Sunday, October 05, 2008

Real Value Through Acquisitions of Troubled US Companies

“Meltdown in the world financial markets has thrown open new opportunities for Indian firms to buy out under-valued overseas assets that fit well into their gameplan for achieving global ambitions, India Inc's top CEOs say.” Press Trust of India, October 5, 2008

Given the current state of the US economy, corporate India and other foreign buyers are recognizing that this is a critical time to consider the acquisition of undervalued US companies, including through the US bankruptcy process. Though a purchase of a troubled company is more complicated than the stock or asset purchase of a healthy US company, tremendous value can now be achieved through the purchase of low-priced US assets.

In response to the current economic environment in the US, we have put together an experienced team of corporate transactional, restructuring and bankruptcy lawyers to assist foreign buyers of US companies. We also operate in a cost-effective way that is all but impossible to match by larger law firms.

Not much more than a glance at financial headlines yields a very prominent example of the purchase by a foreign company of the assets of a US company through a Section 363 sale under the US Bankruptcy Code - Barclays’ purchase of certain assets of Lehman Brothers. On Sunday, September 14, Barclays had been negotiating with Lehman for the purchase of certain of its assets. The next day, Lehmans filed for bankruptcy protection. On Tuesday, September 16, Barclays was then bidding through a Section 363 sale process for the very assets it had sought, reportedly for several hundred million dollars less than the September 14 price. The sale would also result in the purchase of such assets virtually clear and free of any liens, encumbrances and liabilities. While the headlines blared the bankruptcy of Lehman, the story is also about a savvy foreign company making a play for cheap US assets through the US bankruptcy process.

What About an Asset Sale Outside of Bankruptcy Process – Better to Buy Before a Bankruptcy Filing? A conventional asset sale pursuant to an asset purchase agreement may be possible if the target company has not yet filed for bankruptcy - such as was pursued by Barclays prior to Lehman’s bankruptcy filing. However, while such a sale avoids the expense and procedural requirements of a bankruptcy sale, shareholders and creditors of the selling company may later seek to reverse the sale by claiming that the sale was a fraudulent transfer. For example, the US Bankruptcy Code permits the reversal of a sale as a fraudulent transfer if the company receives less than reasonably equivalent value for its sold assets and the company was insolvent at the time of the sale.

A Bankruptcy Sale Under Section 363 - Real Value for Foreign Buyers. This section of the US Bankruptcy Code allows a purchase of the assets of a company free and clear of liens and claims. This sale process under Chapter 11 of the US Bankruptcy Code involves an offer from an acquiring company (referred to as a “stalking horse”) to purchase the assets of the bankrupt company (the role played by Barclays in the Lehman transaction). The bankrupt company is then required to solicit competing bids and to conduct an auction to determine the highest and best bid. Even if the “stalking horse” loses the bid, it can be entitled to compensation for its time and expenses through a break-up fee and/or expense reimbursement that is approved in advance by the bankruptcy court.

  • Advantages to the First Bidder (the "Stalking Horse"). If other competing bids can beat the initial bidder as the “stalking horse,” why not wait for someone else to act as the stalking horse if you may lose the bid even if you gain a break-up fee? The stalking horse has some real advantages: (1) it is able to negotiate its own deal terms - other prospective purchasers must accept the stalking horse’s asset purchase agreement terms with few changes, (2) it is able to perform greater due diligence than a latecomer, and (3) other prospective purchasers must make bids that exceed the stalking horse’s bid by at least a specified minimum amount, plus the amount of any break-up fee.
  • A Deal Cleansed of Liabilities. The end result, unlike in a conventional asset purchase sale mentioned above, is that the terms of the Section 363 sale are approved by the bankruptcy court and offer the buyer some degree of certainty that it is getting the kind of assets it wants without the kind of liabilities it seeks to avoid. We have recently discussed ways in which Indian companies may be underestimating the legal risks of US acquisitions - click here for this discussion. Here is a way to gain great value and limit such risks.
  • Asset Agreement and Diligence Process is Otherwise Similar. Though the asset sale agreement is subject to bankruptcy court approval, the process of negotiating and documenting the asset purchase agreement is no different from that of a conventional asset purchase sale. The parties enter into the same kind of confidentiality agreement and there is a due diligence process as in a conventional sale.
  • Such Bankruptcy Sales are on the Rise. The numbers of these Section 363 transactions are increasing, with a greater share being pursued by foreign companies. As overall numbers, 32 Section 363 sales, worth $1.6 billion, were announced in the first quarter of 2008 as compared with 21 such sales, worth $888 million, in the first quarter of 2007. While an Indian buyer may be less familiar with the US bankruptcy process and may not move as quickly as an experienced US buyer, good US legal advice can help steer a transaction to conclusion. For example, in a recent sale of the assets of a US manufacturing company, an Indian buyer won the Section 363 auction process, and was able to navigate the compressed timing of the bankruptcy sale, even though it entered the bidding at a late stage.

Other options are also open to a company acquiring the assets of a troubled company, including the following:

Sale Under a Chapter 11 Plan. This avoids the competitive bidding process under Section 363 and requires the investor to co-sponsor the target’s Chapter 11 plan of reorganization. The Chapter 11 plan is then voted on by the target’s creditors.

Secured Creditor Foreclosure/Sale of Assets. Such an arrangement takes the form of a negotiated package with a secured creditor whereby the creditor would foreclose on a loan to obtain the assets and at the same time sell the assets to a foreign buyer.

Acquisition of Debt or Extension of Loan. A foreign investor could either extend a loan to a target company or acquire the debt of a target company, and then either exert some degree of control over the target through loan covenants or even exchange the debt for the target’s equity.


Allan said...

just curious, are you aware of any recent section 363 sales involving asia-based bidders/buyers?

David Laverty said...

I have learned of other recent section 363 bids by Indian buyers that are pending but not finalized - I am also interested in learning of examples. Let's all share such information as we become aware of section 363 deals from Asia.