October 17, 2009
Section 363 Sales in the US
By Pauline Renaud, featuring Neil B. Glassman
The current financial crisis has dramatically increased the number of US companies filing for Chapter 11 bankruptcy protection in recent months. For investors, such situations provide them with an opportunity to acquire the assets of distressed companies at a discount, via the Section 363 bankruptcy sale process. The process can also be an appealing option for creditors and debtors, and it is increasingly the case that bankruptcy has become a vehicle for sales as much as for reorganisations. But while they offer great advantages for debtors, creditors and potential investors alike, Section 363 sales also require advance planning and a full understanding of the process. This is particularly important, as there are a number of potential pitfalls along the way.
A Section 363 sale allows the debtor to sell assets ‘free and clear’ of the company’s liabilities, and the 363 sale process usually starts with the debtor selecting a so-called ‘stalking horse’ bidder and negotiating an asset purchase agreement (APA). “This APA serves as a floor against which all other bids for the assets will be made at auction,” explains Robert Harris, a partner at Waller Lansden Dortch & Davis LLP, and chair of the firm’s Finance and Restructuring practice. “In exchange for coming forward and negotiating the initial APA with the seller/debtor, the bankruptcy court often grants the stalking horse certain bidding protections, such as expense reimbursement, and break-up fees in the event its bid is exceeded.” Following that, a bankruptcy court approves the procedures governing the sale, and an open auction process ensues, thereby ensuring that the assets are sold at a fair price. “The notice and auction procedures usually contemplate some sort of market testing procedure, either by way of a stalking horse proposal, which is tested against overbids from third parties, or without a stalking horse by way of an open or closed auction, or other bid process such as sealed bids,” confirms Neil B. Glassman, a partner at Bayard, P.A. “Although such market testing procedures are not always required, the idea of a 363 sale is that the notice provisions for the sale and the ‘auction’ procedures are supposed to maximise value for the estate and its constituents.”
Following that auction process, courts generally require only a ‘sound business justification’ to approve a sale, and are usually quite deferential to the debtor, particularly in cases where the future of the company is at stake. Typically, the bankruptcy court will approve the highest bid received at the auction or, if there are no other bidders, the stalking horse bid itself. The basic standard for a sale is usually that it has to be in the best interest of the estate and creditors. Finally, the court enters a sale order, approving the sale and clearing title to the assets. Most Section 363 sales usually follow that process but there have been several recent Section 363 sales that have been somewhat atypical, notes Nancy L. Sanborn, a partner at Davis Polk & Wardwell LLP. “This includes the sale of Lehman Brothers’ investment banking business to Barclays, where the sale was approved only five days after the Chapter 11 filing, and the Chrysler and GM sales, where the sales included the provision by the purchasers of substantial amounts of cash and equity to junior claimants in connection with assumption of contracts or entry into new contracts with the junior claimants, notwithstanding that other unsecured and/or secured debt claims would not be paid in full.” However, sales of this nature are unusual and likely to becoming rarer, particularly now that the market is seeing the early signs of recovery.
Amid the current crisis, there has been a substantial increase in the number of Section 363 sale cases, particu
The current financial crisis has dramatically increased the number of US companies filing for Chapter 11 bankruptcy protection in recent months. For investors, such situations provide them with an opportunity to acquire the assets of distressed companies at a discount, via the Section 363 bankruptcy sale process. The process can also be an appealing option for creditors and debtors, and it is increasingly the case that bankruptcy has become a vehicle for sales as much as for reorganisations. But while they offer great advantages for debtors, creditors and potential investors alike, Section 363 sales also require advance planning and a full understanding of the process. This is particularly important, as there are a number of potential pitfalls along the way.
An increase in 363 sales
A Section 363 sale allows the debtor to sell assets ‘free and clear’ of the company’s liabilities, and the 363 sale process usually starts with the debtor selecting a so-called ‘stalking horse’ bidder and negotiating an asset purchase agreement (APA). “This APA serves as a floor against which all other bids for the assets will be made at auction,” explains Robert Harris, a partner at Waller Lansden Dortch & Davis LLP, and chair of the firm’s Finance and Restructuring practice. “In exchange for coming forward and negotiating the initial APA with the seller/debtor, the bankruptcy court often grants the stalking horse certain bidding protections, such as expense reimbursement, and break-up fees in the event its bid is exceeded.” Following that, a bankruptcy court approves the procedures governing the sale, and an open auction process ensues, thereby ensuring that the assets are sold at a fair price. “The notice and auction procedures usually contemplate some sort of market testing procedure, either by way of a stalking horse proposal, which is tested against overbids from third parties, or without a stalking horse by way of an open or closed auction, or other bid process such as sealed bids,” confirms Neil B. Glassman, a partner at Bayard, P.A. “Although such market testing procedures are not always required, the idea of a 363 sale is that the notice provisions for the sale and the ‘auction’ procedures are supposed to maximise value for the estate and its constituents.”
Following that auction process, courts generally require only a ‘sound business justification’ to approve a sale, and are usually quite deferential to the debtor, particularly in cases where the future of the company is at stake. Typically, the bankruptcy court will approve the highest bid received at the auction or, if there are no other bidders, the stalking horse bid itself. The basic standard for a sale is usually that it has to be in the best interest of the estate and creditors. Finally, the court enters a sale order, approving the sale and clearing title to the assets. Most Section 363 sales usually follow that process but there have been several recent Section 363 sales that have been somewhat atypical, notes Nancy L. Sanborn, a partner at Davis Polk & Wardwell LLP. “This includes the sale of Lehman Brothers’ investment banking business to Barclays, where the sale was approved only five days after the Chapter 11 filing, and the Chrysler and GM sales, where the sales included the provision by the purchasers of substantial amounts of cash and equity to junior claimants in connection with assumption of contracts or entry into new contracts with the junior claimants, notwithstanding that other unsecured and/or secured debt claims would not be paid in full.” However, sales of this nature are unusual and likely to becoming rarer, particularly now that the market is seeing the early signs of recovery.
Amid the current crisis, there has been a substantial increase in the number of Section 363 sale cases, particu