Distressed M&A

Before buying or selling a financially distressed company, it is important to have the advice of lawyers who specialize in Distressed M&A. Blenheim’s Dutch lawyers advise on distressed M&A transactions in the Netherlands and assist clients with every legal aspect of such deals. Blenheim provides guidance to buyers and sellers in approximately 30 transactions a year, including distressed M&A transactions.

What is distressed M&A

Distressed M&A differs significantly from traditional M&A. It involves the sale and purchase of companies or assets facing acute financial stress, acquiring assets, shares, or businesses where the seller or the company being acquired is under financial distress. The level of financial difficulty can vary, from a company having some breathing room and being in early discussions with its lenders about future cash needs, to being deeply involved in restructuring negotiations or undergoing formal insolvency proceedings. In the Netherlands, distressed M&A often occurs in the context of WHOA proceedings, pre-pack sales, or Dutch insolvency law.

Distressed M&A sales processes

A distressed M&A sale process depends significantly on the level of stress a company is experiencing. Companies with more pressing financial concerns may request restructuring of their debt, as the proceeds from a company sale might not sufficiently cover outstanding liabilities, compared to the potentially better returns from restructuring. In contrast, companies not facing the immediate threat of insolvency may have more flexibility to run an auction process. However, due to the limited timeframe of a distressed sales process, marketing of assets may be more restricted than in traditional M&A sales processes.

It is important that the sales process is managed by lawyers with a wealth of experience in the buying and selling of companies. In the Dutch market, Blenheim regularly assists with such sales, including those involving trustees and restructuring experts. Blenheim provides guidance to buyers and sellers in approximately 30 transactions a year, including distressed M&A transactions.

Due diligence and valuation issues

The limited timeframe and resource constraints during a distressed sales process result in little time for full due diligence and limited access to or availability of due diligence materials. Comprehensive legal due diligence and vendor disclosure is rarely feasible, meaning that buyers typically do not get a head-start on the diligence process. As a result, they will often face higher costs as they must conduct their own thorough examination of the target assets. Combined with the limited timeframe, buyers must focus their attention on the more critical issues and more material risks. Therefore, early identification of potential problems is crucial, which makes targeted and risk-based due diligence essential.

Structuring the transaction

The structure of a transaction is crucial, especially in distressed M&A deals. A potential buyer of a financially distressed company will typically favor either a business and assets sale, selectively choosing desirable assets, or a hive-down sale, where specific assets are transferred to a newly-formed target company. Both structures reduce the buyer’s risk of inheriting unknown liabilities.

Both buyers and sellers have to take into account a situation of an ‘insolvent transaction’ arising, which occurs when a company cannot pay its debts, allowing another party to receive more towards the satisfaction of a debt than they would in the company’s liquidation. In such cases, a liquidator could reverse the transaction and reclaim the assets. Experienced legal advice is essential to navigate these clawback risks effectively. The lawyers at Blenheim are here to assist you.

Warranty protection and W&I insurance

In distressed M&A transactions, buyers typically do not receive warranties from sellers, especially if the company is in a formal insolvency process. However, to mitigate this lack of protection in distressed M&A transactions, buyers may explore warranty and indemnity (W&I) insurance, through which the insurer provides warranties directly under the policy. This offers a safety net for the buyer against potential losses, while reassuring sellers that the transaction follows through.

Anti-embarrassment clause

Anti-embarrassment clauses in distressed M&A transactions aim to protect sellers from the potential embarrassment or disadvantages from selling the assets below their actual value or due to a short-term value fluctuations. These clauses typically require the buyer to compensate the seller if the acquired assets are resold at a significant profit within a defined period, typically within one to three years after the initial sale.

Distressed M&A and regulatory issues

Regulatory issues in distressed M&A transactions can be complex, especially when foreign investment is involved. Acquiring assets, or taking control or ownership by enforcing security upon default, could potentially trigger scrutiny from foreign investment regulatory authorities if the new owner is foreign-owned, with de-globalization and increased national protectionism leading to stricter screening of foreign investments. In the Netherlands, this includes the new Vifo Act (Wet Vifo), which introduces foreign investment screening for certain sectors.

In distressed M&A, competition law is also crucial, especially with sector consolidation as stronger companies acquire weaker ones. In cases of extreme financial distress, the “failing firm” concept in merger control rules may allow for waivers or derogations from the usual merger control clearance requirements. Engaging early with regulatory counsel is key to identifying and managing these risks.

Blenheim’s Corporate and M&A team regularly advises buyers and sellers in complex distressed M&A situations. For tailored advice or support in navigating such transactions, please contact us.