Matthew C. Lein, Esq.
Lein Law Offices
www.leinlawoffices.com
INTRODUCTION
In the series of articles published
Inforuptcy's blog, readers have learned investment opportunities exist within the bankruptcy court. For example, the bankruptcy court can provide a venue for distressed securities investors to purchase and work with debtors to provide mutually beneficial outcomes.
Building on the above, how does an investor, who would like to purchase a distressed asset through the bankruptcy court, make a sound investment and potentially recover the costs of an unsuccessful bid?
An investor can make an offer to purchase an asset or company through the bankruptcy court by making a stalking horse bid. In the event that bid is not the winning bid, then the investor may request a breakup fee. Distressed companies may welcome a stalking horse bid because they know there is a buyer willing to pay a minimum bid, and that bid may prompt other investors to make better offers.
EXAMPLE
Consider a situation where Jimbo’s Gym is insolvent because of a large lawsuit and is forced to file for Ch. 11. Assume Jimbo (“the Debtor”) is in control of the bankruptcy estate (Please note: certain creditors may have influence over a debtor’s decisions). Jimbo has hired analysts who have valued Jimbo’s Gym at $2.5 million.
Billy Buyer, who watches the Ch. 11 filings via Inforuptcy, realizes an opportunity if he were to buy Jimbo’s Gym for $2 million. Billy Buyer spends $60,000 investigating the potential purchase of Jimbo’s Gym.
Billy Buyer negotiates with Jimbo an asset purchase agreement whereby Billy Buyer will purchase Jimbo’s Gym’s assets in exchange for $2 million cash ̵#8211; this is the stalking horse bid. Billy Buyer knows he is offering to buy the assets for Jimbo’s Gym at a discount and may be outbid prior to the confirmation of the asset purchase agreement. As a preemptive measure, Billy Buyer has included a clause in the asset purchase agreement whereby if he is outbid, he, with the approval of the bankruptcy court, will be allowed to recoup his investment investigation or due diligence costs, and some of the time he spent (this is the breakup fee). The Debtor knows he may have entered into an asset purchase agreement whereby Billy Buyer may be able to purchase the assets of Jimbo’s Gym at a discount, but believes the opening bid of $2 million will attract other buyers that may make a better offer.
One of two things can happen: (1) there is no other bid and Billy Buyer wins, or (2) there is another bid and Billy Buyer loses.
1. There is no other bid.
If there is no other bid, Billy Buyer will receive all of the assets of Jimbo’s Gym for $2 million.
2. There is another bid.
Millionaire Max, at the same time Billy Buyer noticed that Jimbo’s Gym had filed Ch. 11, also subscribes to Inforuptcy and noticed Jimbo’s Gym had filed Ch. 11. Millionaire Max believes $2.5 million is a steal and will not hesitate to pay that amount. Millionaire Max offers $2.5 million and, accordingly, the offer is accepted.
Billy Buyer, who has spent $60,000 thus far, has lost and now wants to recoup his breakup fee. The bankruptcy court agrees Billy Buyer’s bid prompted Millionaire Max to pay the full price, and therefore, benefited the estate and agrees to allow Billy Buyer recover his due diligence costs and a reasonable breakup fee.
MIXED OFFERS
Assume that instead of offering cash, Millionaire Max offers a combination of cash and stock. The combination of cash and stock from Millionaire Max must be compared the all-cash offer from Billy Buyer. If Jimbo believes the combination of stock and cash from Millionaire Max is worth more than Billy Buyer’s all-cash offer, then he should still accept Millionaire Max’s offer over Billy Buyer’s.
CONCLUSION
In conclusion, there may be opportunities within the bankruptcy court should investors monitor the bankruptcy filings using tools like those provided through Inforuptcy.
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You May Also Be Interested In:
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Property of the Estate Under 11 U.S.C. § 541
The Automatic Stay
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Why U.S. Bankruptcy Acquisitions Make Good Sense For Foreign Investors
Overbid? What is that?
Is Your Bankruptcy Asset Purchase Lien Free? Why?
Buyer Beware! The Battle Between Sections 363(f) and 365(h) of the Bankruptcy Code
Stalking Horse Bidder – To Be or Not To Be
It Can Be Done: Case Studies of Successful Acquisitions Out of Bankruptcy by Foreign Investors
Why Every Buyer Should Always Seek 363(m) Protection in an Asset Purchase
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Strategies for Secured Creditors
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