The StaRUG x Leoni AG case is making history in corporate restructuring. Specifically, it represents a paradigm shift. According to the summary of the restructuring plan, the expected return for the shareholders affected by the plan in the next best alternative scenario was 0%. This has never happened before. How has this case affected restructuring practices since then? Who are the winners and losers? And what opportunities or risks does StaRUG hold for LLCs? Ralf Ehret, Partner and Head of Debt Advisory, provides insights.
StaRUG, the Corporate Stabilization and Restructuring Act, has been in effect since January 2021 and is well-established. What was life like before StaRUG? And what more does the law offer companies in crisis situations than other solutions?
Before StaRUG, companies had exactly two options: either they reached an agreement with all their stakeholder groups, or they went into insolvency. With StaRUG, there is another restructuring tool available: it is a pre-insolvency procedure rather than an insolvency procedure. As such, it doesn't carry the same "stigma of failure" that traditional insolvency procedures still have in this country. Under StaRUG, companies can – provided they have implemented an early crisis warning system – take certain measures to correct their balance sheets. This applies to inherently healthy companies, those with a stable business model but, for example, too much debt.
You mention "certain measures," and it’s said that StaRUG can't do everything: Existing contracts, such as rental agreements, cannot be adjusted or suspended through StaRUG. Employee rights are not protected either. Do you think the law has gaps?
When StaRUG was initially discussed and drafted, I was not a fan of it. Precisely because of the points mentioned: you couldn't touch negative contracts. You couldn't adjust them. You could only involve certain groups in the restructuring. But actually, the tool wasn't designed to do that. One should ask why the legislature created the law at all. And the fact is: for a company to enter the StaRUG procedure, there can only be a looming, but not an acute, insolvency. If a company is already insolvent, it must file for insolvency within certain deadlines to avoid liability. For a StaRUG procedure, however, companies must still be maneuverable. They must have an intact business model but need restructuring on the liabilities side for whatever reason. The legislature chose this approach consciously.
Several corporations, including Gerry Weber, Softline, and Branicks Group, have used the StaRUG procedure. Today, we’re discussing the case of Leoni AG. What is unique about this case to you?
StaRUG was a perfect fit for Leoni's starting point. There were various capital market instruments and very different interests among the creditors. The big advantage of StaRUG as a pre-insolvency procedure is that opposing creditors can be brought along through corresponding majorities within the creditor groups. Opposing creditors, such as noteholders bought out by hedge funds resisting certain measures, can be overridden by legal means if at least 75% majorities are achieved. This is subject to strict legal requirements.
What are those requirements?
Creditors must be better off in the procedure than in the next worse alternative. And in the StaRUG procedure, this is usually insolvency.
So, StaRUG can also be used to threaten opposing groups?
Before Leoni, this was done quite frequently. If a creditor didn't want to go along with an out-of-court restructuring, the StaRUG tool was definitely used to bring creditors along against their will. This approach is comparable to other European systems that existed before StaRUG – for example, in France or in England, where it is called a "Scheme of Arrangement."
In Leoni's case, the expected return for the shareholders affected by the plan in the next best alternative scenario was set at 0%. This is stated in the summary of the restructuring plan. In March 2023, a headline in "Der Aktionär" read: "Leoni: Worst Case for Shareholders." All shareholders, despite all lawsuits, were left empty-handed. Can you understand the outrage?
I understand the sentiments. But economically, I can't comprehend the outrage regarding expropriation or similar claims. Creditors had to make significant concessions – specifically, they waived about half of their claims in the StaRUG procedure. When creditors suffer such losses in their financing, equity is simply wiped out. This is an economic fact. It is harsh, but when you invest as an entrepreneur, you must be prepared for a total loss. This is simply entrepreneurial risk.
Who are the winners if the shareholders are the losers? And how has Leoni developed further?
The company is the winner. This must not be forgotten. The company is significantly deleveraged. It now has the chance to redevelop with new capital, resulting in manageable debt levels. Investor Stefan Pierer financed Leoni's entire restructuring with equity. Otherwise, Leoni could not have been saved. Through the StaRUG procedure, jobs are preserved, as are locations. The company can continue to operate in the market. Therefore, the company and its employees are the biggest winners: StaRUG provides them with a future.
However, StaRUG always requires someone to ultimately finance the restructuring.
Absolutely. In the case of a corporation like Leoni, the takeover by an equity investor not only resulted in the old shareholders being left empty-handed: Leoni was also delisted from the stock exchange. Previously, in such restructurings, old shareholders – even though their shares were economically worthless – were often paid a kind of "approval premium." I recall various insolvency plans where old shareholders were granted a residual stake in the course of the insolvency plan.
What does the StaRUG x Leoni AG case symbolize? And how has restructuring practice changed since then?
Leoni's case rewrote the rules of restructuring in Germany. Firstly, because of its impact, and secondly, because of how the procedure – as the first major publicly traded case – was conducted.
Leoni is a corporation. How does the application of StaRUG look for LLCs? What opportunities or risks exist there?
The opportunities and risks differ depending on the legal form. For example, it was decided at the highest judicial level that Leoni AG’s management did not need the approval of the general meeting to apply the StaRUG procedure. This is not yet the case for LLCs. In an LLC, management is fundamentally dependent on the instructions of its shareholders – especially for such significant interventions in the company. If management pursues a StaRUG procedure, it is conceivable that shareholders might file a lawsuit.
You say the highest judicial ruling is "not yet" given for LLCs. Does this mean you expect it to happen in the future?
I think there will be cases with larger LLCs where the individual circumstances will be decisive. The courts will have to examine each situation carefully. It is evident that the interests of an LLC's management and its shareholders can be quite different. The management of an LLC has liability risks and sees it as their duty to keep the company liquid through a StaRUG procedure. Opposing them are shareholders who might threaten to dismiss the management for damaging the company's reputation or acting abusively. Forcing old shareholders out through a StaRUG procedure is much more complex for an LLC than for a corporation, which does not require a general meeting's approval. This is the major difference between the legal forms. It will be interesting to see how the courts decide on a case-by-case basis.
Do you actively advise on StaRUG?
The first step is always a consensual restructuring. But StaRUG is clearly a new tool that can be used depending on the situation. With LLCs, one has to delve deeper and figure out how to handle potential liability risks. But yes, in cases where it's uncertain if all parties will support the restructuring, I advise directly on the StaRUG option – always after a careful assessment of the situation and other factors.
What do you consider the most bitter lesson from the Leoni AG case?
The downside is certainly the costs incurred in the Leoni AG case. They were immense. Lawyers, judicial oversight, preliminary examinations, documentation, expert opinions, scenario calculations, the restructuring plan: the StaRUG x Leoni case was complex and costly. Not every case will be so intricate – with stock market listing and capital market products. Nonetheless, costs should correspond to the case's economic context.
Do you see any additional positive learnings for other companies besides the mentioned advantages for Leoni?
A positive takeaway is that companies can, if their stock market listing no longer makes sense, be delisted as a last resort. Many companies went public ten or fifteen years ago but have not really succeeded there. They haven't been able to raise capital on the stock market due to their current situation. They only face obligations, such as quarterly reporting, capital market communication, and holding general meetings. I would argue that there are many titles in the secondary markets today that no longer belong on the stock market. They lead a neglected existence and are unattractive to stock market investors. In the context of a StaRUG procedure, one could consider having these companies taken over by capital-strong investors. This way, they can be revitalized and made future-proof through new investments.
What important thought would you like to share in conclusion?
It's important that each case is individually examined for the viability of using StaRUG. And also, how to achieve the best economic outcome for the company and stakeholders. StaRUG is a very useful tool – especially when individual parties refuse consent for illegitimate reasons, such as taking an extortionate stance to gain an advantage. In insolvency, this is not a problem: there is an obstruction prohibition. Outside such procedures, this wasn't the case in the past. It was left to free markets and the balance of forces. Now, with StaRUG, if one gets such a mandate in time, the outcome of the case can be better managed.
And that is my final word: a StaRUG procedure must be prepared in a timely manner. This means: the company must still be liquid, and there must be enough time to develop a plan, communicate with all stakeholders, and more. Therefore, I always advise companies to maintain a sensible risk early warning system and have a realistic assessment of their actual situation. Here, as in all restructuring, timing is key.
Thank you for the conversation, Mr. Ehret.
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