The typical chapter 11 sale process is well-developed: A debtor markets substantially all of its assets and sells its business, ideally as a going concern, in accordance with a court-approved marketing and sale process.
While this structure is well-known, bankruptcy also offers mechanisms for the sale of discrete or unique assets—such as litigation, leftover assets at properties where leases have been or will be rejected, remnant assets, and many others. This flexibility provides unique opportunities to create value or acquire assets.
Chapter 11 Sale Process, Generally
A debtor or a trustee can “use, sell, or lease” property outside of the ordinary course of business, subject to bankruptcy court approval.[1] While there are nuances in each case, a chapter 11 sale process generally falls into five stages.
- Prepetition marketing and selection of a stalking horse. Prior to filing for bankruptcy, a chapter 11 debtor markets the assets to potential strategic and financial buyers. The goal is to identify a stalking horse bidder that would provide the baseline bid against which all other interested parties would compete. In exchange, the stalking horse bidder receives certain bid protections, like a break-up fee of 1–3 percent of the purchase price and reasonable expense reimbursement.
- Commencement of chapter 11 case and approval of bidding procedures. Next, the debtor files its chapter 11 bankruptcy case and, shortly thereafter, seeks approval of bidding procedures that establish the process for selling its business.
- Additional marketing, auction, and selection of successful bidder. After the bankruptcy court approves the bidding procedures, the debtor continues marketing the assets. The duration of the postpetition marketing period depends upon the extent of the prepetition marketing effort. The postpetition outreach includes those who were contacted prior to the bankruptcy filing. If there is sufficient interest, the debtor holds an auction, and the “highest or otherwise best” offer is selected as the successful bid, with the second-best offer often selected as the binding back-up bid.
- Approval of the successful bid and the back-up bid by the bankruptcy court. Following the auction, the sale to the successful bidder and the back-up bidder is presented to and approved by the bankruptcy court.
- Closing. Upon satisfaction of all conditions precedent, the sale closes.
One of the primary benefits of a chapter 11 sale process is the ability of the buyer to “cherry pick” specific assets (and liabilities) it wishes to acquire. The bankruptcy court authorizes the sale “free and clear” of liens, claims, and encumbrances that attach to the proceeds of the sale.[2] The ability to make a “free and clear” sale can be reason enough to justify a chapter 11 filing.
Sales of Discrete Assets
Bankruptcy also offers additional, flexible sale structures that allow for liquidation and maximizing the value of individual, discrete, or intangible assets.
- Going out of business sales. Debtors, particularly those in retail, often file with the goal of right-sizing their lease portfolio. What to do with the inventory and other assets located at stores that will be closed? Going out of business sales allow the debtor, through a liquidation agent, to sell remaining inventory and fixtures at a discount. A debtor can generally conduct these sales notwithstanding applicable state law or lease provisions to the contrary. This process allows debtors to recover some value, instead of abandoning residual assets and deriving no value from them.
- Sales of wholly owned nondebtor entities. Rather than an “asset” sale, a debtor can sell the equity of a wholly owned subsidiary even if the subsidiary is not itself a debtor in bankruptcy. Since these are structured as equity sales, there are some limitations: The subsidiary is sold wholesale, and a buyer does not acquire the assets of the subsidiary free and clear of liens, claims, and encumbrances. Nevertheless, a sale of nondebtor subsidiary equity interests allows a debtor to effectively sell an entire, sometimes profitable, business unit through bankruptcy without directly involving that subsidiary in the chapter 11 process.
- Sales of litigation. Discrete litigation can be sold through chapter 11, even if it would not generally be assignable under state law. The sale can be structured as a contingency fee structure or a true sale, with complete control and risk passing to the purchaser. In some instances, a sale of litigation can occur through an auction process.
- Remnant asset sales. Remnant assets include intangible assets and payment rights not tied to the debtor’s core business. The sale of remnant assets allows a debtor to generate some value for assets that may be contingent, unknown, or otherwise abandoned.
- Intellectual property sales. A debtor can sell its intellectual property, such as brands, software, trademarks, patent portfolios, and digital assets, among others. There are some limitations on the assignability of intellectual property over a licensor’s objection.
Conclusion
Going concern sales in chapter 11 are common, but they are not the only means of monetizing a debtor’s diverse assets. There are creative solutions available for the sale and maximization of value of even unique asset portfolios and nontraditional assets. This flexibility offers opportunities for distressed companies to generate value as well as for interested parties to acquire discrete assets.
