opportunity buying 101
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Richard A. Rogan
OPPORTUNITY BUYING 101Purchasing Valuable Assets Beforeand After Bankruptcy
2010 Jeffer Mangels Butler & Mitchell LLP. All rights reserved
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Disclaimer
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Potential Buyers
Seller
Creditors
Stalking Horse Bidder
The Players
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Objective: Toarrange the bestpossible terms withthe certainty ofclosing.
Fears: Seller willuse buyers effort to
put the companyinto play. Someoneelse ends up buyingthe assets.
The Potential Buyers
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Objectives: To get agood price andreasonable terms
not a low-ball offer.To satisfy fiduciaryobligations tocreditors and
shareholders. Fears: Gettingsqueezed by thebuyer and thecreditors.
The Seller
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Objective: Obtainreliable data to help
create a swift cashpayoff.
Fears: Will have to
discount the debt;wait too long forpayment.
The Creditors
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Lenders
Leasing Companies
Cash payoff at closing
- Negotiate
Assumption and
assignment- Negotiate?
- Cure payments?
How lowwill they go?
Secured Creditors Consensual
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Lienholders
- Judgment liens- Mechanics liens
- Ag (producers liens)
- Tax liens
Cash payoff
- Negotiate?
Secured Lenders Nonconsensual
How lowwill they go?
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Assumption andassignment?
Caps on unsecuredclaim
- State law
- Bankruptcy Code
- Out of court?
Is propertyessential?
Want premises back?
Landlords
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Will insist on
gettingsomething.
Unsecured
Official v. Unofficial
Oversee Process- Fairness
- Get best price
- Get simplest terms
- Discount for cash?
Assumed executory contracts
Cure payments
Creditors Committee
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Auction
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Distress Sale Outside of Bankruptcy
Foreclosure by Secured Creditor
Receivership Assignment for Benefit of Creditors (ABCs)
Bankruptcy
Chapter 11
Chapter 7
Involuntary
Prepackaged
The Framework
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Quick
Flexible
No Court approval Fiduciary duties
Form unofficialCreditors
Committee Compositionagreement?
Liens
- Must negotiate
Assumption andassignment
Bulk sale notice?
Fraudulent transferconcerns
Receivership
InvoluntaryBankruptcy
Distress Sale: Outside of Bankruptcy
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Quick- Personal Property,10
days
- IRS Notice, 25 days- Real Property, 4 months
Must pay off SecuredCreditor
Difficult if multiplesecured creditors,landlords, leases Group sale?
Payment by priority
Lien-free sale- Caveat: some assets
might not be subject tobanks lien
No Court approval Not a fraudulent transfer
Foreclosure by Secured Creditor
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Neutral party
Appointed by Court
Equity receivers Corporate dissolutions Partnership
dissolutions
Rents and profitsreceivers Loan defaults
Receiver controlssellers position
Sale requires Courtapproval
Liens must be paidor negotiated
Receivership
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Neutral party
No Court
involvement Creditors committee
Assignee controls
sellers position Liens must be paid
or negotiated
Assignment for Benefit of Creditors
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Chapter 11
Chapter 7
Involuntary
Prepackaged
Bankruptcy
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Section 363 Sale
- Court Approval
Debtor in Possession- Retains control
- Has some goal
Creditors Committee
- Wants to encouragebidding
Sale procedures order
- Stalking Horse
Secured creditors must bepaid in full or consent
Sale Auction
Sale confirmation order
- Free and clear of liens
- Good faith buyer
Sale pursuant to confirmed
plan of reorganization- Could liquidate all assets
- Could sell off someassets
Chapter 11
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Section 363 Sale Trustee
- Cannot operate business for long
No Creditors Committee Free and clear of liens
Sale procedures order- The stalking horse bid
Sale Auction
Sale Confirmation Order- Free and clear of liens
- Good faith buyer
Chapter 7
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3 Creditors
$13,475 claims
- Not contingent
- Unsecured
Use to force sale
Chapter 7 Trustee- Elect trustee
Usually converts toChapter 11
Involuntary
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Strike deal beforebankruptcy
Write restrictiveterms of sale
Seller files Chapter11
Immediately movesto confirm sale
Must satisfy Courtand creditors
Fairness issues Sale - Auction
Prepackaged
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Sellersconsiderations
Buyersconsiderations
Stalking horse
bidder Other bidders
The Sale
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Hire pros
Investment banker
Business broker
Real estate broker Appraisers
Attorneys
Define the Sale
What is being sold? Ideal terms
Timeline
Identify target buyers
Financial disclosures
Qualify bidders balance capabilityagainst open bidding
Creating the Procedure: Seller's Considerations
Level the playing field
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Clarify objectives
- Desired end result?
- Value to buyer?
- All or part? Hire Professionals
- Valuation experts
- Attorneys
Define ideal terms
- Contracts and leasesto be assumed andassigned
- Cure payments?
Do you want to bethe...
Buyers Considerations
Tilt field to favor the buyer
Creating the Procedure
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Stalking Horse Bidder
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Set opening bid Low bid encouragesoverbids
Set sale procedure Get involved in auction
Pre-qualify bidders Other qualified buyersmight outbid you
Break-up fee and initial overbid Limited to actual expenses
Subsequent overbids Increases ultimate price
Unique terms Not a level playing fieldAssume certain contracts Subject to attack unfair
cure payments
Not all cash Could lose to cash buyer
PROS CONS
Stalking Horse Bidder
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Complete duediligence
Risk costs
Fight for levelplaying field
In Court salesprocedures order
Out of Court termsof bidding
Can you spin off someassets?
-Avoid collusion
Qualification as bidder
Bid what is right for
you- Modifying terms
If You Aren't the Stalking Horse
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Questions
Richard A. Rogan
Jeffer, Mangels, Butler, & Marmaro LLPTwo Embarcadero Center, 5th Floor
San Francisco, CA 94111(415) 398-8080
2009 Jeffer Mangels Butler & Marmaro LLP. All rights reserved2010 Jeffer Mangels Butler & Mitchell LLP. All rights reserved.