Restructuring Trusts – A More Efficient Way to Recover Debt?
→ Wolfgang Höller
→ Miriam Simsa
In times of financial difficult and a challenging market environment, establishing a restructuring trust provides an insolvency-proof structure that meets the demand of the financing banks for an immediate change of control in the company while ensuring a professional M&A process with an upside for all stakeholders.
When a debtor company experiences a severe financial crisis, the financing banks usually face a dilemma. They can either extend existing loans and provide additional financing in order to give the company time to implement restructuring measures and overcome the crisis, or they can “pull the plug” and try to recover as much as possible by enforcing existing security rights.
Financing banks usually consider enforcement of securities as a last resort. A forced sale, which would also have to comply with the statutory rules on security enforcement, usually generates substantially lower consideration than an organised transaction process. Even less favourable is the situation when the financing banks have security rights only over the assets of the debtor company but not over the shares in the company itself, in which case enforcement equals a liquidation of the company.
But financing banks are often reluctant to continue financing a distressed company. This holds true especially when the shareholder is not able or willing to provide additional financing. In such cases, financing banks frequently request a change of control in the company as a condition for further financing. Such requests strain the already tense relationship between the financing banks and the shareholder.
The common way to achieve such a change of control is either a fire-sale, which normally forces the shareholder to accept comparably low consideration and the financing banks to agree to a haircut, or the granting of a security over the shares of the company in favour of the financing banks combined with a power of attorney to sell the shares outside of a statutory enforcement procedure. Both alternatives are usually perceived by the shareholder as a de facto expropriation and are met with strong resistance.
Solution: a restructuring trust
One way to solve this conflict of interest is to establish a restructuring trust over the shares in the company. This structure is well established in Germany, successfully used, for example, in the restructuring process of Merckle, and has recently been used by Schoenherr in several restructuring cases in Austria.
To set up a restructuring trust, the financing banks and the shareholder appoint a joint escrow agent to hold and then sell the shares in the company on trust for the financing banks and the shareholder. Depending on the financial situation of the company and the market environment, the escrow agent is mandated to sell the shares in the company either with or without carrying out a prior restructuring process. Thus, the escrow agent typically is a special purpose vehicle set up by a restructuring expert or financial advisor.
In the restructuring trust agreement, the financing banks and the shareholder agree on general guidelines for the escrow agent, such as possible transaction structures, the minimum purchase price and representations and warranties. Apart from these guidelines, the escrow agent is not bound by instructions from the financing banks or the shareholder (weisungsfrei). The former shareholder can thus rely on the escrow agent to adhere to the guidelines set out in the restructuring trust agreement, while the financing banks have the comfort that the company is no longer controlled by the former shareholder. In addition, financing banks usually insist on the escrow agent not being bound by instructions from the trustors in order to minimize the risk of qualifying as a de facto shareholder under the Austrian Capital Substitution Act (EKEG).
The guidelines for the sales process should be drafted in line with the general statutory principles for enforcement of securities so to avoid being challenged for circumvention of mandatory law.
A key advantage
One crucial advantage of the restructuring trust is that, if done correctly, it will remain binding even if one trustor becomes insolvent. Other than escrow arrangements with just one trustor, which terminate automatically if the trustor becomes insolvent, escrow arrangements with two or more trustors (mehrseitige Treuhand) survive if certain conditions are met, even if a trustor becomes insolvent. If the restructuring agreement underlying the restructuring trust agreement cannot be terminated or otherwise set aside by the receiver of an insolvent trustor, the receiver will also remain bound by the restructuring trust agreement. The escrow agent can thus continue the transaction process and distribute the generated proceeds according to the provisions of the restructuring trust agreement, even if the shareholder becomes insolvent in the course of the process.