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. It also highlights some of the more important and easily misunderstood issues faced by potential purchasers of such assets. Historically, the principal focus of a Chapter 11 reorganization case. Assets was October 5, at p.m. (prevailing Eastern Time) (the “Bid Deadline”). In the event that more than one Qualified Bid was received on or before the Bid Deadline, the Debtors were to conduct an Auction commencing on October 11, at a.m. Pursuant to that order, on March 26, , the Debtors filed the Notice of (I) Cancellation of Auction and (II) Designation of (A) Stalking Horse Bid as the Successful Bid and (B) Credit Bid as the Back-Up Bid. The Bankruptcy Court will hold a hearing to consider approval of the sale on June 9, Hearing on First Day Motions.
A notable distinction in the Canadian insolvency regime compared to the US is that stalking horse bids, break-up fees, and auctions are not required, and, while they are sometimes used, the structured sales procedures in a typical section sale are less common in Canada.
Prospective buyers should also be aware that a Canadian court will only approve a sale of assets so long as it is satisfied that any required payments to employees, former employees and their pension plans can be met. For a US debtor with assets in Canada, Canadian courts have statutory authority to make orders and grant relief to approve or implement arrangements from a chapter 11 proceeding, including a section sale.
Although the primary focus of this article covers section sales, it is worth noting that a party interested in acquiring the assets or stock of a debtor in bankruptcy can also acquire such assets or stock pursuant to a chapter 11 plan instead of separately through section of the Bankruptcy Code.
The biggest drawback of acquiring assets or stock through a plan and what makes sales under a plan far less common than section sales is the time and expense associated with doing so. With certain exceptions, it often takes at least days and often longer for the sale to receive bankruptcy court approval, because the sale must be approved as part of the chapter 11 plan of reorganization or liquidation and thus is subject to all of the various plan confirmation requirements, including the requisite creditor acceptance — and creditors may oppose the plan even if they are unopposed to the sale.
Also, unlike in the section sale context for stalking horses, break-up fees are not customary in the context of a sale under a plan. On the other hand, a buyer who wishes to acquire the equity of the debtor usually the equity in the reorganized debtor often prefers to do so under a plan instead of a section sale. Other advantages of a sale under a plan include i the possible avoidance of an auction process, ii the ability to issue securities exempt from SEC registration requirements, iii in certain circumstances, the ability to provide non-cash consideration, iv greater flexibility in terms of financing or structuring the sale including by merger, stock, or asset acquisition , and v preserving valuable tax attributes.
Generally speaking, the benefits of a sale pursuant to a plan vs. While each transaction needs to be evaluated on an individual basis, the overall regime of section sales as an alternative to an out-of-court distressed sale is worth consideration earlier rather than later. Sign in Join. Sign in. Log into your account. Sign up. Password recovery.
Forgot your password? Get help. Create an account. Global Compliance News. Toronto skyline at sunset. The target has a history of litigation claims or other types of latent claims potential or actual , which it may not be able to satisfy. Even with diligence and proper structuring, the buyer may not be able to get comfortable that an asset sale or indemnification covenants will thoroughly protect it against successor liability claims. If the target is on the brink of bankruptcy, wait until the target files for bankruptcy and subsequently emerges.
Seek to acquire the target or its assets through the bankruptcy process. Overview of the Section Sale Process A section named after the section of the US Bankruptcy Code that authorizes a debtor to sell its assets is a court-sanctioned sale process for a company in a US bankruptcy case.
A section sale can protect the successful bidder in a number of ways: The bankruptcy court will approve the sale process and approve the winning bidder. As an asset transaction, the buyer can select the assets it wants to purchase and specifically delineate the liabilities it will assume.
It is unusual for a buyer to assume substantial liabilities as part of a section sale. Once in bankruptcy, the debtor seller does not need shareholder approval, even if it is selling substantially all of its assets. Because the sale and sale process are approved by the bankruptcy court, officers and directors of the debtor seller are generally protected from shareholders and creditors attacking the sale price or fairness of the transaction.
These parties have the right and opportunity to come in and raise any concerns with the transaction before the bankruptcy court approves the sale. Executory contracts and unexpired leases generally can be assigned to the buyer notwithstanding any anti-assignment language in such contracts or leases so long as outstanding defaults are cured.
Defaults triggered by the bankruptcy filing or the financial condition of the debtor, however, need not be cured. Whether the buyer or the debtor pays cure costs is typically a point of negotiation. The effect of such a finding is that, even if a party successfully challenges the sale on appeal, a completed sale cannot be reversed. Approval of the Bid Procedures and Bid Protections Before the formal bankruptcy marketing process begins, the bid procedures including notice procedures for contract counter-parties and bid protections for the stalking horse bidder will be brought before the bankruptcy court for approval.
In most cases, a stalking horse bidder will negotiate for bid protections in the form of a break-up fee and due diligence expense reimbursement if the stalking horse bidder is not selected as the winning bidder in the auction.
Once approved by the bankruptcy court, the bid protections are administrative expenses, which means that they have priority in payment over prepetition unsecured claims against the debtor.
It is typical for the bid procedures to require that any break-up fee or expense reimbursement be payable to a bidder at the closing and directly out of the sales proceeds. The bid procedures will specify the mechanism and requirements for other bidders to access the data room and the criteria for submitting bids that will qualify to participate in the auction.
One of the most important criteria is the minimum purchase price for a competing bid. Subject to bankruptcy court approval, the stalking horse bidder can heavily influence the procedures for the auction, can set milestones for the key dates in the bidding process, and can condition its obligation to close on a specific form of bid procedures being approved by the bankruptcy court.
Bid Protections. As noted above, the stalking horse bidder can also negotiate for a break-up fee and due diligence expense reimbursement if the stalking horse bidder is not selected as the winning bidder in the auction. Purchase Agreement. As discussed above, the stalking horse bidder dictates the terms of the initial asset purchase agreement. Any other bidders must mark up the Stalking Horse APA to reflect any changes they require, and the bid procedures typically will require that qualified competing bids cannot impose conditions or terms that are materially less favorable to the debtor than those contained in the Stalking Horse APA.
Sale Order. Similarly, the stalking horse bidder will draft and negotiate the form of order approving the sale. Orders approving section sales can be quite extensive and will contain a number of findings and provisions designed to protect the successful bidder. It is difficult for a competing bidder to require more provisions and protections than the stalking horse bidder negotiated. Any changes to the Bid Deadline will be published the sale website, www.
The Property is an approximately 3. The Property shall be sold to the bidder who submits the best offer, subject to Trustee and Bankruptcy Court approval.
The Property will be conveyed or assigned, as described below, pursuant to the PSA and, as applicable, section of the Bankruptcy Code, free and clear of any liens, claims, encumbrances, or interests asserted by any party, except as expressly provided below. Prospective bidders are advised to carefully review the Bid Procedures. Trustee reserves the right to amend, supplement or modify the Bid Procedures at any time. In no event shall such inspections include any environmental testing or sampling.
Bidders and the successful purchaser will not be allowed to ask questions of the store managers or employees of the current tenants. The vacant space in the Property will be made available for general inspection prior to the Bid Deadline. Please check the Sale Website for additional details. Various due diligence materials pertaining to the Property, will be available for download at no charge on the Sale Website for prospective purchasers who register for the Sale on the Sale Website.
Available documents will include, as available, property-specific physical, financial, legal, tax bills, surveys or site plans, and title information. All information contained in the due diligence materials is confidential and is to be kept confidential by each person and entity receiving same. All interest parties must execute a Confidentiality Agreement prior to downloading due diligence materials.
To obtain a Bid Package for the Property and other due diligence materials, a prospective bidder is required to register for the Sale by creating a user account on the Sale Website and executing a Confidentiality Agreement. All bids for the Property must be made on the PSA contract form contained in the Bid Package, with any changes requested clearly marked.
Bids received in any other format or on a PSA that is incomplete or modified in any other respect will not be a Qualified Bid as defined in the Bid Procedures. Each bidder will be required to disclose the identity of each entity or person that will be consummating the Sale of their bid. In addition, each bidder will be required to deliver preliminary proof of its financial capacity to close on their submitted bid.
Such documents may include, but are not limited to, financial statements and proposed funding commitments obtained by the bidder for the purchase of the Property. Personal or company checks will not be accepted. The bid must by its terms remain binding and irrevocable until 30 days after the date of selection of the Successful Bid; provided that if the bid is not selected as the Successful Bid or Backup Bid, the bid may be revoked after approval of such Successful Bid by the Bankruptcy Court.
Bidders will be notified of any BAFO by phone, or email, in which case bidders will be given an opportunity to raise their bids. Bidders may not submit BAFO bids below their original bid amount.
If no BAFO is received, the original bid amount will remain in full force and effect. June 15, at p. Each Backup Bid shall be irrevocable until the closing of the transaction with the successful bidder. If a successful bidder fails to consummate the approved transactions contemplated by its Successful Bid, the Trustee may select a Backup Bidder as the successful bidder, and such Backup Bidder shall be deemed a successful bidder for all purposes.
Bid Deposits for bids that are deemed not to be a Qualifying Bid will be returned by mail by NRC approximately seven 7 business days after the Bid Deadline.
The Bid Deposits of all other Backup Bidders shall be returned on or within five 5 business days of the closing of a transaction to the successful bidder. The effective date of the award of the bid for the Property shall be the date that the Trustee executes the PSA.
Since time is of the essence, the successful bidder will be notified of the award via fax or email, if possible, with the executed PSA to be sent by overnight or electronic mail.