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05 December 2008
Some predict that the credit crunch and the growing economic crisis will lead companies - not just industrial and commercial groups, but also holding companies - to begin trading away investments they deem less strategic, especially if those investments are held in businesses that are experiencing market difficulties.
The banks will probably exert severe pressure. They will reserve lending for companies that have refocused on core businesses, where the associated risks are - in the banks' opinion - better controlled by the borrower. This could present possibilities for players that have been denied build-up opportunities due to the intense activity of hedge funds in recent years.
However, both industrial and financial stakeholders must maintain control over all exposure connected with these divestment transactions (ie, legal, criminal and social exposure, and exposure of reputation), and favourably manage their financial and human resources.
During the delicate phase of restructuring their assets, stakeholders and investment managers must find ways to optimize these divestments in a financial and economic crisis that is likely to increase their number and pace. Solutions might be found through the intelligent use of bankruptcy legislation and particularly those laws aimed at preventing business insolvencies.
In this respect, professionals who deal with the restructuring of distressed companies have long hailed recourse to independent mediation as the most flexible and confidential means at their disposal to deal with the issues they face. Its users also praise mediation as better and more original than other methods, which include client companies and shareholding investment funds.
Financial market players and professional advisers have observed that the framework for independent mediation is particularly well adapted to the divestment-related issues described above.
Originally built around practice and now regulated by law (Article L 611-3 of the Commercial Code(1)), independent mediation is an appropriate legal mechanism for business advisers to propose to their clients, managers and shareholders, depending on the circumstances and nature of the matter.
Since independent mediation lies within the field of prevention of business insolvencies under the supervision of the chief judge of the Commercial Court, it is generally assigned to a court-appointed professional (one of the 110 national administrators subject to strict rules of ethics and independence), a Commercial Court judge or, exceptionally, a lawyer.
Independent mediation offers a framework that companies can tailor as they please (including the choice of administrator, the nature and scope of his or her assignment and its duration) and even modify based on their future requirements.
This fine tuning of the process of mediation during initial contact with the selected administrator is central to the advice that a company must seek because it will be memorialized by an order of the chief judge of the Commercial Court and will bind the administrator (who is accountable to the chief judge) and the company.
The success of mediation is probably due to the fact that it uses proven, effective tools. Its effectiveness is greatly reinforced by the unique position of the administrator - who is chosen by the company and both appointed by and answerable to the chief judge of the Commercial Court - in any negotiations between a debtor and its counterparties. The capacity to mediate disputes is also vital; hence the importance of the advice received by the company on its choice of administrator.
Consider a company with a shareholder that wishes to sell its stake. The shareholder engages in negotiations with one of the company’s competitors. The shareholder would benefit from facilitating negotiations with the potential acquirer in order to consider, with the assistance of its advisers: (i) the role of facilitator and the focal point that a third party such as an administrator could play in a crisis; and (ii) the resulting interest of the shareholder in the administrator's appointment.
The administrator would be in a position to fulfil a double role, alongside management and in harmony with the shareholder.
First, he or she would analyze and pre-approve the decisions made during the period preceding insolvency in his or her discussions with the company and the chief judge of the Commercial Court. In France, as in many European countries, management risks becoming liable if it fails to file an insolvency declaration in a timely fashion and the company subsequently suspends payment of debts (Article L 631-4 of the Commercial Code).(2) However, decisions of this nature can be sensitive when negotiations are underway between a shareholder and one or more potential purchasers.
Although dialogue with an administrator does not constitute a legal approval that will later bind a court, it is an ongoing process through which a company and its counsel discuss the reasons behind decisions they are considering with a neutral and independent court-appointed professional. Detailing, documenting and explaining decisions as they are made allows criticisms to be handled in advance, avoiding subsequent legal exposure. Transparency should be respected in this area as the essential condition for the assistance and favourable attention that a company receives from the court. This is reassuring for management to the extent that it marks the narrow path between normal and abnormal acts of management.
Second, the administrator acts to facilitate negotiations of all kinds. Independent mediation aims to bring the parties together and reach the best possible compromise while avoiding discussions becoming bogged down by preconceptions and entrenched positions or compromised by unexpressed frustrations. The administrator thus participates in an open process which permits parties to advance their negotiations more effectively.
Negotiations between a UK shareholder, divesting non-strategic shareholdings in a distressed French company, and the potential purchaser recently demonstrated to both the shareholder (which was initially sceptical) and the purchaser (which was surprised by the initiative) that the involvement of an administrator can greatly contribute to the success of a sale transaction. The negotiations allowed all parties to overcome cultural misunderstandings and to combine divergent legal practices.
Mediation is implemented rapidly in practice because the procedural mechanism is simple. A request is filed with the support of management and the assistance of counsel, including a complete file compiled in accordance with the relevant legal requirements and according to the specific requirements of the relevant court. The file must contain:
Remuneration is usually based on an hourly rate, itself based on the standard rates of business consultants, sometimes with the addition of a success fee. However, the exact details of remuneration are always freely negotiated and the court usually simply acknowledges the agreement.
The company and its advisers must ask themselves whether, after an analysis of the issues facing the company, independent mediation seems the most appropriate solution. Independent mediation presents the greatest chance of success when:
If mediation seems appropriate, the parties must decide on how best to draft the administrator's assignment, selecting the issues that may be handled effectively in the different phases of one or several mediation assignments (as their number is not limited, in contrast to conciliation).
If the company and its advisers decide to enter into mediation, they will benefit from a dynamic process whose flexibility permits the head of the company to ensure that the administrator is acting properly and thus maintain the effectiveness of the mediation.
Hence, the company retains control over its future, its daily management and the persons related to it. This is the reason behind the success of independent mediation, to such an extent that Chief Judge Soutumier, delegate magistrate for the prevention of business insolvencies at the Paris Commercial Court, recently observed that in Paris over the past three years nearly 500 independent mediation assignments have yielded satisfactory results for all parties.
Independent mediation derives its success from the fact that supervision by the judicial authority (which is specific to independent mediation and absent from other mediation processes in other jurisdictions) has a positive impact on the decision process.
As a guarantee of safety for the company, its partners and any third-party participants, the confidentiality of communications is guaranteed during independent mediation. This guarantee results from Article L 611-15 of the Commercial Code, which provides that:
"Any person who is called to a conciliation procedure or to an independent mediation or who, by virtue of his or her duties, has knowledge thereof is bound to confidentiality."
The confidentiality of independent mediation acts in concert with the professional secrecy that covers exhibits provided by parties called by the administrator. Violation of this secrecy is subject to heavy penalties; Article 226-13 of the Penal Code provides that:
"The disclosure of any information having a secret nature by a person who is the depository thereof either by status or by profession, either due to a function or a temporary assignment, is punishable by imprisonment of one year and a fine of €15,000."
If an assignment fails, various provisions (contained in Article L 621-1 of the Commercial Code)(3) permit any court that opens a safeguard procedure to follow a failed independent mediation to obtain the exhibits and agreements relating to the independent mediation. However, these provisions do not seem to allow for the fact that an administrator will be held to have disclosed confidential information if he or she provides that evidence at any other step of the insolvency proceedings.
Provided that consideration has been given as to whether mediation is suitable, the specifics of any assignment given to an administrator and the choice of administrator, independent mediation can be a highly effective tool to assist stakeholders in the restructuring of their portfolio through the sale of distressed businesses.
For further information on this topic please contact Constantin Achillas at Denton Wilde Sapte by telephone (+33 1 53 05 16 00) or by fax (+33 1 53 05 97 27) or by email (firstname.lastname@example.org).
(2) The commencement of these proceedings must be requested by the debtor within forty-five days of the cessation of payments if the debtor has not, within that time limit, requested the commencement of conciliation proceedings. If the conciliation proceedings fail, the court will initiate a case of its own motion in order to rule upon the commencement of reorganization proceedings if it appears from the conciliator's report that the debtor is in a state of cessation of payments.
(3) The court shall issue an order on the commencement of the proceedings after having heard in or duly summoned to the judge's chambers the debtor and a representatives of the works council or in the absence of a works council, the employee delegates.
The court may hear any other person whose testimony it deems useful. Where the debtor is an independent professional with a statutory or regulated status or whose designation is protected, the court will decide, if necessary, after hearing or giving notice to the supervisory body or relevant authority.
Before making a ruling, the court may appoint a judge who will gather information regarding the business's financial, economic and employment situation. This judge may apply the provisions of Article L 623-2. He or she may be advised by any expert of his or her choice. The hearing for the commencement of safeguard proceedings with respect to a debtor who benefits or has benefited from a special commission or from composition proceedings during the preceding eighteen months must be held in the presence of the public prosecutor.
In this case, the court may, of its own motion or on motion of the public prosecutor, obtain all documents and deeds relating to the special commission or the composition proceedings, notwithstanding the provisions of Article L 611-15.
This update was co-authored by Isabelle Didier, a French insolvency practioner (administrateur judiciaire).
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