Related videosIBC Amended: Promoters Of Stressed Assets Excluded From Bidding Process
The purchaser will want to impose its form of asset purchase agreement on other bidders. The stalking horse bidder will determine which assets it wishes to acquire and then seek to limit any subsequent bids for those same assets. In being the stalking horse bidder, one has the ability to structure a transaction and to purchase assets that one most wants, and potentially to deny other bidders the opportunity to buy different assets or a different amount of assets, or to pay for such assets in a different manner, i.
Of course, from the perspective of almost all of the other constituencies in the case, i. A word here about the provisions of the asset purchase agreement pertaining to representations and warranties. The purchaser will want some recourse if something should go wrong after the sale closes. The purchaser will generally understand that the debtor may not be able to respond to a breach of contract claim.
However, if the estate will have substantial assets after the sale, the purchaser would not want to limit its claim for potential breaches of representations and warranties. Thus, the purchaser will want, at the very least, to ensure that the accuracy of the representations and warranties be a condition precedent to closing and may want a hold back of a portion of its purchase price to cover post-closing adjustments and breaches of representations and warranties.
If drafted properly, the sale order will offer greater protection than any representation or warranty—for example, a sale order will vest title in the purchaser free and clear of all liens and encumbrances, and can cut off successor liability.
Generally, the only way to obtain representations and warranties in the asset purchase agreement is to create an economic incentive by offering to pay for the representations and warranties.
The initial bidder typically wants to set the break-up fee as high as possible. In most cases, a bankruptcy court will approve a reasonable break-up fee arrangement to the extent the court believes the fee will not chill the bidding process and is necessary to induce the initial bidder into making a binding offer.
The court may also look to the costs incurred or to be incurred by a stalking horse bidder when determining the reasonableness of a break-up fee. Limiting the break-up fee will limit the amount necessary for an initial overbid of the stalking horse bid. Generally, the lender will be neutral toward the break-up fee, but will not want the issue of break-up fees and expense reimbursement to slow down the sale process.
After all, the purchase price will have to pass muster with the lender for the transaction to move forward and the lender will largely be unaffected by these issues.
Overbid amounts and bidding increments are amounts by which subsequent bids must exceed prior bids. The stalking horse bidder will want the initial overbid to be substantially greater than its own offer, to create a threshold other bidders will be reluctant to overcome. The stalking horse bidder will also want to establish steep bidding increments to discourage competing bids.
The stalking horse bidder may seek matching rights so that it will not have to overbid itself. Of course, the stalking horse bidder should receive credit for the amount of the break-up fee and the maximum expense reimbursement allowance in any subsequent bid it makes. In general, a court will require that the first overbid amount be at least as much as the proposed break-up fee and expense reimbursement allowance so that the estate will not be diminished if a subsequent offer is accepted.
Subsequent bidding increments may be smaller. The auction process may take many forms. If no such notice of competing bid is received by the bid deadline, no auction will be held and the parties will go forward with the proposed sale agreement.
A higher, riskier bid may provide the creditors a chance at some recovery from the case which would not be available with the less risky deal. Continued employment should not be used to curry favor with the existing management.
The actual or perceived chilling of a sale through the action or inaction of the existing management or incomplete access to all of the due diligence information could cause the bankruptcy court to deny approval of the sale or to limit the protections afforded the purchaser in the sale order. Section f states: The trustee may sell property under subsection b or c of this section free and clear of any interest in such property of an entity other than the estate, only if — 1 applicable non-bankruptcy law permits sale of such property free and clear of such interest; 2 such entity consents; 3 such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; 4 such interest is in bona fide dispute; or 5 such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
Asset Dispositions in a Bankruptcy Case: Guidelines for the Successful Stalking Horse This article is intended to familiarize you generally with the landscape of an otherwise fairly complicated process involving the sale of assets of a debtor in bankruptcy. The Bankruptcy Sale Process This article is intended to familiarize you generally with the landscape of an otherwise fairly complicated process involving the sale of assets of a debtor in bankruptcy.
The Mechanics of the Bidding Process In negotiating the initial offer, the goal of the prospective purchaser obviously is to acquire the desired assets at the best price.
The sale date From the perspective of the stalking horse bidder, the earlier the auction the better. The form of the asset purchase agreement The purchaser will want to impose its form of asset purchase agreement on other bidders. Overbid amounts and bidding increments Overbid amounts and bidding increments are amounts by which subsequent bids must exceed prior bids. The auction The auction process may take many forms.
ENDNOTES: Section f states: The trustee may sell property under subsection b or c of this section free and clear of any interest in such property of an entity other than the estate, only if — 1 applicable non-bankruptcy law permits sale of such property free and clear of such interest; 2 such entity consents; 3 such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; 4 such interest is in bona fide dispute; or 5 such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
Share via. Copy Link. Powered by Social Snap. The landlord cannot send default notices, file or continue an eviction action, collect a judgment against the tenant, demand the payment of delinquent rent or other amounts, or terminate the lease even if the lease provides that the landlord may terminate if the tenant files bankruptcy without first obtaining relief from the bankruptcy court. If a landlord violates the automatic stay, the landlord can face damages for such a violation.
Further, the landlord can face consequences for contempt violating a court order because the automatic stay is a court order. Despite the automatic stay, the tenant must pay rent first coming due after the bankruptcy filing, but the landlord must be prepared to enforce this right in the bankruptcy court.
Bankruptcy Code Section d requires debtors to perform all commercial lease obligations until the lease is assumed or rejected. If the tenant fails to pay rent or other amounts first coming due after the bankruptcy filing and thereafter, the landlord can move for the bankruptcy court to compel payment. One option is to assume the the lease. If the tenant elects to assume the lease, it must cure all defaults under the lease and the lease will otherwise continue in accordance with its terms.
A second option is to assume and assign the lease to a third party. This is likely to happen if the tenant is selling its business as part of the bankruptcy. If the tenant elects to assume and assign the lease, the tenant must cure all defaults, and the assignee must demonstrate the ability to perform all future obligations under the lease.
If the lease is assigned, the tenant will be relieved of all future obligations under the lease, and the assignee will be the new tenant under the lease. The third option is to reject the lease. If the lease is rejected, all obligations of the tenant will cease, the landlord may retake the space, and the landlord may file a claim for damages just like any other creditor. If a tenant files bankruptcy, it does not render a landlord helpless. Instead, the landlord must work within the framework of the bankruptcy laws in exercising its rights and remedies.
Since bankrupt tenants are often permitted to disregard valid lease provisions absent an objection from the landlord, landlords should consult with experienced counsel to ensure their rights are enforced in the bankruptcy case.
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