Replies to post #202046 on Xechem International Inc. (fka XKEM)

[foxwoodsfan]

Here is an interesting read and possibly some contacts worth speaking to:


Clare Pierce, Cathy Vance, and John Wheeler are with Development Specialists,
Inc., a provider of management and consulting services on behalf of lending institutions,
secured and unsecured creditors, shareholders, bondholders, and business
owners. The authors can be reached at [e-mail], [e-mail],
and [e-mail], respectively.


Asset Sales in Bankruptcy:
The Financial Advisor’s Perspective
CLARE PIERCE, CATHY VANCE, AND JOHN WHEELER
The authors review the practical aspects of Bankruptcy Code
Section 363, governing sales of assets in bankruptcy.
Section 363 sales in bankruptcy, which are named for the Bankruptcy
Code provision that governs them, have become a prominent and
important feature in Chapter 11 over the last several years. Section
363 of the Code permits the bankruptcy trustee or, in most Chapter 11
cases, the company itself (called the “debtor in possession”) to sell, lease
or use property outside the company’s ordinary course of business.
SELLING ASSETS “FREE AND CLEAR”
A Section 363 sale has characteristics that have no corollary outside
of bankruptcy, notably that an asset can be sold “free and clear” of interests.
This means that liens and other interests are stripped off the asset to
be sold and attached to the proceeds of the sale. As an example, say a
debtor wants to sell its inventory, in which the debtor’s lender holds a
security interest. Section 363 permits the security interest to be separated
from the inventory. The buyer acquires the latter free of the bank’s interest.
The bank doesn’t lose its lien, but instead of attaching to the inventory,
the lien rights are in the proceeds, which remain within the debtor’s
bankruptcy estate.
Another big advantage of Section 363 sales is the protection afforded
the buyer. Like the lienholder in the above example, claim holders can
look only to the proceeds of the sale and the buyer is immunized from
most successor liability claims. Moreover, because most Section 363
sales are finally approved by the bankruptcy court (some courts won’t
sign a sale order if no one complains) and the order will include findings
that the sale is in the best interests of the bankruptcy estate and is a good
faith transaction, the buyer is protected against attacks on the sale transaction
itself.
(A disclaimer is in order here. Just about any property can be sold via
a Section 363 sale, which forces us to talk in generalities. Specific types
of assets may be governed by state or federal law in a way that diminishes
to some degree the ability of the buyer to acquire the property “free and
clear” of all interests.)
VARIOUS PARTIES’ INTERESTS
It might seem as if Section 363 was designed to tilt heavily in favor
of the buyer, but the seller, and the bankruptcy estate’s creditors, also benefit
from these sales. Most obviously, the property is likely to command
a higher price if it can be sold without its liabilities. This creates a larger
pool of cash that the debtor can distribute to creditors. Adebtor might also
make use of Section 363 early in its case to create needed cash flow or it
might sell off property, such as a manufacturing line, that has proven to be
unprofitable and a drain on the company’s resources. Whatever the reason
for the sale, the debtor’s decisions are tempered by the fiduciary duty
it owes to creditors, who must be made better off by virtue of the sale.
There is no “typical” Section 363 sale. The property subject to such
a sale can range from a single car to an operating company. Trustees in
consumer cases and large companies that are trying to reorganize make
similar use of the Section 363 sale option. Whether the sale is small or
large, simple or complex, the procedures for effectuating the sale are
largely the same.
THE ADVISOR’S ROLE
However, the greater the complexity of the transaction, the more likely
it is that financial advisors will play crucial roles for both seller and
buyer. Financial advisors can be thought of generally as the business
counterpart to the legal expertise the attorneys provide and can be valuable
in moving the sale forward and ensuring that it’s done right.
On the seller’s side, one of the first tasks for the financial advisor is
to market the asset. Usually, the financial advisor creates a package of
vital information about the asset, along with information about how the
sale will proceed and how a potential buyer should respond, and then
finds a way to get packages into the hands of likely buyers. Some marketing
avenues are obvious, while others require some creativity. Take a
car, for example. An ordinary car of average value will be marketed differently
than a vintage model and a fleet of Bentleys will not pique the
interest of the same crowd as a Chevrolet dealership’s inventory.
Once the package is sent to the target market, the financial advisor’s
job is to “work the room” as it were, figuring out who will have a genuine
interest in bidding on the property. Ideally, the financial advisor will find
among this smaller group of potential bidders one that will be the “stalking
horse,” which is to say someone interested enough to perform the necessary
due diligence and work out terms of a sale.
The seller is almost always better off if a stalking horse bidder can be
found because a good amount of uncertainty is eliminated. The sale terms
negotiated between the seller and the stalking horse bidder will form the
basis of the notice that will go out to all affected parties, which means that
the notice itself will be more specific. In addition, the seller knows its
worst case scenario; if no one makes a higher or better offer, the seller has
a buyer and can move forward with the sale.
THE NEGOTIATIONS
Financial advisors often play a lead role in negotiations with stalking
horse bidders, who are not only interested in buying the asset, but also in
protecting themselves against subsequent bidders who often rely on the
stalking horse’s due diligence and negotiated sale terms (formed with the
aid of their own financial advisors) to form their bids.
Part of the financial advisor’s job, then, is to negotiate appropriate
“break up” or “termination” fees, which give the stalking horse bidder
some compensation for the work it has done in the event it is not the winning
bidder. The goal here is to strike the appropriate balance between
what the stalking horse bidder wants and what is in the best interest of the
bankruptcy estate. Courts examine break up fees carefully and will disapprove
those that are excessive or that will chill the bidding process.
(Another disclaimer: Just what a court will approve can vary by jurisdiction
and different courts have their own preferences and pet peeves, not
just with break up fees, but with many aspects of the sale. Know your
jurisdiction!)
Another important aspect of the negotiations is over bid increments,
to which the courts also give careful scrutiny. Again, the concern is the
best interest of the bankruptcy estate and the courts will view with disfavor
bid increments that discourage others from making their own offers
for the property. Indeed, any fees or other terms that seem designed to
ensure that the stalking horse is the winning bidder could jeopardize sale
approval by the court.
If no stalking horse bidder is found, the financial advisor faces the
task of finding out why. It could be that the property needs to be reevaluated
and a different marketing strategy created. In some cases, the property
will go to auction without a stalking horse.
With or without the stalking horse bidder, Section 363 requires that
proper notice be given to all parties who may have an interest in the property
or its sale, and anyone with an objection must be provided an opportunity
to be heard. This requirement is the most important in effectuating
the Section 363 sale and is the means by which the buyer is able to take
the property free and clear.
THE NOTICE
The content of the notice may vary depending on the property, but
there are certain aspects that are true in all cases, in which the notice
• Alerts those with an interest in the property of the sale and advises
them of the effects of the sale;
• Informs parties how the sale will take place and what the terms are;
• Describes the property to be sold;
• Explains why the sale is in the best interest of the bankruptcy estate,
including a discussion of the fair value of the property; and
• Includes all details that are pertinent to the purchaser, including that
the sale is an arms-length transaction and is made in good faith.
The notice may trigger objections or, if there is a stalking horse, additional
bids for the property. With respect to the latter, the financial advisor
will evaluate the terms and assist with a determination of whether any
subsequent offer is better than the stalking horse bid; just because a bid is
for a higher dollar amount does not mean it is a better offer. The financial
advisor may conclude, for example, that the higher offer has contingencies
or less certain financing, which may have a negative effect on the
estate.
To confirm a sale the bankruptcy court must find that there is a sound
business purpose for the sale, the notice given is reasonable and accurate
and the price paid is fair and reasonable.
Any number of objections to the sale may be raised. A party may, for
example, assert its own right in the property. There might also be allegations
that a bidder is not acting in good faith, that the sale is, in essence, a
plan of reorganization disguised as a sale (called a “sub rosa plan”), that
there is collusive bidding or that bidding devices, such as break up fees,
are unreasonable or geared toward limiting alternative bidding.
Also, courts are unlikely to approve sales for a price that is less than
the value of liens on the property. Although the attorneys take the lead on
matters that go before the court, the financial advisor may be called to tes-
tify about the substance of the transaction, such as the good faith of the
parties’ negotiations or why the sale price represents the fair value of the
property. The court may also require that the financial advisor testify
about the scope and nature of the marketing of the assets.
In general, courts tend to defer to the seller’s business judgment.
Some circumstances will trigger closer judicial scrutiny, such as when the
assets are being sold to a company insider. But these are exceptions to the
general rule that provision of notice and an opportunity to be heard is the
key to Section 363 sale approval.
THE AFTERMATH
Once the bankruptcy court approves a Section 363 sale, it is very difficult
to mount any sort of legal challenge to the sale’s terms. A party that
wants to appeal must do so within ten days and must get a stay of the sale
order pending appeal. Absent a stay, an appellate court will consider only
the limited question of whether the sale is to a good faith purchaser. Even
with a stay, there will likely be a heavy dose of deference to the bankruptcy
court’s findings.
In other words, a properly noticed and approved Section 363 sale is
practically bulletproof, which, along with stripping off the liabilities,
makes the advantages and appeal of Section 363 — and the need for the
right professionals throughout the process — apparent.