OPPORTUNITY BUYING 101

Purchasing Valuable Assets Before

and After Bankruptcy

Richard A. Rogan

©2010 Jeffer Mangels Butler & Mitchell LLP. All rights reserved
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 The Players

Seller

Potential Buyers

Creditors

3 Stalking Horse Bidder

 The Potential Buyers

• Objective: To arrange
the best possible terms
with the certainty of
closing.
• Fears: Seller will use
buyer’s effort to put
the company into play.
Someone else ends up
buying the assets.

4
 The Seller

• Objectives: To get a
good price and
reasonable terms—not
a low-ball offer. To
satisfy fiduciary
obligations to creditors
and shareholders.
• Fears: Getting
squeezed by the buyer
and the creditors.

5
 The Creditors

• Objective: Obtain
reliable data to help
create a swift cash
payoff.

• Fears: Will have to

discount the debt; wait
too long for payment.

6
 Secured Creditors Consensual

• Lenders
• Leasing Companies
• Cash payoff at closing
- Negotiate
• Assumption and
assignment How low
- Negotiate? will they go?
- Cure payments?

7
 Secured Lenders Nonconsensual

• Lienholders
- Judgment liens
- Mechanics’ liens
- Ag (producer’s liens)
- Tax liens
How low
• Cash payoff will they go?
- Negotiate?

8
 Landlords

• Assumption and • Want premises back?

assignment?
• Caps on unsecured
claim
- State law
- Bankruptcy Code
- Out of court?
• Is property essential?

9
 Creditors Committee

• Unsecured
• Official v. Unofficial Will insist on
• Oversee Process getting something.
- Fairness
- Get best price
- Get simplest terms
- Discount for cash?
• Assumed executory contracts
– Cure payments
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 Auction

11
 The Framework

• Distress Sale Outside of Bankruptcy

• Foreclosure by Secured Creditor
• Receivership
• Assignment for Benefit of Creditors (ABCs)
• Bankruptcy
– Chapter 11
– Chapter 7
– Involuntary
– Prepackaged
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 Distress Sale: Outside of Bankruptcy

• Quick • Assumption and

• Flexible assignment
• No Court approval • Bulk sale notice?
• Fiduciary duties • Fraudulent transfer
• Form unofficial concerns
Creditors’ Committee • Receivership
• Composition • Involuntary
agreement?
Bankruptcy
• Liens
- Must negotiate
13
 Foreclosure by Secured Creditor

• Quick
- Personal Property,10 days
- IRS Notice, 25 days
- Real Property, 4 months
• Must pay off Secured
Creditor • Lien-free sale
• Difficult if multiple - Caveat: some assets might
secured creditors, not be subject to bank’s lien
landlords, leases • No Court approval
– Group sale? • Not a fraudulent transfer
• Payment by priority
14

• Neutral party
• Appointed by Court
• Equity receivers
– Corporate dissolutions
– Partnership dissolutions
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Receivership
• Rents and profits
receivers
– Loan defaults
• Receiver controls
seller’s position
• Sale requires Court
approval
• Liens must be paid or
negotiated
 Assignment for Benefit of Creditors

• Neutral party
• No Court involvement
• Creditors’ committee
• Assignee controls
seller’s position
• Liens must be paid or
negotiated

16
 Bankruptcy

• Chapter 11

• Chapter 7

• Involuntary

• Prepackaged
17
 Chapter 11

• Section 363 Sale •Secured creditors must be paid

in full or consent
- Court Approval
•Sale – Auction
• Debtor in Possession
• Sale confirmation order
- Retains control
- Free and clear of liens
- Has some goal - Good faith buyer
• Creditors’ Committee • Sale pursuant to confirmed
- Wants to encourage plan of reorganization
bidding - Could liquidate all assets
• Sale procedures order - Could sell off some assets
- Stalking Horse
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 Chapter 7

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
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 Involuntary

• 3 Creditors
• $13,475 claims
- Not contingent
- Unsecured
• Use to force sale
• Chapter 7 – Trustee
- Elect trustee
• Usually converts to
Chapter 11
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 Prepackaged

• Strike deal before • Seller files Chapter 11

bankruptcy – Immediately moves to
• Write restrictive terms confirm sale
of sale – Must satisfy Court and
creditors
– Fairness issues
– Sale - Auction

21
 The Sale

• Seller’s considerations
• Buyer’s considerations
• Stalking horse bidder
• Other bidders

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 Creating the Procedure: Seller's Considerations
Level the playing field

• Hire pros
– Investment banker
– Business broker
– Real estate broker
– Appraisers
– Attorneys
• Define the Sale
• Financial disclosures
– What is being sold? • Qualify bidders – balance
– Ideal terms capability against open
– Timeline bidding
– Identify target buyers

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 Creating the Procedure

Buyer’s Considerations
Tilt field to favor the buyer

• Clarify objectives • Define ideal terms

- Desired end result? - Contracts and leases to
- Value to buyer? be assumed and
assigned
- All or part?
- Cure payments?
• Hire Professionals
• Do you want to be
- Valuation experts
the...
- Attorneys
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 Stalking Horse Bidder

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 Stalking Horse Bidder
PROS CONS
Set opening bid Low bid encourages overbids

Set sale procedure Get involved in auction

Pre-qualify bidders
Break-up fee and initial overbid
Subsequent overbids
Unique terms
Assume certain contracts
Not all cash
Other qualified buyers might
outbid you
Limited to actual expenses
Increases ultimate price
Not a level playing field
Subject to attack – unfair cure
payments
Could lose to cash buyer

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 If You Aren't the Stalking Horse

• Complete due • Can you spin off some

diligence assets?
– Risk costs - Avoid collusion
• Fight for level playing • Qualification as bidder
field • Bid what is right for you
– In Court – sales - Modifying terms
procedures order
– Out of Court – terms of
bidding

27
 Questions

Richard A. Rogan
Jeffer, Mangels, Butler, & Marmaro LLP
Two Embarcadero Center, 5th Floor
San Francisco, CA 94111
(415) 398-8080
RRogan@JMBM.com

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