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Bankruptcy Sales Present Significant Growth Opportunities for Businesses

Chapter 11, the business reorganization section of United States Bankruptcy Code, was created with the goal of giving a distressed company breathing room and negotiating leverage to restructure. Economic realities and the nature of the debtor's assets, however, often prevent a successful reorganization and, instead, result in a liquidation of the Chapter 11 debtor. Companies looking to expand or enhance their existing business should be aware that liquidation sales offer significant growth and value opportunities.

363 Sale Overview

The Bankruptcy Code allows most Chapter 11 debtors to sell some or all of their assets through the "363 sale" process, which begins like other traditional sales with the debtor negotiating a purchase contract with a buyer. However, the terms of the sale become final only after the bankruptcy court determines that the proposed purchase price for the debtor's assets is the highest and best price available. From the buyer's perspective, a 363 sale offers three substantial benefits: the opportunity to purchase assets at a cost lower than normal, the ability to take ownership of these assets free and clear of any liens or similar encumbrances, and the legal right to recoup costs expended in the pursuit of the 363 assets.

363 Sale Opportunities and Advantages

As the economy continues to falter, 363 sales will likely occur with increased regularity. Companies seeking growth should consider the advantages 363 sales offer to purchasers. As previously noted, the advantages of a 363 sale include below market prices, break-up fees that offset due diligence costs, and protection from liens, claims and other encumbrances that may have otherwise attached to the assets. More specifically:

  • Prices lower than those from non-coerced sales. An entity that is not forced to sell its assets on an expedited or distressed basis will spend more time marketing and will command a higher price while waiting for an interested buyer. In contrast, 363 sales involve debtors that lack significant time for extensive due diligence or marketing, which translates into a buyer paying less for the assets.
  • Recouping due diligence costs. The first bidder may obtain an advantage if it is designated as a "stalking horse bidder." Being first in the door, the stalking horse bidder has the opportunity to negotiate a "break-up" or "termination" fee as part of the contract, which is payable if a higher bidder prevails at a subsequent auction or sale hearing. The break-up fee typically compensates the stalking horse bidder for the time and costs incurred in the event that a higher bidder takes away the contract. Many courts allow a break-up fee based on a percentage of the purchase price (1-3% is generally acceptable), while others only allow a break-up fee to the extent of the actual expenses paid.
  • "Free and clear" protection. When the sale is approved, the court gives the buyer an order authorizing the sale of assets "free and clear" of any interest in such property. The free and clear nature of the sale has significant value to the purchaser because it allows a buyer to deal with the assets as if there were no creditor actions affecting them. The order removes any mortgages, liens, claims or encumbrances from the purchased assets and attaches such claims to the sale proceeds.

Companies looking to expand or enhance their existing business may discover great value by participating in a 363 sale. These unique bankruptcy sales offer advantages that growing businesses cannot normally find when participating in a traditional sale, and opportunities for these types of acquisitions abound in a down market.

If you have any questions regarding this, or any other legal issue, please feel free to contact a member of Greenebaum's Bankruptcy and Workout Team or the Corporate and Commercial Group.

Even though the content of the above Greenebaum Doll & McDonald e-bulletin is primarily informative, state and federal law obligates us to inform you that this is an advertisement. You have received this advisory because you are a client or friend of the firm.

About Greenebaum Doll & McDonald PLLC
Greenebaum Doll & McDonald PLLC is a widely-respected business law firm with approximately 200 legal professionals in six offices, serving local, national and international clients in virtually every industry. A forward-thinking business law firm, Greenebaum is committed to the practice of Breakthrough Law®. 

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