From a legal and economic perspective, the global financial crisis, terrorist attacks, wars, natural catastrophes, and COVID-19 all have one thing in common: they are potentially ‘material adverse change’ events. Such events are unpredictable and have severe consequences for the global economy. To help manage the fallout from such negative events, businesses in economically valuable and complex deals, such as debt financing or mergers and acquisition (M&A) agreements, include special contractual risk allocation provisions, called Material Adverse Change/Effect (MAC) clauses. The COVID-19 crisis has had a drastic effect on M&A and debt financing deals, often leading to renegotiation and sometimes to litigation of these agreements based on MAC clauses. Termination of such transactions via MAC clauses poses serious risks, including those of causing a domino-effect in the market.

The effects of MAC clauses in debt finance (as opposed to M&A deals), however, have been largely overlooked both in law and in finance. This paper is the first to investigate the pre-contractual (ex-ante) and contractual (ex-post) effects of MAC clauses in commercial debt financing agreements. It proposes a novel Multifunctional Effect Approach of MAC clauses in debt finance. This paper aims to explain why the commercial parties attach high importance to these vague and uncertain MAC clauses in debt financing agreements but hardly ever rely on them. First, the paper argues that apart from acceleration of the credit facilities, MAC clauses have various beneficial effects, such as screening. Secondly, MAC clauses should be regarded not only as mechanisms to solve information asymmetry but also have the following effects: improving governance, decoupling debt, providing restructuring impulses, countering uncertainty, signalling with acceleration. Potentially, MAC clauses also have the effect of a penalty default rule. The paper finds that despite these functions, the potential of MAC clauses in debt finance is not fully utilised, due to the unique characteristics of debt finance. This significantly undermines the efficiency of MAC clauses in debt finance, as lenders overprotect themselves by additionally relying on other contractual protection mechanisms and risk offsetting strategies for more efficiency.

Soon we can expect a new type of company: the European Private Company (Societas Privata Europaea – SPE) aimed at small and medium-sized enterprises in the EU. In this article, we analyse how creditors of future SPEs will be protected. In the first part, we identify on a general level how creditors can be protected. Then we turn to the tools used in the different draft versions of an SPE statute (Commission Draft, EP Draft and Presidency Compromise). As these do not cover all aspects of creditor protection, the next part examines how these gaps ought to be filled. Subsequently, we discuss whether, from a normative perspective, creditor protection in the EU should be further harmonised. Overall, we conclude that what emerges is a mixed picture between various levels of European and national rules. This may not be ideal but it may be the price worth paying in order to reach political agreement on SPE law.

This contribution sets out to establish whether, and if so to what extent, the Second Company Law Directive allows the EU Member States to introduce different means of creditor protection, as suggested by recent academic studies on the function of legal capital and by various existing proposals for alternative regimes. The conclusion is that the Second Company Law Directive is a flexible instrument in so far as it allows Member States to impose capital requirements that are as severe as they want and it allows Member States to adopt solvency-based systems similar to those existing outside the EU. The recent amendments introduced by Directive 2006/68/EC have already simplified the requirement of an expert evaluation of contributions in kind, relaxed the share buy-back provisions and eliminated the ban on financial assistance. Moreover, Member States are not obliged to require companies to prepare individual IAS/IFRS-based accounts for dividend distribution purposes, and Member States that decide to do so may (but are not obliged to) introduce various mechanisms that limit the possibility of distributing unrealised profits according to the realisation principle entrenched in the Fourth Company Law Directive. As far as no par value shares are concerned, the Second Company Law Directive already allows the introduction of de facto no par value shares in the form of accountable par shares.

A Bill to amend Dutch private company law is currently pending before the Dutch Parliament. In our paper, we discuss the proposed rules for the protection of creditors of Dutch private limited companies (BVs). In order to give an insight in the background of the proposals, we first summarise our study on alternatives for capital protection, which served as a basis for the legislative proposals. Next, we point out what criticisms were made during the consultation following the publication of the draft Bill in April 2006 and how the legislature responded to these criticisms. We show that certain controversial provisions have been amended as a result of the outcome of the consultation process. Our paper ends with a few remarks on the rather limited amendments made to Directive 2006/68/EC. We conclude that after the implementation of the Bill, the rules on creditor protection applicable to Dutch BVs and Dutch NVs (public companies) will differ considerably. In our view, there is no reason to fear that the new creditor protection rules applicable to the BV will lead to increased popularity of the NV, as has been suggested by some. Time will tell whether the fundamental reform of the law applicable to the Dutch BV renders it well-equipped to contend with foreign competition.

This article discusses the proposed changes to the capital maintenance regime applicable to the Dutch BV. The draft legislation introduces a liability of directors for unlawful distributions and an obligation for shareholders to repay distributions made to them in the suspect period of one year prior to the opening of bankruptcy proceedings. The current enhanced balance sheet test is replaced with a simple balance sheet test and a liquidity test. With the proposed new rules on creditor protection, the Dutch legislature aims to balance welfare and fairness: the law should not place unnecessary restrictions on company's financing decisions, but at the same time it should offer effective protection to creditors. The draft legislation has been subjected to a consultation process. The reactions to the consultation document show that it is not easy to strike the right balance between the interests of the three parties involved: the shareholders, the directors and the creditors.

In February 2006, the London School of Economics (LSE) held its second postgraduate company law conference, which focused on corporate governance in transition economies, capital maintenance and social responsibility of multinational corporations.

I would like to use (or abuse) my comment on John Armour's thoughtful paper to sketch out a conceptual approach towards legal capital with an emphasis on structure rather than on substantive regulation.

Following Mülbert's presentation, the first discussion concentrated mainly on the efficiency of legal (minimum) capital in contrast to alternative solutions for creditor protection.

Employee board representation can serve information dissemination purposes. This comment argues that in Germany, which (still) has a bank-oriented financial system, transparency may be better served by using codetermination (under which up to half of the supervisory board is composed of employees) as an information channel, rather than by importing the mandatory disclosure requirements that are typical of Anglo-Saxon jurisdictions. There are two reasons for this. One is that the evidence about the efficiency of mandatory disclosure requirements is mixed. The other is that mandatory disclosure is an intrinsic component of market-oriented financial systems such as the US financial system.

Transplanting a market-oriented component into a bank-oriented financial system brings the risk of inconsistencies, as it affects the complementarities that exist among the intrinsic components of a bank-oriented system. This comment thus concludes that before suggesting ways to transplant further mandatory disclosure requirements into the German financial system, or improve existing ones, one should consider how to use or improve the use of codetermination as an information dissemination channel.

Creditor protection through mandatory disclosure since long is a highly debated issue among corporate lawyers. This paper considers whether the legal system should compel corporations to disclose information publicly in order to better protect its creditors. First, the paper elaborates on the various economic rationales of mandatory disclosure advanced by proponents of that approach. Second, it rehearses the theoretical framework of mandatory disclosure. Third, it gives a brief overview of the law on those mandatory disclosure requirements that primarily or at least in part aim at corporate creditor protection. Fourth, it outlines limitations of mandatory disclosure with respect to creditors and debtor companies. Fifth, it briefly surveys several important challenges to mandatory disclosure regulation with respect to materiality, standardization, comprehensibility and timeliness. And finally, this paper deals with various legislative options to enforce creditor-protective mandatory disclosure.

This issue of EBOR presents to a wider audience the papers and proceedings of a symposium on ‘Efficient Creditor Protection in European Company Law’, which took place from 1 to 3 December 2005 at the premises of the Max Planck Institute in Munich, as a joint venture of Munich’s Ludwig Maximilians University and the Max Planck Institute for Intellectual Property, Competition and Tax Law. As the organisers of this conference, we were proud and delighted that so many outstanding scholars from Europe and the United States agreed to participate, give presentations, make comments and contribute to the discussions, although we had nothing to offer but a lot of preparatory work, uncomfortable winter travel and the prospect of exchanging some views on questions of corporate law reform in our conference room. We would also like to express our gratitude to the Max Planck Society for the Advancement of Sciences for its generous financial support of the conference and this publication.

Summarizing the many thoughtful papers presented at this conference is a difficult task for an outside observer of European law reform. In lieu of bad comments on good papers, I offer instead my own observations on several of the conference's principal themes.

The first afternoon session included three presentations addressing the issue of whether regulatory requirements are required or helpful to ensure efficient creditor protection. The chairman, Marcus Lutter of the University of Bonn, introduced the afternoon's topic by highlighting the positive effects a legal capital concept might have. John Armour of Cambridge University questioned this concept in his presentation by arguing that such a regime was outdated in today's economy. Holger Fleischer of the University of Bonn followed with additional critical remarks. In his comments, he referred to the distinction between voluntary and involuntary creditors, the latter having no opportunity to protect themselves by means of a contract. One example given were tort victims. John Armour focused strongly on a similar distinction; however, he referred to them as adjusting creditors and non-adjusting creditors. Most participants agreed on the major relevance of this distinction.

Protection of corporate creditors has become an important topic within the European Union. At EU level, discussion has been sparked by widespread dissatisfaction with some very rigid and cumbersome provisions, and even with the whole concept of the Second Company Law Directive. At EU Member State level, three landmark decisions by the European Court of Justice – Centros, Überseering, and Inspire Art – opened the way for an all-out competition between the different company forms provided for by national company laws. At both levels, albeit for different reasons, British company law – and in particular the absence of any legal capital in the private limited company – acts as the main driving force putting pressure on the concept of legal capital as enshrined in the Second Directive, which in turn was modeled on German company law notions.

The High Level Group of Company Law Experts provided the appropriate starting point for the present discussion by dealing not only with the raising and maintenance of capital, but by also taking up the wrongful trading remedy (s. 214 British Insolvency Act) and the equitable subordination remedy. This present article builds upon this broader approach, seeking to develop a conceptual framework for an efficient creditor protection regime within a purely national setting, i.e., leaving aside the additional problems created by pseudo-foreign companies and the impact of the provisions of the EU Treaty for the free movement of companies on national company laws.

Given the rich variety of creditor protection mechanisms within EU Member States, any attempt at developing even a high-level framework has to start by identifying the relevant risks against which creditors need protection and the required extent of such protection. Against this backdrop, any jurisdiction has to make a choice whether to rely mostly on creditor self-help or on mandatory protection rules. In principle, since all mechanisms for creditor self-help are inherently costly and fail to protect involuntary (tort) creditors and “weak” contractual creditors as effectively as they do “strong” contractual creditors, there is a case for mandatory protection rules. The article then goes on to review the different well-known mechanisms for mandatory creditor protection. In line with earlier findings and the criticism mostly from English scholars, the case for a German-style legal capital regime turns out to be weak, at best.

On the other hand, since shareholders' incentive to act to the detriment of creditors increases with the company becoming financially distressed, it is important to provide for mechanisms that will work to effectively control any opportunistic behavior on the shareholder's part. In this respect, equitable subordination of a shareholder's right as well as the wrongful trading remedy may serve important roles. The article concludes by taking a brief look at the resultant high-level framework for an efficient creditor protection regime.

This paper reviews the case for and against mandatory legal capital rules. It is argued that legal capital is no longer an appropriate means of safeguarding creditors' interests. This is most clearly the case as regards mandatory rules. Moreover, it is suggested that even an ‘opt in’ (or default) legal capital regime is unlikely to be a useful mechanism. However, the advent of regulatory arbitrage in European corporate law will provide a way of gathering information regarding investors' preferences in relation to such rules. Those creditor protection rules that do not further the interests of adjusting creditors will become subject to competitive pressures. Legislatures will be faced with the task of designing mandatory rules to deal with the issues raised by ‘non-adjusting’ creditors in a proportionate and effective manner, consistent with the Gebhard formula.

The first round of discussion focused on the presentation by Rickford and Schön's commentary on it. It concentrated on the question of how to determine distributable profits and whether to apply a balance sheet test, a solvency test or a combination of both.

Covenants are a means to mitigate the agency problems between borrower and lender that are induced by the allocation of cash flow rights in a debt contract. This comment shows that if covenants could be renegotiated without any transaction costs they could be used to induce efficient behaviour on the part of the borrower and to fully protect lenders. Due to problems of asymmetric information, collective action and hold-up, however, covenants are imperfect. The analysis suggests several ways to improve the functioning of covenants.

Many participants pointed out that management is already under a duty to attempt a turnaround, including an out-of-court workout, in most European jurisdictions. At present, it seems unclear, however, when such a duty ‘in the vicinity of insolvency’ would run specifically to the company's creditors. It was emphasised that the ‘probability of insolvency’ test proposed by Eidenmüller is not intended to trigger formal insolvency proceedings; rather, it should only give rise to the directors' duty of care to creditors in managing the company – which, as the case may be, requires directors to continue or cut back business operations, to undertake restructuring and refinancing efforts and/or to initiate formal bankruptcy proceedings. The duty should not only require directors to take action but also to abstain from ‘risk-shifting,’ i.e., from increasing the company's business risk to the detriment of creditors. Because bankruptcy of small and medium-sized corporations often entails individual insolvency of directors, criminal and administrative sanctions – including director disqualification – should be applied to ensure effective deterrence.

One of the standard requirements of company law is the restriction of distributions to shareholders in order to protect the legitimate interests of the company's creditors. As lawful dividends don't have to be paid back when the company runs into losses at a later stage, we need a measuring rod in order to decide on the availability of funds for distribution. The traditional balance sheet test is running into criticism due to the rigidity of the old rules and the conflicts between the philosophy of IAS/IFRS and the concept of creditor protection. Newly offered devices like the solvency test aim at giving a better view of the business prospects of the company but they suffer from a limited time horizon and a wide range of discretion for directors. This makes them particularly problematic when long-term obligations have to be addressed. In the end, a combination of balance sheet test and solvency test seems to be a reasonable solution.