Justification, Indemnification, Obfuscation and Procrastination: Tales of Sales and Chapter 11 Gales

04/26/2002

Introduction

Reorganization and restructuring can reflect hard times, and losses may result for lenders, other creditors and investors involved with troubled companies.  However, reorganization and restructuring of troubled companies may present attractive opportunities for competitors, new investors and other acquirers.  Consequently, the level of investor interest in financially troubled companies has increased dramatically.  Moreover, investment bankers and merchant banks are dedicating more resources to reorganization and restructuring activities.

Quality businesses with too much debt which must reorganize and restructure present significant opportunities for investors.  Over the past several years the bankruptcy courts have become more receptive to traditional acquisition techniques that make investing more efficient, such as blind auctions, the use of customary acquisition agreements, the use of professional financial advisers, the payment of “break up” fees and the reimbursement of the acquirer’s expenses if the transaction is not consummated.  In addition, the troubled debtor equivalent of a hostile tender offer, the purchase of debt or claims, has emerged as a controversial tactic to gain control of the reorganization process.  Consequently, reorganizing and restructuring has become more attractive than ever to those in a position to capitalize on the opportunities presented.

This paper will address the motivations a buyer may have for considering the acquisition of a financially troubled entity or its assets and the means by which such a buyer can accomplish such an acquisition both pursuant to and outside of a plan of reorganization.  This paper will then explore the advantages and disadvantages of both pre bankruptcy transactions and transactions with bankrupt debtors as well as special considerations for the purchaser and other interested parties.

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