gibson dunn: getting ready for the next cycle: unlocking ......pros & cons of 363 sales 4....

Attorney Work Product; Privileged and Confidential

Presented by: Oscar Garza, Keith Martorana, Mike Neumeister, and Taylor Hathaway-Zepeda

May 29, 2019

Getting Ready for the Next Cycle: Unlocking Value in Troubled Companies: 363 Asset Sales


1. Overview of 363 Sales

2. Typical 363 Sale Situations

3. Pros & Cons of 363 Sales

4. Differences Between 363 Sales & Healthy M&A

5. Alternative Approaches to Distressed Sales

6. Selecting a Stalking Horse

7. Understanding the Auction Process & Bid Procedures

8. Navigating a Sale Hearing

2

Agenda


• A Section 363 Sale is the process by which assets are sold in bankruptcy

• Assets may be sold “free and clear” of liens and other interests

• Normally the debtor accepts bids and enters into an agreement with the lead bidder, known as the “stalking horse”

• The agreement is submitted to the court for approval and, as part of that approval, competing bidders are given an opportunity to top the stalking horse bid in connection with an auction process

• Ultimately, the sale will be approved if the debtor can show it has accepted the highest or otherwise best offer

• A 363 Sale is NOT a Sub Rosa Plan

3

What is a 363 Sale?


1. Pre-petition marketing and negotiation

2. Indications of interest and letters of intent

3. Stalking Horse proposals and bids

4. Filing

5. Bid Procedures

6. Post-petition marketing or auction

7. Sale Hearing

8. Closing

363 Sale Timeline

4


• In a 363 Sale:

o Debtor-in-Possession controls the disposition of the assets, rather than a Trustee

o Debtor may avoid complex and cumbersome aspects of plan sales, such as:

Detailed formal disclosure statements and notices

Specific classification of creditors

Vote of approval by creditor supermajority

o The ultimate legal test for sale approval is less burdensome

5

363 Sale vs. Plan Sale


6

Stats on 363 Sales


• General Motors (GM)

o In 2009, Old GM sold the bulk of its assets to the majority government-owned New GM through a 363 sale

• Brookstone Holdings Corp. (BHC)

o In October 2018, after a successful auction process, BHC and certain of its subsidiaries closed different sales for its remaining going concern assets (focused on intellectual property and airport operations) and its headquarters real estate for in excess of $70 million in the aggregate.

• Sears Holdings Corporation (SHC)

o In February 2019, SHC and certain of its subsidiaries sold substantially all of their remaining assets, focused on approximately 425 go-forward stores, for approximately $5.2 billion in the form of cash and credit bid.

7

High Profile 363 Sales


• Distressed seller

• Inability to raise equity capital or new debt

• Inability to restructure existing debt

• Material adverse claims

• Short time horizon before material debt or contractual default

• Prospect for long-term success absent short term debt, liability, and liquidity

issues

8

Typical 363 Sale Scenario Characteristics


• Buyer:

o Sales are “free and clear” of other liens, claims, and interests

o Assumption and assignment of contracts and leases

o Certainty that once the sale is approved by the court, it will not be subject to later challenges

This includes freedom from fraudulent conveyance attacks

• Seller:

o Significantly higher sale price given the reduced risks to buyer

o No need for stockholder approval of the sale

o Fiduciaries’ decisions are protected by court approval

9

Pros of a 363 Sale


• Buyer:

o Greater competition may result in upward price pressure and being outbid

o Timing can be affected by court process

May need to provide DIP financing to keep debtor operational during the sale period

• Seller:

o Greater potential exposure in the press

o Bankruptcy may adversely affect business operations

o Need to obtain DIP financing if debtor is cash flow negative

10

Cons of a 363 Sale


• In 363 Sales:

o More limited reps and warranties

o Reps do not survive closing

o No indemnification and generally no hold-backs

o Detailed provisions regarding the assumption of contracts and payment of cure costs

o Often more certainty about what assets and liabilities are being acquired or assumed by buyer

o Federal bankruptcy laws govern and the parties submit to the jurisdiction of the bankruptcy court

11

363 Sales vs. Healthy M&A


• Fewer post-closing covenants

o E.g., less likely to include tax, non-solicit, non-compete, and other similar provisions

• Fewer closing conditions

o E.g., no stockholder approval and fewer third party consents required

• Bankruptcy-related covenants

o E.g., auction procedures and deadlines

• Termination fees & reimbursement expenses for Stalking Horse

o Fees greater than 3% may be deemed “excessive” and likely to chill bidding

12

363 Sales vs. Healthy M&A


• Non-bankruptcy asset sale

• Liquidation through receivership or assignment for the benefit of creditors

• Chapter 11 filing without identifying buyer (or potentially without marketing)

• Chapter 11 filing after initial marketing but before selecting stalking horse

o This may be the case where the debtor is running a dual-track plan/sale

process (or running out of prefilling liquidity)

• Chapter 11 filing after selecting a stalking horse

13

Alternative Approaches to Distressed Sale


• Bankers may conduct a mini-auction to select the Stalking Horse

o Goal is to identify the highest or otherwise best offer, taking into account price, structure, assumption of liabilities, timing, and other concerns

• Secured Lender may become a Stalking Horse through a Credit Bid

o Credit bids allow lenders to bid the amount of their claims against the debtor as payment for the assets subject to sale

o Credit bids often include DIP financing to bridge the sale and control the sale process, including milestones

• Termination Fee/Expense Reimbursements

o One of the main benefits of being a Stalking Horse, although subject to court approval

• Negotiate milestones debtor must meet to avoid default

14

Selecting a Stalking Horse


• Can technically proceed with private 363 Sale (no overbid process)

o However, bid procedures are the standard practice.

• Usually involves a 30-60 day auction process

• Bid procedures will be subject to notice, hearings, and court approval

o Committee, lenders, landlords, and others will often comment or object

• Bidders should consider 363(n) issues

o Debtor may avoid a sale or recover damages if bidders agreed among themselves to fix the price

• Need specific procedures for assumption, assignment, proposed cure amounts, etc.

15

Bid Procedures & Auction Process


• Marketing Period

o Critical to select the right bankers, advisors, and communication strategy

• If multiple assets are being sold:

o Individual-asset bids allowed or only portfolio bids?

• Consent/approval rights among Debtors, Committee, and Secured Lenders

• Minimum Bids

• Generally no financing contingencies for qualified bids

• Back-up Bids

• Cash-Only Bids

• Landlord Issues

Common Bid Procedure Issues

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• Two Hearingso 1) obtain approval of bid procedureso 2) obtain approval of best offer

• Courts will apply the Business Judgment standardo largely process focused

• Must satisfy one of the 363(f) conditions for sale to be “free & clear”o Non-bankruptcy law permits the saleo A consenting lien holder formally agrees to the saleo Asset sale price is greater than the aggregate lien value on the asseto Interest is in bona fide disputeo Interest holder could be compelled in a legal/equity proceeding to accept

a money satisfaction of the interest

17

Sale Hearings


• Section 363(f) can allow sales free and clear of:o Successor liabilityo Ownership disputes (subject to dispute)

• Section 363(f) does not allow sales free and clear of:o Government approvalso Ongoing environmental obligationso Assumption and Assignment of Contracts/Leases

• Adequate assurance of future performance• Resolution of cure disputes

18

363(f) Considerations


• 363(m): Any reversal or modification of the sale on appeal will not affect the sale’s validity unless its authorization has been stayed pending appeal

• Debtor and Buyer must negotiate up front whether the sale will close over an appeal

o This could affect ability to get title insurance in a real estate transaction

• Protection from Appeals

o 14 day appeal period

o Section 363(m) – Good faith purchaser

19

363(m) Considerations

gibson dunn: getting ready for the next cycle: unlocking ......pros & cons of 363 sales 4....

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