Bankruptcy Sale of Business
Posted on Sep 1, 2023 4:00am PDT
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.