“Restructure or resign“ – Dealing with stubborn shareholders in times of crisis
In times of economic uncertainty, companies see themselves increasingly confronted with rising costs and falling income. Added to this there are often differences among shareholders about the appropriate restructuring strategy. The aim of the example set out below is to clarify the possible solutions for an appropriate restructuring plan.
An example - The facts of the case
A GmbH [private limited company] is facing a situation of imminent illiquidity. The management, with the help of expert advice, develops a restructuring plan that would require contributions to equity from the shareholders. While those representing 70% of the capital are willing to accept the increase, nevertheless 30% refuse to approve it. The minority instead proposes that shareholder loans should be granted by the majority. From the perspective of the majority shareholders this would however be one-sided, at their expense and would run the risk that the minority would be ‘free-riding’.
The issue is: what courses of action are available to the management and to the majority shareholders?
Capital reductions and increases
A capital reduction to zero followed by an increase by the shareholders who are willing would not be achieved because a majority of 75% is necessary.
The minority is obliged to give its approval
The Federal Court of Justice in its ruling of 19.10.2009 (case reference: II ZR 240/08) decided that the partners in an insolvent partnership had to agree to a restructuring if the restructuring plan would not make their financial situation any worse than would be the case in the event of a liquidation. The case concerned a real estate fund in the legal form of an OHG [ordinary partnership] where the partners were personally liable for creditor defaults. It was clearly demonstrated here that the refurbishment of the properties was definitely the more financially advantageous solution.
It is still disputed whether or not this ruling could also be applied to a GmbH because in the case of a GmbH the shareholders are not personally liable. Nevertheless, in the specialist literature and in rulings by higher courts (e.g., Cologne Higher Regional Court of 6.5.2021, case reference: 18 U 133/20) there are considerations to apply these principles to GmbHs.
Three criteria have to be satisfied in order for there to be an obligation to give approval for a restructuring:
- The shareholders may not be placed in a less favourable position as a result of the collapse than in the case of resignations.
- There cannot be a milder alternative.
- The restructuring has to be more promising.
In an individual case, even if there are many reasons to believe that the three criteria have been satisfied, a legal dispute can nevertheless be uncertain and protracted; it can moreover be difficult to obtain temporary legal protection for such far-reaching measures.
Restructuring proceedings (StaRUG)
An alternative could be restructuring proceedings under the Business Stabilisation and Restructuring Act (Gesetz über den Stabilisierungs- und Restrukturierungsrahmen für Unternehmen, StaRUG), which has been applicable since 2021. If the shareholders do not arrive at a mutually agreed solution, then the StaRUG can facilitate a discreet and swift alternative in order to include even obstructive shareholders against their wills in the reorganisation with the support of a court but without public insolvency proceedings.
In the restructuring plan it is possible to use any means that is permissible under company law to impinge on shareholders’ rights, for example, via a debt equity swap or a reduction in capital. However, 75% of the affected groups will have to give their approval. In the case study described above, if the shareholders are not divided into groups of those who are willing and unwilling to support a reorganisation then the shortfall would be 5%. Furthermore, there are still a number of uncertainties, for example, whether or not the management needs a majority resolution with 75% in advance before it can initiate proceedings. It is therefore strongly recommended to seek expert advice and also to consult the restructuring court.
Insolvency proceedings with a protective shield
In the context of an insolvency plan, an application for insolvency proceedings with a protective shield in self-administration likewise provides far-reaching measures for impinging on the position of the shareholders. In addition, all the other restructuring instruments under German Insolvency Law are also available, such as
- restricting employee rights and the entitlement to a welfare scheme (Sozialplan),
- refusing to execute open or unprofitable contracts, and
- using insolvency payments as restructuring aid.
However, such a step requires courage and confidence on account of the accompanying publicity, but it will lead to a comprehensive and rapid complete realignment with an overhaul of the relationships under company law - and ultimately and ideally to the continued existence of the business under the leadership of shareholders who were willing to support restructuring.
