574 20 Acquisition Finance
Restructuring and Refinancing After Change of Control
After the acquirer has obtained control over the target company following the
closing of the acquisition agreement, the target and its existing debt will often be
restructured.^92 This is why “advance restructuring” can also be used as a defence
against hostile takeover bids, corporate predators and private-equity firms (section
18.2).
The purpose of restructuring and refinancing is to: (a) put in place a funding
mix according to the acquirer’s own funding objectives; (b) use the assets of the
target to repay acquisition loans; (c) avoid structural subordination and obtain bet-
ter credit terms; (d) replace short-term loans with long-term loans; (e) increase li-
quidity; (f) release capital; and (g) increase cash-flow. There can also be tax rea-
sons for restructuring.^93
For example, where an asset-light acquirer has too much debt following the ac-
quisition, the acquirer and the target can merge. The merger will also help the ac-
quirer to mitigate problems caused by restrictions on the distribution of assets^94
and by structural subordination.^95 The merger will enable a debt push-down.
In a German target-AG, this would usually require a majority of 75% at the general meet-
ing,^96 but the decision to merge would virtually always be contested in the court by minor-
ity shareholders^97 unless minority shareholders have already been squeezed out.^98 Before a
merger, minority shareholders of the target have an incentive to force the two companies to
agree on control (Beherrschungs- und Gewinnabführungsvertrag) as this would guarantee
them dividend payments (Garantiedividende).^99
Where the company still has too much debt, it can sell assets to repay part of the
debt and renegotiate its terms.^100 The sale of assets is often called “the sale of as-
sets that do not belong to the company’s core business”, “the sale of unperforming
assets”, or “asset-stripping”. The sale of unperforming assets can release capital,
increase liquidity, and increase cash-flow.^101
Other ways to increase cash-flow include increasing the book value of assets
(step-up). This can sometimes enable higher write-offs and tax savings.^102
Liquidity can be increased by raising additional funding that can be used as
working capital or by releasing existing working capital (section 3.4). For exam-
ple, the company can: introduce factoring; cut DSO and the payment terms it of-
fers to customers; and reduce inventories. The acquirer should keep such financing
(^92) Ibid, § 3 number 2.
(^93) Ibid, § 3 number 1.
(^94) Ibid, § 3 number 1. See also § 49 number 3.
(^95) Ibid, § 3 number 1. See also § 39 number 4.
(^96) § 65 UmwG.
(^97) §§ 243 and 245 AktG.
(^98) § 327f AktG.
(^99) § 304 AktG.
(^100) Diem A, op cit, § 3 number 1. See also § 49 number 3.
(^101) Ibid, § 3 number 1. See also § 3 number 18.
(^102) Ibid, § 3 number 20.