Under Section 363(f) of the Bankruptcy Code, the trustee or debtor-in-possession may sell the bankruptcy assets "free and clear of any interest in the property". This provision of "free and clear" allows the debtor to make a quick sale and the buyer to obtain protection from successor liability, with some exceptions.
The preemptive or initial buyer acts as a "stalking horse" for the assets, based upon an order from the court authorizing the sale free and clear of all interests. The initial sale is also subject to competitive bids and specific liabilities assumed in the sale agreement.
In effect, Section 363 governs the sale of business assets outside the ordinary course of business and in lieu of a reorganization under a Chapter 11 proceeding. The Code changes in 2005 also have made certain types of bankruptcy "reorgs" far more difficult. Often, lenders who provide working capital do so on a short term basis; thus, the Section 363 sale must satisfy the debtor's lenders. Another consequence is the opportunity to assign favorable leases and executory contracts to the buyer. Most importantly, these sales can be consummated rather quickly, often in two to three months, or less.
As an investment bank who has completed 363 sales, the primary factors we have experienced to conduct and close a transaction process are the following:
- The "stalking horse" bidder must be credible and capable of funding the deal. This first bid establishes the floor of value.
- The stalking horse asset purchase agreement (APA) can be shopped to other potential bidders. If not the successful bidder, the stalker usually gets a "break-up fee". The bankruptcy court will apply a business judgment test as to whether to approve this fee. The court also determines the reasonable basis for this fee by finding that the break-up fee preserved the initial bid and actually benefitted the estate.
- The negotiated stalking horse fee and general sale procedures agreed upon between the "horse" and debtor will be incorporated into a bidding procedures motion and proposed orders. The process includes the auction time and place; required auction notice; and, deadlines for qualified bids and sales objections. A qualified bidder provides an irrevocable offer that exceeds the stalking horse price. Often, evidence of ability to pay and a deposit are also required.
- In some cases, the courts have blocked these asset sales when lienholders legitimately objected and these creditors' rights are significantly negated. In those instances, the courts decided that a Chapter 11 reorganization was more appropriate for the debtors liquidation.