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Family businesses are an essential pillar of the economy, both because of their weight in the business fabric and their capacity to generate employment. However, they have characteristics that differentiate them from other companies, especially in terms of management, succession and decision-making. These particularities make them more vulnerable to certain structural risks which, in situations of financial difficulty, can lead to insolvency.
The insolvency regulations currently in force in Spain do not establish a differentiated regime for family businesses to regulate their response to a situation of insolvency, which poses specific challenges when facing a liquidity crisis or over-indebtedness. In particular, the reform introduced in September 2022 has significantly strengthened the power of creditors, who can take over the company's capital through court-approved restructuring plans.
We are interested in informing family businesses of the measures that can be taken to anticipate the effects of insolvency regulations and safeguard corporate control against possible hostile plans promoted by creditors.
Structural factors of insolvency in family businesses
The uniqueness of family businesses is reflected in their governance and their relationship with the market. For this reason, there are certain causes that can lead to or aggravate insolvency, which do not occur in other types of companies. Among these causes, the following stand out:
1. Poor management of the company inherited from the first generation
The founder's resistance to retiring and facilitating generational transition creates difficulties in both ownership and management. The effective transfer of responsibilities is often complex, which hinders the continuity of the company. This is further complicated by a failure to adapt to new market demands, which compromises the competitiveness and sustainability of the company.
2. Absence of independent directors or external advisors
The concentration of decision-making power within the family and resistance to incorporating independent voices leads to excessively personalised management, particularly when the founder remains at the helm. This dynamic, coupled with a lack of strategic planning, limits the company's ability to respond to crises affecting the family business.
3. Lack of a family protocol
The absence of formal agreements between partners on crisis management and the provision of resources in cash flow emergencies increases the company's vulnerability to insolvency scenarios. Protocols allow agreements to be established to protect the interests of the company in special situations, such as the need for extraordinary capital contributions in times of cash flow crises.
Legal framework for restructuring and insolvency
The 2022 insolvency reform has had an impact on restructuring plans designed to avoid insolvency proceedings, so that, through these plans, whether approved by the courts or not, companies are allowed to emerge from insolvency without having to file for bankruptcy.
At the same time, however, this reform has also brought about a significant change in the balance of power between debtors and creditors. It has considerably strengthened the power of creditors, allowing them to acquire the capital of the debtor company without the consent of the shareholders or directors, provided that the following requirements are met: (i) the company is currently or imminently insolvent, and (ii) there is a scenario of over-indebtedness, i.e. the debt exceeds the enterprise value, as assessed by a court-appointed expert.
In these circumstances, a group of creditors (representing the majority of the claims within at least one set of claims into which the company's liabilities can be divided) may obtain approval of a restructuring plan not agreed with the debtor company (i.e., a hostile plan) that allows them to:
- Acquire the capital of the debtor company without the consent of the shareholders or directors.
- Impose hostile plans, provided that the legal requirements are met: current or imminent insolvency and over-indebtedness.
- Bind the entire class of creditors, even if there is no unanimity, provided that the majorities required by law are met.
The exception is in the case of so-called small companies (fewer than 49 employees and turnover or balance sheet total of less than €10 million), which retain a right of veto against hostile plans.
The Celsa case is a paradigmatic precedent, as it was the first time that creditor funds presented a hostile plan to take control of the company through this legal mechanism.
Preventive strategies for family businesses
Given this scenario, it is essential that family businesses take preventive measures, in the event of anticipated insolvency, whether current or future, that allow them to retain corporate control. These measures include:
- Incorporating defensive clauses into financing agreements. Establishing restrictions on the transferability of credits and agreeing on pre-emptive rights in favour of partners or the company itself in the event of a discounted debt transfer.
- Early diagnosis and restructuring. Anticipate the diagnosis of financial difficulties and negotiate your own restructuring plan. The regulations allow such a plan to be imposed, subject to court approval, on dissenting creditors under certain conditions, which strengthens the company's position vis-à-vis third parties.
- Defence against hostile plans. The best defence is to present an alternative plan.
Otherwise, if creditors have taken the lead, the partners may first oppose the plan, if applicable, questioning compliance with legal requirements; the formation of classes of credits, the valuation of the company that is the basis for said plan, etc. And ultimately, the partners may challenge the court approval on the grounds, among other reasons, that: (i) the plan does not reasonably guarantee the viability of the company; (ii) there is unequal treatment between creditors, particularly if some receive shares with a value greater than their claims, to the detriment of the partners.
Despite their importance in the business world, family businesses have specific weaknesses that make them particularly vulnerable in times of crisis. Current insolvency regulations, which give creditors a predominant role in restructuring processes, reinforce the need for these companies to take a proactive approach to insolvency management.
Experience shows that early and carefully planned restructuring allows the company to preserve both its economic viability and family control over the company. Conversely, inaction can lead to the imposition of hostile plans that affect not only the financial structure, but also ownership and corporate governance.
In short, the new legal framework requires family businesses to anticipate the risks of insolvency through internal protocols, contractual defence mechanisms and, above all, the ability to lead their own restructuring processes. Only in this way can they safeguard their continuity and identity in the face of market dynamics and pressure from creditors.
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More information about Family Business
Javier Romano – Family Business Group
Partner in the commercial and intellectual property area
