- Juanita Schwartzkopf
Becoming a Stalking Horse Bidder
Of the 25,430 commercial bankruptcy filings from January to September of 2020, Chapter 11 bankruptcy filings were 21.7% of the total filings. The majority of Chapter 11 bankruptcy cases do not result in a successful reorganization. In the last couple of decades, more and more bankruptcy cases are filed to facilitate 363 sales. The 363 sale process allows going concern values to be maximized. Because assets are sold free and clear of liens through the 363 sale process, many businesses file for Chapter 11 to facilitate a sale.
Being a stalking horse bidder in a Chapter 11 case can be a straightforward process that provides financial and legal protections for the buyer.
What is a 363 sale?
A 363 sale is a sale of all or part of the assets of a business that is under the bankruptcy court’s jurisdiction. The debtor in bankruptcy will:
Market the business to potential buyers.
Negotiate an asset purchase agreement with a stalking horse bidder and file that agreement with the court as part of a motion with the court to approve a stalking horse bid, auction procedures and the ultimate free and clear sale.
Conduct the auction.
Participate in the sale approval hearing.
Close the sale.
The 363 sale process provides many benefits in addition to the free and clear purchase of assets. These include:
The sale process is clearly identified. This includes a specific timeline leading to a closing.
The asset purchase agreement is detailed and approved by the court.
The costs expended during the due diligence period may be recovered via expense reimbursement and/or a break-up fee if the stalking horse bidder is not the successful buyer.
The bid procedures are often negotiated to be favorable to the stalking horse bidder.
The level of transparency in a 363 sale process may make some potential buyers uncomfortable, but if a buyer understands the process and hires legal and financial advisors for support through the process, a 363 sale has numerous advantages for all parties. One of the key advantages is the free and clear sale order that is generally obtained from the bankruptcy court.
What should a stalking horse bidder consider?
The stalking horse bidder is often an active participant in the preparation of the asset purchase agreement and the bid, auction and sale procedures. These documents may include a reimbursement of reasonable expenses or break-up fee. The amount reimbursed is usually capped at a dollar amount or a percentage of the purchase price. Each judge and court may have different approaches to expense reimbursement and break-up fees, but the opportunity to recover reasonable expenses is available to the stalking horse bidder.
Often the expense reimbursement and/or break-up fee will be paid to a stalking horse bidder, if the stalking horse is not the successful bidder, at the time of the closing of the sale transaction. This is an important provision to negotiate because otherwise the stalking horse bidder runs the risk that the bankruptcy estate does not have adequate funds to make payment.
A rule of thumb for expense reimbursement and breakup fees is approximately 3% of the purchase price, but under the case law the facts matter. If the fees are carefully limited and structured, the creditor’s committee and the US trustee, who are the most likely parties to object to these fees, are much less likely to have a basis on which to object.
Bid procedures are an area where a stalking horse bidder may be able to gain advantages over other potential bidders. The court, the creditor committee(s), and the US trustee may object to terms they see as chilling the bidding process, but a stalking horse bidder should work with legal and financial advisors to be creative and proactive related to the bidding procedures. Minimum overbid amounts and separating assets into bid lots are aspects of the bid procedures that a stalking horse bidder should consider trying to influence. Timelines and speed to close may also be favorable considerations for the stalking horse.
The Stalking Horse Has Advantages
The purchase of all or part of a business using the 363 sale process in bankruptcy is an important tool for purchasers of distressed businesses to consider. The free and clear transfer of title to assets, coupled with proactive negotiations of the purchase and sale agreement, and bid and auction procedures, can create a transaction that either results in the purchase of a business, or the reimbursement of costs or payment of a break-up fee upon the closing of the sale transaction if the stalking horse is not the successful buyer. In some instances, the creditor committee(s) may ultimately prefer the stalking horse bidder as the purchaser due to the relationships built during the sale process and the known ability to close the transaction timely.
Become familiar with the 363 sale process and hire legal and financial advisors who are experienced helping buyers through the court process. Now let’s find a business to buy!