Public auc­tion (gover­nan­ce & audit trail) vs. work­out vs. distres­sed M&A: opti­mi­zed share sale

Deal Cer­tain­ty — Pri­ce Dis­co­very — Time-to-Clo­se

In the distres­sed or enforce­ment case, finan­ciers opti­mi­ze deal cer­tain­ty, pri­ce dis­co­very, time to clo­se and cost to exe­cu­te. The public auc­tion — under Ger­man law the public auc­tion — offers the effi­ci­ent, legal­ly com­pli­ant path for this: trans­pa­rent in the pro­cess, fast in exe­cu­ti­on (4–6 weeks), cost-opti­mi­zed, final in the result (award as an act of sove­reig­n­ty; no room for ren­ego­tia­ti­on).

Public auc­tion: fast, final, cost-trans­pa­rent

• In the case of non-per­forming expo­sures secu­red by shares, the public auc­tion pro­vi­des a tried and tes­ted pro­ce­du­re for fast and legal­ly com­pli­ant imple­men­ta­ti­on. Ger­ma­ny is based on codi­fied law, not case law. The legis­la­tor has defi­ned the regu­la­to­ry path in a bin­ding man­ner; the­re is no need for pages of cost-inten­si­ve con­tracts, as is com­mon in com­mon law juris­dic­tions.
• Cen­tral func­tion of the auc­tion­eer: The knock­down is a legal­ly for­ma­ti­ve act of sove­reig­n­ty (Sec­tion 1235 BGB). This results in deal cer­tain­ty exact­ly at the time of the knock­down, fixed, trans­pa­rent cos­ts, a short time to liqui­di­ty, non-dis­cri­mi­na­to­ry com­pe­ti­ti­on and an audi­ta­ble audit trail. This archi­tec­tu­re ensu­res relia­ble pri­ce dis­co­very — both for col­la­te­ral enforce­ment and vol­un­t­a­ry public auc­tions.
• Com­pa­ri­son with workout/distressed M&A: legal­ly com­pli­ant end­ga­me situa­ti­on, 4–6 weeks to accep­tance of bid, cal­culable cos­ts (wit­hout earn-outs, sub­se­quent pri­ce com­pon­ents, MAC clau­ses or con­di­ti­ons pre­ce­dent), no exe­cu­ti­on risk and relia­ble time to clo­se.
• Legal frame­work (from Janu­ary 1, 2025): § Sec­tion 383 BGB (new ver­si­on) defi­nes the public auc­tion; car­ri­ed out pri­ma­ri­ly by a publicly appoin­ted and sworn auc­tion­eer, also pos­si­ble digi­tal­ly (virtual/hybrid). Sove­reign respon­si­bi­li­ty and digi­tal orga­niza­ti­on are enshri­ned in law and pro­ce­du­ral­ly secu­red.
• Deli­mi­ta­ti­on of insol­ven­cy law: The BGH (27.10.2022 — IX ZR 145/21) has cla­ri­fied: The insol­ven­cy admi­nis­tra­tor’s right of rea­liza­ti­on pur­su­ant to sec­tion 166 InsO does not extend to “other rights”; an ana­lo­gy was rejec­ted. The fol­lo­wing the­r­e­fo­re appli­es to pled­ged com­pa­ny shares and rights of all kinds: Rea­liza­ti­on is gover­ned exclu­si­ve­ly by lien and auc­tion law, not by an exten­ded insol­ven­cy law regime.
• Tech­no­lo­gy & mar­ket archi­tec­tu­re: AI-sup­port­ed research/benchmarking tools increase objec­ti­vi­ty, eli­mi­na­te infor­ma­ti­on advan­ta­ges of indi­vi­du­al inter­me­dia­ries and empi­ri­cal­ly bench­mark pri­ce bands. But one thing remains: Exe­cu­ti­on risk always remains in the clas­sic deal. It is only com­ple­te­ly eli­mi­na­ted by the public auc­tion — becau­se the­re the knock­down acts as a final act of sove­reig­n­ty.

Deal con­text and valua­ti­on frame­work

Finan­ciers requi­re a legal­ly com­pli­ant, effi­ci­ent, and con­clu­si­ve pro­ce­du­re for the rea­liza­ti­on of pled­ged collateral—including share deals—as well as for the objec­ti­ve deter­mi­na­ti­on of value. As the out­co­me of open, non-dis­cri­mi­na­to­ry com­pe­ti­ti­on, the win­ning bid reflects the objec­ti­ve mar­ket value; for the pur­po­se of deter­mi­ning fair mar­ket value, tax aut­ho­ri­ties and the courts pri­ma­ri­ly rely on pri­ces actual­ly rea­li­zed in tran­sac­tions with third par­ties (Erb­StR R B 11.2; estab­lished case law of the Fede­ral Fis­cal Court/BFH). Pro­vi­ded the pro­cess is con­duc­ted pro­per­ly, the tax aut­ho­ri­ties gene­ral­ly reco­gni­ze the win­ning bid pri­ce.
The legal sta­tus of the publicly appoin­ted and sworn auc­tion­eer (Sec­tion 34b of the Trade Regu­la­ti­on Act [GewO] in con­junc­tion with the Auc­tion­eer Ordi­nan­ce [VerstV]) ensu­res neu­tra­li­ty, com­pli­ance with gover­nan­ce stan­dards, pro­cess inte­gri­ty, and a trans­pa­rent audit trail.

Exe­cu­ti­on and legal advan­ta­ges

• Legal con­for­mi­ty: Con­clu­si­on of con­tract by award of con­tract as an act of sove­reig­n­ty (Sec­tion 156 BGB); ren­ego­tia­ti­ons are sys­te­ma­ti­cal­ly excluded.
• Cre­di­tor pro­tec­tion: No rescis­si­on after knock­down (§ 156 BGB); sta­tu­to­ry exclu­si­on of war­ran­ty in the sale of pled­ges (§ 445 BGB); acqui­si­ti­on in good faith in the auc­tion envi­ron­ment pri­vi­le­ged (for mova­ble pro­per­ty § 935 para. 2 BGB; spe­cial law for shares).
• Speed & fina­li­ty: final situa­ti­on with a fixed dead­line; imme­dia­te clo­sing; same-day award invoice; real-time pay­ment obli­ga­ti­on; imme­dia­te trans­mis­si­on of trans­fer docu­ments.
• Time-to-clo­se: 4–6 weeks to award, wit­hout leng­thy con­tract cycles.

• Exe­cu­ti­on efficiency:Standardized, lean pro­ces­ses ins­tead of sequen­ces las­ting seve­ral months; VDR under NDA with KYC/AML gate; AI ana­ly­tics (benchmarking/scoring); stan­dar­di­zed con­tracts alre­a­dy in place (rea­dy-to-exe­cu­te).
• Cost effi­ci­en­cy / lower cost-to-exe­cu­te: lower cost-to-exe­cu­te thanks to stan­dar­di­zed pro­ces­ses and eli­mi­na­ti­on of nego­tia­ti­on over­heads

• Scope & com­pe­ti­ti­on: Announce­ment in accordance with Sec­tion 1237 BGB (with refe­rence to Sec­tion 383 (3) BGB new ver­si­on) ensu­res scope and trans­pa­ren­cy; con­fi­den­tia­li­ty is main­tai­ned via NDA-pro­tec­ted VDR.
• Gover­nan­ce & repu­ta­ti­on: impar­ti­al imple­men­ta­ti­on free of ins­truc­tions; docu­men­ted pro­ces­ses mini­mi­ze lia­bi­li­ty and repu­ta­ti­on risks.
• Digi­tal Rea­dy: Virtual/hybrid exe­cu­ti­on pos­si­ble (§ 383 BGB n. F.); surchar­ge regime accor­ding to § 7 VerstV; docu­men­ta­ti­on ensu­res audi­ta­bi­li­ty and veri­fia­bi­li­ty; digi­tal exe­cu­ti­on infra­struc­tu­re in place (audit-rea­dy).
• Cre­di­tor opti­ons: Co-bid­ding rights and off­set­ting opti­ons extend the stra­tegy cor­ri­dor (inclu­ding sec­tion 1239 BGB).
• Valua­ti­on robust­ness: Award pri­ce replaces expert opi­ni­on and is reco­gni­zed for tax pur­po­ses (Erb­StR R B 11.2; BFH).

Repu­ta­ti­on pro­tec­tion & gover­nan­ce effi­ci­en­cy

Espe­ci­al­ly in situa­tions clo­se to insol­ven­cy or when the­re is a high level of media atten­ti­on, pro­per publi­ci­ty crea­tes gover­nan­ce secu­ri­ty: Sec­tion 1237 of the Ger­man Civil Code gua­ran­tees mar­ket libe­ra­liza­ti­on, sen­si­ti­ve con­tent remains VDR-exclu­si­ve (NDA, qua­li­fi­ca­ti­on check). This mini­mi­zes the risk of obstruction/challenge, acce­le­ra­tes the pro­cess and increa­ses accep­tance of the result.

Fair­ness as an eco­no­mic con­trol fac­tor

Fair­ness acts as an eco­no­mic manage­ment tool in the finan­cial mar­ket: it influen­ces IC gates, repu­ta­ti­on assess­ments and regu­la­to­ry audit trails — and the­r­e­fo­re direct­ly influen­ces refi­nan­cing capa­bi­li­ty and capi­tal cos­ts. The public auc­tion ful­fills this cri­ter­ion sys­te­mi­cal­ly: trans­pa­rent com­pe­ti­ti­on, clear deal mecha­nics wit­hout ren­ego­tia­ti­on, veri­fia­ble pri­ce dis­co­very and a docu­men­ted audit trail. The result: gua­ran­teed deal cer­tain­ty, shorter time-to-clo­se and exit secu­ri­ty.

Myths vs. facts

Myth 1: Dama­ge to repu­ta­ti­on through public auc­tion
Fact: Reason is alre­a­dy known in the mar­ket; publi­ca­ti­on accor­ding to § 1237 BGB opens the mar­ket, VDR pro­tects con­fi­den­ti­al infor­ma­ti­on → com­pe­ti­ti­on wit­hout leaks, robust pri­ce dis­co­very.

Myth 2: Auc­tions are more expen­si­ve
Fact: Cos­ts can be cal­cu­la­ted from the out­set; buy­er pays pre­mi­um; no retai­ner or suc­cess fees, no “open-ended” fees → lower cost-to-exe­cu­te.

Myth 3: More bidders redu­ce the pro­ba­bi­li­ty of clo­sing
Fact: Qua­li­fied bidder field (KYC/AML, col­la­te­ral, bin­ding auc­tion con­di­ti­ons) increa­ses pri­ce dyna­mics and clo­sing abili­ty → no deal drift.

Myth 4: M&A offers grea­ter con­trol.
Fact: Com­ple­xi­ty crea­tes only the illu­si­on of con­trol. Lists of war­ran­ties, MAC clau­ses, and earn-outs pro­long pro­ces­ses. In a public auc­tion, Sec­tion 156 of the Ger­man Civil Code (BGB) estab­lishes the final, non-nego­tia­ble point of decis­i­on.

Myth 5: M&A achie­ves struc­tu­ral­ly hig­her pri­ces
Fact: Public auc­tion­eers have core com­pe­tence in acqui­si­ti­on and reach; in net of cos­ts & risks the public auc­tion is at least equi­va­lent, in distressed/pledge sce­na­ri­os regu­lar­ly supe­ri­or.

Key Takea­way: Deal Cer­tain­ty, Mar­ket Effi­ci­en­cy & Cost Opti­miza­ti­on

A public auc­tion is not a distres­sed fire sale but rather a mar­ket-effi­ci­ent allo­ca­ti­on pro­cess fea­turing trans­pa­rent pri­ce dis­co­very and a clear clo­sing mecha­nism. The award of the bid estab­lishes fina­li­ty wit­hout exe­cu­ti­on risk, and the time-to-clo­se is shorter than in bila­te­ral M&A pro­ces­ses. Stan­dar­di­zed pro­ce­du­res and the eli­mi­na­ti­on of nego­tia­ti­on over­head result in signi­fi­cant­ly lower tran­sac­tion cos­ts and impro­ved cost opti­miza­ti­on. The out­co­me is deal cer­tain­ty, capi­tal mar­ket via­bi­li­ty, cost effi­ci­en­cy, and effi­ci­ent value allocation—all groun­ded in theo­ry (auc­tion theo­ry, Milgrom/Wilson; 2020 Nobel Pri­ze) and legal­ly secu­red (§ 156 and § 935 para. 2 of the Ger­man Civil Code [BGB]).

About the aut­hors
Eber­hard Oster­may­er & Dr. Dag­mar Gold — gene­ral­ly publicly appoin­ted and sworn auc­tion­eers, Deut­sche Pfand­ver­wer­tung

Dis­clai­mer
This artic­le con­ta­ins gene­ral mar­ket and prac­ti­cal infor­ma­ti­on and does not con­sti­tu­te indi­vi­du­al legal or tax advice. An asset- and pro­cess-spe­ci­fic review is requi­red.