In the past few years, many automotive suppliers have been facing increasing financial or operational problems. The COVID-19 pandemic has exacerbated these problems and is putting some of these companies in considerable distress. The search for possible solutions is in full swing, and for financial investors or competitors with strong liquidity, there is the opportunity to acquire shares in the companies in crisis or alternatively in individual assets at comparatively favourable conditions.
In addition to undeniable advantages, however, acquisitions of companies in crisis entail considerable risks, which must be identified and evaluated with the help of competent advisors. Key to any successful acquisition of an automotive supplier are the operational implications in relation to the acquisition target's customers (OEMs) and its own suppliers (Tier 1 to Tier 3).
Here are a few important factors that need to be factored in when calculating the post-acquisition restructuring costs doing the restructuring planning:
- The OEMs generally need to agree in accordance with their purchasing conditions or quality assurance agreements and/or the IATF 16949 any production transfer; on top of that, any new production facilities as well as the serial products that are manufactured there, need to be audited and validated.
- In the case of anticipated plant closures, it is important to know what impact this will have on existing delivery obligations to the OEMs.
- Delivery to new production sites by suppliers may increase the logistics and other costs, and therefore may require commercial changes to existing contracts and, in any event, such suppliers’ consent to changes of the delivery address. In the case of complete plant closures, the existing contracts with suppliers need to be terminated or ended otherwise.
The acquisition of automotive suppliers can take place before the filing of an insolvency petition, in the phase between the filing of an insolvency petition and the opening of insolvency proceedings, as well as after the opening of insolvency proceedings. Which is the most favourable time from the investor's point of view has to be weighed up, taking into account all the benefits and risks.
Acquisition before filing for insolvency
The decisive advantage of a purchase at this early stage is:
- the exclusive access to and sales negotiation with the shareholders and the management,
- the chance to receive guarantees and warranties for the business and the acquired assets, as well as
- the avoidance of the negative market perception associated with insolvency and of irritations in the business relationship with the important OEMs and suppliers.
However, if the purchaser acquires shares in the automotive supplier, this does not eliminate the crisis of such company. Rather, after the acquisition the purchaser, and possibly the new management appointed by the purchaser, must:
- assess the need to file for insolvency, for illiquidity, or over-indebtedness (including the associated liability risk if the assessment turns out to be wrong),
- minimise the risks identified in the course of the due diligence and accepted as part of the deal, as well as
- close a liquidity gap with his own financial resources.
If the purchaser wants to avoid both and therefore only wants to acquire individual assets, he must be aware of the following risks:
- Risk of liability for the liabilities of the former owner (according to Sec. 25 German Commercial Code a person continuing an acquired commercial business operation under the previous company name is liable for all of the previous owner’s liabilities arising in the business operation);
- Risk of liability for tax liabilities of the selling automotive supplier (Sec. 75 German Tax Code);
- Risk of transfer of employment relationships at the time of transfer of the business (Sec. 613a German Civil Code).
If the value of the assets exceeds the value of the consideration and the selling automotive supplier files for insolvency within four years of the transfer of the assets, there is also the risk of the insolvency administrator contesting the transfer of the assets (Sec. 134 German Insolvency Code).
Acquisition between filing for insolvency and opening of insolvency proceedings
If a weak (in comparison to a strong) preliminary insolvency administrator has been appointed, such insolvency administrator is not yet authorised to enter into any divestment transaction. Nevertheless, any divestment transaction entered into by the shareholders or the managing director requires his approval. The preliminary insolvency administrator is also required to bring about the best possible satisfaction of the creditors. Against this background, an exclusive sales process is almost impossible.
Otherwise, for the period of provisional insolvency administration up to the opening of insolvency proceedings, the same applies in principle as for the purchase of an automotive supplier before the filing of an insolvency application.
Acquisition after opening of insolvency proceedings
The acquisition of the automotive supplier’s assets after the opening of insolvency proceedings is regularly accompanied by considerable time pressure and a bidding contest. In addition, the purchaser cannot expect to receive any guarantees and warranties for the business and the acquired assets from the insolvency administrator.
The main reasons for the acquisition of selected assets from the insolvency estate after the opening of the insolvency proceedings are:
- the liabilities remain with the insolvent automotive supplier (such as bank liabilities or pension obligations);
- the contracts existing between the insolvent automotive supplier and its contracting parties do not automatically pass to the purchaser, so that the purchaser can leave unneeded/too expensive contracts with the insolvent automotive supplier; and
- the above-mentioned elements of liability due to continuation of business and company as well as liability for tax liabilities do not apply. Although even a purchase from the insolvency estate cannot prevent a transfer of business and thus the possible transfer of employment relationships, the tools of insolvency law and the support of the insolvency administrator make it easier, faster and more cost-effective to implement the frequently required labour law measures. With a conclusive purchaser concept or a transitional company (Transfergesellschaft), the re-organisation on the employee side can be carried out according to the purchaser's ideas and the labour law risk can be significantly limited.
However, the purchaser runs the risk that contracts that are necessary for operations or important for other reasons (in particular contracts with OEMs and own suppliers) can only be taken over if the contractual partner agrees. Under certain circumstances, the continuation of the contract may come at a price (i.e. the purchaser may have to accept new terms and conditions). Furthermore, new applications for official (owner-related) approvals, authorisations or permits from the company must be submitted regularly.
In addition, the insolvent company's most important creditors (in addition to banks, also OEMs) regularly sit on the creditors' committee and play a decisive role in determining the conditions of the asset purchase.
Due to the exemption from liabilities and the lower liability risks, it is regularly recommended to purchase the assets after the opening of insolvency proceedings. In exceptional cases, however, a purchase prior to filing an application may be preferable. Benefits and risks must be weighed up carefully. Based on this, a concept must be developed together with the company and the (provisional) insolvency administrator and implemented promptly. In any case, an acquisition in the run-up to or as a result of insolvency remains a complex matter, not least because the different interests of banks, creditors, employees, trade unions, customers and suppliers must be taken into account.
For more information on our Automotive team, see here.
Last reviewed: 23 April 2020