Creditor Protection and Leveraged Buyouts in Europe: A Policy Approach

Summary

SUMMARY

Despite having improved their reputation, leveraged buyouts remain a controversial legal issue that can only be resolved through a comprehensive analysis of the transaction and a specification of the role to be played by the different branches of the law involved. In this regard, it is the agency costs arising between creditors with a low bargaining power and those with a higher one that pose the most important legal challenge. Company law should not establish any form of prohibition or restrictive approach since that would not guarantee every beneficial transaction taking place. Still, creditor protection could be ameliorated if solvency tests were introduced, as they are not costly, do not lead to any form of risk aversion, and can be an interpreting element if insolvency eventually takes place. Concerning insolvency law, legislators should focus on the mechanisms that may guarantee the continuance of a company's economic activity after an insolvency procedure. Finally, regarding banking law, the rules on the compensation of directors should be designed to avoid excessive risk-taking and thus making them refrain from providing liquidity to certain transactions.

KEYWORDS

Leveraged buyout, financial assistance, creditor protection, solvency test

INTRODUCTION

For a long time, leveraged buyouts have mistrustfully been regarded as being a source of harmful effects for creditors, minority shareholders, and even employees. Financing company acquisitions through substantial amounts of debt was regarded as a signal of future difficulties when having to return them and would hence result in an increase of the risk of financial distress as a result. Indeed, highly leveraged transactions have historically been associated with the collapse of big firms, as well as with periods of economic crisis, such as the one following World War I in the United Kingdom. Still there is an untold part of the story since most of these situations have a beneficial component which can be observed both at firm and at macroeconomic level. In most cases, though, the way in which this kind of transaction seems to have been legally addressed is far from being a technical, but rather an impulsive one, and there are plenty of statutory examples that can be considered in this regard. In recent times, despite the fact that normative proposals have been sufficiently discussed both at legislative level and in the literature, its legal treatment has remained quite restrictive and sometimes inefficient across European jurisdictions, if not generally lacking legal certainty.