Current legal developments in distressed M&A

Although the M&A-market in Germany is generally weakening (see here, in German), the background noise in the so-called “distressed M&A” market is increasing. Depending on the stage, the purchase of a company in crisis can offer a number of advantages in addition to the generally lower purchase price. However, these advantages also carry their price tag – which the potential acquirer should definitely include in his considerations. For this reason, the following section will take a practical look at some of the key legal aspects of such acquisitions.


When acquiring a “business”, a distinction is made between the so-called “share deal”, i.e. the purchase of company shares, and the so-called “asset deal”, i.e. the purchase of assets, in the context of distressed M&A mostly the purchase of the individual assets which together make up the business operations of the (insolvent) company. From the perspective of the transferring company, the sale of the business operations (i.e. the assets that form the asset side of the balance sheet) in crisis and insolvency is often also referred to as a “restructuring via transfer of assets” (“übertragende Sanierung“).

Often the insolvency administrator does not undertake the sale himself, but engages specialised advisors. The first hurdle for potential buyers is therefore often to first contact the “right” people – especially as the time pressure in these situations is normaly enormous. The administrator is basically obliged to achieve the best possible price for the sale – which is of course a difficult undertaking in view of the crisis situation. Therefore, bidding procedures are carried out – partly in a structured manner, partly free-handedly. The actual sale process then usually follows the lines of a “normal” M&A deal – LoI, proof of financing, asset purchase agreement, signing, closing. But even in these steps, insolvency-specific peculiarities must be taken into account, which will be explained in more detail below.

Minimising so-called “purchaser risks” when buying out of insolvency

a) One of the major advantages of the purchase of a business out of insolvency (by way of an asset deal) is the minimisation of the so-called “purchaser risks” to which a purchaser is normally exposed in the context of a purchase outside of insolvency. This concerns in particular the risks arising from the so-called “liability in case of continuation of business” according to § 25 HGB, the liability for tax claims against the acquired company according to § 75 AO and finally the transfer of employment relationships according to § 613a BGB. According to prevailing opinion, the liability for continuation of the company under § 25 HGB (the German Commercial Code, which in any case only applies in the case of “continuation of the company”, i.e. further use of the name of the acquired company) does not apply in the case of a purchase out of (opened) insolvency (so most recently BGH, Urt. v. 03.12.2019 – II ZR 457/18, here, explicitly upholding its previous case law, my comments here, in German).

b) Liability of the acquisition for tax liabilities also does not apply under section 75(2) AO (the German basic tax law) in the case of acquisition out of insolvency. Furthermore, a liability for social security payments in arrears (derived from § 75 AO) is probably not to be feared.

c) In contrast, the provisions of § 613a BGB (German Civil Code) on the rights and obligations in the event of the transfer of an undertaking in insolvency apply at least partially (see BAG, judgment of 20 June 2002 – 8 AZR 459/01, here, in German). Thus, a dismissal of employees solely because of the transfer of the business is invalid, but the right to terminate the employment relationship for other reasons remains unaffected, cf. § 613a (4) BGB.

However, the applicability of the regulation was restricted by the BAG on the one hand with regard to so-called pension claims, that in the case of the sale of a business in insolvency the regulation does not apply to those claims of the employees that have already arisen at the time of the opening of insolvency proceedings, but only to the claims of the insolvency estate arising as of the opening of insolvency proceedings (cf. 19.12.2006 – 9 AZR 230/06, here (in German), para. 28, see most recently BAG, Urt. v. 26.01.2021 – 3 AZR 139/17, here (in German)). This privilege makes it possible to leave the often considerable pension entitlements of employees with the insolvent company. However, holiday entitlements are only covered to the extent that they can be attributed to a point in time prior to the insolvency; the same applies to any claims to holiday pay. However, the acquirer is jointly and severally liable with the insolvency administrator for claims to remuneration that arose in the period between the opening of insolvency proceedings and the effective date for the transfer of the business.

In addition, various strategies have emerged in practice to prevent a transfer of employment relationships. Apart from “opt-out solutions”, the establishment of (qualification and) transfer companies or the so-called “dissolution of the operational unit”, the model of a so-called “acquirer concept” (“Erwerberkonzept“) is regularly used, which is also regarded as lawful by the BAG (judgement of 20 March 2003 – 8 AZR 97/02, here, in German). Accordingly, the dismissal of the seller of the business on the basis of an acquirer’s concept “does not violate section 613a (4) BGB if a binding concept or a reorganisation plan of the acquirer exists, the implementation of which has already taken tangible shape at the time of receipt of the notice of dismissal“. Accordingly, at least to minimise risk, a binding purchaser concept should indeed be concluded between the administrator and the purchaser.

Further particularities when buying out of insolvency

The purchase of a company out of insolvency is subject to special regulations under insolvency law, some of which deviate significantly from the practices of the “normal” M&A market: the purchaser will find that the insolvency administrator rejects any liability for the asset sold; a fortiori, he will not issue any guarantees. In view of the fact that the insolvency administrator has taken over the company in a crisis that threatens its existence, this is quite understandable and customary in the market in this area and rarely negotiable. The positive side of this coin is a purchase price, which is usually considerable lower compared to a “normal” sale of a company.

Pursuant to § 160 InsO, the insolvency administrator must also obtain the consent of the creditors’ committee, or if it has not been appointed, that of the creditors’ meeting, to the sale of the company. The failure to obtain the consent is not decisive for the validity of the sale, cf. § 164 InsO. However, since the administrator would again run the risk of liability if consent was not obtained, he usually makes the effectiveness of the sale agreement subject to the (suspensive or resolutory) condition of the consent of the creditors’ meeting. Even though the decisive creditors’ meeting must be convened quickly by law (cf. § 29 InsO), weeks of uncertainty often pass between the conclusion and effectiveness of the contract. The resulting risks can only be minimised to a limited extent – for example, through provisions on the (delayed) transfer of risk and on payments of the purchase price only when the purchase contract becomes effective. However, this does not solve the main problem – no considerable influence on the acquired company or even none at all. Only agreements with the insolvency administrator, which must be negotiated on a case-by-case basis, can help.

Conclusion: “In every crisis there is not only an opportunity, but also a chance” (Martin Luther King) – one only has to seize it professionally, one is inclined to add with regard to the acquisition of a business out of a crisis & insolvency. Insolvency proceedings in particular not only offer the opportunity to acquire an undervalued asset in the sense of Buffett’s investment strategy. In order to seize this opportunity, however, a number of legal and practical moves are necessary, the scope of which one should be aware of before initiating the process. The effort that has to be invested in the newly acquired business after the closing is often also considerable. It takes good business sense to make the decision to acquire under time pressure. But the success, hence profit, can be considerable.

Leave a Comment