Distressed M&A in Germany

Written on 26 Mar 2020

A. Introduction

The acquisition of a company in distress provides for special opportunities, but also contains special risks. Osborne Clarke is happy to be your trusted advisor to guide you through these risks and highlight opportunities from a legal point of view.
In general, the sale and acquisition of companies in distress follow the same rules applicable in any other deal. However, certain distress-specific aspects have to be taken into consideration.

As in other transactions, the acquisition of a company in distress can take place by way of an asset deal (and liquidation of company) or a share deal (and restructuring of company). The typical pros and cons generally also apply in case the company is in distress. Please contact us for more details.

B. Asset Deal

The below chart provides a high-level overview of the main two stages of acquisition in case of an asset deal.

Company in liquidity crisis Company in insolvency
Time of acquisition
  • All times prior to the application for insolvency
  • Following the opening of insolvency proceedings
Seller
  • Company
  • Insolvency administrator (on behalf of the Company)
Statutory Liabilities
  • Investor, under certain circumstances, has to bear certain existing liabilities, in particular (i) certain tax liabilities, (ii) liabilities if the firm name of the company is retained and (iii) employee related liabilities in case of a transfer of undertaking (TUPE)
  • Statutory liabilities pursuant to sale of a company as a whole are not applicable, except in case of TUPE, however, also in this case, investor is not liable for any employment claims which arose prior to the opening of the insolvency proceedings
Key Opportunities
  • Reputational damage of insolvency is reduced
  • Involvement of insolvency administrator and creditors is avoidable
  • Facilitation of company restructuring as insolvency law provides for alleviations: (i) refusal of performance of contracts that have not been fully performed; (ii) reduction of work force possible (outside of an insolvency, German law is employee protective); (iii) special right of termination in case of lease agreements
  • “Failing company defence“ in case of merger control
Insolvency specific risks
  • If company goes insolvent, insolvency administrator is entitled to (i) refuse performance of the purchase agreement (if transactions thereunder are not fully consummated) and (ii) contest transaction.
  • Repayment claim of investor will generally be treated as an ordinary insolvency claim (and therefore will be subject to a quota)
  • Insolvency administrator cannot contest the purchase agreement, however, will need to be involved in transaction
Purchase agreement
  • Measures to be implemented to protect investor against insolvency administrator contesting transaction in case of eventual insolvency
  • Indemnification from apparent risks
  • Insolvency administrator may require liability exclusion, may not be willing to give any guarantees (especially no operational guarantees) and may insist on locked box mechanism
  • Consent of creditor‘s committee/assembly as condition precedent (which has an impact on timing)

C. Share Deal

Any acquisition of a company in distress is subject to increased time pressure. Given liabilities can be left behind and a “black box” can be avoided, investors often prefer an asset deal.

However, if at least certain contractual relationships of the company are key or if the investor seeks to gain control over the company to avoid an insolvency, a share deal may be the preferred option of the investor. Other as in an asset deal, no consent of the contractual party is required and control is obtained by stepping in as shareholder.

If the company in distress is already insolvent, the following main aspects have to be taken into account:

  • The contractual relationships cannot be terminated by contracting party even if such contract provides for a change-of-control clause
  • The sale and the restructuring of the distressed company regularly take place as part of an insolvency plan
  • An acquisition within an insolvency plan will generally be more time consuming and involve higher costs
  • The terms of an insolvency plan have to be approved by thereby impacted creditors and confirmed by the insolvency court