Distressed Disposals – The Key Negotiating Aspects

Course Overview:

Companies facing financial difficulties face three options: flog, fix or fail (close). Often a restructuring will involve a mixture of both debt restructuring accompanied by a sale of part or, occasionally, all of the business. M&A is a challenging process in normal conditions; however, selling a business in a distressed scenario is fraught with difficulty and presents a raft of challenges over and above a sale in the ordinary course. In an ideal world the sellers will seek to execute a sale outside and before any formal insolvency process (Administration) however, in some cases this may not be possible. The programme focuses on the challenges of selling a business both before the imposition of a formal insolvency process and also after Administration via a pre-packages sale. Interestingly pre-packs have been used in jurisdictions other than the UK; namely Holland, Luxembourg and Germany.

This programme aims to identify the typical issues which parties are likely to encounter in the process and provides a route map on how these might be resolved. The programme adopts a generic approach which is relevant to stakeholders who may have an interest in these types of transactions including; lawyers, financial advisers, senior and junior lenders, accountants and owners.

The problems typically include the nature of the sale process, the structure of the deal and the manner in which the consideration is to be paid (deferred methods are unattractive at best). For the buyer problems arise through the absence of warranties coupled with the limited due diligence which is conducted owing to timing pressures. In addition, the sale is also open to a number of additional impediments not present in more normal circumstances; attempts by (competing/trade) buyers to wind down the clock, difficulties with valuing the target if that is itself distressed, the ever-present risk of Directors’ fiduciary duties which become more relevant in distress.

Course Content:

Initial considerations in accelerated/distressed disposals

• Background issues
• Target’s situation
  • Distressed seller
  • Distressed target
• Exploring the Seller’s options – to mitigate risk
  • Dual / triple track approach: sale, equity injection, debt restructuring
• Summary of key differences to “non-distressed” M&A
  • Deal structure
  • Tax
  • Key contracts – mitigating termination risk
  • Pensions/ Employees
  • Claw-back risk

Valuation issues and risk for Directors

• Importance of the valuation
  • Special considerations in distress
  • Establishing the value of the Target (the fulcrum capital vis-à-vis other stakeholders)
  • Due diligence issues
• Issues for the (Sellers’) Directors
  • Fiduciary duties
  • Summary of position in key European jurisdictions (Sweden, Norway, France, Germany, Lux, Spain)
• Key risks
  • Vulnerable transactions
  • Transactions at an Undervalue
  • Preferences
  • Review of position in key European jurisdictions
• Steps to mitigate risk & subsequent challenges by Liquidators post Formal Insolvency

Other impediments / considerations in re Stake-holder issues

• Issues arising from the Senior Secured lenders – issues affecting the sale
  • Structure of the loan
  • Syndicated/Club deal – issues
  • Bilateral loan – issues
• Impact of the Junior Secured lenders
  • Critical issues In the Inter-creditor
  • Where to focus -release of collateral control over the agent
• Junior-Unsecured Lenders – limited leverage available
• Getting Bond-holders’ approval – key issues
  • Who are they
  • Co-ordinating action
  • Exit consents – dealing with hold-outs
  • Market Abuse Directive issues
• Shareholders
  • Issues with split shareholdings
  • Dealing with Management
• Other key stake-holders – tactics for managing
  • Landlords
  • Aggressive creditors
• Special considerations for Listed Companies
  • Disclosure
  • Approvals
  • Market Abuse Directive issues
• Employee Rights / Issues
  • EU Acquired Rights Directive & TUPE
  • Pension matters
• Regulatory / Competition Authority issues

Structuring the Deal

• The Purchaser’s perspective & approach
  • Structure of the deal
• Seller issues & preferences
  • Structure of the deal – issues favouring a share purchase
  • Issues favouring an asset purchase
• Sale process – methods
  • Traditional auction
  • Mini-auction
  • Accelerated/ fast-track auction
  • Sealed bids / tender
  • Stalking horse method
• Special considerations for distressed sales
  • Managing the bidders
  • Dealing with competitors – key role of confidentiality
  • Tactics for avoiding value destruction
• Structuring the deal methods
  • Shares vs Assets
  • Hive-downs
  • Schemes of Arrangement (apply to non-UK companies with UK connection)
  • Acquiring control via a loan-to-own
• Methods of structuring the Consideration – pros & cons
  • Cash
  • Deferred consideration
  • Other methods of closing the value gap

Special considerations for Insolvent / distressed sales

• Insolvency practitioners’ locus standi
• Warranties & Indemnities – the value gap
• Warranty Insurance, Escrow Accounts
• Transitional Service Agreements
  • Key features
  • How they can help – pros & cons
  • Seller issues
  • Buyer issues
• Asset sales
  • Identification of assets
  • Delivery of assets
• Third Party Agreements
  • Customers & supplier issues
  • Leased Plant & Equipment
  • Leased premises
  • Licences
  • Inventory – retention of title
  • Book debts
  • Real property

Pre-packaged sales in UK & some European Jurisdictions

• Sale under formal Insolvency process –contrasted with non-insolvency sales
• Pre-packaged sales generally
  • What are they
  • How are they achieved
  • Where can they be used
  • Pre-packages sales in UK
  • Pre-packaged sales in Europe (Lux, Holland, Germany)
• Five advantages of using pre-packs
• Disadvantages of pre-packs
• Types of pre-packs / mechanics of the process
  • Operational
  • Financial