Restructuring in case of crises

Restructuring once in a while is a normal procedure for companies. However, with the recent chain of new unexpected high-impact situations (for instance, covid, Ukraine, rising interest rates, climate), restructurings are needed more frequently and are often larger in scale than before. It is useful for General Counsels to take note of the following points of interest.

1. Preparation and written record
It sounds obvious, but it is important to prepare for a (intended) restructuring and to properly document all resolutions and agreements in writing. It does not matter whether it is a corporate or financial restructuring.

A transaction as part of a restructuring can be prepared by checking whether all corporate documents, such as a shareholders' register, are present and up to date. The process of preparing financial statements can also be considered. Is all decision-making in order and available?

This is not only about recording agreements with third parties, but also about recording the internal decision-making process. In doing so, also consult the articles of association or what has been agreed in a shareholders' agreement. For instance, it is important to check whether prior written approval is needed from another body for entering into a certain transaction before a resolution can be taken. Written records also force the articulation of the rationale behind the proposed restructuring (e.g., divestment of a business unit) and provide an opportunity to record the relevant facts known at the decision moment, to combat hindsight bias. This can be valuable if the divested business unit unexpectedly runs into financial difficulties at a later stage.

2. Identify and break cross-links
In case the group is being sold as part of a restructuring, it is important to identify and map the remaining links between the part being sold and the rest of the group. This could include:

• Current account balances;
• Issued corporate guarantees or deposits to third parties, e.g., to a landlord of the part being sold;
• Issued comfort letters (403-verklaringen);
• Is there group financing and, in that context, collateral issued by the group for the part being sold.

Agreements for the business unit to be sold should also be assessed as to whether they contain a change-of-control provision. Such a provision may in fact entail that an agreement must also be reached with the contracting parties involved for the restructuring to succeed.

3. Avoid avoidance actions (Actio Pauliana)
Creditors outside bankruptcy and a trustee in bankruptcy may void legal acts if these acts are detrimental to creditors. This may result in losing the legal basis behind a transaction, meaning that, for example, shares or other assets have to be returned. Of course, nobody wants that. To reduce risk of a successful avoidance action, the following aspects should be considered:

• The assets/shares to be sold should be valued and these valuation reports should be included in the seller's records;
• A commercial purchase price in line with the valuation of the assets to be sold should be agreed;
• The purchase price should then also actually become available to the seller (setting off the purchase price against a debt to the purchaser or of a vendor's loan (owing the purchase price by the buyer to the seller) may pose a risk).

This article was published earlier in the GCN's General Counsel NL Newsletter.