Bidding Procedures and Sale Orders: The Keys to Distress M&A

Transcription

1 ALI-ABA Course of Study Corporate Mergers and Acquisitions September 11-12, 2003 New York, New York Bidding Procedures and Sale Orders: The Keys to Distress M&A By Corinne Ball John K. Kane Jones Day New York, New York

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3 BIDDING PROCEDURES AND SALE ORDERS: THE KEYS TO DISTRESS M&A I. Introduction Corinne Ball and John K. Kane 1 In non-distress M&A transactions, much of the strategic battling between buyers and sellers takes place in the negotiation of the purchase agreement. In a sale other than in the ordinary course of business pursuant to section 363 of the Bankruptcy Code (a Section 363 Sale ), the purchase agreement is still very important, but the primary strategic focus is often instead on the bidding procedures and form of sale order, samples of which are attached as Annexes A and B. This presentation will discuss these key elements of a Section 363 Sale, with particular attention to the differing views and objectives of the buyers and sellers who negotiate them. II. Procedural Background a. Section 363 process In the bankruptcy context, sales of assets are typically consummated either as a Section 363 Sale or pursuant to the debtor s overall plan of reorganization or liquidation (a Plan Sale ). These materials focus on Section 363 Sales as the archetypal chapter 11 sale, primarily because Section 363 Sales provide certain benefits over Plan Sales and have become the prevalent method for disposing of debtor assets. Recent notable sales pursuant to section 363 include International Steel Group, Inc. s purchase of the assets of Bethlehem Steel Corporation, American Airlines's purchase of the assets of Trans World Airlines, Inc., Time Warner Telecom Inc.'s purchase of the assets of GST Telecommunications Inc., IDT Corp. s purchase of the assets of Winstar Communications Inc., UBS Warburg s purchase of Enron Corp. s trading business, and Comdisco Inc. s sale of various portions of its businesses to various buyers. Section 363 of the Bankruptcy Code enables a debtor to sell property other than in the ordinary course of its business with the approval of the Bankruptcy Court. Courts typically require debtors wishing to use section 363 to provide a sound business purpose for its use and a strong showing that a sale outside of a plan of reorganization is justified. 2 Section 363 Sales 1 Corinne Ball and John K. Kane are partners at Jones Day, resident in the New York Office. Daniel J. Ellowitch, an associate at Jones Day, and Tanvir Alam, an associate at Jones Day, assisted with the preparation of these materials. Portions of these materials may have been and may be used by the authors and their colleagues in other outlines or articles. Copyright All rights reserved. 2 See In re Industrial Valley Refrigeration and Air Conditioning Supplies, Inc., 77 B.R. 15, 21 (Bankr. E.D. Pa. 1987) (stating that the requirements for a Section 363 Sale include accurate and reasonable notice, a showing that the price to be paid is adequate, fair and reasonable, and a showing of good faith, e.g., the absence of lucrative insider deals); In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir. 1983) (stating that a bankruptcy judge must consider all the salient factors of the proceeding to determine if a sound business purpose exists, including the proportionate value of the asset to the estate as a whole, the amount of elapsed time since the filing, the likelihood that a plan of reorganization will be proposed and confirmed in the near future, the effect of the proposed disposition on future plans of reorganization, the proceeds to be obtained from the disposition vis-à-vis any appraisals of the property, NYI v9

4 permit a seller to sell assets without having to go through the plan confirmation process, thereby circumventing the protections afforded creditors and equity holders in the plan process and effectively disenfranchising constituents from voting on a plan. In fact, a common objection to the sale of substantially all assets in a Section 363 Sale is that the proposed sale is a sub rosa plan that impermissibly avoids the plan confirmation process. 3 But Section 363 Sales of substantially all assets are often justified by exigent circumstances, such as rapidly deteriorating assets or a shortage of working capital, either of which may ultimately lead to a liquidation scenario and a worse recovery for creditors if the seller is required to undertake a timeconsuming Plan Sale. 4 b. Stalking horse role A Section 363 Sale typically begins with the selection of a stalking horse. 5 The stalking horse is a buyer who has entered into some form of purchase agreement with the seller, expecting and hoping to ultimately purchase the business for sale. If the buyer has something unique to offer or has some other competitive advantage, its best strategy is probably to be the stalking horse. The stalking horse agreement is sometimes a complete purchase agreement and sometimes just a letter of intent, albeit usually at least a superficially binding one. The debtor then provides notice of the stalking horse bid to the interested constituencies, who will be permitted to bid against the stalking horse s purchase agreement, subject to certain bidding procedures agreed to between the stalking horse and the seller and approved by the Bankruptcy Court. This auction process is intended to help the Bankruptcy Court ensure that the Section 363 Sale results in the highest and best offer for the assets to be sold. 6 (continued ) which of the alternatives of use, sale or lease the proposal envisions and, most importantly perhaps, whether the asset is increasing or decreasing in value ). 3 See, e.g., In re Braniff Airways, Inc., 700 F.2d 935 (5 th Cir. 1983). 4 The sale of TWA to American Airlines illustrates this point. The sale of substantially all of TWA s assets in a Section 363 Sale, which was completed in less than three months, was permitted because: TWA had no other strategic transaction available to it and had no offer for value to which it could turn. Nor could TWA rely on its self-help plan because TWA was unable to procure adequate capital infusion to implement that plan. Its only alternative was a free fall chapter 11 filing with the high likelihood of a piecemeal liquidation of the enterprise. In re Trans World Airlines, Inc., et al., No (PJW), 2001 WL , at *4 (Bankr. D.Del. Apr. 2, 2001). 5 Some Section 363 Sales are conducted without a stalking horse. The reasons for this range from a lack of interest from prospective buyers to a sense of urgency that precludes the time needed to negotiate a stalking horse agreement and bidding procedures. In these circumstances, the business is usually sold to the highest bidder at the Bankruptcy Court-sponsored auction. Since there is no stalking horse to influence the process, the bidding procedures governing these auctions are typically very seller-oriented and will encourage as many bids as possible. 6 See, e.g., In re Abbots Dairies of PA, Inc., 788 F.2d 143, 149 (3d Cir. 1986) (stating generally that an auction may be sufficient to establish that one has paid value for the assets of a bankrupt ); In re Food Barn Stores, Inc., 107 F.3d 558 (8 th Cir. 1997) (discussing bidding procedures and their importance in maximizing the value of the estate). Consider, for example, the auction for the assets of GST Telecommunications Inc., in which Time NYI v9 2

5 Highest and best includes consideration of non-monetary factors, such as prospects for regulatory clearances, financing requirements and other matters relating to certainty of closing. Once a winning bid is selected, the Bankruptcy Court enters a sale order, which typically provides, among other things, that the winning buyer takes the assets sold free and clear of liens and provides a mechanism for the debtor s assumption and assignment of the contracts included in the winning bid. Prospective buyers should remember that in the Section 363 Sale context, it will be negotiating not only with the seller, but directly or indirectly with numerous other parties, possibly including secured and unsecured creditors, landlords, bondholders, equity holders, financial and legal advisors, trustees and labor unions. The role and authority of the management team of the seller itself may therefore be unclear, especially since the ultimate decision-maker is the Bankruptcy Court, and negotiating the stalking horse agreement with the multitude of constituencies may prove extremely difficult. Stalking horses also bear the risk of bidding too high, especially if the business is in an industry, such as telecommunications, in which there is a rapidly growing glut of assets for sale: a reasonable price at the outset may seem extraordinarily rich three months later when the Court-sponsored auction occurs. 7 In addition, after the difficulties of getting to a final deal, the prospective buyer will not receive the deal-protective contractual provisions that it might have received in a nonbankruptcy sale. For these reasons, some prospective buyers may prefer to allow another bidder to take the role of stalking horse, wait to see the final terms approved by the Bankruptcy Court, and then make a decision whether or not to offer a higher bid, assuming that opportunity is presented. c. The purchase agreement If the seller has filed, or has decided to file, for chapter 11 protection, each prospective buyer will have to make an important decision: is it willing to serve as the stalking horse bidder and enter into a purchase agreement? On the one hand, entering into a purchase agreement and agreeing to become the stalking horse will ensure the buyer the opportunity to make a bid in the unlikely event that, after the bankruptcy petition is filed and the agreement to sell has been filed with the Bankruptcy Court, the Court determines that an auction is unnecessary. Perhaps more importantly, the initial purchase agreement plays a key role in setting the minimum parameters of the deal because, in connection with entering into the purchase agreement, the buyer will participate in the drafting of the bidding procedures governing the process by which other buyers will be able to bid against its purchase agreement. (continued ) Warner Telecom Inc. s initial bid of $450 million was increased to $690 million after an auction advocated by AT&T Corp., one of GST s creditors. See Leon Lazaroff, Time Warner Telecom Wins GST Auction, THE DAILY DEAL, August 25, Consider, for example, the purchase of the assets of Winstar Communications Inc. by IDT Corp. for $42.5 million. Less than one year earlier, Winstar claimed its assets were worth $5 billion. See Leon Lazaroff, More Deals Ahead for IDT, THE DAILY DEAL, January 2, NYI v9 3