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How do restructuring plans affect shareholders of a family business?

restructuring plans affect shareholders of a family business

In September 2022, the Insolvency Act was amended to introduce restructuring plans. The new regulation has various effects on the partners of a family business. In this post we analyse the reform and the consequences of the restructuring plan on the shareholders. 

The reform of the Insolvency Act came about as a result of the transposition of European Directive 2019/1023 on restructuring and solvency and aims to promote preventive corporate restructuring mechanisms. To this end, restructuring plans are included in the insolvency law. 

One of the most common problems in pre-bankruptcy restructurings is the so-called “Holdout” of shareholders, which refers to the blocking actions taken by certain shareholders against a viable restructuring out of fear of dilution. This may involve their refusal to reach agreements for capital increases or the sale of essential assets of the company, which are essential operations to carry out the restructuring.

Cases in which a restructuring plan can be implemented

There are several cases in which a restructuring plan can be implemented:

  • Current insolvency: This occurs when the company is unable to meet its obligations. 
  • Imminent insolvency: In this case, the company foresees that insolvency may occur within the next three months. 
  • Probability of insolvency: In this scenario, if measures are not taken through a restructuring plan, it is likely that the company will not be able to meet its obligations within the next two years.

What effects do corporate restructuring plans have on shareholders?

The reform of the Insolvency Act brings significant changes for company shareholders. Under certain circumstances, creditors have the power to impose a restructuring plan on the shareholders. This results in the imposition of new rules to facilitate plan approval, even if some shareholders disagree. However, dissenting shareholders still have the right to challenge the plan.

Measures related to the approval of the restructuring plan

If the corporate restructuring plan includes measures that need to be approved by the general meeting, such as a merger, spin-off, or the sale of essential company assets, it must be presented for approval at that meeting. To facilitate agreement, the reform has made changes to the Insolvency Act, simplifying the convocation process and making it easier to achieve majorities for adopting resolutions. The following measures have been implemented:

  • The prior notice period has been reduced to 10 days for public and private limited companies and 21 days for listed companies. 
  • The only item on the agenda will be the approval or rejection of the restructuring plan as a whole.
  • Shareholders’ right to information is limited to this specific matter.
  • The resolution shall be adopted by an ordinary majority, without the application of qualified majorities regulated by law or the articles of association.
  • The resolution approved by the general meeting can only be challenged following the corporate rules and through the procedures and timeframe established in the Insolvency Act for opposing or challenging the approval.

Facilitation of credit capitalization 

It is common for restructuring plans to involve credit capitalization. To facilitate the operation, it will be considered that the credits are liquid, due, and payable in compliance with the regulations governing commercial companies.

Inclusion of Dissenting Partners in the Restructuring Plan

As mentioned before, partners must vote on the corporate restructuring plan at the General Meeting. However, if there are dissenting partners, it is possible to approve the plan against their will through homologation. In this way, those partners are dragged along by the majority, as it happens in the case of other corporate agreements.

Challenging by dissenting partners 

If a partner challenges the approval of a restructuring plan before the courts and the challenge is successful, the effects of the plan will not apply to the dissenting partners but will apply to the rest of the partners. In cases where the effects cannot be reversed, the dissenting partners must be compensated for any damages and losses incurred.

In which cases can a restructuring plan not be imposed on partners?

Based on the new regulations, there are several cases in which a restructuring plan can’t be imposed on partners. These cases include:

  • When there is no current or imminent insolvency. 
  • If the debtor is an individual entrepreneur. 
  • When the debtor is an SME or micro-enterprise. 
  • When there are partners who are legally responsible for the company’s debts.

In conclusion, the new regulations on corporate restructuring plans promote the continuity of companies in insolvency situations by eliminating obstacles that hinder decision-making due to opposition from some partners. If you have any doubts, contact Leialta, and our team of experts will help you develop a restructuring plan.

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