(Bloomberg) — In Germany, some small investors who lost everything on companies on the verge of insolvency are complaining that they haven’t been allowed to put more money into the collapsed businesses.

Battery maker Varta AG, auto supplier Leoni AG and communications-equipment company Mynaric AG all used a relatively new process known as StaRUG in the past few years to restructure their debts.

In each case, stockholders were wiped out and, when it came time for the company to seek fresh equity capital, they weren’t given rights to subscribe to new shares. In many cases, the companies allowed only big shareholders or major creditors to contribute new money, leaving minority equity investors indignant.

The result has been complaints on social media from shareholder advocates, as well as legal challenges to restructuring cases. Equity investors rebelled against the idea that they were excluded from the chance to participate in the potential recovery of the businesses. In the case of Varta, they’re now asking Germany’s constitutional court to rule in their favor in the coming months.

The complaints have mystified some restructuring experts, who point out that investing in distressed businesses is a risky proposition for small-time shareholders who, in most cases, have already been wiped out.

“Subscribing for new capital typically does not rescue their existing investment,” said Marlene Ruf, a partner at Milbank LLP in Munich who specializes in restructuring. “The existing investment in these situations is typically worth zero.” Individual investors shouldn’t forget the risks that come with new investments, she said, with their judgment “potentially overshadowed” by the perceived prospect of salvaging their old investment.

Advocates for small shareholders argue that they deserve a chance to participate in a potential recovery. They point to the restructuring of BayWa AG, an agriculture and renewables conglomerate: Under its plan, not only did banks and major shareholders provide new financing, but ordinary shareholders also had a chance to chip in.

“BayWa is a really positive signal,” said Holger Clemens Hinz, head of corporate finance at Quirin Privatbank. “From a stakeholder perspective: Why wouldn’t you want to include the shareholders that have remained with the company right until the end?”

That case may remain an outlier, however, since BayWa was in better shape than most StaRUG candidates. The company itself termed it a “StaRUG-light” approach: BayWa extended the maturities of its debt but didn’t reduce the amount that creditors would receive in repayment, and the company’s equity retained some value. The process essentially forced a tiny handful of recalcitrant creditors to comply.

Germany introduced StaRUG in 2021 as a way for companies to restructure their debts before they become insolvent. Unlike many insolvencies, management stays in control and no administrator is appointed.

Still, most companies going through the process would have otherwise ended up in insolvency, meaning shareholders have limited negotiating power as their investment is effectively worth zero.

The StaRUG outcomes have, however, long worried some in the equity markets, who fear that wipeouts could further deter still-reluctant German retail investors from investing in stocks.

The level of animosity reached such a height that, when the Düsseldorf Stock Exchange surveyed market participants in 2024 about the “most hated word” of the year, the winner was StaRUG.

“Criticism among shareholders is growing,” said Rolf Deml, managing director of the exchange. “When investors realize that, as in the aforementioned cases of Varta and Leoni, they will suffer a complete loss of capital, this does not inspire confidence.”

The case that has attracted the most scrutiny is Varta, which was briefly valued at more than €7 billion ($8.2 billion) as investors flocked to the supplier to Apple’s AirPods. Burdened with a heavy debt load, large dividends and misplaced investment bets, the company was forced to restructure in 2024.

Shareholders were wiped out. The new equity was split among a group of creditors, a Varta customer — sportscar maker Porsche AG – and the original majority stockholder, Austrian industrialist Michael Tojner. Minority investors failed in their legal efforts to appeal the restructuring, and now some are taking their complaint to the constitutional court.

A spokesperson for Varta didn’t respond to a request for comment. A spokesperson for Tojner declined to comment.

StaRUG’s impact on people’s property is incompatible with the German constitution, said Markus Kerber, who is representing 130 Varta shareholders in a complaint against the restructuring deal at the court in Karlsruhe.

The court still hasn’t said whether it will hear the case; Kerber said it could take several months for a decision. The court rejected a previous constitutional complaint, deciding it wasn’t clear that the decision violated the shareholders’ rights.

In an interview with the Frankfurter Allgemeine Zeitung, Tojner said it wouldn’t have been possible to include shareholders in the capital raise, as the company didn’t have audited accounts and thus couldn’t put together a prospectus.

In the case of the BayWa deal, there was a prospectus that enabled the company to raise equity from its shareholders. BayWa’s two major owners — German and Austrian agricultural cooperatives that are tied to the region’s savings banks — agreed to make up any shortfall.

In the end, the backstop wasn’t needed, with the company seeing an 89% takeup and raising about €179 million, according to a November statement. BayWa declined to comment.

Still, in the case of Varta, disgruntled investors contended that a new company could have raised the cash from minority shareholders, making the lack of accounts a moot point, according to court documents seen by Bloomberg News.

The regional court in Stuttgart, however, threw out the appeal, saying that the complainants hadn’t demonstrated that their alternative scenario was feasible.

For now, a major overhaul of the StaRUG law appears unlikely, with an increasing number of companies turning to the process to avoid a more costly insolvency.

“Individual shareholders losing their investments is not a consequence of the StaRUG, or the German legislator or the creditors,” said Milbank’s Ruf. “It reflects the inherent risk of an equity investment decision.”

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