The COVID-19 pandemic has created1 significant financial distress for many businesses and there have been a number of bankruptcy filings recently,2 with more likely on the horizon. As a result, there is likely to be an increase in acquisitions of companies or assets out of bankruptcy. 3 Companies considering bankruptcy sale-transactions need to consider the structure that best suits their needs—e.g., a " 363 sale" offering a separate sale process and potentially speed, or a sale as part of the plan of reorganization or liquidation plan, which allows for the sale to be incorporated into the plan process. It also is important to recognize that just because a target has filed—or is likely to file—for bankruptcy, does not mean that the transaction is immune from the antitrust laws. Parties to transactions meeting certain thresholds must file notification with the Federal Trade Commission and Antitrust Division of the Department of Justice and observe a waiting period prior to closing. And, the US antitrust authorities will continue to scrutinize and investigate transactions raising substantive antitrust issues—whether meeting the threshold for filing or not. Both the filing and substantive review occur independent of the bankruptcy court's approval.

Below is a summary of the key issues to consider when contemplating acquisitions in bankruptcy, especially those that may raise antitrust issues.

Bankruptcy Overview

There are a number of considerations for a company when contemplating acquiring the assets of a distressed company; one is whether to acquire the assets pursuant to a section 363 sale or a sale under a confirmed plan of reorganization/liquidation.

363 Sale

In a sale pursuant to section 363 of the Bankruptcy Code, a buyer typically negotiates a purchase and sale agreement (PSA) pursuant to which the buyer agrees to acquire all or certain of the assets of the target company, and agrees on the liabilities that the buyer is willing to assume in connection with the acquisition of the identified assets. The parties also agree upon the contracts that will be assumed and assigned to the buyer in connection with the acquisition of the identified assets. In connection with the negotiation of the PSA, the buyer and target company also negotiate the terms and conditions of bidding procedures that will be operative in connection with the sale of the assets pursuant to the PSA. These procedures generally include, among others, a "break-up fee" and "expense reimbursement" that will be payable to the buyer if a third-party outbids the buyer at any auction.

Under the sale process described above, the buyer is often referred to as the "stalking horse bidder" and the requisite PSA and associated bid procedures to be implemented in connection with the sale of the assets to the stalking horse bidder are generally fully negotiated between the buyer and the target company prior to the commencement of the bankruptcy proceedings. In this scenario, the fully negotiated PSA and bid procedures, and the motions seeking the approval of the PSA and the bid procedures, are then submitted to the bankruptcy court for approval at the same time (or close in time) to the commencement of the bankruptcy proceedings.

In other cases, typically where a company has not identified an agreed-upon buyer prior to its bankruptcy filing, the company (now a debtor in bankruptcy) instead seeks approval of bid procedures without an identified stalking horse bidder and attempts to use the process of soliciting bids as a way to find a potential buyer during the bankruptcy.

In other cases, typically where a company has not identified an agreed-upon buyer prior to its bankruptcy filing, the company (now a debtor in bankruptcy) instead seeks approval of bid procedures without an identified stalking horse bidder and attempts to use the process of soliciting bids as a way to find a potential buyer during the bankruptcy.

In either case—that is, with a stalking horse bidder or simply the debtor seeking to establish bid procedures separately during the bankruptcy case, upon receipt of the bankruptcy court's approval of the bid procedures—the debtor can conduct the auction process to ascertain if there are any qualified bidders or any qualified competing bidders, as applicable, and to the extent any such bidders are identified, conduct an auction to determine the ultimate winning bidder. Once the winning bidder has been determined, the actual sale of the assets is submitted to the bankruptcy court for approval, and subject to receipt of the bankruptcy court's approval (and any closing conditions in the PSA), the sale may be consummated.

Some benefits of an acquisition of assets pursuant to a section 363 sale in bankruptcy include:

  • Speed—potential for 60-90 days to closing;
  • Potential for lower transaction costs;
  • Ability to "cherry pick" assets and liabilities to be assumed;
  • Ability to "cherry pick" assets and liabilities to be assumed;
  • Restricted contracts can often be assumed and assigned to the buyer; and
  • Buyer protections—including potential "break-up" fees, "expense reimbursements," ability to influence minimum overbid amount and other terms of the bidding procedures.

Buyer protections—including potential "break-up" fees, "expense reimbursements," ability to influence minimum overbid amount and other terms of the bidding procedures.

In addition to acquiring the assets of a target company pursuant to a section 363 sale, an interested buyer may seek a sale-process effectuated under a confirmed plan of reorganization or liquidation. In this context, the target company/debtor proposes a plan pursuant to which the debtor agrees to sell the designated assets, subject to the assumption of agreed upon liabilities, to an identified buyer pursuant to a section 363-like process that is incorporated into the plan; that is, such sale is subject to the debtor's receipt of higher and better offers from third parties, which could be solicited pursuant to bidding procedures implemented in connection with the plan.

Although a sale of assets in connection with a plan is like a section 363 sale in that the buyer ultimately acquires the designated assets generally free and clear of liens and claims, subject only to the agreed upon assumed liabilities, because the sale is implemented in connection with the plan process it may be subject to all of the uncertainties, time delays, procedural requirements and impediments that are generally inherent in the plan process. For these reasons, the acquisition of assets by means of a sale process implemented in connection with a plan is generally utilized only where agreement has been reached among the debtor and its key creditor constituencies prior to the commencement of the bankruptcy proceedings regarding the sale of the debtor's assets. In this context, the plan is effectively "pre-packaged" or "pre-negotiated" by the debtor with its key creditor constituencies in order to avoid any unforeseen circumstances or time delays.

Generally, the benefits of acquiring assets pursuant to a "pre-packaged" or "pre-negotiated" plan include:

  • Major stakeholders have agreed on critical terms prior to the filing;
  • Assets can generally be transferred free and clear of encumbrances and interests;
  • Restricted contracts can often be transferred;
  • Transfer tax exemption under Section 1146(a) of the Bankruptcy Code;
  • Potentially shortens and simplifies the bankruptcy process;
  • With respect to a "pre-packaged" plan, votes for the plan have often already been solicited and approval received prior to the filing;
  • Parties' interests more likely aligned, facilitating bankruptcy court approval of the plan and the documentation of the sale transaction; and
  • Once filed, the bankruptcy generally proceeds fairly quickly.

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Footnotes

1 This article was first published by Law 360, July 2, 2020, Reprinted with permission.

2 For example, as of the end of May 2020, there were already a number of well-known retailers and restaurant chains that filed for bankruptcy, with the vast majority of those filings occurring between March and May 2020. These include Tuesday Morning, J. Crew, Pier 1, Modell's Sporting Goods, True Religion, Lucky's Market, Earth Fare, Neiman Marcus, John Varvatos and others. See Business Insider, These 16 Retailers and Restaurant Chains Have Filed for Bankruptcy or Liquidation in 2020 (June 1, 2020); see also J.Crew, Neiman Marcus, and Others Are Filing For Bankruptcy. What Does That Mean, Exactly? (May 12, 2020).

3 See e.g. Business Insider, Dean Foods Receives Court Approval for the Sale of Substantially All of Its Assets (Apr. 4, 2020); Construction Dive, Judge Approves McDermott Reorganization, $2.7B Sale of Lummus Technology (Mar. 13, 2020); Reuters, U.S. Bankruptcy Court Approves $220 Million Sale of Shale Firm Alta Mesa (Apr. 2020); The Real Deal, Costar Acquires Troubled Rental Listings Firm for $588M (Feb. 12, 2020).

Originally published July 22, 2020.

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