Shareholders could veto StaRUG proceedings
After many had proclaimed the German StaRUG to have failed as an effective preventive restructuring regime, there appears to have been a recent increase in cases. While the statistics for 2023 have not yet been published, restructuring practitioners reported a notable increase in StaRUG cases as the year came to an end. In July 2023, Germany saw its first successful utilisation of StaRUG in a high-profile case: automotive supplier LEONI’s StaRUG restructuring plan achieved sufficient majorities among its creditors and the restructuring court at Nuemberg-Fürth rejected all appeals against the plan.
Several German local courts (Amtsgerichte) in their role as restructuring courts have published StaRUG related judgements throughout the year, although this did not generate significant interest outside of the restructuring community. While the LEONI case itself made headlines in the general press, the details of the sanctioning order by the restructuring court Nuremberg-Fürth, in conjunction with an order by the restructuring court Hamburg in a different matter, merit a closer look, as they arguably affect the potential use of StaRUG in a major way.
Directors require the shareholders’ consent to initiate a restructuring by way of StaRUG
Both judgments answer the crucial question of whether directors need to obtain formal approval of the shareholders prior to filing a request to the restructuring court to make use of the StaRUG mechanism. Notably, the legislators did not make any statement in the StaRUG provisions and the question has since been subject to lively discussions. Unfortunately, recent judgments do not provide absolute clarity on the issue. Nevertheless, they provide valuable guidance for future cases.
The restructuring court in Hamburg had to rule on an appeal filed by the shareholder of a limited liability company (GmbH) after its director had initiated StaRUG proceedings for the company.[1] In his verdict, the judge ruled that while the representative control of a director in external relations is generally absolute, it finds its limits where it becomes abusive. The court found the initiation of StaRUG proceedings, which may impede shareholders’ rights, to be a grave misuse of power by the director. It is therefore necessary for the shareholders to approve the initiation of StaRUG proceedings. The court was persuaded that the obvious breach of duties by the director rendered the legal act of initiating StaRUG proceedings invalid and the court therefore had to reject the director’s application.
Less resolute statements from Nuremberg
In contrast to the opinion expressed by the Hamburg judge, the restructuring court in Nuremberg-Fürth positioned itself more in line with the general opinion among most restructuring professionals.[2] The StaRUG plan the Nuremberg court was asked to sanction, however, had been proposed by the board of a stock corporation (AG) and not by a GmbH. GmbH shareholders are generally able to give specific orders to the company’s directors while the board of an AG, in principle, does not have to adhere to orders or decisions of the AG’s general assembly. The restructuring court in Nürnberg-Fürth was confronted with resistance from a group of shareholders who had voted against the plan and claimed that the board had failed to ask the general assembly for its consent to the StaRUG plan proposal. While the Nuremberg judge did not conclude the Hamburg decision was wrong, he stated that the reasoning used therein was inapplicable and that the case was fundamentally different from the one before it. He concluded that, at least in an instance where the only reasonable alternative to the StaRUG is the company’s insolvency, the board of an AG is not required to seek the approval of the general assembly prior to initiation of StaRUG proceedings. In other words, the board must make a credible case that it would have to file for bankruptcy if it does not enter into a StaRUG plan. The court made clear that the general assembly cannot limit representative control of the board in external relations. Any restrictions imposed by the statutes of the company, if disregarded, may lead to liability of the board, while the validity of the legal act that lies in the initiation StaRUG remains unaffected.
Consequences
These two judgements have given some clarity to the question of shareholder involvement when entering into StaRUG proceedings. Many commentators considered the absolute requirement for shareholder consent proclaimed by the Hamburg judge to be highly problematic. Applied in other cases it could lead to a situation where the shareholders, whose rights are often be impeded by the proposed StaRUG plan, are essentially given the right to “pre-vote” on the StaRUG plan before it even reaches the actual voting procedure. In consequence, this could give shareholders the chance to veto the restructuring as a whole and force the company into insolvency. While there may be cases in which the reasoning of the Hamburg court applies, in a broader context, it seems to disproportionally favour the interests of shareholders over those of the company’s creditors.
Going forward, directors and board members alike, regardless of which type of company they represent, should appropriately involve the shareholders when considering the proposal of a StaRUG plan in order to avoid potential conflicts or appeals by shareholder groups. Directors and advisors are required to assess viable alternatives and provide, not only to the court, but particularly to the creditors and shareholders, a sound reasoning of why the StaRUG plan is the best alternative for all parties.
