Divesting business units

Divesting business units

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 as part of restructuring and insolvency

Divesting a business unit is rarely an end in itself. Often, it is an instrument within a broader restructuring and insolvency process: by separating a loss-making branch, the healthy core of the enterprise is saved and long-term survival is secured. When financial distress is severe, divestment becomes directly intertwined with themes such as reorganization, a creditors' agreement (WHOA), and, in extreme cases, a restart after bankruptcy. It is precisely in this context that the difference lies: a divestment that is sensible in calm waters can be challenged by the trustee just before bankruptcy. Our mixed teams of lawyers and in-house counsel are familiar with both worlds – from strategic corporate law to sharp insolvency law.

Asset and liability transaction or share transaction?

There are two main ways to divest a business unit. In an asset-liability transaction, the company transfers the individual assets and liabilities of the unit; the buyer and seller jointly determine exactly which assets (inventory, machinery, real estate, goodwill, contracts) and which liabilities are transferred. This is often attractive in a restructuring: the buyer leaves behind loss-making or risky parts, while the seller liquidates the healthy parts. In a share transaction, an entire subsidiary – including all assets, liabilities, and hidden risks – is transferred in one go. Each route has its own legal and tax implications: in an asset-liability transaction, the book profit is immediately subject to corporate income tax, whereas the buyer can depreciate goodwill. We map out in advance which structure suits your objective, whether you are an international group or the entrepreneur around the corner.

Transfer of undertaking: what happens to the staff?

A frequently underestimated risk when divesting a business unit is the transfer of undertaking. If the identity of the unit is preserved, Article 7:662 and subsequent articles of the Dutch Civil Code (BW) apply. Pursuant to Article 7:663 BW, the employees of that unit then transfer to the buyer by operation of law—retaining all their terms and conditions of employment. The buyer cannot contractually exclude this. Furthermore, the former employer remains jointly and severally liable for obligations arising prior to the transfer for one year after the transfer. In the event of bankruptcy, the rules are different: pursuant to Article 40 of the Bankruptcy Act, the trustee can terminate employment contracts, meaning that in principle, employees do not automatically transfer in the event of a restart following bankruptcy. We assess whether a transfer of undertaking has taken place and what consequences this has for your cost structure.

Contracts, creditors and securities

In an asset and liability transaction, contracts do not automatically transfer: the cooperation of the counterparty concerned is required for the assignment of contracts (Article 6:159 of the Dutch Civil Code). Important supplier, lease, and financing contracts must therefore be mapped out in a timely manner and, where necessary, renegotiated. The position of creditors also deserves attention: the divestment of valuable assets must not come at the expense of creditors' recovery options. If the asset is divested via a legal demerger (Article 2:334a of the Dutch Civil Code), creditors have a statutory right of objection. Our legal experts ensure that securities, joint and several liabilities, and ongoing obligations are settled properly, so that no surprises arise afterwards.

Pauliana and directors' liability: the insolvency pitfall

This is where the insolvency angle becomes sharp. If you dispose of a business unit while bankruptcy is imminent, the transaction can be challenged retrospectively. Under the bankruptcy avoidance action (Article 42 of the Bankruptcy Act), a trustee can annul a gratuitous legal act if creditors have been prejudiced as a result and the parties knew or ought to have known this. If you sell a valuable unit at too low a price or to an affiliated party, that risk is lurking. In addition, the management runs the risk of directors ' liability: in the event of manifestly improper management that is a major cause of the bankruptcy, the trustee can hold the management liable for the deficit in the bankruptcy estate under Article 2:248 of the Dutch Civil Code. A carefully documented, businesslike disposal at a fair price is therefore not a luxury, but pure risk management.

Our approach to divesting business units

Whether you are a large corporation divesting a non-core division or an SME entrepreneur looking to save the healthy core – our lawyers and in-house counsel work in mixed teams and provide strategic and legal input. We map out the transaction structure, tax implications, personnel consequences, and insolvency risks in a coordinated manner, draft the agreements, and oversee their execution. This prevents a sound business decision from being legally reversed later on. Questions about divesting a business unit? Feel free to contact us for a no-obligation consultation.