic, Slovenia, Turkey, Ukraine LAC Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador , El Salvador , Honduras, Jamaica, Nicaragua, Paraguay 32

Kirkland & Ellis LLP Lessons: Legal Framework & Registries 1. Creditor Rights Legislation – – Secured Transactions on Real Estate: functional Secured Transactions on Movable Assets: outdated 2. Registries – – Inefficient & unreliable - Need to modernize and computerize Need for registries for recording interests in movable assets 3. Insolvency Legislation – – Frequently Antiquated & Inefficient Unsupportive of modern businesses, especially lacking rescue procedures for financially distressed enterprises 11

Kirkland & Ellis LLP 12 Lessons: Court & Regulatory Practices 4. Weak / Inefficient Enforcement Proceedings – – – True of unsecured and secured claims Lack of extra-judicial enforcement mechanisms Outmoded procedural codes and regulations 5. Ineffective Court Systems – – For enforcement and insolvency proceedings Inadequate training among judges / inefficient case administration Inconsistency in decision making / lack of transparency System abuse and influence 6. Weak Regulatory Frameworks – Lax or absent procedures to qualify, license and supervise and discipline administrators and practitioners

Kirkland & Ellis LLP Case Study - Slovakia l Privatization of Banks (2000 -01) l Starting a new business (2002) l Corporate governance (2002) l Security/access to credit (2003) l Insolvency & Enforcement (2006) 13

Kirkland & Ellis LLP Background – Starting a new business l Business unfriendly environment incompatible with economical reforms and their aims l Potential for corruption l Contrary to the idea of free and smooth entry into the market l Need to harmonise the law with the acquis communautaire in some aspects (e. g. publicity) 14

Kirkland & Ellis LLP Background – Corporate governance l Unclear and hardly enforceable directors’ duties l Unclear rules for the protection of minorities often abused by both majorities and minorities l Lack of suitable capital protection rules (incl. financial assistance and related parties transactions) l Need to harmonise the law with the acquis communautaire 15

Kirkland & Ellis LLP Background – Security/access to credit l Difficult to create security over a number of classes of assets (e. g. movables, receivables) l Difficult to enforce security l Access to credit stifled by most enterprises, but mostly SMEs l Unjustified priorities (state related claims) 16

Kirkland & Ellis LLP 17 Slovak: Key policies - Security/Credit Access l Wide definition of collateral (incl. future assets) l Non-possessory charges l Public register of charges l Out-of-court enforcement (private or auctions) l Removal of unjustified priorities

Kirkland & Ellis LLP 18 Background - Insolvency / Enforcement l Inefficient - 6 -12 mos. to open, 3+ yrs to complete l Ineffective - low recovery rates (affecting both secured and unsecured creditors) l Lack of modern restructuring l No rules fostering responsible behaviour by stakeholders l No regulated profession of trustees l Enforcement - protracted and unpredictable

Kirkland & Ellis LLP Slovak: Key policies - Insolvency l Consistent with World Bank Principles l Clearer rules governing stakeholders l Management of process transferred to trustees l New regulated profession of trustees created l More control shifted to creditors (secured creditors in particular) over realization of assets l New moratorium and restructuring concepts to give troubled businesses a chance 19

Kirkland & Ellis LLP Case Study - Turkey (Background) l l l l Financial Crisis 2000 13 -18 failed banks (USD billions NPLs) 90% lending secured - unconditional mortgage (by pass courts) No security in moveable assets Contested foreclosures (2 -3 yrs or longer) 99. 5% of cases (est. 500, 000) execution; 0. 5% insolvency cases; stigma; 3 -5 years No workout or modern company rescue law 20

Kirkland & Ellis LLP 21 Kirkland & Ellis LLP Turkey - Debt Recovery Procedures 1 yr 2 yr 3 yr Unconditional Mortgage (90% lending) Contested Public Auction 2 -3 years Uncontested Public Auction 2 -3 mos Judgment/Execution Uncontested Order 4 -8 mos Contested Judgment/Exec. 2 -3 years Liquidation (4 -8 yrs) (Ave. 6 yrs) Declaration of Bankr (1 yr) Contested Decl. (2 -3 yrs) Appeals from Declaration of Bankruptcy (2 -3 yr) No creditors are stayed Concordat Procedure is rarely used Secured Creditor Actions Exempt Claims Resolution (3 -5 yrs)

Kirkland & Ellis LLP 22 Turkey (Restructuring via Reconciliation) Istanbul Approach Out-of-court Restructuring Ap pli <7 c 5% ation 66 bu % t> Bank Signatories Approval by 75% BRSA Bank Restructuring Agency Commercial Court tio Out-of-court Restructuring (prepackaged plan) Affected Creditors * Majority Approval 50+ number & 2/3 amt A lica pp n 30 days Upon request Status conference Pretrial relief Hearing on Plan Application Within 30 days Court Judgment Injunction Approved Dismissed Interim Supervisor Priority Financing Concordat Previously: 2 -3 years Amended: 3 months / 2 month extension = 5 -6 months * Affected Creditors are those whose debts are in default or to be restructured. Court Judgment Approved Denied Liquidation

Kirkland & Ellis LLP Lessons and Trends l Today’s reality: Increasing convergence in practices and laws driven by changes in business, technology and the int’l factor l Vacuum tube issue: laws cannot be developed without reference to the culture and broader legal framework, nor without input from key stakeholders l Transplant issue: no ideal laws, only those that serve the needs of a country; models and transplants are difficult 23

Kirkland & Ellis LLP Lessons and Trends l Old-wine-new-wineskin: laws easily change, practices do not l Implementation gap: good laws, weak capacity, lax regulation l Other challenges: labor, taxes, governance, accounting l Risk Management: Increased need for better risk management tools and models / across the board (Basel II) 24