The Mechanics of a Deal

Timing is essential in such a case, as any delay could jeopardize the ability to maximize the estate’s value. The 363 bankruptcy sale of Lehman Brothers in 2008 is a good example. When the company filed for Chapter 11, the value of its assets were in freefall. Lehman’s assets were sold to Barclays Capital just seven days after the company filed for bankruptcy.

The second, more common reason for a 363 sale is financial, Amendola says. “The debtor company doesn’t have enough money to cover the expense of a prolonged restructuring and may not be able to borrow money.” Lenders are often reluctant to provide financing if they are unsure a company can successfully emerge from Chapter 11.

For prospective buyers, there are two advantages that make a 363 sale very appealing: they receive clear title to the assets, and favorable contracts and unexpired leases are easily assigned to the new owners.

To sweeten the pot, a buyer may offer a commitment for “debtor-in-possession” financing to support a debtor company’s operations through the sale process. An example is the 363 sale of California-based Andronico’s (now Andronico’s Community Markets), headquartered in San Leandro. Renwood Opportunities Fund, a private equity firm that purchased the assets, was a creditor prior to Andronico’s filing for Chapter 11 and provided the debtor-in- possession financing during the 65-day term of the bankruptcy sale process.

An agreement to acquire the assets of a distressed company does not necessarily mean the purchase will be consummated. Under Section 363, a debtor or trustee usually sells its assets through public auction to the highest or best bidder, which may or may not be the party with the initial proposal.

The Process
Under a 363 sale, the debtor or bankruptcy trustee identifies an initial bidder called a ‘stalking horse’ either prior to or immediately after filing for bankruptcy. The debtor and bidder negotiate an asset purchase agreement (APA), which establishes a minimum or floor price for the assets, a deposit amount paid by the stalking horse (usually 10 percent), a structure for the transaction, and the bidding procedure.

The bidding procedure includes when and where the auction will be held, required auction notice, qualifications for competing bidders, amount required of bidders as a good-faith deposit, deadlines for bids, and objections to the sale. The APA also may stipulate that competing bids must exceed the initial bid by a certain percentage.

Because a stalking horse can be outbid, the APA includes various ‘protections’: (a) a breakup fee, which can be a flat fee or percentage (e.g., 2 to 4 percent) of the purchase price; (b) a topping fee, which is a percentage of the difference between the initial bidder’s offer and the amount of the winning bid; and (c) reimbursement of expenses associated with the due diligence and document preparation related to the purchase. The stalking horse also may require the right to match any counteroffer.