November/December 2009 / Features
Acquiring Companies in Bankruptcy
Acquiring companies in bankruptcy through a Section 363 sale presents strategic buyers with some key advantages. They can purchase selected assets and cherry pick beneficial contracts. They can assume some liabilities and leave others behind. Whereas in a purchase outside of bankruptcy, a buyer might be required to obtain consent of a contract counter-party in order to purchase or assume the contract, in a Section 363 sale third-party consent is unnecessary.
A sale of a debtor’s assets in a Chapter 11 bankruptcy proceeding requires the approval of the bankruptcy court. The court will then require the debtor to hold an open auction to maximize the value of the assets, even when the debtor has fully marketed the assets prior to its bankruptcy filing and determined that a buyer’s bid was the highest and best.
A Section 363 sale often commences with the debtor or target choosing a “stalking horse” or lead bid, which will serve as the opening bid at the court-authorized auction. All other bidders will need to submit bids higher than the stalking horse bid in order to participate. There are advantages and disadvantages to becoming the stalking horse. The decision whether to become the stalking horse will ultimately rest on the perceived advantage of dictating the process, as opposed to living with a process dictated by another bidder.
