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363 transaction bankruptcy

363 transaction bankruptcy

Jun 01,  · June 1, If your company is on the cusp of bankruptcy because of the downturn, you might consider selling all or some of your assets under Section of the U.S. bankruptcy code rather than go through Chapter You can often sell more quickly and for higher valuations and investors can buy free and clear of liens and other encumbrances, bankruptcy and insurance specialists say. Aug 30,  · August 30, Businesses struggle and bankruptcies are filed for a number of reasons, regardless of the economic climate. While unfortunate, this provides opportunities for others to purchase assets of distressed companies through the bankruptcy process. A sale under Section of the United States Bankruptcy Code ("Section Sale") can provide a useful tool for distressed . Section transactions (named for the relevant part of Chapter 11 of the Bankruptcy Code) are sales of assets outside the debtor’s (i.e., the seller’s) ordinary course of business that are conducted as part of an in-court bankruptcy proceeding. 363 transaction bankruptcy

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Please provide a professional email:. Access to Justice. Asset Management. Capital Markets. Class Action. Commercial Contracts. Consumer Protection. Government Contracts. The intellectual property rights included in the sale, which can be subject to many restrictions under the Bankruptcy Code. Due Diligence Overall, the bankruptcy process affects the fundamental approach taken towards due diligence, with respect to the review of the assets bought and the liabilities related to such assets Due diligence of the assets is crucial in section sales for several reasons.

The asset purchase agreement typically contains the following disclaimers: A warranty disclaimer, disclaiming any representation or warranty of any kind, whether express or implied, concerning merchantability, fitness for a particular purpose or compliance with applicable laws or regulations.

A representations disclaimer, disclaiming liability for any inaccuracy in the description of assets. Liabilities Due diligence with respect to the liabilities attached to the assets is generally less of a concern in section sales than in non-bankruptcy sales because assets are sold free and clear of liens and most liabilities see Free and Clear of Interests.

The buyer should obtain an independent report on filings of: UCC-1 financing statements. Tax liens. Real estate tax liens. Personal property tax liens. Fixture filings. Judgment liens. Therefore, prospective buyers should be aware that the following items reduce the value of the bid and make it more difficult to value and compare to other bids: Bids consisting of non-cash consideration, such as stock or notes.

Offers for less than all of the assets. Offers that specifically exclude certain liabilities relating to the assets such as labor agreements, pension plans or employee benefit programs. Material closing conditions, such as a material adverse change. Cure costs and damage claims in connection with executory contracts and leases. Stalking Horse Bidding In an emerging trend, some winning bidders are providing value to unsecured creditors in the form of equity ownership in the sold assets which occurred in the bankruptcies of General Motors, Chrysler and Polaroid, among others.

The advantages of being the stalking horse include: Due diligence. The stalking horse has more time to conduct due diligence, which is crucial in a section sale see Due Diligence. Setting the baseline. The stalking horse sets the floor price, basic contract terms and structure of the transaction. It negotiates the form of the asset purchase agreement that is likely to be the template for other bidders. This gives the stalking horse the unique opportunity to negotiate for contract terms that are particularly important to it, that it otherwise would likely not obtain.

Also, the stalking horse may be more comfortable accepting more debtor-friendly contract terms than other bidders because it has conducted more due diligence. This makes it difficult for competing bidders to alter the stalking horse contract in ways that make their bids more attractive. Also competing bidders have limited ability to negotiate the asset purchase agreement negotiated by the stalking horse because any changes sought may cause the bid to be disqualified see Bidding Procedures.

Regulatory issues. In a regulated industry, the stalking horse has more opportunity to work with regulators to develop a plan to obtain approval of the sale, as well as a head-start on seeking approvals and the ability to start the running of waiting periods before the auction process. Strategic relationships. Obtaining their support and commitment can give the stalking horse a competitive edge over competing bidders.

Deal protections. To induce potential bidders to act as the stalking horse, they are given various incentives to compensate them for the risk of losing the auction, such as break-up fees and topping fees. Bidding procedures. In connection with its negotiation of the asset purchase agreement, the stalking horse is involved in formulating and negotiating the procedures governing bidding in the auction.

Bidding procedures determine the fundamental terms of the auction, such as the timing of the process, who can participate in the auction and the nature and form of qualifying bids see Bidding Procedures. They not only set the stage for the sale process, but can also impact its outcome. Negotiating the bidding procedures is a key advantage because it provides the stalking horse with an opportunity to inhibit competition.

The disadvantages of being the stalking horse include: Time and expense. The stalking horse invests a significant amount of effort and expense conducting due diligence, negotiating the deal and preparing documents for a transaction that will be shopped later for a higher and better offer. There is no guarantee that the stalking horse will win the auction and much of its investment is used for the benefit of competing bidders.

Although an unsuccessful stalking horse typically receives a break-up fee and expense reimbursement fee see Deal Protections , they may not adequately reimburse the stalking horse for its transaction expenses, such as professional fees, bank fees and other related fees incurred in connection with negotiating the asset purchase agreement. Competing for the stalking horse position is expensive as well, and in that phase of the sale process, there is no compensation to a losing competitor.

Reputational damage if unsuccessful. There is a reputational cost associated with losing a deal in bankruptcy court, which is a public forum. Late and non-conforming bids. The bankruptcy process is informal and unpredictable. In order to obtain maximum value for the assets, courts may be willing to entertain late and nonconforming bids, despite court-approved bidding procedures see Bidding Procedures.

The stalking horse can be outbid even while it is preparing for closing if a higher and better offer emerges before the sale is officially approved by the court. Risk of overbidding. Binding bid. The stalking horse is bound by its agreement, which typically contains few outs and contingencies, while the debtor is not bound until the sale is approved by the court. The court auction process reduces the chance that the deal with the stalking horse will be successfully closed.

Court approval. Deal protections and bidding procedures must be approved by the bankruptcy court. Courts carefully scrutinize deal protections because they impose an expense on the estate. Accordingly, bankruptcy courts tend to use much stricter standards to evaluate deal protections in section sales than those used by other courts in sales outside of bankruptcy.

Other interested parties also scrutinize deal protections and bidding procedures to ensure they promote competitive bidding and do not unreasonably favor the stalking horse. As a result, deal protections for the stalking horse can be less than what could be obtained in a non-bankruptcy sale.

The stalking horse often obtains some of following deal protection terms: Break-up fee. A fixed amount payable to the stalking horse if the sale is made to another bidder to compensate the stalking horse for lost opportunity costs. Other aspects of the break-up fee can be negotiated, including: Expense reimbursement fee. Typically an amount up to a specified cap payable to the stalking horse to reimburse it for its actual, out-of-pocket due diligence expenses.

The cap is generally based on the expected intensity of due diligence and the complexity of the transaction. It is usually triggered by the same conditions as the break-up fee.

Topping fee. Alternatively, the stalking horse can sometimes credit any topping fee it would otherwise be entitled to receive against the purchase price if it participates in the auction and submits the winning bid. This means they are determined to be actual and necessary costs of preserving the estate and are paid before most all other unsecured claims. Some typically negotiated aspects of bidding procedures include: Minimum overbids. A minimum specified amount by which any competing bid must exceed the earlier bid.

In other words, bidders are required to make overbids in minimum increments. Subsequent bids must exceed the existing bid by just the minimum overbid amount. Bid deadline. Competing bids must be submitted a minimum number of days in advance of the auction. Stalking horses favor short deadlines because this makes it difficult and expensive for potential bidders to complete the necessary due diligence, obtain any required regulatory approvals or secure financing. This can impact the ability of potential bidders to compete in the auction.

Late bids. The stalking horse should insist on a provision stating that the debtor will not consider or accept bids submitted after the bid deadline. However, courts do not always enforce this provision in the interest of maximizing the purchase price s ee In re Women First Healthcare, Inc. Used to demonstrate the good faith of competing bidders and to signify that these bidders can meet their bid obligations.

Bidder qualification. In addition to requiring the posting of a deposit, prospective bidders must demonstrate that they have the financial ability to complete the transaction. This typically requires the prospective bidder to submit their most recent audited and unaudited financial statements. If the bidder is an acquisition vehicle, typically its equity investors must submit their financials and a written commitment.

Bid qualification. The terms and conditions of competing bids must be the same as, or substantially similar to, those agreed to by the stalking horse. For ease of comparability, bids for asset groupings different than the group of assets to be bought under the agreement with the stalking horse are often not permitted.

Bidding procedures also commonly require that competing bids be irrevocable with limited closing conditions, often specifically precluding financing, due diligence and regulatory approval conditions. Right of first refusal. Also known as a last look provision, a right of first refusal grants the stalking horse the right to match any higher bids. Sometimes the stalking horse can credit any topping fee, break-up fee or expense reimbursement fee it would otherwise be entitled to receive against the final purchase price.

Both approaches should produce the same result. The treatment of these fees when the stalking horse competes in the auction is usually not addressed explicitly in the bidding procedures. Changes to bidding procedures. A stalking horse with substantial leverage should insist that the debtor cannot materially modify the bidding procedures without its consent and a court order. Otherwise, the bidding procedures usually permit the debtor to supplement or modify the bidding procedures if the terms of the bidding procedures order or the asset purchase agreement are not violated.

Courts are divided over which standard of review to apply in approving bidding incentives: Business judgment rule. Second Circuit courts including the Southern District of New York apply a relatively lenient business judgment standard, presuming bidding incentives are valid unless there is evidence of self-dealing.

In applying this standard, courts consider whether fees deter or encourage bidding and whether the amount of the fee is reasonable in relation to the proposed purchase price see Official Comm. Integrated Res. In re Integrated Res. Elliot Mgmt. Best interests of the estate test. Other courts apply the best interests of the estate test. This is a higher standard than the business judgment rule and focuses on whether the bidding incentive at issue and the transaction, as a whole, make economic sense and are in the best interests of the estate see In re Wintz Cos.

Nut Co. Airlines, Inc. Administrative expense test. Third Circuit courts including the District of Delaware apply the most restrictive test, which requires satisfying the standards for allowance of an administrative expense claim.

Under this approach, the bidding incentive in question must be actually necessary to preserve the value of the estate implying that approval of the break-up fee must be a condition to the bid see Calpine Corp. There is a reputational cost associated with losing a deal in bankruptcy court, which is a public forum. Late and non-conforming bids. The bankruptcy process is informal and unpredictable. In order to obtain maximum value for the assets, courts may be willing to entertain late and nonconforming bids, despite court-approved bidding procedures see Bidding Procedures.

The stalking horse can be outbid even while it is preparing for closing if a higher and better offer emerges before the sale is officially approved by the court. Risk of overbidding. Binding bid. The stalking horse is bound by its agreement, which typically contains few outs and contingencies, while the debtor is not bound until the sale is approved by the court. The court auction process reduces the chance that the deal with the stalking horse will be successfully closed.

Court approval. Deal protections and bidding procedures must be approved by the bankruptcy court. Courts carefully scrutinize deal protections because they impose an expense on the estate.

Accordingly, bankruptcy courts tend to use much stricter standards to evaluate deal protections in section sales than those used by other courts in sales outside of bankruptcy. Other interested parties also scrutinize deal protections and bidding procedures to ensure they promote competitive bidding and do not unreasonably favor the stalking horse.

As a result, deal protections for the stalking horse can be less than what could be obtained in a non-bankruptcy sale. The stalking horse often obtains some of following deal protection terms: Break-up fee.

A fixed amount payable to the stalking horse if the sale is made to another bidder to compensate the stalking horse for lost opportunity costs. Other aspects of the break-up fee can be negotiated, including: Expense reimbursement fee. Typically an amount up to a specified cap payable to the stalking horse to reimburse it for its actual, out-of-pocket due diligence expenses.

The cap is generally based on the expected intensity of due diligence and the complexity of the transaction. It is usually triggered by the same conditions as the break-up fee. Topping fee. Alternatively, the stalking horse can sometimes credit any topping fee it would otherwise be entitled to receive against the purchase price if it participates in the auction and submits the winning bid. This means they are determined to be actual and necessary costs of preserving the estate and are paid before most all other unsecured claims.

Some typically negotiated aspects of bidding procedures include: Minimum overbids. A minimum specified amount by which any competing bid must exceed the earlier bid. In other words, bidders are required to make overbids in minimum increments. Subsequent bids must exceed the existing bid by just the minimum overbid amount.

Bid deadline. Competing bids must be submitted a minimum number of days in advance of the auction. Stalking horses favor short deadlines because this makes it difficult and expensive for potential bidders to complete the necessary due diligence, obtain any required regulatory approvals or secure financing.

This can impact the ability of potential bidders to compete in the auction. Late bids. The stalking horse should insist on a provision stating that the debtor will not consider or accept bids submitted after the bid deadline. However, courts do not always enforce this provision in the interest of maximizing the purchase price s ee In re Women First Healthcare, Inc. Used to demonstrate the good faith of competing bidders and to signify that these bidders can meet their bid obligations.

Bidder qualification. In addition to requiring the posting of a deposit, prospective bidders must demonstrate that they have the financial ability to complete the transaction. This typically requires the prospective bidder to submit their most recent audited and unaudited financial statements. If the bidder is an acquisition vehicle, typically its equity investors must submit their financials and a written commitment. Bid qualification.

The terms and conditions of competing bids must be the same as, or substantially similar to, those agreed to by the stalking horse. For ease of comparability, bids for asset groupings different than the group of assets to be bought under the agreement with the stalking horse are often not permitted.

Bidding procedures also commonly require that competing bids be irrevocable with limited closing conditions, often specifically precluding financing, due diligence and regulatory approval conditions. Right of first refusal. Also known as a last look provision, a right of first refusal grants the stalking horse the right to match any higher bids.

Sometimes the stalking horse can credit any topping fee, break-up fee or expense reimbursement fee it would otherwise be entitled to receive against the final purchase price. Both approaches should produce the same result. The treatment of these fees when the stalking horse competes in the auction is usually not addressed explicitly in the bidding procedures. Changes to bidding procedures. A stalking horse with substantial leverage should insist that the debtor cannot materially modify the bidding procedures without its consent and a court order.

Otherwise, the bidding procedures usually permit the debtor to supplement or modify the bidding procedures if the terms of the bidding procedures order or the asset purchase agreement are not violated. Courts are divided over which standard of review to apply in approving bidding incentives: Business judgment rule. Second Circuit courts including the Southern District of New York apply a relatively lenient business judgment standard, presuming bidding incentives are valid unless there is evidence of self-dealing.

In applying this standard, courts consider whether fees deter or encourage bidding and whether the amount of the fee is reasonable in relation to the proposed purchase price see Official Comm. Integrated Res. In re Integrated Res. Elliot Mgmt. Best interests of the estate test.

Other courts apply the best interests of the estate test. This is a higher standard than the business judgment rule and focuses on whether the bidding incentive at issue and the transaction, as a whole, make economic sense and are in the best interests of the estate see In re Wintz Cos.

Nut Co. Airlines, Inc. Administrative expense test. Third Circuit courts including the District of Delaware apply the most restrictive test, which requires satisfying the standards for allowance of an administrative expense claim.

Under this approach, the bidding incentive in question must be actually necessary to preserve the value of the estate implying that approval of the break-up fee must be a condition to the bid see Calpine Corp. Energy, Inc. In re OBrien Envtl. However, a US Court of Appeals for the Third Circuit decision may have relaxed this standard by also allowing courts to award break-up fees where doing so is necessary to compel the stalking horse to adhere to its bid even if did not condition its bid on approval of the break-up fee and outweighs the potential harm that a break-up fee would cause by deterring other bidders see In re Kelson Channelview LLC v.

Multi-factor test used with the administrative expense standard. Some courts apply the administrative expense standard by analyzing several factors to determine whether a break-up fee is actually necessary to preserve the value of the estate see AgriProcessors, Inc. In re Tama Beef Packing, Inc. Ohio At least one court has also used the multi-factor test to apply the best interests of the estate standard see Sea Island Co. Official Comm. Bid Procedures Although the Bankruptcy Code offers debtors much discretion about the method of conducting the sale Fed.

The notice must include the time and place of any public sale, the terms and conditions of any private sale, and the deadline for filing objections Fed.

All interested parties have a voice in the section sales process and can object to a proposed sale. While binding on the bidder, the debtor is not bound by the asset purchase agreement until the court approves the sale.

Highest and best price. The debtor has a fiduciary duty to obtain the highest and best price for the assets. To satisfy this requirement, the sale is usually subject to an auction. The highest price is not always the best price, and it is not necessary to show that the purchase price was the highest possible price obtainable under the circumstances see Valuation. Good faith. Good faith purchasers in section sales receive special protection see Good Faith Purchaser Protection.

A sub rosa plan is a transaction that has the practical effect of predetermining the essential terms of a plan of reorganization. Braniff Airways, Inc.

In re Braniff Airways, Inc. Sound business purpose. The debtor must demonstrate that the sale is supported by a sound business purpose. Although courts consider various factors in determining if there is a sound business purpose, the most important factor is whether the assets are decreasing or increasing in value see Committee of Equity Security Holders v.

Lionel Corp. In re Lionel Corp. Sales to Insiders If the proposed section sale is to an insider, or insiders will benefit from the sale, courts apply a higher degree of scrutiny to approve the sale see In re Station Casinos, Inc.

Courts typically focus on: The nature of the sale process. Whether the assets have been exposed to the market. The transparency of the proceedings. The fairness of the price. If the Clear Channel decision is adopted by other courts it could have the following implications: Non-consenting junior lienholders whose claims are not satisfied by the proceeds of the sale may have greater leverage in blocking sales or obtaining payoffs or other concessions from the debtor or the senior lienholder.

If buyers cannot rely on the free and clear relief in sale orders, this may chill their interest in buying assets in section sales. As a result, lenders who would otherwise provide DIP financing on the assumption they will be repaid with proceeds from section asset sales may be disinclined to lend money, leading to more Chapter 7 liquidations. More asset sales may occur through a plan of reorganization, which is more time consuming, cumbersome and expensive.

Buyers may reduce the amount they are willing to pay for assets in section sales or demand escrows to protect them if the free and clear provisions of the sale order are reversed. In the News:. Group Contact Information Richard G. Grant rgrant culhanemeadows. This website and the communications herein may be considered attorney advertising. Previous results are not a guarantee of future outcome. This website is for informational purposes only and does not constitute legal advice.

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