GERMANY TRENDS AND DEVELOPMENTS Contributed by: Carsten Loll, Otto von Gruben, Torsten Volkholz, Frank Grell and Sebastian von Hornung, Latham & Watkins
As an example: Craftsmen have continued to work for the debtor in the belief that the debtor will continue as a going concern because of the sale; they were not informed that a sell-off can - not avoid insolvency and was only temporarily prolonging the debtor’s struggle for survival. That said, Section 826 of the BGB establishes high requirements for liability, as damage to third-party creditors must at least be tolerated by the investor or the debtor, and the other third- party creditors must prove this circumstance. Risk Mitigation As shown above, claw-backs by the insolvency administrator and third-party claims pose espe - cially significant risks to a real estate transac - tion in a distressed scenario. This section dis - cusses general considerations on risk mitigation, explains key mitigation methods, and focuses on the practically relevant concept of fair market value and the liquidation agreement. General considerations Typically, risk mitigation can be achieved more easily in real estate transactions compared to corporate transactions, because third-par - ty creditors and their claims as well as cash demand in general are easier to identify. Further, the number of creditors – at least on the PropCo level – is rather limited. As a starting point, the risk of potential third- party claims must be analysed. Depending on the potential volume of these claims, the investor should assess, based on the information avail- able, whether these claims may be satisfied in full to avoid claw-back risks. If all third-party creditors’ claims are satisfied, the seller may be liquidated as a going concern. As a result, the relevant transaction would not impair such creditors.
The solvency of the affected company must be carefully assessed in both a share and asset deal. With a share deal, the solvency of the shareholding entity is primarily relevant since its potential insolvency administrator could claw- back the share deal. On the contrary, with an asset deal, the solvency of the relevant special purpose vehicle (SPV) is primarily relevant since its potential insolvency administrator could claw back the asset purchases. In addition, the investor should consider whether an agreement with other existing creditors on the distribution of proceeds should be concluded, in particular considering existing collateral and In general, thoughtful timing of the transaction given the tight financial situation of the target is essential to avoid any obligation to file for insol - vency. The mitigation of claw-back risks also includes thorough deal structuring and careful contract drafting. In particular, the following tools can help, depending on the individual case: • Comprehensive due diligence before the acquisition that is not only limited to the assets, but also considers the financial situ - ation of the selling entity or the SPV (asset versus share deal, see General considera- tions section above). • Confirmation of a restructuring expert that the solvent liquidation or going concern of the selling entity is highly likely; in a best-case scenario, the investor enters into a liquidation agreement with the selling entity (for more details, see Liquidation agreement section below). non-secured creditors. Key mitigation methods
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