The success of the StaRUG continues – decision of the Federal Constitutional Court in the VARTA case gives rise to discussion

For 2025, the highest number of corporate insolvencies is expected in Germany since the economic crisis of 2009. At least that's the headline of the Wirtschaftswoche (WiWo) recently. For January 2025, the Federal Statistical Office (Destatis) already reported an increase of roughly 14 % in the number of insolvency proceedings filed compared with the same month a year earlier.

Insolvency proceedings not only lead to bad debts from suppliers and other creditors, but often also to job losses and other damages. Against this background, the Corporate Stabilisation and Restructuring Act (StaRUG), which came into force on 1 January 2021 and was created in implementation of European law requirements, is becoming increasingly important as an insolvency-avoiding restructuring framework.

However, due to a number of major restructuring cases, namely the restructuring proceedings of LEONI AG and VARTA AG, in which small shareholders lost their shares without compensation, the StaRUG has recently been subjected to fierce criticism from shareholder protectors. In the following, we shed light on the background and classify the discussion.

VARTA AG case: Total losses of small shareholders and defeat of small shareholders before the Federal Constitutional Court intensify discussions about StaRUG

The discussion about the StaRUG was recently intensified by the decision of the Regional Court of Stuttgart of January 21, 2025 (docket no.: 1 T 12/24) in the case of VARTA AG, which rejected the appeals of numerous small shareholders against the restructuring plan confirmed by court order of the Local Court – Restructuring Court – Stuttgart and did not allow appeals to the Federal Court of Justice. In its recent decision of 28 February 2025 (case no. 1 BvR 418/25), the Federal Constitutional Court did not admit for decision the constitutional complaints lodged by a total of 19 small shareholders against these two court decisions alone – but not against the StaRUG itself or individual provisions of the StaRUG, in particular not against § 66 (2) no. 3 StaRUG or § 64 (3) StaRUG. However, the Federal Constitutional Court also pointed out that there was another constitutional complaint in connection with VARTA AG's plan confirmation, the acceptance of which had not yet been decided. This provides an opportunity to briefly describe the objectives, prerequisites and effects of restructuring in accordance with the StaRUG.

A. Objective of the StaRUG: Insolvency avoidance through restructuring outside of insolvency proceedings

The aim of the StaRUG is to offer companies that are in financial difficulties and are imminently insolvent, but appear operationally viable, an opportunity to restructure themselves outside of insolvency proceedings and thus avoid the occurrence of insolvency and/or over-indebtedness.

B. Core elements of the StaRUG: Restructuring plan, adoption with three-quarters majorities (amount of claim or capital share)

The core of the law is the restructuring plan. In this plan, the parties whose rights are to be encroached upon are divided into groups of so-called plan affected persons according to appropriate criteria. Three-quarters majorities in all groups are required for the adoption of restructuring plans, which are determined solely by the amount of claims (creditors) or capital share (shareholder). Even those affected by the restructuring plan who reject the plan are bound by the plan regulations when it is accepted and the plan is confirmed by the court ("cram-down"). These voting rules are intended in particular  to increase and integrate piecework disruptors in the debt area and in the area of shareholders. In exceptional cases, a cross-group majority decision is also possible as a so-called "cross-class cram-down". This also binds those affected by the plan in a group in which the necessary majority has not been achieved to the plan regulations. The prerequisite is that the members of this group are not likely to be worse off as a result of the restructuring plan than they would be in the alternative scenario without the plan.

C. Unfair expropriation of small shareholders? StaRUG as "Stock Exchange Unword of the Year 2024"

Ultimately, the StaRUG was recently wrongly portrayed as a means of unfair, uncompensated expropriation of small shareholders. The Düsseldorf Stock Exchange recently even chose the term "StaRUG" as the stock exchange non-word of the year 2024, saying that shareholders had allegedly been deprived of valuable asset positions and forcibly "expropriated" by the application of the law. This is particularly anti-social towards affected shareholders, who are small investors who have invested in shares to build up assets or to supplement their pensions.

D. Withdrawal of shares/shares without compensation is not the rule provided for by the StaRUG

However, this criticism does not do justice to the prerequisites and consequences of restructuring under the StaRUG. It ignores the proximity to insolvency as an economic situation in which the companies that make use of the restructuring options under the StaRUG find themselves. In addition, limiting the discussion to capital and debt haircuts in the restructuring plan obscures the range of possible stabilisation and restructuring instruments.

It is true that all measures permissible under company law can be provided for in restructuring plans vis-à-vis shareholders, including capital cuts and capital increases with exclusion of subscription rights. However, restructuring plans under the StaRUG are by no means always accompanied by the exclusion of existing shareholders without compensation.

I. Softline AG: Exclusion of shareholders with payment of severance payments

If there is no over-indebtedness and the equity still has a value, as in the case of Softline AG, the payment of severance payments for the loss of shares can be provided for in the restructuring plan. Restructuring plans may also provide for mere maturity extensions or deferrals, adjustments to covenants and interest rate changes without any action against the shareholders.

II. BayWa AG: No interference with the rights of shareholders

Another example is the current restructuring project of BayWa AG. According to their information, the rights of shareholders are not to be interfered with.

III. VARTA AG: Appeals rejected by the Regional Court of Stuttgart, material worse position not credibly demonstrated by the restructuring plan

The restructuring plan of VARTA AG, on the other hand, regulates a capital cut to zero, combined with a delisting from the Frankfurt Stock Exchange. Only the Chairman of the VARTA Supervisory Board and majority shareholder Michael Tojner and the future VARTA major shareholder Porsche will receive new shares without subscription rights of the other former shareholders.

Some former shareholders did not want to accept this. They objected to the restructuring plan and voted against its adoption at the discussion and voting hearing. They then lodged an appeal with the Stuttgart Regional Court against the plan confirmation. They unsuccessfully argued that the restructuring plan would put them in a much worse position than in possible alternative scenarios such as insolvency proceedings. According to the court, a material disadvantage as a result of the restructuring plan was not sufficiently substantiated. The complainants had not succeeded in credibly presenting an alternative continuation scenario for VARTA AG, which could have been realised for the most part and in which the small shareholders would have been better off. The appeals directed against the resolution confirming the restructuring plan were therefore rejected as inadmissible by the Regional Court of Stuttgart in its order of 21 January 2025 (case no. 1 T 12/24).

E. BVerfG: Constitutional complaints in the VARTA case dismissed as inadmissible. Further constitutional complaint still pending

Constitutional complaints against the plan confirmation in the VARTA case were unsuccessful, as was previously the case in the LEONI case. The possibility of a violation of fundamental rights by the two challenged court orders of the Stuttgart Local Court (plan confirmation) and the Stuttgart Regional Court (rejection of the complaints) had not been sufficiently demonstrated. The constitutional complaints were not to be admitted for decision because they had not been sufficiently substantiated by the expiry of the time limit for filing an appeal and were therefore inadmissible (BVerfG of 28.02.2025 – 1 BvR 418/25).

Successful appeals against court confirmations of restructuring plans face high hurdles. In particular, a significant disadvantage as a result of the restructuring plan compared to the next best alternative scenario may by no means be asserted solely with generalising statements. Complainants must sufficiently substantiate and substantiate both the material worse position and the sufficient probability of the feasibility of the next best alternative scenario put forward.

F. Demands for amendments to the StaRUG meet concerns under European law and constitutional law

Demands for amendments to the StaRUG by the legislature are met withconcerns under European law and constitutional law. The EU Directive on which the StaRUG is based  provides a fast and effective procedure for avoiding insolvency that must not be exposed to the possibility of blocking by shareholders. In addition, the constitutional protection of property under Article 14 of the Basic Law is not unlimited. The property is subject to a social bond. Encroachments on shareholder rights by restructuring plans that avoid insolvency can therefore be justified and necessary against the background of the rights of other affected parties in the event of proximity to insolvency and economic devaluation of the share ownership. This applies if the restructuring plan does not worsen the situation for shareholders compared to the next best alternative scenario, but improves it for other stakeholders such as creditors, suppliers, customers and employees. It should be noted that the next best alternative scenario is usually insolvency proceedings. In this policy, shareholders as equity investors also usually come away empty-handed due to the subordination of their legal positions to creditors.

Therefore, significant changes to the StaRUG, which is very successful from the point of view of restructuring practice, have not been initiated by the legislator and, in our opinion, are not to be expected.

Practical tip from an investor's point of view: Vigilance and rapid reaction to StaRUG proceedings are advisable

From the point of view of shareholders, special vigilance in monitoring the market and reviewing investment decisions are therefore advisable at the first signs of a crisis in the respective issuer. Insofar as shareholders are affected by StaRUG proceedings, they should carefully examine the imminent insolvency of the issuer as a prerequisite for the restructuring notification and the alternative scenario together with the comparative calculation.

Conclusion

The StaRUG is an effective restructuring instrument that avoids insolvencies and, when viewed as a whole, has positive effects from the stakeholders' point of view. The law is neutral in its legal form and is not aimed at stock corporations. It is not directed against shareholders, but allows for necessary interventions in the rights of shareholders and thus also of shareholders that are economically devalued due to imminent insolvency. These interventions are usually justified. In the event of a withdrawal of (still) valuable legal positions, severance payments may have to be paid. European law requirements stand in the way of the abolition of the StaRUG and changes in the law, which would open up blocking possibilities for shareholders. Shareholders are advised to keep a close eye on market developments and to question investment decisions immediately if there are signs of crisis on the part of the respective issuer.