Initial Public Offerings

• What A Turbulent, Often Unpredictable IPO Can Teach

Bankruptcy & Insolvency

• How To Buy Assets From A Bankrupt Debtor

Securities Offerings

• Corporate And Government Refinancings Will Trigger A New Credit Crunch

Global Markets

• Get A Global Reach By Cross-Listing On Euronext

Mergers & Acquisitions

• Practical Techniques For Finding Intellectual Property Pitfalls

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FAQs on distressed acquisitions. Although buying a failing company's assets can be tricky, attorneys Robert Loewer, Stephen Sayre, and Richard Bendix suggest some routes are better for success. Foreclosure under UCC Article 9 lets a secured lender sell collateral by a commercially reasonable public or private method following the debtor's default. The sale transfers all the debtor's rights to the buyer and discharges any junior security interests. This process is relatively inexpensive and, if the debtor cooperates, extremely rapid; unfortunately, if the debtor does not, it can take months. One drawback is that the Uniform Commercial Code covers only personalty. Another is that the sale usually takes place outside of court, so the buyer cannot rely on judicial findings concerning the discharge of senior liens (such as tax liens), the sufficiency of the purchase price, or the buyer's liabilities as the debtor's successor. Instead, a cautious buyer should conduct due diligence.

IOU holders have some say. An assignment for the benefit of creditors is a second method for obtaining assets, the authors explain. The debtor signs a trust agreement transferring all assets to an independent third party, which then liquidates the debtor. This transfer has to be approved in the manner dictated by the debtor's charter and by the statutes or common law of the debtor's state of incorporation. The debtor can make the assignment without the creditors' consent, but the assignee needs the consent of the secured creditors in order to wipe out their liens in the liquidation sales. Because the assignee conducts an auction that sets the assets' market value, the winning bidders face little risk that a court will subsequently find that the sales to them were fraudulent conveyances.

KO liens by way of bankruptcy. The third method noted by the authors is an asset sale by the debtor or a trustee under Chapter 11 of the Bankruptcy Code. Confirmation of a Chapter 11 reorganization plan is much slower than a Section 363 sale outside a plan. The Section 363 sale that is not in the ordinary course of business must be approved by a bankruptcy court's order; then the debtor may sell assets free and clear of all liens and interests, assuming the presence of any of five specified but vague conditions (which courts usually interpret broadly). The court order should have thorough factual findings and legal conclusions on the fairness of the price paid and the selling process. This not only shields the buyer from other creditors' claims but also removes the risk that sales will be subsequently challenged as fraudulent conveyances. The order frequently protects against successor liability, but exceptions include all environmental-remediation and some collective-bargaining obligations. Another advantage to this method is that the buyer can cherry-pick the debtor's unexecuted agreements and unexpired leases, since the Bankruptcy Code allows the debtor to cancel or assume and assign them. There are, however, drawbacks: the Section 363 process is ordinarily slower and more costly than an Article 9 foreclosure sale or an assignment for the benefit of creditors, and it could drive up the purchase price.

SOP under Section 363. An asset-purchase agreement is much less complicated for a Section 363 sale than for a nonbankruptcy sale, the authors point out, since the debtor is selling assets “as is.” It therefore does not make most of the representations and warranties that, as a seller, it otherwise would. The buyer cannot expect to recover damages from a bankrupt debtor and must therefore perform painstaking due diligence to evaluate the deal's risks. The purchase price can then be adjusted to reflect those risks. A stalking-horse bidder customarily makes the first offer and signs an agreement, after which a public auction occurs. Rival bidders usually have to show that they can close and that they consent to the terms of the stalking horse's agreement. They must also put down a considerable deposit. The stalking horse often gets special protections, such as a breakup fee if a third party outbids it.

Abstracted from ACC Docket, published by Association of Corporate Counsel, 1025 Connecticut Ave. NW, Suite 200, Washington DC 20036-5425. To subscribe, call (202) 293-4103; or visit www.acc.com/php/cms/index.php?id=38.