Bidding procedures establish a road map for the sale of a debtor’s assets in bankruptcy. This article examines certain key provisions a potential bidder on such assets will want included as part of the bidding procedures. While this list is not intended to be exhaustive, it serves as a good starting point for advancing the goals of a potential bidder.
Break-Up Fee and Expense Reimbursement
The stalking-horse bid is the initial bid on the debtor’s assets, which sets a baseline against which all other bidders must bid. One of the main inducements for serving as the stalking-horse bidder is the ability to negotiate a break-up fee and expense reimbursement. The break-up fee is a set amount paid to the stalking-horse bidder if it is not ultimately declared the successful bidder. The amount is designed to compensate the stalking-horse bidder on account of the time, commitment and effort made by the stalking-horse bidder to establish a bidding floor. The expense reimbursement is intended to reimburse the stalking-horse bidder’s actual legal fees and expenses under this scenario.
While a stalking-horse bidder will want these amounts to be as large as possible, it is important to know the local practice regarding the amount that a court will approve with respect to break-up fees and expense reimbursements. In Delaware, for example, the general rule of thumb is that the break-up fee and expense reimbursement combined cannot exceed 3 to 5 percent of the total sale consideration.
Super-Priority Administrative Expense Claim and Carve-Out
A stalking-horse bidder will also want to examine how its break-up fee and expense reimbursement will get paid. At a minimum, the break-up fee and expense reimbursement should constitute a super-priority administrative expense claim, senior to all other administrative expense claims of the debtor. Additionally, since in many cases the secured lender has a lien on substantially all of the debtor’s assets, the stalking-horse bidder should consider negotiating a carve-out with the secured lender to ensure payment of its claim from the proceeds of the secured lender’s collateral.
Publication Notice
A potential bidder will want to ensure that as much notice of the sale is given as possible in order to bind parties-in-interest. To accomplish this goal, a potential bidder will want the debtor to publish notice of the proposed sale in at least one publication or newspaper. The potential bidder should carefully consider what publications are appropriate (i.e., national vs. regional publications or an industry-specific publication).
Actual Notice of the Sale
Additionally, a potential bidder should carefully review the parties-in-interest to which the debtor intends to provide actual notice of the proposed sale. Examples of parties that a potential bidder may want to receive notice of the sale include (1) all parties who are known to assert a security interest, lien or claim in any of the assets; (2) all nondebtor parties to executory contracts and unexpired leases and any parties who are known to claim interests therein; (3) all applicable federal, state and local taxing authorities; (4) all government agencies required to receive notice under the Bankruptcy Rules; (5) the debtor’s insurance providers; and (6) the creditors listed on the debtor’s creditor matrix.
Good-Faith Deposit
Bidding procedures normally require a potential bidder to provide a good-faith deposit in connection with its bid. In Delaware, for example, the general rule of thumb for the deposit is 10 percent of the total sale consideration. A potential bidder will carefully want to review how long the debtor intends to retain the deposit of the back-up bidder since most bidders would prefer to have their deposit returned as quickly as possible.
Additionally, bidding procedures typically provide that in addition to retaining the good-faith deposit, the debtor shall have the right to seek any and all other remedies and damages from a defaulting bidder. A stalking-horse bidder may want to use its leverage to try to limit its damages solely to the amount of the good-faith deposit.
Due Diligence
A potential bidder will want to carefully review the proposed sale timeline to ensure that it provides for a reasonable amount of time to conduct due diligence and submit a bid. Additionally, the bid procedures should provide that the debtor will provide reasonable access to all written due diligence information provided to any other potential bidder. This is important to ensure that all bidders are privy to the same information and that no one bidder has a leg up in the sale process.
Executory Contracts and Unexpired Leases
A potential bidder will want the debtor to serve notice on all counterparties to executory contracts and unexpired leases that their contract or lease may be assumed and assigned as part of the sale. Such service should conform to the manner of service of a summons and complaint to avoid any arguments by third parties that service was defective.
Additionally, a potential bidder will want the flexibility to add and remove executory contracts and unexpired leases from the final list of assumed executory contracts and unexpired leases up to the date of closing on the sale. By properly serving all counterparties to executory contracts and unexpired leases and retaining the flexibility to add or remove such contracts and leases up to the point of closing, a successful bidder will minimize its risk of being leveraged by a contract or lease counterparty that does not want its agreement assumed and assigned.
Irrevocability of a Bid
A potential bidder will want to review the bidding procedures to understand the period of time its bid will be irrevocable such that the potential bidder is not left having to keep its offer open for an unreasonable amount of time.
Qualified Bids
A potential bidder will want to make sure that the bidding procedures require the debtor to distribute copies of all qualified bids to all qualified bidders at least one day prior to the auction and to indicate at that time which qualified bid constitutes the opening bid for the auction. This will provide the bidder with time prior to the auction to review all of the bids and finalize its auction strategy.
Auction
The bidding procedures should provide that only bidders who have submitted qualified bids by the bid deadline can participate in the auction. The bidding procedures should also require each bidder to confirm at the start of the auction that it has not engaged in any collusion with respect to bidding on the assets. In addition, a potential bidder will want to understand the rules regarding how bids are submitted (i.e., open bids or sealed bids) to avoid any surprises or confusion at the auction. Finally, a potential bidder should also understand any local rules that may govern the auction. For example, in Delaware, all creditors are permitted to attend an auction, and the auction must be transcribed or videotaped.
Closing the Auction
A potential bidder will want to make sure that the bidding procedures require that at the conclusion of the auction the debtor will announce the successful bidder and close the auction. Case law is clear that reopening an auction is in the court’s discretion, and while a court may reopen an auction if a new overbid is substantially better, this factor alone is generally not enough. By formally closing the auction, a potential bidder will have as much comfort as possible that the results of the auction, once closed, are final. To this end, a potential bidder will also want language in the bidding procedures that provides that following the closing of the auction, neither the debtor nor its representatives will initiate contact with, solicit or encourage proposals from any person with respect to the assets that are for sale.