has the most leverage in imposing its
terms on the debtor. For example, the
stalking horse bidder can condition its
bid on court approval of certain bidding
procedures. If the proposed procedures
are not approved, the purchaser will
generally reserve the right to withdraw
the bid without penalty.
of the prospective purchaser obviously
is to acquire the desired assets at the
best price. Generally, you can expect
that the debtor will establish a "data
room" for interested bidders to conduct
due diligence. If you are going to enter
the bidding process and conduct due
diligence, expect to be asked to sign a
confidentiality agreement. Any offer to
purchase the debtor's assets will require
court approval, will be subject to higher
and better offers and will immediately
become public knowledge. In part, these
requirements are designed to ensure
that only sales that are negotiated
at arm's length, in good faith and
without collusion are approved by the
bankruptcy court.
horse bidder, the earlier the auction
the better. An earlier auction provides
less time for other prospective bidders
to formulate their bids and may make
it more likely that additional bidders
will fail to satisfy the requirements set
forth in the bid procedures. There may,
however, be a less subjective reason for
holding the sale as soon as possible. If
the debtor's assets are declining in value,
the sooner the sale the more value the
assets will bring. In many instances,
however, local rules of practice will
impose parameters with regard to how
much and to whom notice must be
bidder, who wants to move the process
along as quickly as possible to frustrate
potential competitors, creditors will want
to stimulate the bidding in the hope of
receiving one or more higher bids. From
the creditors' perspectives, the longer
the process, the greater the likelihood
of obtaining the best possible price for
the assets. This is particularly true if the
assets are not declining in value.
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 his
or her claim for potential breaches of
representations and warranties. The
principal concern of the purchaser
should be to obtain full disclosure of
all information about the assets he or
she is buying through representations
and warranties, and some assurance
that the debtor's operational controls
are maintained so that the assets do
not lose value through the bidding and
pre-closing period. 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.
The debtor and the creditors will want
to avoid making any representations,
warranties or indemnities that could
create a risk of additional claims that
will dilute the sale proceeds available
for distribution to creditors. The argument
most often used by the debtor and
the creditors to avoid making such
the purchaser can rely on the sale
order issued by the bankruptcy court
for comfort. 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.
forms. Usually, there will be a deadline
set by the court for interested parties to
announce their intention to submit bids
that exceed the initial bidder's offer by
the requisite overbid amount. If no such
notice of a competing bid is received
by the bid deadline, no auction will be
held and the parties will go forward with
the proposed sale agreement. If one or
more such notices are received by the
deadline, however, some type of formal
auction will generally be held, usually
at the office of the debtor's attorney or in
open court.
The debtor and the creditors will
generally look for the most cash, with a
minimum of risk; however, the creditors'
may advocate a more risky deal if they
are "out of the money," that is, if there
is no value in the assets being sold over
and above that which is owed to secured,
administrative and priority claimants.
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.
As highlighted above, purchases of
distressed assets in bankruptcy can be
advantageous and viable to investors that
are versed in the applicable Bankruptcy
Code provisions.