Distressed debt: Gaining control of companies in crisis

Excerpts: Distressed debt: Gaining control of companies in crisis

  • A growing market thus beckons for financial investors specializing in cases of capital reorganization. The objective of such investors is to gain control over a business enterprise requiring a capital reorganization to safeguard it against insolvency through a capital restructuring and by the implementation of a reorganization plan.
  • The gaining of control and thus the possibility of implementing a reorganization strategy without delay is effected if an investor, subject to individual provisions of the articles of association, holds at least 75 percent of the voting capital of the company. Otherwise, there is a risk that shareholders’ resolution and reconstruction measures will be defeated by blocking minorities.
  • In addition to the gaining of direct control, the discharge of distressed debt by means of a “debt-equity swap” is also increasingly playing a key role in the market.
  • The primary task, which falls to the insolvency administrator, is to satisfy creditors by the continuation or liquidation of the business enterprise, with the continuation of the business enterprise being less prevalent in practice.
  • The conversion of debt claims against the target company into equity capital is effected in the course of a capital increase through contributions in kind in the form of the investors’ claims. The capital increase requires a shareholders’ resolution and entry into the Commercial Register to be valid.
  • Such capital increase, as a rule, is preceded by a capital writedown by a simplified capital reduction. The capital writedown can prevent a deficit on the balance sheet and renders the equitable distribution of the capital interests between former shareholders and the investor possible.