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On September 30, 2010, in In re American Safety Razor, LLC, et al., Case No. 10-12351 (MFW), the United States Bankruptcy Court for the District of Delaware ruled that the debtors’ proposed bid procedures for the sale of the business were unfair and unreasonable. The bid procedures, among other things, provided too much discretion to the debtors in the auction process.
363 Sales in General
Section 363 of the Bankruptcy Code provides authority to sell a debtor’s assets. Sales under Section 363 are often referred to as 363 Sales. In 363 Sales, assets can be sold free and clear of any interest in the assets under certain circumstances. By eliminating the risk that another party later claims an interest in the assets that are sold, 363 Sales can maximize the price parties are willing to pay for the assets.
In 363 Sales, courts generally encourage open, robust and competitive bidding in order to maximize the sale price of the assets to be sold. Because many courts require that the sale process be subjected to a market test, an open market auction is believed to be a reasonably efficient way to market test the value of the assets being sold.
When an interested buyer agrees to serve as an initial bidder, referred to as the “stalking horse bidder,” this interested buyer sets the floor for bidding. The existence of a stalking horse bidder tends to increase other potential bidders’ interest in the assets and thus encourages competitive and spirited bidding.
Stalking horse bidders generally seek stringent bidding procedures in order to discourage other bidders from driving up the sale price at an auction. Conversely, sellers generally like having an acceptable floor for bidding while at the same time seeking flexible bidding procedures in order to obtain competitive bidding and thus drive up the sale price at auction above the floor.
Sellers derive value from stalking horse bidders because the stalking horse bid encourages interest in the auction and the assets to be sold. Thus, sellers generally agree to certain demands by the stalking horse bidder regarding bid procedures in order to encourage a party to serve as the stalking horse bidder.
ASR’s Bankruptcy and Bid Procedures
On July 28, 2010, American Safety Razor Company, LLC and numerous of its affiliates (collectively, “ASR”) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. ASR was in the shaving razor business.
On the same day that ASR filed bankruptcy, it filed a motion seeking approval of bid procedures and the sale of substantially all of its assets free and clear of encumbrances. The hearing on the bid procedures and sale motion was intentionally scheduled by ASR to take place only after the auction concluded.
Prior to its bankruptcy filing, ASR had negotiated with its First Lien Lenders for the sale of ASR’s business to them. The First Lien Lenders’ stalking horse bid consisted of a credit bid of $243.6 million and assumption of all of ASR’s liabilities.
ASR’s bid procedures required that only “Qualified Bids” from “Qualified Bidders” would be accepted. The deadline for Qualified Bids was September 20, 2010.
To become a Qualified Bidder, ASR required that interested parties submit an indication of interest that included a purchase price. ASR was not required to provide any due diligence materials until after a party became a Qualified Bidder. ASR had until September 15, 2010 to determine if a party was a Qualified Bidder. Therefore, under the proposed bid procedures, a Qualified Bidder might have only five (5) days to review due diligence materials before the deadline to submit a Qualified Bid. The bid procedures further provided ASR with discretion to require a deposit from any particular bidder.
Generally, debtors first seek approval of bid procedures before going forward with an auction process. ASR collapsed the typical steps in 363 Sales and proceeded with the bidding process so as to consolidate the hearing for approval of both the bid procedures and the sale of the business. A hearing was scheduled for September 28, 2010 to consider approval of the bid procedures and sale of the business.
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