Could Chapter 11 be a way forward for VW?
This is the third in a series of articles about corporate governance, using VW as an example.
Wolfsburg and Berlin, 11 Jan 2016, from our own correspondent.
In a surprise move initiated by the German Federal government, VW was this morning placed into bankruptcy protection against its creditors. The German bankruptcy code, similar to Chapter 11 in the USA, allows a company to continue trading while agreement is reached with creditors and legal claims settled. It’s expected that VW’s foreign subsidiaries will also be placed into bankruptcy protection under the relevant local laws.
VW shares have fallen sharply since the emissions scandal erupted in September and trading has now been suspended on the Frankfurt stock exchange. The VW supervisory board has been dissolved, with the company being run by a court-appointed administrator. But no job cuts or plant closures are expected.
Olaf Ehrlich, the German Minister for Economic Affairs, went out of his way to stress that the move does not presage VW’s demise, rather it being a step to restore the company to health. “VW is threatened with government fines, tax avoidance penalties, shareholder class-actions, consumer compensation claims and environmental lawsuits,” he said in a prepared statement this morning. “This action is to give workers, owners and suppliers confidence VW shall continue while claims are settled. We will not let this valuable company fail,” he continued, “it’s too important for Germany and everything that Made in Germany stands for. But there will be no state aid; VW will recover through its own efforts.” To that end, he also announced that VW is to be broken up.
The administrator who now leads VW outlined the strategic plan for the business in the press conference. “We will move as quickly as possible,” she explained, “to spin out Audi into a new listed entity to challenge BMW and Mercedes in the premium car segment. Similarly, Scania will merge with MAN and the combined entity floated. Other brands have been put up for sale and we already have expressions of interest from China and Italy in Skoda and SEAT. I am confident we will find a buyer for Bentley and Lamborghini,” she continued, “and there is a lot of interest from Private Equity funds in Ducati and in Porsche. Proceeds from the IPOs and company sales will boost VW’s cash resources, so we can settle all claims as soon as possible.” She emphasized that it was too early to say whether shareholders, bond holders and loan providers would receive any compensation but added, “VW will meet all financial, pension and salary obligations to staff and suppliers worldwide and VW will continue to design and build the best small and mid-range cars in the world.”
Last week, in a move that most likely triggered today’s extraordinary news, the main ratings agencies downgraded VW’s finance arm credit rating to junk status, making it almost impossible for VW to offer car loans on attractive terms to its customers.
VW shareholders are the big losers. Shares in Porsche Holding, whose largest asset is its holding in VW, have been suspended pending an announcement, with rumours circulating that the company has breached its banking covenants. In a blow to the Piëch and Porsche families, the financial problems most likely rule them out from making an offer for the Porsche car company they once owned.
Lower Saxony, another large shareholder, is furious. The Economics Minister issued a statement strongly criticising the move as “out of all proportion to what is needed, sensible or justifiable” and threatening legal steps for compensation from the federal government for the loss in the value of their VW shares. Qatar, another large shareholder, has so far refused to comment.
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This is fiction, but who knows? Few expected Lehman Brothers to collapse, for example. Breaking companies up may also stimulate economic activity, so Germany as a whole could benefit.
Most importantly, it would rid VW of its awful governance. TheVolkswagengesetz gives the Lower Saxony government — a 12.7% owner — a veto over change; the Mitbestimmungsgesetz gives rights to 46% of VW workers but no rights to the other 54%; and the Preference-Ordinary share structure gives 53.1% of the votes to the owners of just 16.8% of VW (the families own 50% of Porsche, which owns 33.7% of VW).
There is of course one other possible outcome for VW: they pay the fines and settle the lawsuits. The offending cars are fixed, business recovers and VW carries on pretty much as before, leaving absolute power with no accountability vested in people who cannot be changed or even challenged. That’s a time-bomb.
Bankruptcy could be the least bad option for VW.
