The advantages of a stalking horse in Chapter 11 acquisitions

We have noted in a number of our posts the trajectory of mergers and acquisitions. Most are initiated so that a business can protect its market share, and others are completed to further a brand change.

However, businesses are not immune to the hazards of the marketplace. When a business falls upon hard times and seeks Chapter 11 bankruptcy protection and is put up for auction, there may be several suitors that may seek to take over the business and lead it back to profitability.

The most likely suitor is referred to as the “stalking horse,” which is based on an old hunting reference where the hunter would disguise himself in order to get closer to his prey. Creditors in this position have a number of advantages, which we will highlight in this post. 

Thorough due diligence -  The bankruptcy code allows for fees and expenses incurred by the stalking horse to be reimbursed if it is outbid. Because of this, the stalking horse can take solace in performing thorough due diligence in measuring up the company for a proper bid.

Access to management – In the same vein of performing proper due diligence, the stalking horse may have more access to company management, where it may be able to learn more about the company’s strengths and weaknesses, and how it may perform in the future under alternate ownership.

Control over the bidding process – Further, the stalking horse may have the opportunity to shape the terms of the purchase agreement in order to discourage other bidders.

Even with these advantages, potential bidders can benefit from experienced legal counsel throughout the process. If you have questions about how the attorneys of Shulman, Bastian & Hodges can help, we encourage you to contact us. 

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