How To Succeed When Buying A Bankrupt Company

Tuesday, December 2, 2003

Shari Siegel, Latham & Watkins, New York, NY, http://

Better Business & Planning Practices

Abstracted from: Acquiring All Or Part Of A Troubled Business
The Practical Lawyer - Vol. 49, No. 4, Pgs. 11-23

Overview:
Describes the procedures for purchasing bankrupt companies. Covers the purchase of the assets, the stock, or a claim against the bankrupt firm. Explains the issues that each approach raises under the Bankruptcy Code.

Pros and cons of a Section 363 asset purchase. As the number of companies declaring bankruptcy rises, the number of strategic buyers seeking to acquire all or part of those troubled companies-not surprisingly-also rises. Shari Siegel outlines the common acquisition strategies and advises deal planners on the pros and cons of each choice. The purchaser could buy some or all of a debtor's assets in a sale under Bankruptcy Code Section 363. A straightforward transaction, it has the advantage of usually occurring outside the plan of reorganization, which makes it faster to complete. The buyer decides which assets to purchase and which liabilities to assume and need not consider or negotiate the eventual distribution to the creditors (an advantage that debtors and creditors may find to be a negative). These dispositions, though common in New York and Delaware, are less accepted in other jurisdictions, where creditors may consider the deal an improper attempt to evade the Code.

Getting the sale through court. When the purchase is not done as part of the reorganization plan-and sometimes even when it is-the bankruptcy court will have to approve the sale. Because the deal must be the "highest and best offer," Section 363 sales can morph into an actual auction, the author warns. The buyer might lose the benefit of its bargain if a better offer appears before the bankruptcy court has signed off. Purchasers can protect against losses resulting from having been outbid by negotiating a breakup fee or expense reimbursement in the purchase agreement; however, the court must also approve these fees. Some jurisdictions are more likely to do so than others, but approval and amount can vary from judge to judge. The motion to approve the sale can contain specific requirements that competing bids must meet. Generally three or four weeks pass between notice of the sale and the sale hearing. If approved, the deal can close immediately (provided the automatic 10-day stay is waived).

Making a capital contribution. The purchaser might instead choose to buy most or all of the debtor's stock. This approach-making a capital contribution in the troubled company-requires a plan of reorganization but has the advantage of providing the reorganized entity with the greatest protection from pre-bankruptcy claims. The author outlines the requirements for the contents of a plan and the method of soliciting approval from the classes of creditors and other stakeholders. For example, claimholders that will not be paid in full are entitled to vote on the plan, and they must get a disclosure statement with adequate information to decide whether to vote for the plan. The court will approve the plan only if it seems "feasible" because the debtor is unlikely to require further reorganization. Each claimholder must approve the plan or receive at least as much as it would receive in the event of liquidation. The court may approve the plan even if one class rejects it, so long as no class junior to the class that rejected the plan will receive anything under the plan.

Purchasing a claim. In addition to or in lieu of giving the debtor a capital contribution, the purchaser can buy claims against the debtor, expecting to convert them to equity under the plan of reorganization. Creditors benefit from this approach because they receive a faster payout on their claims. The author mentions several areas of concern. For instance, the purchaser can hold no rights beyond what the original claimholder had. Voting as claim purchaser expressly to take control of a debtor may be a sign of bad faith, and the court can decide that the holder of the purchased claim is not entitled to a vote on the plan. The court does not need to approve a claim purchase; however, the purchaser may want approval to guard against being designated as a nonvoting claimholder.

Abstracted from The Practical Lawyer, published by ALI-ABA Committee on Continuing Professional Education, 4025 Chestnut Street, Philadelphia, PA 19104-3099.

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