Albrecht Lutterbeck and Jacob Ampofo, Preu Bohlig: "Distressed M&A: Acquisition opportunities in times of insolvency"

 The acquisition of businesses or business units out of insolvency – commonly re­ferred to as distressed M&A – gives inves­tors the chance to selectively acquire valu­able assets. Unlike traditional share deals, asset deals allow buyers to cherry-pick de­sired assets, such as patents, trademarks or equipment, while leaving liabilities and unprofitable divisions behind in the insolvency estate. This advantage, howev­er, is often not as cut and dried as it first appears, and comes with significant legal complexity for the buyer.

Tight timeframes

Insolvency transactions are time-sensitive. During the preliminary insolvency phase – typically lasting three months – the in­solvency administrator evaluates the po­tential realization of individual assets and often reaches out to potential investors.

 Successful distressed M&A transactions require precision in contracts, expertise in IP law and deep familiarity with insolvency proceedings

Bidding procedures frequently begin even before formal insolvency proceedings are opened, and therefore required fast de­cisions. For acquisitions of entire com­panies, the period between signing and closing is short due to financial pressures; ongoing costs (e.g., rent, salaries, supplier invoices) must be covered. Buyers must therefore secure not only the purchase price but also sufficient liquidity to ensure business continuity, since turning around the fortunes of a company starts with en­suring its short-term viability. Banks and investors expect prospective buyers to present robust plans that address both ac­quisition and operations.

Opportunities in partial acquisitions

While share deals are possible, they entail assuming all liabilities, including hidden risks. Asset deals are often more attractive, enabling the buyer to focus on profitable elements while avoiding burdens. Tax ad­vantages may also arise from asset depre­ciation. Yet this requires clear contractual drafting, especially for licenses, which must be insolvency proof and transfer­able. Assessing patents or other IP rights demands specialist expertise in intellectu­al property law.

Initially, the insolvent company is rep­resented by its management and a pre­liminary insolvency administrator. Once proceedings are formally opened, the administrator usually becomes the sole legal representative. As part of the sale preparation, the administrator evaluates which assets are valuable and whether a transfer restructuring (sale to an investor) is feasible. Using special powers, adminis­trators may terminate contracts or lay off employees to make the acquisition more attractive. Buyers must therefore negotiate such measures in advance.

Due diligence specifics

Unlike traditional M&A deals, insol­vency administrators typically provide no warranties or indemnities and limit liability to the minimum. Buyers thus assume full risk regarding the value of acquired assets. Given that due dil­igence must be thorough yet adapted to compressed timelines, it is vital that an investor’s legal representation have outstanding expertise in this domain. What’s more, administrators may lack complete or reliable data, further com­plicating the process.

Acquisitions arising out of insolvency can allow investors to acquire valuable assets without legacy liabilities

For technology-driven companies or those with sensitive assets, acquisitions by for­eign buyers may trigger a foreign-invest­ment review on the part of the authorities. These reviews consume valuable time and can delay or even jeopardize transactions if not anticipated. In practice, ministries may extend reviews beyond statutory deadlines. Only a carefully prepared filing can minimize delays and ensure transac­tional security.

Interdisciplinary advice as the key

Successful distressed M&A transactions require precision in contracts, expertise in IP law and deep familiarity with in­solvency proceedings. Our clients bene­fit from our position at the intersection of corporate and IP law, as well as from our established network of insolvency administrators and public procurement experts.

Acquisitions out of insolvency, especially asset deals, offer attractive opportunities to acquire valuable businesses or busi­ness units, usually for a price significant­ly lower than if the target was in better financial health. At the same time, they are highly complex, requiring fast action, legal precision and interdisciplinary ex­pertise that Preu Bohlig & Partner man­ages with creativity, attention to detail and broad experience.

KEY POINTS

• Distressed M&A purchases give investors the chance to cherry-pick valuable assets

• These deals come with significant legal complexity for the buyer

• On top of the purchase price, sufficient liquidity is required to ensure business continuity

• Administrators may have special powers to terminate contracts or lay off employees

• Tax advantages for may arise from asset depreciation

• Successful distressed M&A transactions require precision in contracts

• Due diligence must be thorough yet adapted to compressed timelines

• Acquisitions by foreign buyers may trigger a foreign-investment review

Albrecht Lutterbeck, Partner, and Jacob Ampofo, Associate, Preu Bohlig, Germany

ABOUT THE AUTHORS

Albrecht Lutterbeck counsels and litigates in the field of compa­ny and commercial law. His areas of specialization encompass restructuring, conflict resolution among partners and drafting and negotiating of contracts in commerce. A distinguished figure in German legal circles, he delivers advice both to medium-sized as well as large-scale enterprises.

Jacob Ampofo advises national and international clients on all aspects of corporate law and litigation, with a particular focus on restructur­ing, conflict resolution among partners, contract drafting and con­tract negotiation. Ampofo represents companies, private individuals and public figures in the field of press and media law.