GM’s crash and US govt rescue throws up some tricky issues on both sides of the Atlantic. By Margaret Taylor
The world has got used to bad news over the past few months. When Lehman Brothers crashed last September, taking a raft of financial institutions with it, there was a feeling of panic in the air as every economy across the globe felt the repercussions. While the news was hugely damaging to the global economy, for a select band of transatlantic law firms – Linklaters and Sullivan & Cromwell among them – it resulted in instruction after instruction on top-quality mandates.
News of General Motors’ (GM) collapse and subsequent US government bail out did not instil quite the same sense of Armageddon as the banking crisis did, but for the law firms involved, the mandates are just as coveted (see box for the list of firms involved in the GM collapse and rescue). For the average man in the street the impact could actually be more acute.
DLA Piper insolvency partner Huw Dolphin, who is acting for a number of GM’s European suppliers, says: “Lehman was unprecedented, but banks don’t impact on many people’s worlds. GM does – it might be the jeep you’re driving or the garage down the road.”
Just as the collapse of countless financial institutions had a knock-on effect in the wider economy, with numerous businesses on both sides of the Atlantic falling into administration in the succeeding months, Dolphin believes that many of the suppliers that rely on GM for business could now face insolvency themselves.
That said, Denton Wilde Sapte insolvency head Mark Andrews feels that the impact from the collapse of GM (which along with fellow car manufacturer Chrysler received billions of dollars of US state loans in a bid to avoid bankruptcy) will be less severe because it is a US company.
“The US culture around Chapter 11 [GM filed for government-assisted bankruptcy protection on 1 June] means that it’s well understood by all stakeholders, and directors of troubled companies reach out for it readily.
“By contrast, administration is seen in the UK as so instantly value-destructive that a temporary filing for a business of comparable size would be discounted as an impossibility. We have no equivalent of debtor-in-possession financing, so short-term survival will be dependent upon continued support from existing lenders.
“The US stay on enforcement action, unlike ours, prevents the termination of contracts by customers and suppliers simply on grounds of insolvency.”
Despite this, the reorganised company that is expected to emerge from the Chapter 11 process later this year will bear little resemblance to the original GM, and while bankruptcy protection has helped buy the US business some time, it does not apply to the company’s large European arm. While Canadian company Magna International has stepped in with a rescue bid for GM Europe, which includes German business Opel and Vauxhall in the UK, for the lawyers involved these deals are far from straightforward.
As one City partner points out, while corporate insolvencies in general are quite predictable, in the case of GM politics are at play, which adds an extra level of uncertainty.
“When you get into the sphere of such a huge failure, governments are going to have direct involvement,” the partner says. “It’s very difficult to get a clear idea of where this bankruptcy is going to go.”
Although political wrangling is still ongoing in Europe – UK Business Secretary Peter Mandelson is keen for Magna to avoid as many UK job losses as possible – Dolphin at DLA Piper points out that the timing of deals such as the Magna one can be an issue for the lawyers involved.
“These sorts of deals don’t have a huge amount of time available,” he explains. “There’s a limit to how much can be achieved in such a short period.”
There is a long way to go before GM – a too-large-to-fail US company with global reach – is fully restructured. For the law firms involved, the months ahead are sure to be challenging.
Firms acting on GM issues
General Motors Corporation
Weil Gotshal & Manges partners Harvey Miller and Stephen Karotkin advising on negotiations with lenders, union members and the US government.
Dewey & LeBoeuf restructuring co-head Martin Bienenstock advising on aspects of the Chapter 11 filing.
Baker & McKenzie London corporate partner Charles Whiteford and Berlin corporate partner Peter Wessels advising on M&A.
Honigman Miller Schwartz & Cohn partner Norman Beitner advising on the sale of Hummer.
Clifford Chance Frankfurt partner Kolja von Bismarck and corporate counsel Stefan Sax advising on the restructuring of the business.
Weil Gotshal & Manges UK head Mike Francies advising on the UK aspects of the restructuring.
Gleiss Lutz partner Ulrich Soltesz advising on EU and state aid issues.
Baker & McKenzie German employment partner Guenther Heckelmann advising on employment and company law.
GM creditors and suppliers
Shearman & Sterling bankruptcy and reorganisation head Douglas Bartner.
DLA Piper insolvency partner Huw Dolphin.
Cadwalader Wickersham & Taft restructuring co-chair John Rapisardi and private equity head Ronald Hopkinson advising on GM bankruptcy.
Federal Republic of Germany
Shearman & Sterling partner Harald Selzner.
Gleiss Lutz Frankfurt partner Wolfgang Bosch advising on bid for GM Europe businesses.
Wellensiek Frankfurt partner Alfred Hagebusch advising company’s management.
Apitzsch partner Wolfgang Apitzsch advising the workers’ council.
Hengeler Mueller M&A partner Ingo Kloecker advising on the trustee structure between GM and Germany. Also advising on bridging loan.
Sichuan Tengzhong Heavy Industrial Machinery Co (acquired Hummer)
Shearman & Sterling Hong Kong partner Paul Strecker and Beijing partner Lee Edwards.
Chinese firm Jun He Law Offices.