We would like to introduce you to a great new feature of the
revised German Insolvency Act which makes debt-equity-swaps in
Germany (e.g., as part of loan-to-own transactions) a lot more
attractive. It eliminates troubles caused by change-of-control
provisions in agreements between an insolvent company and third
Introduction: Debt-Equity- Swaps Now Possible Under German
Effective 1 March 2012, the "Act for the Further
Facilitation of the Restructuring of Companies" (Gesetz
zur weiteren Erleichterung der Sanierung von Unternehmen,
ESUG) significantly improves the position of creditors in
insolvency proceedings over the assets of German companies.
Among other things, the revised German Insolvency Act
(Insolvenzordnung) opens up the opportunity to force a
debt-equity-swap against old shareholders by an insolvency plan. It
gives creditors the chance to exchange their debt against the
insolvent company for shares in that company.1
What is the New Feature of Debt-Equity-Swaps Under the
Change-of-control provisions are blocked by a debt-equity-swap
under the German Insolvency Act!
What is a Change-of- Control Provision?
It is common practice that companies are subject to so-called
change-of-control provisions in various agreements with banks,
suppliers, customers, landlords etc. In sum, change-of-control
provisions grant a counterparty the right to terminate an agreement
if the shareholdings in the company change. The change-of-control
events vary from a transfer of 30 percent to 50 percent of the
shares or of the voting rights.
What are the Usual Impacts of Change-of-Control
If material agreements include change-of-control provisions the
respective counterparties are usually required to obtain consent
before a change of ownership may be effected. This avoids
undesirable terminations of such agreements. This avoids
undesirable terminations of such agreements. First, the respective
change-of-control provisions must be indentified in all material
agreements. Then, various counterparties must be convinced to grant
their consent. Finally, if the counterparties are willing to grant
consent, it may still be a lengthy (and expensive!) process until
the signatures have been obtained.
What Does the New Insolvency Act say About Change-of-Control
Pursuant to Section 225a (4) of the new German Insolvency
Third parties may not terminate/ withdraw from agreements with
the insolvent company
Based on corporate measures taken with respect to the insolvent
company (including debt-equity-swaps)
If such measures are effected by an insolvency plan
The law blocks change-of-control provisions in connection with
debt-to-equity swaps. This includes change-of-control provisions as
well as any other provisions enabling a counterparty to
terminate/withdraw from an agreement with the insolvent company
because of corporate measures in an insolvency plan. Contrary
provisions are void. Termination rights based on a breach of other
contractual obligations are not affected.
How Does This Support a Successful Restructuring?
If a creditor uses a debt-equity-swap under an insolvency plan,
it must not worry about counterparties terminating agreements with
the company based on the change of ownership. Thus, there is no
need to contact counterparties to obtain consent. A new shareholder
may focus on restructuring the insolvent company and may rely (at
least from a legal perspective) on the continuation of existing
What About a Group of Companies?
The current German Insolvency Act applies on an entity-by-entity
basis, i.e., there is no "group insolvency" yet.
Change-of-control provisions are blocked to the extent a
termination right would be exercised against the insolvent entity
that is subject to a debt-equity-swap. This may only be avoided if
insolvency plans are introduced on the level of each operating
entity that might be subject to change-of-control issues. The
German government is currently working on further revisions whereby
it might be possible to apply insolvency proceedings on a group of
companies in the future (Konzerninsolvenz.)
1. For a general overview of the ESUG, please see Latham
& Watkins LLP Client Alert No. 1257 dated 14 November 2011. It
is available online at
www.lw.com (under Resources / Firm Publications.)
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.
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