The purchase of a company or part of a company can offer investors in crisis situations the chance of a favourable acquisition opportunity. Various reorganisation mechanisms and several entry options are available, depending on the type of entry and the timing. A few points are outlined below.
Entry by means of a share deal
A Share Deal makes particular sense if a large number of contractual relationships are to be transferred. In the case of non-transferable assets, for example, it is only possible to obtain possession of these assets (e.g. certain non-transferable licences, rights or user data) via the share purchase. This can also have advantages with regard to existing continuing obligations, such as significant rental agreements, as these continue to run during the insolvency plan proceedings. For example, the company can choose which locations it wants to give up and which it wants to continue operating.
When acquiring a company in crisis or in the context of insolvency ("Distressed M&A"), special features of insolvency law must be observed. With the Act to Further Facilitate the Reorganisation of Companies (ESUG)which came into force on 1 March 2012, the Insolvency Code was extensively reformed. The ESUG procedure involves the initiation of insolvency proceedings with the aim of reorganising the company under one Protective shield according to § 270b InsO or in the context of a provisional self-administration in accordance with Section 270a InsO via an insolvency plan and to organise and co-determine the proceedings from the outset together with the most important creditors as part of a so-called provisional creditors' committee. Provisional self-administration can already be ordered in the phase between filing for insolvency and the opening of insolvency proceedings. With the Protective shield proceedings (Section 270b InsO), the debtor is provided with an independent reorganisation procedure in the period between the application to open insolvency proceedings and the opening of proceedings. Following a corresponding application and decision by the court, the debtor is given up to three months to draw up a reorganisation plan under the supervision of a provisional administrator and free from enforcement measures in self-administration, which can then be implemented as an insolvency plan. Another mechanism is the so-called Debt equity swap pursuant to section 225a (1) InsO. A creditor's liability is exchanged for a stake in the company in order to convert debt into equity.
Overall, these mechanisms make it easier for the company to restructure and in various respects take the pressure off it to continue to exist on the market. According to estimates, management errors are the cause of 95% company failures, particularly in medium-sized companies (see also Ettinger/Jaques, Beck'sches Handbuch Unternehmenskauf im Mittelstand, 2nd ed. 2017 Part F para. 1.). This also offers investors and potential acquirers an interesting opportunity to enter the segment in question via a share deal in order to then reorganise the company in question.
Entry via asset deal
In addition to the reorganisation options offered by the Insolvency Code, purchasers have the option of a "transferring reorganisation" to a hive-off entity ("NewCo") of the acquirer in the form of a Asset dealsin order to then establish the acquired part of the company on the market. Assets can be acquired at a significant discount, whereby liabilities and liability risks of the insolvent company may remain. If the business operations are transferred to a new legal entity by way of an asset deal, the new entity must, for example, renegotiate or renegotiate all contracts relating to continuing obligations with the exception of existing employment relationships in accordance with Section 613a of the German Civil Code (BGB).
The participants
The takeover of companies or parts of companies in crisis or even insolvency is particularly complex in the M&A segment, not least due to the large number of parties involved. The expectations of the parties involved pose a particular challenge against the backdrop of time pressure. The conflicting interests of the parties involved (seller and buyer, suppliers, banks, employees, employee representatives, etc.) require focused and finely tuned work by a highly specialised team of experts as well as fast and well-coordinated communication with the stakeholders.
Swift and transparent work and, above all, the rapid involvement of the relevant creditors' committee are important maxims in any case in order to avoid unwelcome surprises. It is not uncommon for the reputational interests of the company in crisis to be taken into account.
The time factor
Buying out of a crisis is usually subject to immense time pressure. It may be necessary to include numerous (suspensive) conditions, guarantees or indemnification provisions in the contract document. Experience shows, for example, that proper due diligence will only be possible to a limited extent in the short time available in individual cases. As a result, this can only be made a condition by means of contractual provisions and made up until the closing. However, the inclusion of guarantees or warranties also presents a practical challenge insofar as - particularly in the case of asset deals - the seller is in crisis or already insolvent. Guarantees of an already insolvent company quickly become toothless tigers. In this case, the respective risk can be taken into account when negotiating the purchase price, provided that it can already be sounded out accordingly when negotiating the contract. A corresponding purchase price deposit in an escrow account ("Escrow") can be considered. Furthermore, it is also possible to cover the risk through a Warranty and Indemnity Insurance ("W&I insurance"). Such warranty insurance policies can cover the guarantees given in the company purchase agreement and assume a large part of the liability that would otherwise have to be borne by the seller. When buying out of a crisis, it is particularly advisable to document the purchase price determination in detail. This allows for renegotiation if necessary if the conditions change significantly or are different.
With regard to the time of acquisition, a distinction must be made in particular between the various phases of the crisis. The acquisition can take place
- in the crisis, but before filing for insolvency (phase I)
- after filing an application and after appointment of a preliminary insolvency administrator (phase II)
- after the opening of insolvency proceedings with final insolvency administrator (Phase III)
Each phase has special features that need to be considered with the utmost care. In-depth due diligence with risk and root cause analyses is therefore required in all phases.
In the case of a purchase prior to filing for insolvency (purchase in phase I), the seller is still fully authorised to dispose of the company. In this phase, the reasons for insolvency in particular must be scrutinised and any management errors must be investigated. In particular, a detailed examination of the process flows is required.
In the case of a purchase before the opening of insolvency proceedings (phase I and II) by means of an asset deal, the liability provisions of sections 25 HGB, 613a BGB and 75 AO as well as any subsequent avoidance and refusal of fulfilment by the insolvency administrator must also be observed or examined.
In Phase II, the provisional insolvency administrator must approve the sale. In phase III, the sale by the insolvency administrator requires the consent of the creditors' committee if the sale is made before the reporting date. Liability provisions such as Section 75 AO or Section 25 HGB do not apply in this phase. In addition, labour law simplifications apply in insolvency with regard to the applicability of Section 613a BGB.
TAXGATE advises on all phases of the transaction. A team of experts consisting of highly qualified tax advisors, lawyers and business consultants is available for this purpose. If you have any questions, please contact Mrs Heidrun Nill, lawyer.
