Quick assistance for the startup scene by the German Parliament?

The options provided by the Act to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal procedure law ("Act") for startups.

The spread of the SARS CoV-2 virus ("COVID-19 pandemic") not only affects our society but also our economy with major impact. The German startup scene is particularly affected. A survey conducted by the Startup Advisory Council at the Lower Saxony Ministry of Economics revealed that two thirds of the startups fear for their existence because of the measures taken against the COVID-19 pandemic. There is talk of sales declines of up to 90%. In order to mitigate the consequences of state regulations for the economy, the Federal Government passed a bill on 23 March 2020 to mitigate these consequences, which was unanimously adopted by the German Parliament on 25 March 2020. But startups have different ways of functioning than the companies the Federal Government and the Parliament had in mind resolving their aid programs. For startups even in good times, liquidity is a scarce commodity, because all capital is invested exclusively in growth and reserves are only formed in exceptional cases. So does the Act miss the needs of startups? The following trends of the Federal Government can be identified: Later-stage startups (with a financing round concluded since 1 January 2017 with a valuation of at least EUR 50 million post-money) are likely to receive direct liquidity support. We will publish our own paper on this option within the next few days. The earlier-stage startups will only receive flanking measures. At this point, we would like to outline the few relevant provisions where the startup scene can benefit from the new Act:

1. Avoidance of insolvency  

(a) The obligation to file for insolvency is suspended until 30 September 2020 if the insolvency maturity is due to the consequences of the COVID-19 pandemic.  

(b) The right of a creditor to file for insolvency proceedings shall be suspended for a period of three months from the date of this Act coming into force.  

(c) Incentives are created to provide companies with new liquidity despite the economic imbalance that has arisen, without making an immoral contribution to delaying insolvency.

2. Right to refuse performance on continuing contractual obligations  

(a) Startups that are micro-enterprises (up to 10 employees, EUR 2 million turnover/balance sheet total) will be granted a right of refusal to perform in the case of continuing obligations if they are unable to fulfil their obligations due to the COVID-19 pandemic.  

(b) But: also and especially consumers can refuse performance accordingly. This may lead to considerable losses for B2C startups with subscription models.

3. Limitation of termination rights regarding lease agreements 

The landlord's right of termination will also be restricted for commercial leases due to rental debts between 1 April 2020 and 30 June 2020. The same applies to tenancy agreements.

4. Deferral of payment obligations from loan agreements 

(a) Consumers are granted a statutory deferral of lenders' claims for repayment, interest and principal payments for a period of three months.  

(b) The Federal Government is authorized to extend the scope of this provision to micro-enterprises by decree. If and when the Federal Government will implement such decree has not been decided.

The Act to mitigate the consequences of the COVID-19 pandemic constitutes a few options, at least for the micro-enterprises among the startup eco-system, to counter the economic consequences of the COVID-19 pandemic. But even these will not be satisfied by those measures. For the later-stage startups, on the other hand, a completely different solution is required, although most of them were not originally intended to fall within the scope of the Economic Stabilization Fund (Wirtschaftsstabilisierungsfonds) that was set up. Following recommendations by the Accounts Committee of the German Parliament, the draft law on the Economic Stabilization Fund was amended. The Economic Stabilization Fund' liquidity should now also be accessible to certain startups. This applies to startups which have achieved a valuation of at least EUR 50 million post-money in at least one completed financing round with private investors since 1 January 2017. 

We are closely monitoring this development and are publishing a separate paper on this subject as part of this series. First and foremost, it will be key that the further equity injections are secured for all startups. It remains to be seen whether the whole startup eco-system will have access to the liquidity support of the Economic Stabilization Fund or if other options will be created by the Federal Government.

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