572 20 Acquisition Finance
Restructuring of the target’s debt. One solution is to mitigate the effects of the
structural subordination by aligning the interests of the target’s and the acquirer’s
lenders. Typically, the target’s existing indebtedness will be repaid and replaced
by new loans granted by the acquirer’s lenders.^76
Undertakings by the target. In principle, debt push-down could provide an al-
ternative. A possible solution could be: to transfer the acquirer’s debts to the target
by means of novation; or to ask the target to provide security for the acquirer’s in-
debtedness by means of acceptance of co-responsibility for their repayment or the
giving of guarantees or collateral.^77
However, debt push-down and the giving of guarantees or collateral can be le-
gally problematic because of timing issues, constraints on financial assistance (see
above), and general company law constraints on the use of the target’s assets.
The target cannot execute any debt push-down before closing because of: legal
restrictions on financial assistance;^78 company law rules prohibiting transactions
that are not in the interests of the company; company law rules protecting other
shareholders and creditors; company law rules on the duties of the target’s repre-
sentatives; and company law restrictions on the representatives’ power to bind the
company (for counterparty corporate risk, see Volume II).^79
The same constraints apply at closing and after closing.^80 It is a matter of inter-
pretation whether the target company can circumvent the prohibition on financial
assistance by concluding, before the closing of the acquisition agreement, an
agreement on debt push-down on such terms that the contract will become binding
after the target has taken all necessary corporate action to authorise it following
the closing of the acquisition agreement. However, the wording of the Second
Company Law Directive is broad enough to prohibit even such transactions.^81
Restrictions on the distribution of assets after closing. After the acquirer and
the vendor have closed the acquisition agreement and the acquirer has become
shareholder of the target, the making of payments to the acquirer will be con-
strained by general restrictions on the distribution of assets to shareholders (sec-
tion 10.2).
Example: AG. For example, a German AG would not be able to grant security for the re-
payment of the short-term bridge loans of the acquirer.^82 Such a transaction would be con-
trary to rules on the distribution of assets to shareholders in general (Einlagenrückgewähr)^83
and, if the debts are based on an acquisition loan facility, contrary to rules on financial as-
(^76) Ibid, § 6 number 10.
(^77) Ibid, § 6 number 10.
(^78) Article 23(1) of Directive 77/91/EEC (Second Company Law Directive).
(^79) Diem A, op cit, § 6 number 11.
(^80) Ibid, § 6 number 11.
(^81) Article 23(1) of Directive 77/91/EEC (Second Company Law Directive).
(^82) Diem A, op cit, § 3 number 3. See also § 46 number 1.
(^83) § 57 AktG.