Does pre‐packed bankruptcy create value? An empirical study of postbankruptcy employment retention in The Netherlands

• Author: Jan Adriaanse,Frank Van Wersch,Henrick Aalbers,Gert‐Jan Boon,Jean‐Pierre Rest,Reinout Vriesendorp
• Date: 01 December 2019
• Published date: 01 December 2019
• DOI: http://doi.org/10.1002/iir.1353

RESEARCH ARTICLE

Does pre-packed bankruptcy create value? An

empirical study of postbankruptcy employment

retention in The Netherlands

Henrick Aalbers

1

| Jan Adriaanse

2

| Gert-Jan Boon

3

|

Jean-Pierre van der Rest

2

| Reinout Vriesendorp

2,3

| Frank Van Wersch

1

1

Centre for Organization Restructuring,

IMR, Radboud University, Nijmegen, The

Netherlands

2

Department of Business Studies, Leiden

Law School, Leiden, The Netherlands

3

Department of Company Law, Leiden Law

School, Leiden, The Netherlands

Correspondence

Jean-Pierre van der Rest, Department of

Business Studies, Leiden Law School, The

Netherlands.

Email: j.i.van.der.rest@law.leidenuniv.nl

Abstract

In recent years, there has been growing interest in whether

pre-packed bankruptcy can be a mechanism through

which firms facing imminent insolvency can preserve

value. Although an extensive body of literature exists on

“pre-packs,”whether such techniques really preserve

value remains ambiguous. By analysing bankruptcy pro-

ceedings filed with Dutch courts in the period 2012–2018

through the lenses of real options and debt overhang the-

ory, we examined employment retention postbankruptcy

as a consequence of the type of bankruptcy proceeding

(pre-packed bankruptcy and conventional bankruptcy) and

the severity of prebankruptcy financial distress. The

results show that in the Netherlands, a pre-packed bank-

ruptcy, when compared with a conventional bankruptcy

proceeding, positively impacts employment retention rates

after bankruptcy. The severity of financial distress before

bankruptcy does not affect employment retention rates

postbankruptcy. This implies that despite the amount of

resource slack, the preservation of employee value is bet-

ter served under a pre-packed bankruptcy than a conven-

tional bankruptcy proceeding. This finding is important

for insolvency practice, as up to 22 June 2017, employee

rights in the Netherlands (including redundancy) were not

Received: 15 July 2019 Revised: 20 October 2019 Accepted: 31 October 2019

DOI: 10.1002/iir.1353

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in

any medium, provided the original work is properly cited.

© 2019 The Authors. International Insolvency Review published by INSOL International and John Wiley & Sons Ltd

Int Insolv Rev. 2019;

28:320–339.

320 wileyonlinelibrary.com/journal/iir

considered to be automatically transferred to the firm

acquiring the bankrupt debtor's assets when a pre-packed

bankruptcy was applied. Implications for insolvency regu-

lation and practice are discussed.

1|INTRODUCTION

Firms that find themselves in dire circumstances can improve their situation by proactively

implementing strategic change to stem survival-threatening performance decline.

1

Asset res-

tructuring, as one of four common restructuring strategies,

2

is a way to initiate strategic change and

to respond to imminent threats and opportunities in the business environment.

3

However, exit bar-

riers can arise when (firm-)specific assets are difficult to trade or transfer or have environmental con-

cerns or other attributes that hinder a fair valuation. If this is the case, firms may have difficulty

implementing strategic change without experiencing value-destroying disruptions to their opera-

tions.

4

For these firms, strategically filing for a bankruptcy proceeding can provide a mechanism to

renegotiate unfavourable relationships with stakeholders, possibly due to unforeseen and uncontrolla-

ble events in the external environment. This will reduce transaction costs in cases where contract pro-

visions do not allow firms to renegotiate when unforeseen events occur.

5

In the strategic management literature, these filings for a type of bankruptcy proceeding are

referred to as “strategic bankruptcy,”which refers to the use of bankruptcy as a mechanism to enable

firms to implement strategic changes to relationships with customers, suppliers, or other stakeholders

in a manner that positively alters the firms' likelihood of sustainable performance improvements and

survival. A common element found in the literature on “strategic bankruptcies”is the perception that

they are pursued to deal with a single problem, such as high-cost long-term leases. Moreover, as

Moulton and Thomas report, firms that file for a bankruptcy proceeding to resolve a single strategic

1

See, e.g., Kathryn Harrigan and Michael Porter, “End-Game Strategies for Declining Industries”(1983) 61 Harvard Business

Review 111; Dominic Lim et al., “Rethinking the Effectiveness of Asset and Cost Retrenchment: The Contingency Effects of a

Firm's Rent Creation Mechanism”(2013) 34 Strategic Management Journal 42; Rick Aalbers, “Rewiring the Intrafirm

Network Under Downsizing: The Role of Tie Loss on Discretionary Tie Formation”(2018) Long Range Planning

(forthcoming); Bert Morrow Jr, Richard Johnson and Lowell Busenitz, “The Effects of Cost and Asset Retrenchment on Firm

Performance: The Overlooked Role of a Firm's Competitive Environment”(2004) 30 Journal of Management Studies 189;

Hugh O'Neill, “An Analysis of the Turnaround Strategy in Commercial Banking”(1986) 23 Journal of Management Studies

165.

2

Jim Lai and Sudi Sudarsanam, “Corporate Restructuring in Response to Performance Decline: Impact of Ownership,

Governance and Lenders”(1997) 1 European Finance Review 197.

3

See, e.g., Irene Duhaime and John Grant, “Factors Influencing Divestment Decision-Making: Evidence from a Field Study”

(1984) 5 Strategic Management Journal 301; Michael Hitt, Jeffery Harrison and Duane Ireland, Mergers and Acquisitions: A

Guide to Creating Value for Stakeholders (Oxford University Press, 2001); Robert Hoskisson and Michael Hitt,

Downscoping: How to Tame the Diversified Firm (Oxford University Press, 1994); Constantinos Markides, “Consequences of

Corporate Refocusing: Ex ante Evidence”(1992) 35 Academy of Management Journal 398.

4

Sharon James, “Strategic Bankruptcy: A Stakeholder Management Perspective”(2016) 69 Journal of Business Research 492.

5

See Oliver Williamson, “Transaction Cost Economics: The Governance of Contractual Relations”(1979) 22 Journal of Law

and Economics 233; Oliver Williamson, “Comparative Economic Organization: The Analysis of Discrete Structural

Alternatives”(1991) 36 Administrative Science Quarterly 269.

6

Wilbur Moulton and Howard Thomas, “Bankruptcy as a Deliberate Strategy: Theoretical Considerations and Empirical

Evidence”(1993) 14 Strategic Management Journal 125.

AALBERS ET AL.321