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Buying a company out of insolvency as an opportunity

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last updated on 22 February 2022 | reading time approx. 2 minutes

 

As opposed to buying a competitor or a regionally close company, which is often time-consuming and capital-intensive, buying a company out of insolvency can be a quick alternative at the optimum price. The greater interest from European and American investors over the last years confirms the attractiveness of buying German insolvent companies. The strong motive behind the transaction was to gain access to European markets and to technologies and know-how.
 

      

The interest in acquiring insolvent companies is also growing because restructuring and a going concern lies at the centre of the statutory framework. All stakeholders, especially customers and employees, are informed in due time about and become involved in the procedure, which can significantly reduce any possible damage to the company's image. As well as a higher rate of satisfying creditor claims, the maintenance of as many jobs as possible and the going concern are the primary aims of the insolvency practitioner.
 
Acquisitions of insolvent companies involve a range of special aspects which have to be centrally managed by the buyer. Besides special provisions of insolvency law, reconciling different interests of banks, employees, labour unions, customers, vendors and landlords/lessors adds to the complexity of the transaction process. In addition, buying a company out of insolvency involves greater time pressure (3 to 4 months) than normal M&A transactions (9 to 12 months). Usually, 'restructuring by transfer' [i.e. where the buyer pays for all or some of the assets of the company] is carried out in form of an asset deal. As a result, the assets required for the company's operation are transferred to the buyer's company created to continue the activities of a former company in liquidation (“NewCo”). In addition, those assets can be bought as a rule at a knock-down price and without the buyer being liable for any liabilities of the insolvent company such as liabilities to banks or retirement benefit obligations.
 
Furthermore, insolvency law provisions applied to the restructuring process allow easy adjustments in the staff structure or early termination of unfavourable contractual obligations (e.g. expensive lease contracts). With a logical concept of acquisition or a transfer company (German: “Transfergesellschaft”, i.e. a company created to continue an employment relationship with the staff laid off from the failed company for up to 12 months) in place, the staff of the target company can be restructured according to the buyer's expectations and the labour law related risk can be significantly minimized. The 2012 insolvency law reform by ESUG offers investors greater perspectives and more freedom of manoeuvre. The most important novelties since entry into force include the introduction of the provisional debtor-in-possession management (Article 270a of the German Insolvency Code, short: InsO), the insolvency protection proceedings (Article 270b InsO), the establishment of an influential preliminary creditor committee and the debt-to-equity swap. The encroachment on the rights of shareholders, which is allowable under the new law, and admission of debt-to-equity swaps make it easier to restructure a company under insolvency plan proceedings. If the investors join and finance the insolvency plan, they can take over up to 100 per cent of shares in the debtor company being restructured. As opposed to the asset deal, the legal entity continues to exist in this case. Almost ten years after coming into force, the ESUG insolvency law reform has established itself in practice. According to the 5th edition of the ESUG study, the vast majority (94 per cent) of the approximately 2,300 respondents stated that they already had experience with provisional debtor-in-possession management. 90 per cent of the surveyed creditors, insolvency administrators, lawyers, judges, investors and managers have already gained experience with insolvency protection proceedings and preliminary creditor committees. The level of acceptance for insolvency as a restructuring measure has thus reached its peak.
 
As compared to foreign investors or financial investors, German family businesses have generally a competitive edge in the transaction process. Firstly, they can handle time pressure significantly better than foreign strategists because no comprehensive due diligence is necessary in most cases and the integration risk is overall lower. In addition, there are no language barriers. Secondly, as opposed to financial investors, such enterprises offer a higher degree of transaction security because they usually can finance the future company from own funds (working capital facility) and there is no need to involve any external financial partners or banks.
 
Buying a company out of insolvency can thus offer buyers major opportunities and advantages if they successfully reduce complexity of the acquisition process and are able to anticipate possible risks. The central management of the acquisition process by an M&A adviser expert in insolvency can push the transaction in the right direction.

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