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Henning Graw

Phone: +49 (61 96) 7 61 14-7 17
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Buying a company out of insolvency can be a quick and cost-effective alternative for medium-sized companies. The 2012 reform of insolvency law (German Act on further easing of capital restructuring of companies – ESUG) laid the groundwork for better perspectives and more freedom of manoeuvre.
 
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 but also Asian and North American investors over last two years confirms the attractiveness of buying German insolvent companies. Thus, for example, Hanwha (South Korea) bought Q-Cells and Lanco (USA) OKU Maschinenbau. The strong motive behind the transaction was to gain access to European markets and to technologies and know-how. With the currently favourable situation around orders and liquidity, buying a company out of insolvency is becoming more and more often the preferred option also for German medium-sized companies. The possible reasons behind it include the need to expand capacities, which can be done quickly thanks to staff of the company acquired, or to gain access to new customers and product segments.
 
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, landlords/lessors adds to the complexity of the transaction process. In addition, buying a company out of insolvency involves greater time pressure (3-4 months) than normal M&A transactions (9-12 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 ["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 law reform by ESUG offers investors greater perspectives and more freedom of manoeuvre. 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% of shares in the debtor company being restructured. As opposed to the asset deal, the legal entity continues to exist in this case.
 
As compared to foreign investors or financial investors, German SMEs 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.