Schefenacker AG – A "cross-border fusion of original minds" (FT Innovative Lawyers Report 2008)

Schefenacker AG (2007)

A&O advised Schefenacker AG in the restructuring of its group bank and bond debt and considerations regarding the re-domiciling of its parent entity from Germany to the UK and full corporate reorganisation, advising on English, German, French, US, Hungarian, Spanish and Italian law. Even today, the Schefenacker case is considered as one of the first and most successful cross-border restructurings in which a migration of a company’s centre of main interest (COMI) was applied to a German company in order to make use of the more favourable restructuring options in the UK.

The Schefenacker group was a leading German car-part supplier owning up to 30% of the global market share in the manufacturing of side- and rear-view mirrors. The group consisted of companies in Germany, Australia, England, Korea, Slovenia, Hungary and the USA and employed more than 8,000 people. The head-office was located near Stuttgart in Germany.

In order to save the group, a highly innovative rescue needed to be devised. Allen & Overy's work on the deal centred on the migration of the holding company's COMI from Germany to the UK. This meant that the restructuring was able to take place under the English insolvency law, which at that time was more flexible and had less strict provisions than the German system and allowed creditors and the company to have a say in the appointment of restructuring professionals. Most importantly, the English law allowed for the release of (third-party) guarantees and debt-for-equity-swaps, which was not possible at that time under German law. In the aftermath of the Schefenacker case, the German legislator revised the German Insolvency Code. Creditors were given more influence on the proceedings generally and debt-equity-swaps were introduced to the insolvency plan procedure. Furthermore, the German Bond Act was amended in 2009 and is now more rescue friendly, as collective-action-clauses and an option to release (third-party) guarantees was introduced to the Act for the first time.

In the UK, the insolvency law allows the use of company voluntary arrangements (CVAs): basically an agreement between a company and its creditors. Schefenacker was one of the first European companies to make use of a CVA to compromise the claims of bondholders and allow a debt-for-equity swap and the release of guarantees.

In order to make use of the English CVA, a procedure which falls under the European Insolvency Regulation and is therefore recognised within the European Union, it was necessary to prove to the English courts that the company's centre of main interest was in the UK. This was done by a complex process including in particular the following steps:

Schefenacker AG was transformed into a German limited liability partnership (Kommanditgesellschaft), Schefenacker GmbH & Co. KG;
one of the general partners of Schefenacker GmbH & Co. KG was Schefenacker plc, a  company founded and registered in Portchester (Hampshire, England);
the other general partner, Schefenacker GmbH, and the remaining limited partner withdrew from the partnership;
this resulted in a collapse merger (Anwachsung) of all assets and liabilities of Schefenacker AG to Schefenacker plc, the only remaining partner in Schefenacker KG;
Schefenacker KG ceased to exist and was subsequently removed from the German companies register; and
the day to day management of Schefenacker plc, the legal successor of Schefenacker GmbH & Co. KG, was conducted out of England.
Once the COMI was migrated to the UK, an inter-conditional balance sheet restructuring, refinancing, M&A solution and operational restructuring took place in order to create a platform from which the new management could re-establish the company as a major force within the automotive supply industry.

Co-operation throughout the process was required from Schefenacker's banks, bondholders, shareholders, major customers, suppliers and operating management. Therefore it was imperative to carefully manage the complex matrix of relationships during the restructuring.

The restructuring was completed in May, with the secured creditors taking 70 per cent of the equity and the unsecured bondholders USD7.5 million in cash and 5 per cent of equity with an option for 10 per cent. The company owner wrote off EUR100m of loans and retained a 25 per cent stake in the company.

Allen & Overy won the award for Legal Expertise for the Schefenacker restructuring at FT Innovative Lawyers Report 2008. Describing the deal as a "cross-border fusion of original minds", the report said it epitomised Allen & Overy's "synthesis of broad geographical sweep and fine legal detail". Furthermore, Allen & Overy received the awards Restructuring Deal of the Year and Restructuring Team of the Year for Schefenacker at the IFLR Europe Awards 2008. 

“The restructuring required highly innovative thinking”

Peter Hoegen (Partner, Frankfurt Restructuring) commented: “The Schefenacker restructuring was only the second company to be migrated from Germany to the UK and one of the most technically and commercially challenging restructurings which has been seen in the European Market.”

The A&O Team

The restructuring was led by Mark Sterling in London and partners Peter H. Hoegen and Dr Walter Uebelhoer in Germany. Additional advice was provided on corporate M&A, IP, tax, employment, antitrust, litigation and capital markets matters by lawyers in Allen & Overy's London, New York, Madrid, Budapest, Luxembourg, Milan and Paris offices.