An industry in transition
It is no secret that technological change in the automotive industry is in full swing. The suppliers in particular are threatened by changes, especially those due to the challenges posed by E-mobility. In the area of powertrains alone, up to approx. 1,400 components will likely be modified or replaced entirely by E-components. Based on surveys, reputable market analyses assume that the structural change could lead to a market shake- out in the automotive supplier industry of up to 30 percent. Unlike previously, the companies in most technology sectors therefore see themselves confronted by disruptive change – and are consequently under considerable pressure to adapt.
Proactive change and strategic reorganisation are required
Electromobility forces suppliers to be proactive with their changes right now and to expedite a strategic reorganisation. This constitutes a need for an operational transformation, i. e. change and adaptation of staff and cost structures while, at the same time, closing skills gaps. However, this also means, innovation and expansion planning, acquisitions and sales of parts of companies or entire companies, securing the medium- to long-term financing of the company and, in particular, separating endangered from promising business units as well as focusing on future business. In order to address these changes, the fundamental structures of a company have to be reorganised and processes of change need to be developed and, finally, implemented in a focused manner.
Act now: The need for a timely reorganisation
From a legal standpoint in particular, owners and managers are advised to act without undue delay and to initiate necessary changes in a proactive manner. When it comes to legal structure, deadlines have to be met, and typical mistakes and risks should be avoided. The sooner action is taken, the easier it is to structure a transaction in a legally reliable manner. This applies for example when separating from “finite” transactions, i. e. the economic split-up into a usually (foreseeable) loss-making “old business” and promising “new business”. Experience shows that this reorganisation has great practical significance and, for this reason, will (have to) be a main focus of many companies, given the imminent change towards E-mobility.
From a legal standpoint, when separating from business units (thus in the case of carve out- and M&A transactions), one should make sure in particular that the “new business” is sufficiently ringfenced against liability risks in a worst-case scenario (insolvency) for the “old business”. The goal is to enable a possible subsequent insolvency of the legal entity or entities in which the old business is bundled to impact the company or companies that operate the new business as little as possible. If possible, (potential) liability for the old business should not “infect” the new business. The question of the right ringfencing has special significance, since the intensity with which the insolvency administrators examine liability issues and assert related claims has increased, and this development is expected to continue in the future.
Important when structuring transactions: Meet deadlines and avoid typical mistakes and risks
It is often the case that, in reorganisations, the assets that are to be contributed as new business are transferred to a new company (NewCo) by way of universal succession, e. g. through a spin- off or demerger. Although such measures in accordance with the German Transformation Act are often attractive from a tax perspective, they should generally be avoided from a liability law perspective. For: due to the subsequent liability pursuant to the German Transformation Act (section 133 German Transformation Act), the entities involved in the transformation are liable – and therefore, if applicable, also the company or companies of the “new business” – for obligations of the transferring entity. This subsequent liability applies for five years starting from the publication of the registration of the measure in accordance with the German Transformation Act in the commercial register. In the case of pension liabilities, the subsequent liability actually applies for ten years. These time periods are “firm” and cannot be excluded from the structuring.
Thus, what is often advantageous is the transfer of the individual assets on the basis of an (intragroup) asset deal, whereby a market-standard purchase price should be paid. The contribution of “new business” to the capital reserves of the company is conceivable. In this connection, the contestation periods according to insolvency law (sections 129 et seq. German Insolvency Code) must be complied with. Unlike in the case of subsequent liability under the German Transformation Act, the risks arising from the contesting of pre-insolvency transactions can be managed if the proper structure is used - and thanks to the changes pertaining to challenge rights, which only recently entered into force on 5 April 2017. Firstly, it can often be ensured that the period is limited to a maximum of four years; secondly, the contestation can largely be excluded if certain requirements are satisfied when drafting the agreement and the structuring is started early enough.
A number of additional questions must be considered in the case of M&A transactions. The primary focus is the sale of loss-making parts of the “old business”. In addition to the above-mentioned issues, other challenges are the selection of the proper transaction structure (share deal or asset deal), the timely identification of and contractual safeguards against existing risks that the seller might face, especially in the case of a sale, as well as the selection of the appropriate buyer.
In order to guide the reorganisation process through the critical phase in a manner that is as legally certain as possible, it can
also be crucial for the management to familiarise itself with the actions that are incumbent upon it in such a situation. This includes the careful review and monitoring of the obligations to file for insolvency (solvency monitoring) as well as the possible preparation of a “plan B” scenario (e. g. insolvency in self- administration, trusteeship and resolution models).
Conclusion: It is necessary to act quickly in order to safeguard future opportunities
The transition in the automotive industry is forcing many companies in the supplier sector to carry out fundamental restructuring and strategic reorganisation. It is important to identify the related risks at an early stage and, when structuring the transaction, to avoid typical mistakes, meet deadlines and, at the same time, prepare for alternative scenarios. Owners and managers have to act now in order to safeguard future opportunities!
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