Germany: Distressed M&A: Swap of Debt for Equity in an Insolvent Company to Be Simplified by a New Law on the Facilitation of the Reorganization of Enterprises

Last Updated: 29 November 2010
Article by Jones Day


As part of an intended comprehensive amendment of German insolvency law, the German Federal Ministry of Justice has prepared a draft of a new law to facilitate the reorganization of enterprises ("Reorganization Facilitation Act"). The new law will curtail the rights of shareholders of insolvent companies and allow capital measures and other corporate measures to be taken in the insolvency of a company without the participation of the shareholders. The new regulation is of interest to investors because it will significantly simplify the purchase of the shares of an insolvent company.

Investors usually buy insolvent enterprises by means of an asset deal. The advantage of this approach is that the buyer, in principle, assumes only those liabilities that he actually wants to assume. (Exceptions may apply, as in the case of liabilities stemming from employment agreements.) In addition, unprofitable parts of the enterprise can be left with the insolvency administrator. There are, however, serious shortcomings inherent in an asset deal. Agreements with third parties that may be of fundamental importance to the business cannot be transferred to the buyer without the consent of the other party to the agreement, which may not be obtained at all or only if the buyer is prepared to make substantial concessions to the other party. Furthermore, public permits required for the operation of the business may not be transferable, so they cannot be assigned to the buyer in the course of an asset deal. The buyer will need to apply for a new permit, which may create difficulties. The purchase of the insolvent enterprise by means of a share deal is frequently preferable in these cases, but only after the debt of the insolvent entity has been restructured by means of a plan of restructuring, which will need to cure a (calculatory) overindebtedness and ensure that the company has an appropriate equity ratio going forward.

Cooperation of Existing Shareholders Required Under the Current Law

Creditors are generally not prepared to waive a company's debt or support the reorganization in any other way if the shareholders themselves do not make an appropriate contribution to the continuation of the business. If the shareholders are unwilling or unable to do so, then the creditors may consider taking shares in the company by swapping their debt for equity. The first step of a debt-forequity swap is usually to reduce the registered share capital of the company (to zero, if required) in order to extinguish any losses in the balance sheet. After the capital decrease, the registered share capital is increased, the company's debt is contributed as consideration for the new shares, and any subscription rights of existing shareholders are excluded. The new shares created by the capital increase are allocated to the participating creditors. Opportunities for investors arise if the existing creditors do not want to take equity in the insolvent company but are prepared to sell their claims (below par) and thus enable the investor to participate in the debt-for-equity swap. An investor can, of course, also agree to subscribe to new shares issued by the company and contribute cash funds as consideration for these shares.

Under current law, the issuance of shares to creditors or investors without the cooperation of existing shareholders is only possible, if it is possible at all, if the existing shareholders are required to cooperate because they have fiduciary duties to the company. Whether such fiduciary duties exist in a specific case is frequently unclear. At any rate, it is usually not possible to enforce fiduciary duties with the help of the courts in time for the reorganization. It goes without saying that there is no incentive for the existing shareholders to agree on the necessary capital measures if the outcome is that they will no longer hold a (meaningful) stake in the company. Creditors that intend to reorganize the insolvent company frequently have no choice but to buy the shares of the existing shareholders at a purchase price that exceeds the actual residual value of the shares in the insolvent company.

No Cooperation Required by Existing Shareholders Under the New Law

The draft Reorganization Facilitation Act provides for the rights of shareholders to be curtailed by means of a plan of restructuring without their consent. Under the new law, capital measures in connection with a debt-for-equity swap, the exclusion of existing shareholders' subscription rights, compensation payments to shareholders exiting the company, the continuation of a company that was dissolved as a result of the opening of insolvency proceedings, the transfer of shares in the company, and other corporate measures may be provided for in a plan of restructuring. Appropriate compensation needs to be provided for in the plan if the existing shareholders lose their shares as a result of such measures. If the shares in the insolvent company are no longer worth anything, then no compensation is required.

The plan of restructuring and the regulations contained therein become effective once the plan has been confirmed by the insolvency court and such confirmation is no longer subject to an appeal. A court will not confirm the plan if mandatory provisions on the content of the plan, on the process, or on the adoption of the plan by the creditors and the existing shareholders were not complied with in all essential points. Voting on the plan of restructuring occurs in groups. The plan itself allocates creditors and shareholders to different groups according to the specific legal position of the respective participant. There will usually be more than one creditor group. In general, an insolvency plan is adopted only if all of the groups consent to the plan. In order for a creditor group to consent to the plan, the majority of the creditors in that group (head count and sum of claims) need to have voted in favor of the plan. In the case of a shareholder group, the new law will provide that a majority of the shareholdings is necessary for the group to consent. A group, especially a group of shareholders, that votes against the plan may nevertheless be crammed down if: (i) the members of the dissenting group are not worse off under the provisions of the plan of restructuring than they would be if there was no plan, (ii) they participate in an appropriate manner in the economic value made available to the participants under the plan, and (iii) the majority of the group vote in favor of the plan.

The plan of restructuring may withdraw shares from the existing shareholders without any compensation if the shares are no longer worth anything, which is usually the case if the company is insolvent. If the group of existing shareholders votes against such a plan, then it can be crammed down. Since the members of the group would not receive anything if there was no plan and the company was liquidated, they will not be worse off with the plan than they would be without it. Members of such dissenting group will participate in an appropriate manner in the economic value that is made available under the plan if no creditor obtains funds or other assets in excess of its claim and no other shareholder is better off under the plan than the members of the dissenting shareholder group. In exceptional cases where the shares in the insolvent company still have some (residual) value, the plan of restructuring needs to provide either for the continuing participation of the existing shareholders in the company following the reorganization in a scope determined by the residual value of their shares or for their shares to be withdrawn and appropriate compensation to be paid.

The value of the shares of the current shareholders needs to be determined as soon as the plan of restructuring is drawn up. The potential residual value of the shares determines the provisions that can be made in the plan with respect to such shares. If the majority of a shareholder group are of the view that the provisions in the plan of restructuring are based on a valuation of the shares which is too low and that they would be better off without the plan than they are with it, then they will vote against the plan. If the insolvency court crams down the dissenting shareholder group and confirms the plan nevertheless, the members of such group may appeal the court decision. In order for such appeal to be admissible, the shareholders need to provide prima facie evidence that they would be materially disadvantaged by the plan and that such disadvantage could not be cured by any payments provided for under the plan. This requirement intends to prevent abuse of the right of appeal.


The new law will prevent existing shareholders from blocking debt-for-equity swaps and other corporate measures with respect to companies in insolvency. It can be expected that the reorganization of insolvent companies and the participation of investors in such companies by means of either loan-to-own strategies or some other acquisition of shares will be facilitated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
13 Dec 2017, Seminar, Cleveland, United States

Jones Day partners Harold Gordon and Tony Dias, and Associate Courtney Snyder will explore the significant role New York's Attorney General and its Department of Financial Services (DFS) play in the financial services industry and why these two state-level agencies will continue to exert significant power over the financial services industry, especially with federal oversight potentially shrinking.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions