Divesting business units

What we do

When a part of an organization starts making a loss, the decision may be made to divest business units. In this way, the well-performing parts of the organization are retained, while the loss-making parts are phased out and disposed of. When divesting a business unit, it is advisable to seek legal advice immediately. Our lawyers and legal experts review the potential risks together with the client and provide legal support.

Questions regarding the divestment of business units? Please contact us.

Divestment of business units within insolvency law

Divesting a loss-making business unit is often a tool to keep the rest of the company healthy and avert impending bankruptcy. Precisely during severe financial difficulties, the bar is set high: a transaction taking place shortly before bankruptcy is strictly assessed retrospectively. Within insolvency law, therefore, it is not just about the price, but above all about whether the divestment holds up against creditors and a potential bankruptcy trustee. Our lawyers and in-house counsel advise both international conglomerates selling a division and local entrepreneurs wishing to divest a single branch or activity. This page falls under our expertise in Insolvency Law.

Asset and liability transaction or share transfer?

Divesting a business unit can be done in roughly two ways. In a share transfer, the entire legal entity changes ownership, including all known and unknown debts and obligations. In an asset-liability transaction, only selected assets and – if agreed – a portion of the liabilities are transferred. To divest a loss-making unit, an asset transaction is usually chosen: the buyer acquires the valuable components, while the debts remain with the remaining company. This “cherry-picking” offers the buyer protection against hidden liabilities but requires careful documentation: each asset (inventory, contracts, intellectual property, licenses) must be transferred separately, and ongoing contracts and licenses often only transfer with the cooperation of the counterparty or the competent authority.

The bankruptcy clawback action: the greatest risk

The primary risk when divesting a business unit shortly prior to bankruptcy is the fraudulent conveyance (pauliana). Pursuant to Article 42 of the Bankruptcy Act, a trustee can annul a gratuitous legal transaction if the company knew or ought to have known that creditors would be prejudiced as a result. Additionally, Article 47 of the Bankruptcy Act addresses the satisfaction of due debts involving collusion or knowledge of a pending bankruptcy. If the divestment is annulled, the assets must be returned to the bankruptcy estate, whereas repayment of the purchase price does not always follow. Selling at a fair, substantiated market price and thorough written documentation are therefore essential. Our lawyers assess in advance whether a proposed transaction is resistant to fraudulent conveyance and how the risk of prejudice can be mitigated.

Transfer of undertaking and the position of employees

If an economic unit retains its identity during a divestment, this may constitute a transfer of undertaking within the meaning of Articles 7:662 and 7:663 of the Dutch Civil Code. In that case, the employees concerned transfer to the acquirer by operation of law, retaining their terms and conditions of employment – ​​the parties cannot contract this away. Outside of bankruptcy, this offers employees strong protection and can saddle the buyer with unexpected wage costs and protection against dismissal. Within a formal bankruptcy, these rules do not apply in principle, meaning that a restart from bankruptcy can be more flexible in terms of personnel. The legal boundary between the two situations is finely tuned; we map out in advance which employee rights are transferred and what employment law consequences the divestment entails.

Timing: dispose before or during bankruptcy

Time is the determining factor for value in a divestment. A transaction before bankruptcy prevents the “negative spiral” that arises after the declaration of bankruptcy: staff seek other work, suppliers cease deliveries, and customers withdraw, causing the business unit to lose value rapidly. At the same time, divesting in the “grey zone” before bankruptcy increases the fraudulent conveyance risk. A transaction through the bankruptcy trustee after the declaration of bankruptcy (for example, in the case of a restart) offers greater security against subsequent infringement, but generally yields a lower return and is conducted “as is,” without guarantees. Together with the client, we weigh the legal and commercial interests and choose the right moment and the right route.

Directors' liability upon divestment

A director who makes incorrect choices regarding a divestment runs the risk of personal liability. If certain creditors are deliberately paid while others are not (selective payment), or if value is withdrawn from the bankruptcy estate, this can lead to liability for the director, including on the grounds of tort and – in the event of bankruptcy – on the grounds of manifestly improper management (Article 2:248 of the Dutch Civil Code). We advise directors on how to structure a divestment carefully and demonstrably in the interest of the collective creditors. You can read more about this on our page regarding directors' liability.

Our approach and related processes

Divesting a business unit rarely stands alone. It is often part of a broader reorganization or serves as the prelude to a restart. Our mixed teams of lawyers and in-house counsel guide the entire process: from the strategic choice of which units to divest, through structuring (asset transaction or share transfer), the fraudulent conveyance test, and employment law implications, to the final transfer. Whether you are an international group or the baker around the corner, we translate legal risks into clear choices.