- Anatomy of an Auction: Maximizing Asset Value through a Bankruptcy Sale
- November 17, 2010 | Author: Colleen E. McManus
- Law Firm: Much Shelist Denenberg Ament & Rubenstein, P.C. - Chicago Office
Going once...going twice...sold! In a time when banks and borrowers increasingly use auctions to dispose of assets, well-conceived bid procedures are the key to turning a ho-hum auction into an effective liquidation or even, in rare cases, a barn burner.
Section 363 of the U.S. Bankruptcy Code allows debtors to sell assets outside the ordinary course of business, including via auction. Article 9 of the Uniform Commercial Code permits auctions as well. In both scenarios, the overarching goal is to maximize both the asset values and the return to creditors.
The process starts with the debtor shopping its assets for sale, which hopefully garners a bona fide offer. The prospective purchaser then can become what is known as a "stalking horse," whereby it enters into a contract with the debtor, albeit subject to higher and better offers. The stalking horse can receive certain protections to compensate it for spending the time and money to initiate the sale process. For example, bid protection establishes a protective cushion so that another bidder cannot swoop into the auction and trump the stalking horse by bidding, let's say, a mere $10 more. Although technically a higher and better offer, this type of bid would be unjust to the stalking horse. Similarly, a break-up fee compensates the stalking horse for the time and expense it incurred in "kicking the tires" and hiring counsel to negotiate a contract with the debtor. In bankruptcy, a court can approve these bid procedures after notice has been given to creditors. Outside of bankruptcy, notice should be provided to creditors and other interested purchasers. Then, the debtor or bank can continue marketing the assets and, if another attractive bid is received, invite parties to an auction.
SK Hand Tool Corporation, a Chicago-based tool manufacturer with plants in Illinois and Ohio, owed its bank roughly $9 million as of March 2010 and had failed in its attempts to obtain any new credit, refinancing or new capital. The bank was no longer interested in funding and threatened to cut off the company's access to receivables. SK's vendors were becoming nervous about payment and starting to implement cash-in-advance requirements. Most troubling, customers were getting skittish and wondering if their tool orders would be filled. The situation was dire.
After hiring an investment banker, SK received three letters of intent to purchase its business assets, the highest of which was for $3.25 million. With that stalking horse offer in hand, SK filed a Chapter 11 bankruptcy petition on June 29, 2010, and immediately sought bankruptcy court approval to hold an auction within 35 days. SK's motion for approval included bidding increments designed, in part, to protect the stalking horse bidder while also enticing other interested purchasers. In addition, SK proposed granting the stalking horse a break-up fee if it was not the successful bidder at an auction. The bankruptcy court allowed SK to go forward with an expedited sale featuring these procedures.
As a result of the sale process, SK received an offer of $3.4 million from another tool manufacturer, which meant there would be an auction. The auction went on for hours, and resulted in a winning bid of $8.25 million by Ideal Industries, Inc. Thus, through effective bid procedures, the price for SK's assets rose by $5 million over the initial bid.
Of course, not all auctions have such a favorable outcome. But skillful marketing and carefully conceived bid procedures can unearth the interest in the market and, thus, achieve the highest value for the assets.