-
Brasilien
Brazil: How to buy distressed assets
12 März 2024
- Zahlungsunfähigkeit
In Brazil, the acquisition of distressed assets does not have to be stressful.
Due to the debtor’s insolvency situation, the acquirer must exercise additional caution to understand the extent of liabilities and to avoid risks of assuming undisclosed liabilities, losing assets in claw-back actions, or being held liable for fraud. In this context, due diligence becomes more thorough and detailed (and therefore more costly).
It is a common investment world jargon that the better the opportunities, the greater the risk; but also, the greater the risks, the better the opportunities.
Considering that excessive risk in the acquisition of distressed assets could deter investors and considering that new investments may be indispensable to save a company in crisis or to obtain funds to pay creditors, Brazilian legislation has chosen to protect acquirers of distressed assets with robust safeguards against risks.
The general rule stipulates that the acquirer will not pay anything beyond the defined price and will not assume any obligations of the debtor of any nature, remaining shielded from liabilities. In other words, creditors will have to compete to receive part of the price paid, but they cannot hold the acquirer responsible for the debt, even if the price is insufficient for settlement. Even if the seller fails to recover and is declared bankrupt, the acquisition remains irreversible.
The non-succession rule ensures that the purchaser or acquirer can invest safely in the debtor’s assets under judicial recovery without the risk of being held responsible for pre-existing obligations and liabilities. The absence of succession, therefore, stimulates competition for the asset to be alienated and consequently maximizes the values to be obtained and reverted for the benefit of the entire community involved in a judicial recovery process.
The assets subjected to the protection may be
- a specific asset (machinery, production lines, trademarks, contracts);
- establishments, branches, units; or even
- the entire business activity as protected assets.
This circumstance, by providing a secure path, mitigates the requirements of due diligence, as risks are now controlled.
There are several safe paths available to acquirers:
- Asset acquisition as a means of reorganization: in the judicial reorganization proceedings (Chapter 11), the debtor may foresee in the plan the selling of assets and the conditions for acquisition, such as minimum price and auction rules. The highest bidder assumes the assets. The price paid is allocated as provided in the plan (usually, a portion is allocated to pay creditors, and another to invest in the debtor’s business activity).
- Direct sale: if selling assets is proven to be indispensable for maintaining the company, the judge may authorize a direct sale at a fair price. The judge may order valuation and auction, unless urgency or the absence of potential interested parties is proven. If an auction occurs, the first bidder may act as a stalking horse, with the right to match the best offer.
- Asset acquisition in liquidation: in case of declared bankruptcy, the acquirer may offer a price lower than the appraisal, without the requirement of being a fair price. In this case, it is unusual to dismiss an open auction proceeding.
- Debtor financing: the acquirer may offer to finance the business activity, providing money or supplies, aiming to acquire assets or as collateral for future payment of the financing.
- Credit acquisition for asset adjudication: the interested party can also take an indirect path, acquiring the credits involved in the procedure and assuming the position of the creditors. Credit acquisition is legitimate, and commonly the price paid is considerably lower than the value of the acquired credit. By becoming the holder of a reasonable percentage of the credits, the interested party may offer these credits as payment for the acquisition of the assets they are interested in.
There are still creative alternatives, which to some extent increase the risk in the transaction but may imply agility and lower investments. There are some other hints in the Legalmondo practical guide for buying distressed assets you can find here
There is only one indispensable requirement for controlling risks: the acquirer must be adequately advised by professionals experienced in distressed asset acquisition operations.
Summary
The reform of the Brazilian Bankruptcy Act brings forward important changes in both reorganization procedures and liquidation measures.
When the Brazilian Bankruptcy Act was about to reach its 15th Anniversary, a major amendment was enacted. It was needed, in fact. Over the past 15 years, creations of the Bankruptcy Act have been tested, and practical experiences showed that some tools needed adjustments, and others demanded complete change.
The goal of this article is to list the top five most relevant novelties.
#5 – Reorganization plan presented by creditors
Before: the amendment, the construction of the reorganization plan was exclusively the responsibility of the debtor. If the majority of the creditors‘ meeting decided to reject the plan, the automatic consequence would be the conversion into bankruptcy (liquidation).
Now: in cases like this, the creditors have the right to present an alternative judicial recovery plan. As a result, creditors assume a more relevant role in corporate restructuring.
#4 – Mediation focusing on the turnaround
Mediation is now encouraged in ongoing judicial reorganization processes so that creditors and debtors may find a way out to overcome the crisis.
The most important novelty is the anticipated mediation, which goal is to avoid reorganization and liquidation. In this procedure, the debtor convenes creditors for a mediated negotiation, and they may seek the judge for an order to stay enforcement measures.
#3 – Distressed assets operations
The disposal of debtor’s assets is now simplified in both judicial reorganization and bankruptcy. Particularly in bankruptcy – in which case maximizing the use of assets is essential – the law authorizes the anticipated sale, adjudication by creditors, and even the donation of assets that creditors are not interested in acquiring.
Besides that, the distressed assets acquisitions and M&A deals are now safer, with a clearer legal provision of a liability shield in favour of the purchaser.
#2 – Debtor-in-Possession (DIP) Financing
The lack of incentive to finance the debtor undergoing judicial reorganization has always been a reason for criticism by stakeholders. In the absence of legal provisions, potential financiers could be insecure about the risks of the operation and the lack of clear advantages to offset the risk.
The complaints were addressed with the legal treatment of the debtor’s financing during judicial reorganization. This type of financing is known as Debtor-in-Possession (DIP) Financing.
The debtor is allowed, through judicial authorization, to conclude financing contracts to pay for the maintenance of his activities and assets, as well as to be liable for restructuring expenses.
As a guarantee for the financing, the debtor may offer his own assets and rights or those of third parties, even if they belong to non-current assets, that is, assets not originally intended for sale, but which serve the business structure (machinery, for example).
#1 – Cross-Border Insolvency
Brazilian law finally incorporated the Uncitral Model Law on Cross-Border Insolvency. An integrated world full of global companies imposes the need to provide for specific rules on cross-border insolvency, which were hitherto non-existent, in order to eliminate the insecurity about the reach of foreign procedures for Brazilian creditors and about the effect of Brazilian procedures for foreign creditors.
We now have a new panorama, with the possibility of procedures abroad having effects in Brazil and also of Brazilian procedures reaching foreigners.
There is a detailed treatment of the participation of foreigners in Brazil and the international cooperation between judges and other authorities to put the fundamental principles that govern the entire insolvency system in motion, namely, the improvement of legal certainty, efficient management of the processes, maximization of assets, preservation of the company, and optimization of asset liquidation.
These are the five main new features, in a nutshell. If you are interested in learning more about any of these topics or if you want to stay updated on insolvency – turnaround in Brazil, please get in touch.
On 6 January 2022 Ukraine finally cancelled almost a two-year long moratorium for the creditor-trigged insolvencies. The moratorium was imposed in the late spring 2020 as a part of the nation’ response to first wave of COVID pandemic.
In a nutshell, the moratorium prohibited creditors from requesting insolvency action against those debtors whose obligations matured after 12 March 2020. A separate set of measures also lifted an early warning duty obliging directors of the companies in distress to file for insolvency within one month from a moment when the distress appeared.
The moratorium was heavily criticized by both domestic and international creditors, who legitimately blamed it for a non-selective approach.
As further 2021 statistic shown, the moratorium never seemed to reach a goal proclaimed by it authors and made no increase for insolvency relief requests by the debtor companies.
Instead, the country has been facing a steady increase in “zombie” companies having little to none liquidation value – and their owners clearly intending to get away with no creditor repayment.
With the moratorium being lifted off the creditors do expect to show no mercy to their Ukrainian debtors. This particularly worries those debtors potentially involved in wrongful trade or fraudulent action. Even with the moratorium in place in 2021 Ukrainian courts confirmed more than UAH 150 mln in creditors loss to be paid by the insolvent companies’ management and owners themselves. This number is expected to triple in 2022 – and there already were Supreme Court’s 2021 judgements confirming liability of the real owners standing behind opaque shareholder company and nominal directors.
As the creditors’ agitation grows, so do the debtor company owners’ concerns. As the owners\management liability process is extremely bespoke and often requires swift action, it is of crucial importance to get a throughout legal advise on either side – and much better to do that before the actual claim has been brought.
There were hardly even a few businesses worldwide not affected by the corona pandemic. As lockdown measures were expanding from March 2020, dozens of visitor-dependent (including retail, public transportation, HoReCa, leisure, entertainment & sport) companies‘ value dropped astonishingly. This immediately resulted in numerous RFPs coming in and out NPL funds and distress investors being ready as never to pluck those companies ripe enough.
Well, at least that is how the things should have been.
A general picture of M&A demand remains with no great changes. According to the recent DataSite EMEA report first 2021 quarter shown 40 % deal value increase and 14 percent deal volume growth. Some sceptic experts already highlighted that Q1 references are insufficient – as Q1 2020 was painted in an unseen uncertainty and hard-model governmental interference whilst Q1 2021 came in much more predictable conditions with vaccination campaigns being successful and more lockdowns lightened.
The 2020 picture for the distressed part of the global (and particularly EMEA) part of M&A market is quite the same. With hundreds of companies still receiving governmental support and financial institutions still having a wide liquidity, the 2020 data from Bloomberg reports show no Big Bang in distress deals (either arising from pre-pack agreements between debtors and creditors or from formal insolvency processes), at least if compared with 2007-8 recession years.
Nevertheless Bloomberg themselves recognize that 2021 market might become red-hot. Whether this prognosis will materialize soon – here are four basic tips to hold in mind when thinking on insolvency-sed distress M&A deal on either – buyer or seller side:
- asset or going-concern purchase. A key business decision is understanding of whether a target business is viable enough and fits in the buyer’s existing\planned portfolio to be bought as a going-concern company. Should there be no certainty – a rule of thumb with almost always be to stick with the asset deal being more secured and the target itself much easier to allocate.
On the other hand, for a manufacturing target license and related IP rights holding might constitute a large part of the business‘ value – without which the desired asset appears to be a no-hand pot.
- watch for exclusivity – as asset-based distressed purchase might lack one because of the procedural obligation of going through bidding process.
- beware of easy ways. With so-called reverse vesting orders and free-and-clean sales an SP process might look very comfortable for a buyer eager to obtaining the target clean of any burdens (liens, mortgages, tax liabilities). Might look – but rarely be such within FSU and a part of CEE countries where a big chance of facing clawback action exists, especially with a huge state (tax\duty) interest at stake.
- do post-deal homework. When purchasing a going concern company it is for the newly-appointed management to be concerned the most: in a number of jurisdictions they might be boomeranged with management-liability claims resulting from previous management\shareholders cadence.
- have an insurance company over the seller’s back. In case any post-closing tails appear, this will give a substantial level of calmness for both sides relying on the insurance to cover a part of the purchase price or post-deal liabilities.
With the post-pandemic distress M&A yet to come and investors being ready as never, these rules will certainly be of use. As S&P 500 non-financials, in late 2020 corporate balance sheets reflected more than $2 trillion of cash – guess if there are funds for making your deal as well? Just remember: there is no one-size-fits-all approach in doing the distress deal and there always is a place for bespoke solutions given by true professionals.
The Italian legislator has enacted law 19.10.2017 n. 155 “Law. n. 155” or “the Reform”; through the said piece of legislation, the Italian government is entitled to adopt a series of legislative decrees (the decrees should be enacted very soon) aimed, on the one hand, at reforming substantially the Royal Decree n. 267/1942 “Bankruptcy Law”, on the other side, at amending accordingly the so called procedure of “over-indebtedness”.
It is interesting to note that art.1 of the Law n. 155 mandates that the Italian legislator, while adopting the said decrees, takes into account the EU regulation 2015/848, EU Commission recommendation n. 2014/135/EU and, most importantly, the UNCITRAL principles and guidelines.
Art. 2 sets forth some fundamental principles that as well must be followed by the Italian legislator.
First of all, the term “bankruptcy” i.e. Fallimento shall be replaced by the notion of judicial liquidation, in this respect, the criminal rules regarding bankruptcy shall be amended consequently. The so called ex officio (i.e. on Court’s initiative) bankruptcy declaration as provided by article 3 of Legislative decree n. 270/1999 (the law governing the so-called extraordinary administration) shall be repealed. The notion of state of crisis (a relative new notion) shall be properly defined as probable insolvency in the future. The definition shall be shaped taking into account the scientific development in the field of the business and administration science. Nonetheless, the definition of insolvency encompassed at art. 5 of Bankruptcy law shall remain the same.
Art. 2 further dictates that in order to ascertain the debtor’s state of crisis or insolvency a unique model procedure shall be adopted pursuant to article 15 of the Bankruptcy Law. The procedure shall be characterized by speediness, even in the ensuing phase of opposition. Legal standing in order to file a petition for bankruptcy shall be bestowed upon the supervising bodies of the business entity and upon the public prosecutor. The latter shall have the right to file a petition whenever he is aware of a state of crisis affecting the business entity.
The proceedings aimed at ascertaining the state of crisis and or insolvency shall concern every category of debtor. Therefore legal entities and individuals alike shall be subject to the procedure that shall regards: commercial business entities, agribusinesses, artisans, entrepreneurs, consumers, professionals, collective entities with the exception of public entities.
Moreover, the Reform shall adopt the notion of center of main interests (“COMI”) as developed within the framework of EU law and case law.
Preeminence and priority shall be given to the restructuring proceedings whereby the ongoing concern of the business is safeguarded in view of the creditors’ satisfaction. In this latter case, the convenience of the rescue plan needs to be properly illustrated. Liquidation, by contrast, is reserved to those cases where no viable alternative is possible. Abuses in any event should be prevented.
Art. 2 also specifies that the Italian Legislator has to coordinate the new rules with the provisions governing the automated process and those regarding the service process to the certified electronic e-mail couriers which shall be applicable to professionals as well.
One of the main goals of the Reform is to reduce the time and the costs associated to the activities to be performed in the proceedings. In particular, the fees of the professionals involved in the proceedings should be kept under control in order to increment the amount of money to be distributed in favor of the creditors.
Another objective of the Reform is to reframe those provisos whose interpretation has generated a contrast amongst the professionals, the scholars and the courts, in order to favor a construction of the rules consistent with the principles and the purposes established by the Reform.
Likewise, for sake of uniformity and consistency, the Reform backs a process of high-level specialization amongst Courts and professionals involved in the procedures. In order to achieve those goals the Reform moves into different directions.
In this respect, the Courts specialized in enterprise matters shall have jurisdiction over the proceedings and all the deriving litigations regarding enterprises subject to the Extraordinary Administration and large group of companies. On the other hand, the competence for the proceedings regarding the consumers, professionals and minor entrepreneurs shall remain unaltered while for the other procedures shall be competent those Courts that shall meet certain requirements in terms of: (i) the number of professional judges involved in the bankruptcy field; (ii) the number of proceedings that have been dealt with in the last five years; (iii) the number of proceedings that have been completed in the last five years; (iv) the average duration of the proceedings during the last five years; (v) the ratio between the requirements above mentioned and the national average; (vi) the number of business entities registered within the competent records together (vii) with the number of the resident population within the relevant territory of the Court.
Moreover, a list of professionals having the requisites of competence, independence and experience o be appointed as administrator, receivers or commissioners shall be kept by the Ministry of Justice.
Last but not least, the insolvency proceedings shall be harmonized with The European Social Charter for the protection of the employment.
Ukraine: new hope for the creditors as the debtors’ concern grows
- Bankwesen
- Zahlungsunfähigkeit
-
Ukraine
The Milestone EU-Mercosur Trade Deal
- Vertrieb
- Auslandsinvestitionen
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Argentinien -
Brasilien
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Italien -
Uruguay
Schreiben Sie an Geraldo
Brazil – Reforms in Insolvency and Turnaround
4 Dezember 2022
-
Brasilien
- Bankwesen
- Zahlungsunfähigkeit
In Brazil, the acquisition of distressed assets does not have to be stressful.
Due to the debtor’s insolvency situation, the acquirer must exercise additional caution to understand the extent of liabilities and to avoid risks of assuming undisclosed liabilities, losing assets in claw-back actions, or being held liable for fraud. In this context, due diligence becomes more thorough and detailed (and therefore more costly).
It is a common investment world jargon that the better the opportunities, the greater the risk; but also, the greater the risks, the better the opportunities.
Considering that excessive risk in the acquisition of distressed assets could deter investors and considering that new investments may be indispensable to save a company in crisis or to obtain funds to pay creditors, Brazilian legislation has chosen to protect acquirers of distressed assets with robust safeguards against risks.
The general rule stipulates that the acquirer will not pay anything beyond the defined price and will not assume any obligations of the debtor of any nature, remaining shielded from liabilities. In other words, creditors will have to compete to receive part of the price paid, but they cannot hold the acquirer responsible for the debt, even if the price is insufficient for settlement. Even if the seller fails to recover and is declared bankrupt, the acquisition remains irreversible.
The non-succession rule ensures that the purchaser or acquirer can invest safely in the debtor’s assets under judicial recovery without the risk of being held responsible for pre-existing obligations and liabilities. The absence of succession, therefore, stimulates competition for the asset to be alienated and consequently maximizes the values to be obtained and reverted for the benefit of the entire community involved in a judicial recovery process.
The assets subjected to the protection may be
- a specific asset (machinery, production lines, trademarks, contracts);
- establishments, branches, units; or even
- the entire business activity as protected assets.
This circumstance, by providing a secure path, mitigates the requirements of due diligence, as risks are now controlled.
There are several safe paths available to acquirers:
- Asset acquisition as a means of reorganization: in the judicial reorganization proceedings (Chapter 11), the debtor may foresee in the plan the selling of assets and the conditions for acquisition, such as minimum price and auction rules. The highest bidder assumes the assets. The price paid is allocated as provided in the plan (usually, a portion is allocated to pay creditors, and another to invest in the debtor’s business activity).
- Direct sale: if selling assets is proven to be indispensable for maintaining the company, the judge may authorize a direct sale at a fair price. The judge may order valuation and auction, unless urgency or the absence of potential interested parties is proven. If an auction occurs, the first bidder may act as a stalking horse, with the right to match the best offer.
- Asset acquisition in liquidation: in case of declared bankruptcy, the acquirer may offer a price lower than the appraisal, without the requirement of being a fair price. In this case, it is unusual to dismiss an open auction proceeding.
- Debtor financing: the acquirer may offer to finance the business activity, providing money or supplies, aiming to acquire assets or as collateral for future payment of the financing.
- Credit acquisition for asset adjudication: the interested party can also take an indirect path, acquiring the credits involved in the procedure and assuming the position of the creditors. Credit acquisition is legitimate, and commonly the price paid is considerably lower than the value of the acquired credit. By becoming the holder of a reasonable percentage of the credits, the interested party may offer these credits as payment for the acquisition of the assets they are interested in.
There are still creative alternatives, which to some extent increase the risk in the transaction but may imply agility and lower investments. There are some other hints in the Legalmondo practical guide for buying distressed assets you can find here
There is only one indispensable requirement for controlling risks: the acquirer must be adequately advised by professionals experienced in distressed asset acquisition operations.
Summary
The reform of the Brazilian Bankruptcy Act brings forward important changes in both reorganization procedures and liquidation measures.
When the Brazilian Bankruptcy Act was about to reach its 15th Anniversary, a major amendment was enacted. It was needed, in fact. Over the past 15 years, creations of the Bankruptcy Act have been tested, and practical experiences showed that some tools needed adjustments, and others demanded complete change.
The goal of this article is to list the top five most relevant novelties.
#5 – Reorganization plan presented by creditors
Before: the amendment, the construction of the reorganization plan was exclusively the responsibility of the debtor. If the majority of the creditors‘ meeting decided to reject the plan, the automatic consequence would be the conversion into bankruptcy (liquidation).
Now: in cases like this, the creditors have the right to present an alternative judicial recovery plan. As a result, creditors assume a more relevant role in corporate restructuring.
#4 – Mediation focusing on the turnaround
Mediation is now encouraged in ongoing judicial reorganization processes so that creditors and debtors may find a way out to overcome the crisis.
The most important novelty is the anticipated mediation, which goal is to avoid reorganization and liquidation. In this procedure, the debtor convenes creditors for a mediated negotiation, and they may seek the judge for an order to stay enforcement measures.
#3 – Distressed assets operations
The disposal of debtor’s assets is now simplified in both judicial reorganization and bankruptcy. Particularly in bankruptcy – in which case maximizing the use of assets is essential – the law authorizes the anticipated sale, adjudication by creditors, and even the donation of assets that creditors are not interested in acquiring.
Besides that, the distressed assets acquisitions and M&A deals are now safer, with a clearer legal provision of a liability shield in favour of the purchaser.
#2 – Debtor-in-Possession (DIP) Financing
The lack of incentive to finance the debtor undergoing judicial reorganization has always been a reason for criticism by stakeholders. In the absence of legal provisions, potential financiers could be insecure about the risks of the operation and the lack of clear advantages to offset the risk.
The complaints were addressed with the legal treatment of the debtor’s financing during judicial reorganization. This type of financing is known as Debtor-in-Possession (DIP) Financing.
The debtor is allowed, through judicial authorization, to conclude financing contracts to pay for the maintenance of his activities and assets, as well as to be liable for restructuring expenses.
As a guarantee for the financing, the debtor may offer his own assets and rights or those of third parties, even if they belong to non-current assets, that is, assets not originally intended for sale, but which serve the business structure (machinery, for example).
#1 – Cross-Border Insolvency
Brazilian law finally incorporated the Uncitral Model Law on Cross-Border Insolvency. An integrated world full of global companies imposes the need to provide for specific rules on cross-border insolvency, which were hitherto non-existent, in order to eliminate the insecurity about the reach of foreign procedures for Brazilian creditors and about the effect of Brazilian procedures for foreign creditors.
We now have a new panorama, with the possibility of procedures abroad having effects in Brazil and also of Brazilian procedures reaching foreigners.
There is a detailed treatment of the participation of foreigners in Brazil and the international cooperation between judges and other authorities to put the fundamental principles that govern the entire insolvency system in motion, namely, the improvement of legal certainty, efficient management of the processes, maximization of assets, preservation of the company, and optimization of asset liquidation.
These are the five main new features, in a nutshell. If you are interested in learning more about any of these topics or if you want to stay updated on insolvency – turnaround in Brazil, please get in touch.
On 6 January 2022 Ukraine finally cancelled almost a two-year long moratorium for the creditor-trigged insolvencies. The moratorium was imposed in the late spring 2020 as a part of the nation’ response to first wave of COVID pandemic.
In a nutshell, the moratorium prohibited creditors from requesting insolvency action against those debtors whose obligations matured after 12 March 2020. A separate set of measures also lifted an early warning duty obliging directors of the companies in distress to file for insolvency within one month from a moment when the distress appeared.
The moratorium was heavily criticized by both domestic and international creditors, who legitimately blamed it for a non-selective approach.
As further 2021 statistic shown, the moratorium never seemed to reach a goal proclaimed by it authors and made no increase for insolvency relief requests by the debtor companies.
Instead, the country has been facing a steady increase in “zombie” companies having little to none liquidation value – and their owners clearly intending to get away with no creditor repayment.
With the moratorium being lifted off the creditors do expect to show no mercy to their Ukrainian debtors. This particularly worries those debtors potentially involved in wrongful trade or fraudulent action. Even with the moratorium in place in 2021 Ukrainian courts confirmed more than UAH 150 mln in creditors loss to be paid by the insolvent companies’ management and owners themselves. This number is expected to triple in 2022 – and there already were Supreme Court’s 2021 judgements confirming liability of the real owners standing behind opaque shareholder company and nominal directors.
As the creditors’ agitation grows, so do the debtor company owners’ concerns. As the owners\management liability process is extremely bespoke and often requires swift action, it is of crucial importance to get a throughout legal advise on either side – and much better to do that before the actual claim has been brought.
There were hardly even a few businesses worldwide not affected by the corona pandemic. As lockdown measures were expanding from March 2020, dozens of visitor-dependent (including retail, public transportation, HoReCa, leisure, entertainment & sport) companies‘ value dropped astonishingly. This immediately resulted in numerous RFPs coming in and out NPL funds and distress investors being ready as never to pluck those companies ripe enough.
Well, at least that is how the things should have been.
A general picture of M&A demand remains with no great changes. According to the recent DataSite EMEA report first 2021 quarter shown 40 % deal value increase and 14 percent deal volume growth. Some sceptic experts already highlighted that Q1 references are insufficient – as Q1 2020 was painted in an unseen uncertainty and hard-model governmental interference whilst Q1 2021 came in much more predictable conditions with vaccination campaigns being successful and more lockdowns lightened.
The 2020 picture for the distressed part of the global (and particularly EMEA) part of M&A market is quite the same. With hundreds of companies still receiving governmental support and financial institutions still having a wide liquidity, the 2020 data from Bloomberg reports show no Big Bang in distress deals (either arising from pre-pack agreements between debtors and creditors or from formal insolvency processes), at least if compared with 2007-8 recession years.
Nevertheless Bloomberg themselves recognize that 2021 market might become red-hot. Whether this prognosis will materialize soon – here are four basic tips to hold in mind when thinking on insolvency-sed distress M&A deal on either – buyer or seller side:
- asset or going-concern purchase. A key business decision is understanding of whether a target business is viable enough and fits in the buyer’s existing\planned portfolio to be bought as a going-concern company. Should there be no certainty – a rule of thumb with almost always be to stick with the asset deal being more secured and the target itself much easier to allocate.
On the other hand, for a manufacturing target license and related IP rights holding might constitute a large part of the business‘ value – without which the desired asset appears to be a no-hand pot.
- watch for exclusivity – as asset-based distressed purchase might lack one because of the procedural obligation of going through bidding process.
- beware of easy ways. With so-called reverse vesting orders and free-and-clean sales an SP process might look very comfortable for a buyer eager to obtaining the target clean of any burdens (liens, mortgages, tax liabilities). Might look – but rarely be such within FSU and a part of CEE countries where a big chance of facing clawback action exists, especially with a huge state (tax\duty) interest at stake.
- do post-deal homework. When purchasing a going concern company it is for the newly-appointed management to be concerned the most: in a number of jurisdictions they might be boomeranged with management-liability claims resulting from previous management\shareholders cadence.
- have an insurance company over the seller’s back. In case any post-closing tails appear, this will give a substantial level of calmness for both sides relying on the insurance to cover a part of the purchase price or post-deal liabilities.
With the post-pandemic distress M&A yet to come and investors being ready as never, these rules will certainly be of use. As S&P 500 non-financials, in late 2020 corporate balance sheets reflected more than $2 trillion of cash – guess if there are funds for making your deal as well? Just remember: there is no one-size-fits-all approach in doing the distress deal and there always is a place for bespoke solutions given by true professionals.
The Italian legislator has enacted law 19.10.2017 n. 155 “Law. n. 155” or “the Reform”; through the said piece of legislation, the Italian government is entitled to adopt a series of legislative decrees (the decrees should be enacted very soon) aimed, on the one hand, at reforming substantially the Royal Decree n. 267/1942 “Bankruptcy Law”, on the other side, at amending accordingly the so called procedure of “over-indebtedness”.
It is interesting to note that art.1 of the Law n. 155 mandates that the Italian legislator, while adopting the said decrees, takes into account the EU regulation 2015/848, EU Commission recommendation n. 2014/135/EU and, most importantly, the UNCITRAL principles and guidelines.
Art. 2 sets forth some fundamental principles that as well must be followed by the Italian legislator.
First of all, the term “bankruptcy” i.e. Fallimento shall be replaced by the notion of judicial liquidation, in this respect, the criminal rules regarding bankruptcy shall be amended consequently. The so called ex officio (i.e. on Court’s initiative) bankruptcy declaration as provided by article 3 of Legislative decree n. 270/1999 (the law governing the so-called extraordinary administration) shall be repealed. The notion of state of crisis (a relative new notion) shall be properly defined as probable insolvency in the future. The definition shall be shaped taking into account the scientific development in the field of the business and administration science. Nonetheless, the definition of insolvency encompassed at art. 5 of Bankruptcy law shall remain the same.
Art. 2 further dictates that in order to ascertain the debtor’s state of crisis or insolvency a unique model procedure shall be adopted pursuant to article 15 of the Bankruptcy Law. The procedure shall be characterized by speediness, even in the ensuing phase of opposition. Legal standing in order to file a petition for bankruptcy shall be bestowed upon the supervising bodies of the business entity and upon the public prosecutor. The latter shall have the right to file a petition whenever he is aware of a state of crisis affecting the business entity.
The proceedings aimed at ascertaining the state of crisis and or insolvency shall concern every category of debtor. Therefore legal entities and individuals alike shall be subject to the procedure that shall regards: commercial business entities, agribusinesses, artisans, entrepreneurs, consumers, professionals, collective entities with the exception of public entities.
Moreover, the Reform shall adopt the notion of center of main interests (“COMI”) as developed within the framework of EU law and case law.
Preeminence and priority shall be given to the restructuring proceedings whereby the ongoing concern of the business is safeguarded in view of the creditors’ satisfaction. In this latter case, the convenience of the rescue plan needs to be properly illustrated. Liquidation, by contrast, is reserved to those cases where no viable alternative is possible. Abuses in any event should be prevented.
Art. 2 also specifies that the Italian Legislator has to coordinate the new rules with the provisions governing the automated process and those regarding the service process to the certified electronic e-mail couriers which shall be applicable to professionals as well.
One of the main goals of the Reform is to reduce the time and the costs associated to the activities to be performed in the proceedings. In particular, the fees of the professionals involved in the proceedings should be kept under control in order to increment the amount of money to be distributed in favor of the creditors.
Another objective of the Reform is to reframe those provisos whose interpretation has generated a contrast amongst the professionals, the scholars and the courts, in order to favor a construction of the rules consistent with the principles and the purposes established by the Reform.
Likewise, for sake of uniformity and consistency, the Reform backs a process of high-level specialization amongst Courts and professionals involved in the procedures. In order to achieve those goals the Reform moves into different directions.
In this respect, the Courts specialized in enterprise matters shall have jurisdiction over the proceedings and all the deriving litigations regarding enterprises subject to the Extraordinary Administration and large group of companies. On the other hand, the competence for the proceedings regarding the consumers, professionals and minor entrepreneurs shall remain unaltered while for the other procedures shall be competent those Courts that shall meet certain requirements in terms of: (i) the number of professional judges involved in the bankruptcy field; (ii) the number of proceedings that have been dealt with in the last five years; (iii) the number of proceedings that have been completed in the last five years; (iv) the average duration of the proceedings during the last five years; (v) the ratio between the requirements above mentioned and the national average; (vi) the number of business entities registered within the competent records together (vii) with the number of the resident population within the relevant territory of the Court.
Moreover, a list of professionals having the requisites of competence, independence and experience o be appointed as administrator, receivers or commissioners shall be kept by the Ministry of Justice.
Last but not least, the insolvency proceedings shall be harmonized with The European Social Charter for the protection of the employment.