As we noted in our prior post, last week’s decision by the Federal Reserve to increase interest rates may not initially affect Chapter 11 bankruptcy filings. However, as future increases are implemented, it is possible that future “363 sales” may be affected. After all, when credit becomes more expensive, it makes potential buyers contemplate further how the acquisition will be financially feasible in the short term as well as in the long term.
Future credit increases could affect so called “stalking horse” bids. For the uninitiated, a stalking horse bid is the initial bid on the assets of a business that has sought Chapter 11 bankruptcy protection. The interested buyer who makes this bid is chosen by the bankrupt company from a pool of potential bidders.
The benefit of a stalking horse bid is that the bankrupt company has assurance that it has at least one buyer of its assets which can be used to prompt other parties to participate in an auction process. The stalking horse bidder can also be accorded certain protections, including being awarded a “break-up fee” equal to some percentage of the purchase price and intended to reimburse the stalking-horse’s out of pocket costs of submitting the bid.
The stalking horse bid will also establish the base line price for the assets. After all, in a 363 sale, the bankrupt company has the burden of proving that the sale of its assets is in the best interest of creditors and that the purchase price is fair and reasonable. By having an auction, the bankruptcy court is able to make a finding that the ultimate purchase price is fair and reasonable. If no other party participates as a bidder, the stalking horse’s price is validated. Either way, the process helps the bankrupt company’s cause and the stalking horse obtains protection from the claims against the bankruptcy company.
If you are considering making a stalking horse bid, or you are part of a pool of bidders that is tasked with responding to such a bid, the attorneys at Shulman Hodges & Bastian can advise you.