MARTINLUTHERUNIVERSITT HALLEWITTENBERG Prof Dr Stephan Madaus Rescue of

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Rescue of Business in Insolvency Law Chicago June 30, 2016

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus www. europeanlawinstitute. eu

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus The ELI, founded in 2011, is an independent organisation to • conduct research, make recommendations and provide practical guidance in the field of European legal development; • contribute to better law-making in Europe and the formation of a more vigorous European legal community; and • provide a forum for discussion and cooperation. ELI operates on its own initiative, but is also available for consultation by, and cooperation with, other institutions.

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Prof. em. Bob Wessels (Leiden Law School) Prof. Stephan Madaus (Martin Luther University Halle-Wittenberg) Ass. Prof. Kristin van Zwieten (University of Oxford)

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Business Rescue in Insolvency Law • Q 1/2014 – Q 1/2017 • Aim: to design a set of norms and requirements that will enable the further development of coherent and functional rules for business rescue in the EU (‘ELI Legislative Guide’) • • 3 Reporters 25 National Correspondents (NCs) Advisory Committee of 10 (AC) Members Consultative Committee (MCC) – some 30 people Chair: prof. Tatjana Josipović (Uni of Zagreb)

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Project Outcomes: 4 Reports 1. Inventory report on national insolvency laws, in particular rescue-related tools, including empirical evidence and the underlying policy choices from 13 selected MSs 2. Inventory report on international recommendations from standard-setting organisations re 10 topics of Questionnaire 3. Legislative aide/guide, possibly model rules, based on transparent and reasoned policy choices and comprising a catalogue of identified good & best practice models which support and facilitate the rescue of business while striking a fair balance with creditors’ interests and other recognized interests 4. (if justified) Legislative proposal (probably: Directive) addressed to the EU legislator, aiming at targeted harmonization of national insolvency laws in order to create a level playing field of balanced rescue solutions in Europe

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus 1. Governance and Supervision of a rescue in court and out-of-court – Conditions for out-of-court workouts, conditions for opening of such ‘proceedings’, conditions for opening formal pre-insolvency and insolvency proceedings – Role of a court, a supervisory judge or other state agency – Status, powers and supervision of insolvency practitioners; duties and liabilities of directors – How are unsuccessful rescue attempts in pre-/insolvency procedures terminated or converted into other procedures? 2. Financing a rescue, including critical vendors and other pressures on liquidity; the stay 3. Executory contracts, including leases, IP-licensing contracts; termination and modification of contracts; transfer of contracts 4. Ranking of creditor claims; governance role of creditors 5. Labour, benefit and pension issues 6. Avoidance powers, including safe harbour for failed rescue efforts in a later bankruptcy, and avoidance powers in pre-insolvency procedures and out-of-court workouts 7. Sales of substantially all of the debtor’s assets on a going-concern basis 8. Rescue plan issues: procedure and structure; distributional issues 9. Multiple enterprise/corporate group issues 10. Special arrangements for small and medium-sized enterprises (SMEs) including natural persons (but not consumers)

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Business Rescue in Insolvency Law Recommendations on a “Pre-insolvency framework”

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Contractual Debt Restructuring • Recent example: APCOA Parking Holding Gmb. H – Credit facilities matured 2014 (€ 760 Mio. ) – Negotiations with financial creditors • “Out-of-court” solution or “workouts” – Contractual debt restructuring = contract law principles apply: • Consent required • Freedom (not) to negotiate • Every solution possible that can be agreed on

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Contractual Debt Restructuring • Pro: – Flexibility – Informality – Speed – Low costs • Downside: – Consensualism Consent of all relevant creditors required

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Contractual Debt Restructuring – Consent of all relevant creditors required In jurisdictions with no pre-insolvency framework: Contract negotiations “in the shadow of insolvency law”

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Contractual Debt Restructuring • Downside: – Consensualism Consent of all relevant creditors required Hold-out rational: – Limited trust in the debtor(s management) – Nothing to gain compared to insolvency scenario – Possible lender/director liability

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Addressing rational “hold-outs” by Protection (statutory stay or moratorium) Mediation Building trust (rules on disclosure and reporting) Incentivising participation (privileges) solvent almost insolvent

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Contractual Debt Restructuring • Downside: – Consensualism Consent of all relevant creditors required Hold-out rational: – Limited trust in the debtor(s management) – Nothing to gain compared to insolvency scenario – Possible lender/director liability Hold-out strategic: see APCOA Parking Holding Gmb. H – Credit facilities matured 2014 (€ 760 Mio. ) – Negotiations with financial creditors in 2013/14 failed due to “hold-out strategies” pursued by creditors holding small percentage of claims

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Addressing strategic “hold-outs” by Protection (statutory stay or moratorium) Mediation Building trust (rules on disclosure and reporting) Incentivising participation (liability) solvent almost insolvent

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Addressing strategic “hold-outs” by Statutory majority rule Obligation to consent (by contract or company law) Collective Action Clauses solvent almost insolve nt

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Competition of legal systems • 1. 3 types of legal regimes: Jurisdictions with no special pre-insolvency framework: – Codes of Conduct (amongst banks) frequently exist (Austria, Germany) • Addressing rational “hold-outs” – Emigration to foreign frameworks reported (COMI shift, UK Scheme of Arrangements) • Addressing strategic “hold-outs”

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Competition of legal systems 2. Jurisdictions with special “workout” framework: – Addressing rational “hold-outs” by: • Statutory mediation and conciliation (Belgium, Spain, France) • Protection of new money (Belgium, Spain, France) – Addressing strategic “hold-outs” by: • Enforceable Obligation to Consent (Netherlands) • Statutory majority rule to enable workouts – Under company law (e. g. Scheme of Arrangements, “Sauvegarde f. a. ” etc. ) – Under bond acts (Germany) – Under insolvency law (AT, BE, GRE, ES, FR, IT, LV), including a possible stay or moratorium

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Competition of legal systems 3. Jurisdictions with an extended insolvency framework (US-style): – Collective proceedings – Statutory “dual track option” = pre-voted bankruptcy (Estonia, Latvia, Poland) – Pre-packaged bankruptcy option – Early stay or moratorium (BE, GRE, ES, FR, IT, LV, PL, UK) – Predictable debtor-in-possession option (supervised by IP or court or both) – Impairment of shareholder rights by rescue plan (UK, FR, GE)

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Competition of legal systems • EU Commission: “Recommendation of 12. 3. 2014 on a new approach to business failure and insolvency” – Recommends a mediation option (court appointed) – Recommends a work-out framework for viable businesses • Early recourse (before but near insolvency) • Mandatory debtor-in-possession (optional supervision by IP) • Optional stay • Majority voting and judicial sanctioning of a plan – Recommends protection of investments made under the plan

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Our preliminary recommendations • Soft law level: – Codes of Conduct for repeat players to address rational hold-outs – No moratorium, but optional individual stay in a work-out framework • National law level (EU Directive): – Limited “Schemes” to overcome strategic hold-outs – Pre-packaged bankruptcy option (dual track)

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Business Rescue in Insolvency Law Recommendations on “Shareholder involvement”

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Shareholder rights in proceedings Questionnaire: “ 8. 2. 2. Shareholders: (a) May shareholders’ rights be affected by a rescue plan? (b) If so, in what circumstances? ” “ 8. 4. 1. Who is entitled to vote on a plan, and who determines this? ” “ 8. 5. 3. Where the debtor is a corporate entity, do shareholders have to approve of the plan? ”

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Shareholder rights in proceedings Analysis: a) In liquidation proceedings: Ø Shareholders are residual claimants b) In reorganisation proceedings (restructurings): Ø Shareholders are either: (1) Not impaired (e. g. AT, NED, SWE), or (2) Treated as residual claimants (e. g. GE, ESP, IT)

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Shareholder rights in proceedings Analysis: a) Arguments against shareholder involvement: (1) Scope of insolvency law: Shares and the corporate entity itself are not part of the estate. (2) Investment protection: BIT’s protect capital investments (“fair and equitable treatment”, protection from expropriation). (3) Directive 2012/30/EU, Art. 29(1): “Any increase in capital must be decided upon by the general meeting. ”

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Shareholder rights in proceedings Analysis: b) Arguments in favour of shareholder involvement: (1) Debt-to-Equity Swap: Shares to creditors instead of cash payments. (2) One forum: Involvement may lead to contribution of private information and/or fresh money. (3) Stop free-riding: No windfall-profits to shareholders.

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Shareholder rights in proceedings (Possible) Recommendations: 1. Allow for shareholder involvement 2. Allow for shareholder voting on plan 3. Shareholder cram down only if plan is fair: • Extinction of old shares proportionate? • Exchanging debt for new preferred stock? (no voting rights; preferred dividend payments) • In MSME cases: no cram down option needed? Ø No valuation dispute (? )

MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG Prof. Dr. Stephan Madaus Let’s talk about it. Prof. Dr. Stephan Madaus Professor of Civil Law, Civil Procedure and Insolvency Law Martin-Luther-University Halle-Wittenberg 06099 Halle (Saale), Germany T +49 (0)345 552 3190 E stephan. madaus@jura. uni-halle. de www. stephanmadaus. de