The German Economic Stabilization Fund and Importance of Fairness Opinions in Corporate Transactions

The German Economic Stabilization Fund and Importance of Fairness Opinions in Corporate Transactions

Help is always welcome in cases of extreme need. Above all, those who through no fault of their own have run into existential danger and no longer have any alternative for action, appreciate it very much. For such cases, the German government set up the Economic Stabilization Fund (WSF) in a fast-track procedure at the end of March 2020. It is intended to save companies from collapsing as a result of the COVID-19 pandemic. The aim is to enable companies to survive this extremely challenging economic phase and to guarantee liquidity and solvency of companies that were “healthy and competitive” prior to the pandemic.

The WSF will support companies of the real economy that meet certain size criteria, or which are deemed critical for the country’s infrastructure. Companies eligible for the WSF will be supported by three key measures:

  • A guarantee framework of EUR 400 billion (bn) to help companies refinance on the capital market (to bridge liquidity bottlenecks)

  • Authorization to take out loans for another EUR 100 bn to refinance the special programs of the Kreditanstalt für Wiederaufbau (KfW)

  • A credit authorization for EUR 100 bn to strengthen the equity base of businesses (recapitalization)

Forms of Direct Government Investments

Direct investments by the government in public and private companies will be made through a variety of instruments. These can include the acquisition of subordinated debt instruments, hybrid bonds, profit participation rights, silent partnerships, convertible bonds, the acquisition of shares in companies and the assumption of other components of equity in these companies, if this is necessary for the stabilization of the company. After successful stabilization, a timely exit by the government under “market standard” conditions is envisaged.

Lessons Learned From Last Financial Crisis – Similar Initiatives Observed and Expected in Several Countries

The experience of the German government with the previous financial crisis in 2008 and in particular the comparison with the U.S. Troubled Asset Relief Program (TARP), has led to stricter investment criteria and higher yield expectations. The U.S. was able to generate profits equivalent to just over USD 121 bn through completed state exits. It can be assumed that stricter investment criteria will likely lead to intense negotiations around financial considerations companies will receive when transacting with the government.

Corporate Boards Will Face Intense External Scrutiny and Potential Shareholder Disputes

A state investment would not remain without impact on existing shareholders and future corporate governance. It is therefore important that corporate boards are convinced to act appropriately in the interests of their shareholders. The management and supervisory boards will have to make existential decisions about the future of the company that are going to be subject to intense external scrutiny. In pursuing the best interests of shareholders, boards must deliberate on these complex corporate transactions in sub-optimal circumstances.

Fairness opinions are a predestined instrument in these challenging situations to support the company’s board with an “independent assessment” of the financial fairness of the transaction. The importance of an independent expert opinion is elevated in these situations in the absence of a market clearing mechanism (e.g. no auction process). Board decisions need to withstand the most rigorous scrutiny in these situations. An independent fairness analysis and opinion will help boards of directors assess these transactions and fulfil their fiduciary duties.

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