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Distressed company investors could be forced to take over German businesses, warns law firm

New German legislation passed last week that will come into force this summer could oblige hedge funds, private equity firms or other investors tha

New German legislation passed last week that will come into force this summer could oblige hedge funds, private equity firms or other investors that between them hold or acquire at least 30 per cent of a distressed company’s shares or voting rights to buy out all other shareholders if they agree to attempt to reorganise the company, according to law firm Schultze & Braun.

An amendment to the Risk Limitation Law (Risikobegrenzungsgesetz) means that if investors acquiring or holding 30 per cent or more of the stock of a German company work together in attempting to restructure a distressed company, they are now compelled to bid for all of it.

“The legislation intends to ban stakeholders acting in concert to influence the management of a listed company concerning its future structure or its overall business purpose,” says Schultze & Braun cross-border restructuring specialist Annerose Tashiro.

“The effect of the change is that if investors seek to co-operate to reorganise a distressed company ahead of it going into administration, they will have to bid for all shares if, together, they hold at least 30 per cent of the stock or plan to acquire [shares up to that level]. There are some exemptions, but there will be much uncertainty around when they apply.

“This is a very broad definition, so hedge funds, investment banks, private equity firms and others involved in distressed debt with the intention of seeking an equity stake particularly need to beware. Even having the option to buy shares may come within the definition.”

Tashiro argues that this part of the legislation reflects a long-standing campaign by German legislators against large financial investors, particularly foreign ones, who were memorably labelled as “locusts” three years ago by Franz Müntefering, then chairman of the Social Democratic Party.

She says: “It is designed to make it harder for large investors to impose their will on smaller ones, but it woefully misses this objective as it will also be hugely off-putting for small stockholders if they fear that co-operating with others could leave them in a position of having to launch a buyout.”

Designed to protect companies, their minority shareholders and employees, the new law also imposes various new obligations to provide greater transparency about the identity of investors. These include requirements to disclose the identity of the shareholders, the origin of the investment and its purpose.

Founded more than 50 years ago in Achern, Schultze & Braun is Germany’s leading business recovery and insolvency law practice with more than 500 employees. The firm’s lawyers, tax advisors and auditors provide a range of legal and financial advisory services to clients throughout Europe and in the US. In particular Schultze & Braun advises financial institutions and their UK legal teams on matters related to business recovery, distressed debt and corporate insolvency in Germany.

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