Guest Post (1/3) By Leonard P. Goldberger, Esq.[1]
Stevens & Lee, P.C.
www.stevenslee.com
Introduction
The U.S. bankruptcy court system is a marketplace or, as I like to think, a giant discount department store. You can buy anything, cheap. Although not exactly like a traditional marketplace because current owners are not necessarily “willing” sellers, the bankruptcy process compels some form of transaction by which liquidity is created to repay creditors. One type of transaction is, of course, the section 363 sale (or its first cousin, a liquidating plan of reorganization).[2] Moreover, this marketplace has (for various reasons beyond the scope of this series of articles) become even more robust during the aftermath of the financial crisis. Indeed, the nature of business reorganization cases is trending from traditional stand-alone reorganizations to relatively quick sales of assets early in the bankruptcy case. As the roots of
globalization sink deeper, this marketplace provides many opportunities for foreign investors to make acquisitions of quality assets (or otherwise deploy capital) that may be superior to those in their domestic markets. These foreign investors have the cash and are willing to spend it abroad;[3] they have their own government’s approval – as well as various U.S. governments’ incentives – to make outbound investments; and they have the strategic need to do so to effectively compete in a global economy.
Five Reasons Why
I’ve identified the following five reasons why making acquisitions out of U.S. bankruptcy cases make good sense for foreign investors. (There are undoubtedly others.)
- Good Stuff. The range of assets available for acquisition in the U.S. bankruptcy court system is exceedingly broad. (One need only read a single issue of
Inforuptcy Bankruptcy Assets for Sale
to quickly reach this conclusion.) In this discount department store, the choices of investment opportunities are varied and extensive, and often align themselves well with strategically-targeted industries,[4] such as renewable energy, advanced manufacturing, pharmaceuticals and biotechnology, medical devices, healthcare technology, computer and information technology, retail and consumer brands, waste management and environmental services, financial services, shipping and distribution, natural resources and, of course, the perennial favorite, real estate. As such, foreign investors can acquire either discrete strategically-important assets, or entire companies.
- Strategic Positioning. In the increasingly competitive global economy, the need for foreign investors to engage in strategic positioning becomes ever more important. This applies equally to those that want access to the valuable U.S. market in order to build global brands, as well as to those seeking advanced U.S. technologies (no military sales, please) to improve their competitiveness in their own domestic and/or other international markets. Assets are available in the U.S. distressed marketplace that can satisfy both of these strategic objectives. For example, in 2014, Sailing Innovation, a consortium of a Chinese investment firm and a Chinese department store operator, bought Brookstone, the 240 store U.S. mall-based retailer, at a bankruptcy court auction for $173
million. The consortium will continue to operate the Brookstone stores as part of a larger strategy that involves other international acquisitions. Increasingly, foreign investors are able to get past the so-called stigma of bankruptcy and recognize the hidden opportunities of acquiring high quality, but otherwise stranded, U.S. assets, i.e., good assets trapped in financially-distressed corporate structures.
- Open and Transparent Process. Like any good discount department store, the U.S. bankruptcy courts are always open to the public. Moreover, with appropriate guidance from experienced U.S. insolvency practitioners, the bankruptcy sale process is fairly transparent. Once a foreign investor decides to get into the game, the playing field is generally level. This means that opportunities to participate in the bidding process are available regardless of national origin;[5] foreign investors have the same ability as their domestic counterparts to be heard on objections to the fairness of bidding procedures before bankruptcy court approval; they have equal access to financial and business-related information necessary to inform the investment decision; the bidding process is
open and transparent, and subject to bankruptcy court oversight to enforce legal prohibitions against collusion; and subject to final bankruptcy court approval to ensure the good faith of the entire sale process.
- Free and Clear, Final & Certain. An exceptional aspect of the U.S. bankruptcy sale process is the ability to provide foreign investors with practical business assurances necessary to mitigate the bundle of risks inherent in any cross-border transaction. These assurances flow from the combination of sections 363(f) and (m)[6] which together allow the bankruptcy court to not only to “cleanse” assets of liens, claims, encumbrances and other interests by providing “free and clear” title, but also to provide legal finality and financial certainty that the deal is done once the sale closes. The ability to efficiently and effectively deliver this practical result benefits foreign investors who might otherwise reluctantly have to be become
entangled in messy, protracted, and expensive U.S. litigation in order to exploit the commercial benefits of the targeted assets.
- Cheap (Sort Of). Distressed assets often trade at liquidation value, or below. Between the generally lowered expectations of value in the bankruptcy marketplace, and bankruptcy court-approved sale procedures that do not always create true competitive bidding, distressed assets can often be acquired cheaply. This, of course, provides an incentive for foreign investors to participate in this marketplace. Conversely, in a world where “cash is king,” U.S. creditors are incentivized to embrace sales to foreign investors. Foreign investors flush with cash (e.g., Chinese state-owned enterprises) can affect a favorable outcome in a marginal bankruptcy case where the alternative to the instant liquidity created by a sale is for a secured creditor to bid in its lien and simply take back its collateral. Sometimes, however, in the face of a foreign investor’s compelling strategic need for targeted assets, price considerations become secondary. Consider, for example, where Wanxiang Auto Group (a large, state-owned Chinese auto parts company, acting through its U.S. subsidiary) outbid Johnson Controls (a U.S. company) by over $125 million to acquire the advanced lithium-ion electric automotive battery technology out of the A123 Systems bankruptcy case. (A year later, in the Fisker Automotive bankruptcy case, Wanxiang Auto Group also acquired the Fisker electric car – which (not coincidentally) uses the A123 Systems electric battery.
Conclusion
The marketplace that exists within the U.S. bankruptcy court system is increasingly affected by the powerful forces of globalized commerce. Not surprisingly, forward-thinking foreign investors recognize – and, accordingly, are attracted to – the many investment opportunities in the U.S. distressed marketplace in order to satisfy their global strategic goals and objectives. Not only is an array of strategically significant assets readily available, but the legal and commercial benefits inherent in the process itself encourage foreign investors to participate in this marketplace. As successful acquisitions like A123 Systems-Fisker Automotive
illuminate the possibilities, other foreign investors will undoubtedly follow. Indeed, although Wanxiang Auto Group is a large Chinese state-owned enterprise, these types of successes will encourage foreign investors who are small to medium-sized enterprises to also participate. All of this will likely increase the vibrancy, competitiveness and liquidity of the U.S. distressed marketplace, all to the benefit of (primarily, U.S.) creditors. Other aspects of this process will be explored in the next two articles in this series.
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[1] Leonard P. Goldberger, Esquire is a cross-border insolvency lawyer, and works with Chinese investors in acquiring financially-distressed businesses and assets out of U.S. bankruptcy cases. He has written and lectured on this topic in the U.S. and China. The opinions expressed herein are solely those of the author and do not represent those of either his law firm or its clients.
[2] See 11 U.S.C. § 363 (sales of assets); 11 U.S.C. § 1123(a)(5)(D) (liquidating plan of reorganization).
[3] In 2014 alone, according to a study by Rhodium Group, Chinese investors made investments in the U.S. totaling in excess of $12 billion. See http://rhg.com/notes/chinese-fdi-in-the-united-states-q4-and-full-year-2014-update.
[4] See, e.g., the various industries targeted for development by China’s 12th Five-Year Plan, adopted by China's legislature, the National People's Congress, on March 14, 2011.
[5] Although foreign investors can bid freely in a bankruptcy sale, closing on any acquisition may be subject to review by The Committee on Foreign Investments in the United States, a federal inter-agency committee chaired by the Secretary of the Treasury that is charged with reviewing transactions that result in control of a U.S. business by a foreign person in order to determine the effect of such transaction on the national security of the United States.
[6] 11 U.S.C. §§ 363(f) and (m).
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You May Also Be Interested In:
The 363 Bankruptcy Sale Procedure – Broken Down and Simplified
Property of the Estate Under 11 U.S.C. § 541
The Automatic Stay
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