STARUG case Varta — When shareholders are threatened with total loss

The STARUG case Varta

The long-established battery manufacturer has been in crisis for a long time. But a mix of declining demand for certain batteries combined with strong competition from the Far East, a cyber attack and “homemade” problems led Varta 2024 to the brink of insolvency. In July, the company pulled the rip cord: The ailing battery company, which is majority-owned by Austrian investor Michael Tojner, filed pre-bankruptcy restructuring proceedings. With this restructuring project in accordance with the Corporate Stabilization and Restructuring Act (StaRUG) should potential insolvency be averted. According to Varta CEO Michael Ostermann, this requires the high debt burden to be brought to an “appropriate order of magnitude” so that the company has room for investment again.

As part of the STARUG procedure, debt relief is therefore an option. This is an agreement between the debtor and his creditors, which cancel part of the debt in order to restore the financial stability of the company. At present, however, creditors are only prepared to do so if a capital cut is made to zero. This means that the existing share capital is reduced to zero and fresh capital required for restructuring is contributed as debt capital or equity and debt capital. However, the debt cut would result in delisting, i.e. a withdrawal from the stock market. In plain language, for Varta shareholders, this means that their company shares become worthless.

Since StaRUG is part of German and European restructuring law and may mean a total loss for shareholders, as described, investors should inform themselves about the main provisions of the Act.

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StaRUG: A bogeyman for shareholders

First of all, the question is why does StarUG actually exist. The regulation was introduced as part of the implementation of the European Restructuring Directive. Accelerated by the COVID-19 pandemic, the Federal Ministry of Justice 2020 faster than expected a draft bill on the implementation of the EU Restructuring Directive presented, which can protect companies in difficulties from insolvency.

In short, StaRUG, also known as a “preventive restructuring framework,” enables companies that are threatened with insolvency to restructure without insolvency proceedings.

A key feature of StaRUG is its differentiation from the insolvency code. While both regulations exist side by side, the StaRUG is specifically designed for early intervention before insolvency: The prerequisite is that the company is not yet acutely bankrupt or over-indebted. However, there must be a risk of insolvency in the next 24 months if no appropriate restructuring steps are taken.

StaRUG thus offers companies the opportunity to be restructured in a crisis without the need to initiate formal insolvency proceedings. This is done by law allowing the implementation of a restructuring plan which, among other things, adjusts or restructures liabilities. What sounds so harmless can have disastrous effects for shareholders. Because if a capital reduction to zero (as with Varta) is necessary to compensate for the losses, small shareholders go blank. Only major shareholders have the opportunity to sign a capital increase and participate in the future of the company.

For shareholders, however, the StaRUG theoretically also includes Opportunity to contribute to the restructuring of the company with a capital contribution. The solution does not necessarily always have to result in a loss of shareholder status due to a capital reduction to zero if a partial reduction followed by a capital increase is sufficient. This can be coordinated at an early stage with other restructuring participants, such as banks or bondholders, as part of a joint restructuring plan. This does not require the consent of all creditors. A majority of 75% is sufficient.

However, there are also limits and challenges when using StaRUG. For example, employee demands and company pension rights may not be included in the restructuring plan.

In principle, the restructuring instrument is available to all companies in all sectors (with the exception of banks and insurance companies). Even natural persons who are entrepreneurial can restructure themselves with the help of StaRUG and thus avoid impending personal bankruptcy.

Die Leoni AG, for example, is one of the STARUG pioneers. In 2023, the automotive supplier should be restructured in this way. At that time, retail investors were expropriated without the opportunity to participate in a capital increase. However, their action due to unjustifiable, deep cuts in creditors and shareholders and the allegedly unlawful, complete loss of legal position was unsuccessful.

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Diversification and protecting tangible assets

For investors, cases such as Leoni or Varta are a lesson. Of course, you can argue about the pros and cons of the STARUG regulation. But one thing should be clear: shares in companies in trouble are never a good investment. Instead, investors should focus on a diversified portfolio consisting of high-quality tangible assets. In addition to stocks, ETFs or funds, this also includes alternative investments. In other words, asset classes such as real estate, collectibles, private equity, citizen participation or infrastructure. Thanks digital shares These private markets, which were previously only accessible to wealthy or institutional investors, are now also available to private investors, starting at just 500 euros and with full financial flexibility.

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