M&A COVID-19 Wire II
1. State Aid
The KfW Special Program 2020 was launched on 23 March 2020. It is aimed at all companies (irrespective of turnover thresholds), self-employed and freelancers who have run into financial difficulties as a result of the corona crisis. Under the KfW Special Program 2020 the conditions of existing promotional programs will be modified and extended. The Federal Government has launched a large-volume Economic Stabilization Fund (WSF). The WSF is intended to implement temporary measures to stabilize the German economy.
2. Draft law to mitigate the Consequences of the COVID-19 Pandemic
- The draft law in connection with COVID-19 provides for a suspension of the obligation to file for insolvency until 30 September 2020. Furthermore, it will temporarily simplify and reduce the circumstances for insolvency appeals considerably and also loosen up payment prohibitions for management
- In the area of civil law, a moratorium on the use of consumers and micro-companies for the fulfilment of contractual claims will be introduced. Consumers and micro-companies affected by COVID-19 should be granted a moratorium if they are unable to provide their contractual services due to the COVID-19 pandemic. This right of refuse of performance shall apply until 30 June 2020 for claims arising from contracts concluded before 8 March 2020. Only material continuing obligations are covered, i.e. those which are necessary to cover the obligations with services of adequate general interest or which are necessary to cover the obligations with services for the adequate continuation of the business.
- For consumer loan agreements concluded before 15 March 2020, the lender's claims for repayment as well as interest and redemption payments due between 1 April and 30 June 2020 shall be deemed to be deferred for three months from the due date if the borrower has lost income due to the COVID 19 pandemic, which makes it unreasonable to expect him to make the repayment owed as well as interest and redemption payments. Termination of consumer loan agreements due to default of payment or due to a significant deterioration in the financial circumstances of the consumer or the value of collateral provided for the loan in the event of such deferral is excluded until the end of the deferral. In addition, the possibility of an amicable settlement between the parties is provided for.
- A right to refuse payments/other performance for tenancy and lease agreements has not been implemented in the proposed law. Therefore and despite the Corona crisis, each tenant is not exempt from the obligation to pay the (monthly) rent. However, a temporary exclusion of termination right is set out in the proposed law. If any tenant does not pay the due rent in the period from 1 April to 30 June 2020 and the non-payment is caused by the effects of the COVID-19 pandemic, the landlord's legal termination options are excluded. This provision applies to both residential and commercial leases. The tenant has to substantiate the correlation between the non-payment and the COVID-19 pandemic.
- The proposed law provides for various forms of simplification for holding shareholders' meetings and passing shareholders' resolutions without physical presence. In addition, it contains an amendment of the German Transition Law: The eight-month time limit for using the balance sheet is extended to twelve months. For companies with a fiscal year equal to the calendar year, this opens up the possibility of reverting to the 2019 balance sheet in the event of a merger/division in the current calendar year. In times of economic crisis, a merger, especially within a group, can be used for corporate restructuring and a turnaround.
3. Labour Law
- The German government is planning further measures to ease the burden on the labour market and in particular to promote access to social benefits (so-called social protection package). Some measures are intended to support the employers, e.g. the continued wage payments in the event of employees being unable to work because of childcare shall become funded by state programs. However, the most important labour law instrument in the current crisis remains the implementation of short-time work and other labour law measures by the employer.
4. Antitrust/Competition Law
European competition authorities signal that they will tolerate certain forms of cooperation also among competitors during the Corona crisis but warn against excessive pricing of essential products.
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M&A COVID-19 in Detail
1. State Aid
a) KfW-Special Program 2020
- The KfW Special Program 2020 was launched on 23 March 2020. It supports companies, self-employed and freelancers who have run into financial difficulties as a result of the COVID-19 crisis. Applications can be made through the respective house bank.
- The KfW Special Program 2020 is implemented through the programs KfW Entrepreneur Loan, ERP Start-up Loan – Universal and the KfW Special Program 2020 – Direct Participation for Consortium Financing, the terms and conditions of which have been modified and extended as follows:
aa) ERP Start-Up Loan – Universal and KfW Entrepreneur Loan
- Both loan programs are now available to companies of all sizes that have run into financial difficulties as a result of the COVID-19 crisis (previously sales restrictions applied).
- In principle, loans of up to EUR 1 billion per group of companies can be granted, with individual company key figures limiting the maximum loan amount.
- KfW offers 90% risk assumption for small and medium-sized companies (up to 250 employees and annual turnover up to EUR 50 million). For companies above these thresholds, KfW offers 80% risk assumption.
- The interest rates have been reduced and are 1%-1.46% for small and medium-sized companies and 2%-2.12% for large companies.
bb) KfW Special Program 2020 – Direct Participation for Consortium Financing
- Under this program KfW participates in consortium financing for investments and working capital of medium-sized and large companies with a term of up to six years. KfW's share of the risk is generally at least EUR 25 million, with individual company key figures limiting the risk share. In addition, KfW's assumption of risk may amount to a maximum of 80% of the financing, with KfW's share in the company's total debt being limited to a maximum of 50%.
- An overview of all state aid for affected companies can be found under this link.
- Further information can also be found under the following links (in German):
- www.kfw.de - Factsheet KfW-Unternehmerkredit
- www.kfw.de - Factsheet ERP-Gründerkredit – Universell
- www.kfw.de - Factsheet Sonderprogramm Direktbeteiligung für Konsortialfinanzierung
b) Economic Stabilization Fund (WSF)
- The German government has launched a large-volume WSF. The WSF is to have three central stabilization instruments, limited until the end of 2021:
- Guarantees: The WSF can assume guarantees up to an amount of EUR 400 billion for liabilities of companies that were established after the Economic Stabilization Fund Act came into force. A time limit of 60 months applies.
- Loans: The Federal Ministry of Finance is also authorized to take out loans of up to EUR 100 billion to cover WSF expenses and measures in connection with participation in direct recapitalization measures of companies. Subordinated debt instruments, hybrid bonds, profit participation rights, silent participations, convertible bonds and shares are available for recapitalization measures. The recapitalization is to be carried out at market conditions.
- KfW loans for loans of up to EUR 100 billion to refinance the KfW Special Programs.
- As can be seen from the current draft of the Economic Stabilization Fund Act dated 23 March 2020, in principle only those companies in the real economy (i.e. commercial companies that are neither companies in the financial sector nor credit or bridge institutions) that have fulfilled at least two of the following three criteria in the last two financial years before 1 January 2020
- a balance sheet total of more than EUR 43 million,
- a turnover of more than EUR 50 million as well as
- an average of more than 249 employees.
- In exceptional cases, however, a discretionary decision may also be taken on applications from smaller companies which do not meet these criteria, provided that these companies are active in one of the sectors listed in Section 55 of the Foreign Trade and Payments Regulation or are of comparable importance for security or the economy.
- The stabilization measures under the WSF are to be granted to companies only if no other financing possibilities are available. In addition, the stabilization measure must provide a clear independent going concern perspective after the corona pandemic has been overcome and companies must be well managed ("solid and prudent business policy″). The corporate policy focus is on the necessary safeguarding of production chains and jobs. The beneficiary companies commit themselves to healthy corporate governance and grant the state-owned WSF certain possibilities of influence.
- In order for the measures to be effective and for companies to be helped quickly and unbureaucratically, some provisions of company law will also be adapted.
Tobias Jäger - email@example.com
2. Draft Law to Mitigate the Consequences of the COVID-19 Pandemic (COVID-19 law)
The COVID-19 law aims to mitigate the significant consequences of the COVID-19 pandemic in the areas of civil, insolvency and criminal procedure law. The key points are listed below.
a) Insolvency Law
aa) Obligation to File for Insolvency
- The COVID-19 law provides for a suspension of the obligation to file for insolvency with effect from 1 March 2020 until 30 September 2020 (extension option by statutory order until 31 March 2021). However, the obligation to file for insolvency remains in force if an illiquidity is not due to the effects of the COVID-19-pandemic or if there is no prospect of eliminating an illiquidity that has occurred.
- However, the causal link between COVID-19 and the insolvency and the prospect of eliminating the illiquidity is presumed if the debtor was not insolvent on 31 December 2019. This is to ensure that the current uncertainties and difficulties regarding the proof of causal link and the predictability of further developments are not at the expense of the party obliged to file an application.
- A rebuttal of the presumption can only be considered in such cases where there can be no doubt that the COVID-19-pandemic was not the cause of the insolvency and that the elimination of an insolvency that has occurred could not be successful.
- Moreover, the presumption rule does not change the burden of proof. We therefore recommend that companies adequately document the causal link between the effects of the COVID-19 pandemic and the insolvency, as well as the measures taken by which there are prospects of eliminating the illiquidity (e.g. by applying for state aid or subsidized loans).
- The COVID-19 law makes no further statement or restrictions regarding the reason for over-indebtedness. In this respect, if over-indebtedness exists, there is no obligation to file for insolvency for the first time (without restriction) even if the prognosis for continued existence is no longer valid due to the COVID-19-pandemic during the suspension period. However, the reason for the over-indebtedness or the prognosis of continued existence should be kept in mind especially at the end of the suspension period and a hopefully (again) existing prognosis of continued existence should be documented accordingly.
- At the end of the suspension period for the obligation to file for insolvency when the debtor is then ready to file for insolvency, an application for insolvency would have to be filed immediately according to current interpretation. If insolvency occurs and is expected to occur during the suspension period, reorganization and restructuring measures should be initiated and prepared early on, e.g. by means of an insolvency plan with corresponding debt relief for the company.
bb) Consequences of Suspension of the Obligation to File for Insolvency
- In addition to the suspension of the obligation to file for insolvency, the COVID-19 law provides that payments by the management remain permissible during the suspension period if they are made to maintain or resume business operations or to implement a restructuring plan. However, caution is still required here, as the management still faces a considerable liability risk if the company becomes insolvent. For every payment made by the management at the stage of insolvency, there is a risk that the payment may not subsequently be qualified as permissible according to the above criteria. We therefore recommend that, when the company is in insolvency during the suspension period, each payment to be documented as being made to maintain or resume business operations or to implement a restructuring plan.
- Loans and credits granted after the announcement of the law until the end of the suspension of the obligation to file for insolvency can be repaid until 30 September 2023 without the repayment being considered disadvantageous to creditors. This means that this payment cannot be contested retroactively. The same applies if credits or loans are repaid which release a security granted during the suspension period. Since only credits and loans granted after the promulgation of the law are privileged thereafter, it is currently advisable to wait until the promulgation of the law before granting credits or loans (if possible).
- Shareholder loans granted during the suspension period are not considered subordinated in case of insolvency of the company before 30 September 2023. Also, the rescission for repayment is suspended accordingly. In this respect, the granting of shareholder loans should currently be waited until the law is promulgated.
- Banks and other lenders may grant loans during the suspension period without a restructuring report on the elimination of an immoral contribution to delayed filing of insolvency being available. In fact, the law feigns a crisis of the company, for which a sufficient restructuring success is assumed. This considerably shortens the time required for the examination of the granting of a loan.
- The circumstances of insolvency appeal are considerably simplified and reduced. Any payment that a creditor could claim in terms of type and time cannot be contested in subsequent insolvency proceedings. Debtor and creditor are enabled to agree on the type and time of performance deviating from the original contractual agreement. This does not lead to the fact that the contestability of such payments is effectively eliminated. In this respect, the possibility is created for debtor and creditor to support each other and for none of them to take the risk that this support might later entitle the insolvency administrator to contest the payment. However, the creditor must not be aware that the debtor's restructuring and financing efforts are not suitable to eliminate the insolvency.
cc) Reason for Opening Insolvency Proceedings for Creditors
- The right of creditors to file for insolvency is limited for three months. The three-month period begins with the promulgation of the law.
- Within the three-month period, creditors can only file for insolvency if the reason for opening insolvency proceedings was already present on 1 March 2020. If the period is not extended by statutory order, creditors can file for insolvency after the expiry of three months after the promulgation of the law if there is a reason for insolvency.
- If the restriction is not extended beyond the three months by statutory order, companies must expect creditors to file for insolvency if they become insolvent, especially if they have suspended payments. To eliminate the risk of a creditor application as far as possible, the restructuring efforts must ideally eliminate the insolvency within the three-month period. At this point, we would also like to refer once again to the deferral options for taxes and social security contributions, which should be used as early as possible, since the greatest risk of creditor insolvency applications is known to be posed by social security institutions and tax offices.
b) Contract Law
The measures to contain the COVID-19 infections will lead to considerable loss of income for many people who will not be able to pay their current liabilities, or only to a limited extent, until the measures are lifted.
aa) Right of Refusal
- In the area of civil law, a moratorium on the settlement of contractual claims is to be introduced. Persons affected by COVID-19 should be granted a moratorium if they are unable to provide the services they are contractually obliged to provide as a result of the COVID-19 pandemic. The original draft of the COVID-19 law initially standardized this right to refuse performance for each debtor, which would have meant a wide scope of application. Ultimately, these provisions are intended to ensure in particular that consumers and micro-companies are not deprived of the basic supply (electricity, gas, telecommunications, and to the extent regulated by civil law, also water) will be cut off if they do not meet their payment obligations due to the crisis.
- Following a revision of the draft of the COVID-19 law, the right of refusal no longer applies to all debtors but only to consumers and micro-companies (within the meaning of Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small and medium-sized companies OJ L 124, 20. May 2003, p. 36: less than 10 employees and an annual turnover or balance sheet total of less than EUR 2 million) until 30 June 2020 for claims arising from contracts concluded before 8 March 2020 which constitute a continuing obligation. Also the initially fixed period of six months (30 September 2020) has been reduced to three months until 30 June 2020. The Federal Government may extend this period by statutory order. The cut-off date of 8 March 2020 is due to the fact that the pandemic-like spread of COVID-19 was not yet foreseeable by the public at that time. The moratorium is intended to benefit debtors who have entered into contractual obligations up to this date in confidence in their own ability to pay. However, the conclusion of contracts after this date should no longer be worthy of protection.
- The right to refuse performance applies only to material continuing obligations, i.e. those which are necessary to cover the obligation with services of an appropriate general interest or which are necessary to cover the obligation with services for the appropriate continuation of its business operations.
- The consumer's right to refuse performance shall apply if and to the extent that the performance cannot be rendered without endangering the consumer's reasonable subsistence or the reasonable subsistence of its dependents due to circumstances attributable to the COVID-19 pandemic.
- Micro-companies may refuse to provide the services to satisfy a claim only if, as a result of circumstances arising from the COVID-19 pandemic, (i) the company cannot provide the service or (ii) the company would not be able to provide the service without jeopardizing the economic basis of its commercial operations. In the view of the German government, micro-companies are just as worthy of protection in the context of the COVID-19 pandemic as consumers. The right to refuse performance for micro-companies will also apply to claims that are not claims for remuneration, e.g. services as well as claims for restitution, compensation and reimbursement of expenses.
- The debtor must expressly invoke the right to refuse performance and prove that he cannot perform because of COVID-19. By exercising this right, the enforceability of the performance and at the same time the creation of secondary claims is prevented. The debtor is only entitled to the right to refuse performance as long as he is prevented from rendering performance due to the COVID-19 pandemic.
- The right to refuse performance shall be excluded (i) in the case of a consumer contract, if the debtor's non-performance is unreasonable for the creditor because the non-performance would jeopardize the economic basis of his business or (ii) in the case of a contract with a micro-company, the non-performance would jeopardize the reasonable maintenance of the creditor or reasonable subsistence of his dependents or the economic basis of the creditor's business. In such cases, the debtor has a special right of termination to take account of the interests of both parties to the contract. The relevant civil law provisions shall apply to the legal consequences.
- The aforementioned right to refuse performance expressly does not apply in connection with rental, lease and loan agreements and employment contracts. Any deviation from the above provisions to the detriment of the debtor by individual agreement or general terms and conditions of business is not permitted.
- The Federal Government may extend the period of the right to refuse performance by statutory order until 30 September 2020 if it is to be expected that the social life, the economic activity of a large number of companies or the gainful employment of a large number of people will continue to be significantly affected by the COVID-19 pandemic.
bb) Consumer Loan Agreements
- The loss of revenue due to the COVID-19 pandemic will also affect borrowers. The present draft of the COVID-19 law is intended to prevent these loans from being terminated due to default and the collateral provided from being realized. In addition, it is intended to take account of the fact that the parties to the loan agreement would have an increased interest in not having to terminate the agreement immediately even in crisis situations. They should be able to look for solutions to continue the loan relationship once the crisis has subsided. In this case, a right to refuse performance and a possibility of termination would not be in the interest of the parties, as they would trigger an (excessive) repayment obligation.
- This provision was also initially broader in scope and now only applies to loan agreements with consumers within the meaning of section 491 of the German Civil Code (i.e. no longer to other loan agreements) concluded before 15 March 2020.
- For these, the lender's claims for repayment as well as interest and redemption payments due between 1 April and 30 June 2020 are deemed to be deferred for three months from the due date if the borrower has lost income due to the COVID-19 pandemic, which makes it unreasonable to expect him to make the repayment owed as well as interest and redemption payments. This is particularly the case if the borrower's reasonable subsistence or the reasonable subsistence of his dependents is at risk. The consumer must explain and prove the loss of income. Deferment of payment shall have the effect of postponing the due date of the claim and shall be assessed individually for each claim.
- However, a deferment of payment shall not be granted if the consumer continues to make his contractual payments during the aforementioned period. However, the deferral effect shall only cease to apply "insofar as" the consumer makes the payment. The consumer can still invoke the deferral effect at a later date if he is then no longer able to do so due to the crisis.
- Termination of consumer loan agreements due to default of payment or due to a significant deterioration in the financial circumstances of the consumer or the value of collateral provided for the loan in the event of such deferral is excluded until the end of the deferral. This applies regardless of when the conditions for termination (already before or after 1 April 2020) occur or the grace period set before the cut-off date (section 498 of the German Civil Code) expires after that date. Deviations from this may not be made at the expense of the consumer.
- The protection against dismissal should also serve to give consumers the necessary time to take advantage of offers of assistance and to apply for support measures, the timely examination and granting of which is beyond their control.
- The COVID-19 law provides that the lender should offer the consumer a discussion about the possibility of an agreement and about possible support measures. The contracting parties should be given the opportunity to agree on a different contractual solution after the deferral period has expired. If it is not possible to reach an amicable solution for the period after 30 June 2020, the contract period shall be extended by three months. The due date of the contractual services shall be postponed for this period so that the consumer is not charged twice.
- The rules on consumer loan agreements, in particular the deferral and the right of termination, do not intervene if they are unreasonable for the lender. For example, serious or protracted culpable breaches of duty on the part of the consumer may be considered. As a result, the COVID-19 law assumes that due to the great need for protection of consumers, their interest in a deferment of payment will generally prevail.
- The above-mentioned provisions on consumer loan agreements apply accordingly to the settlement and recourse between joint and several debtors.
- The Federal Government may, by statutory order, extend the scope of application of this scheme to other borrowers, in particular micro-companies. In addition, the period up to 30 September 2020 and the extension of the contract period may be extended to up to twelve months if it is to be expected that social life, the economic activity of a large number of companies or the employment of a large number of people will continue to be significantly impaired by the COVID-19 pandemic.
cc) Lease/Tenancy Agreements
- According to the current legal situation, the landlord can terminate a tenancy by notice if the tenant does not meet his obligation to pay the rent (continued). According to the COVID-19 law, the legal termination right of the landlord in case of (continued) non-payment of the rents is suspended for payment amounts becoming due in the period from 1 April to 30 June 2020, if the non-payment is caused by COVID-19. The suspension lasts until 30 June 2022. The tenant has to substantiate the correlation between COVID-19 and the non-payment of the rent. However, the obligation to pay the rent remains unaffected. The tenant is in default if the rent is not paid and default interest is incurred. An extension of the period beyond 30 June 2020 is possible by legal decree.
- The regulations apply to residential and commercial leases as well as to tenancy agreements. The new regulations are intended to protect the tenants against loss of the rented property (as their home or basis for gainful employment). The COVID-19 law does not stipulate any further rights of the tenant or the further share of risks among the parties. There is not right to reduce the rent due to the consequences of the COVID-19 crisis.
c) Company Law/Transformation Law
- COVID-19 makes it difficult to hold (physical) shareholder meetings. In response, the COVID-19 law provides for a number of simplifications for holding general meetings (Public Limited Company, Partnership Limited by shares, European Company and Mutual Insurance Association) using remote devices of communication without physical presence, as well as for passing shareholder resolutions by way of circulation (Limited Liability Company). In addition, there are new regulations on the law governing cooperatives, associations and foundations as well as condominium owners' associations.
- According to the German Transformation Act the balance sheet, which must be attached to a merger or division when it is filed with the commercial register, may not be more than eight months old. This allows companies whose financial year is the calendar year to use the annual financial statements of the previous year if the conversion is filed by 31 August. This period is to be extended now from eight to twelve months. This shall simplify conversions, due to the fact that the preparation of documentation and the holding of shareholders' meetings is more complicated now.
- In case of an economic crisis of a company, a merger can be a used for restructuring the company and a turnaround, especially within a group. By transferring an ailing company to a still healthy company (or vice versa), insolvency or over-indebtedness can be eliminated. At the same time, liability consequences for the parties involved threaten in case of a later insolvency of the healthy company as a result of the merger.
3. Short-Time Work in Practice
- In general, all employees who are subject to compulsory insurance can receive short-time work benefits. Excluded are employees whose employment relationship has ended, as well as those receiving sickness benefit or benefits from the Federal Employment Agency. There are new regulations for temporary employees.
- However, short-time work cannot be decreed unilaterally by the employer. An agreement with the employee (in some cases employment agreements contain anticipatory clauses that allow the implementation of short-time work) or a collective-law regulation is required. Depending on the legal basis (employment agreement, collective bargaining agreement, works agreement), case law imposes different, sometimes strict requirements in order to receive (partial) reimbursement of the amounts paid to the employee in the form of short-time work compensation. A works council has a right of co-determination when short-time work is implemented.
- In the absence of a regulation, negotiations with the employee/workforce are necessary. However, short-time work can also be advantageous for the employee, as the salary per hour worked increases and short-time allowance is not taxed (but subject to progression).
- Short-time work compensation is granted in a two-step application procedure. First, the employer reports the loss of work to the competent employment agency (the conditions for the granting of short-time work benefits must be substantiated). Second, the employer submits a benefit application for the respective month.
Nemanja Burgic - firstname.lastname@example.org
4. Antitrust/Competition Law
- European competition authorities have issued a joint statement via the European Competition Network (ECN) indicating that they will not actively intervene against necessary and temporary measures put in place in order to avoid a shortage of supplies and ensure fair distribution of scarce products during the COVID-19 crisis. If companies have doubts about the compatibility of such cooperation initiatives with competition law, they can reach out to the competition authority concerned any time for informal guidance. The President of the German Federal Cartel Office also stressed that his authority is available for guidance and will tolerate cooperation between companies for "good reasons." In practice, this may be particularly relevant for cooperation in the areas of production and distribution and respective exchanges of information (e.g. on stock levels).
- At the same time, the competition authorities emphasize that it is of utmost importance to ensure that products considered essential to protect the health of consumers in the current situation (e.g., face masks and sanitizing gel) remain available at competitive prices. They will therefore not hesitate to take action against companies taking advantage of the current situation by cartelizing or abusing their dominant position. Some competition authorities have already started to investigate certain pricing practices.
Daniel Wiedmann - email@example.com