A stalking horse bid, in the Canadian insolvency context, is an attempt by a Company (and/or its Monitor, Receiver or Trustee) in a Court supervised insolvency proceeding, to set the floor price for the assets. The intent is to maximize the value of its assets as part of a Court supervised sales process and to discourage any bid below a certain value.
According to Wikipedia, “The term stalking horse originally derived from the practice of hunting, particularly of wildfowl. Hunters noticed that many birds would flee immediately on the approach of humans, but would tolerate the close presence of animals such as horses and cattle. Hunters would therefore slowly approach their quarry by walking alongside their horses, keeping their upper bodies out of sight until the flock was within firing range. Animals trained for this purpose were called stalking horses.”
In the insolvency context, a stalking horse bid stands to test the market to see how the market values the assets for sale. If the market values the assets less than the amount of the stalking horse bid, then no one will bid higher and the party who made the stalking horse bid will be successful in acquiring the assets. If the market values the assets more than the amount of the stalking horse bid, then higher offers will be made for the assets and for the Court to consider for approval. Presumably a higher offer will be approved, that purchaser will purchase the assets and the stalking horse bid will not prevail.
After the stalking horse bid is negotiated, it will be necessary for the Company, Receiver or Trustee to obtain Court approval of not only the stalking horse bid, but also for the entire sales process to be implemented. If the Company is attempting to restructure, then those corporate proceedings would be either under the Companies’ Creditors Arrangement Act (“CCAA”) or the Proposal provisions of the Bankruptcy and Insolvency Act (Canada) (the “BIA”). In that situation, it is the Company making application to the Court with the support and assistance of the monitor or proposal trustee. If it is a corporate receivership or bankruptcy proceeding, then it is either the receiver or bankruptcy trustee making the application.
When applying to the Court, approval for an entire sales process is being sought, a component of which is the stalking horse bid. The Court has various considerations in determining if a stalking horse sales process should be approved. An important case in Ontario to determine what the Court’s concerns will be is Brainhunter Inc. (Re), 2009 CanLII 72333. In his decision, the Honourable Regional Senior Justice Morawetz stated:
“…the court should consider in the exercise of its general statutory discretion to determine whether to authorize a sale process:
(a) Is a sale transaction warranted at this time?
(b) Will the sale benefit the whole “economic community”?
(c) Do any of the debtors’ creditors have a bona fide reason to object to a sale of the business?
(d) Is there a better viable alternative?”
I must emphasize that at this point of the insolvency proceeding, the Court is only being asked to consider approving a sales process. This is different than the parties coming back to Court after the sales process has been run for approval of an actual sale. In an earlier blog, “PARK LANE CIRCLE-PEOPLE WHO LIVE IN GLASS HOUSES CAN’T CHANGE THE RULES”, we discussed the issues that a Court must consider when being requested to approve a particular sale.
In the event the stalking horse bid is not the successful winner, it is normal for the stalking horse purchaser to receive some form of compensation. The compensation is for the time, cost and resources invested to perform its due diligence, to make its offer which was found to be reasonable in the circumstances and to expose that offer to the marketplace to stand as a stalking horse bid, and for that bidder to not end up as the successful purchaser.
Our Firm has been involved in situations where the stalking horse bid has been both the successful bid and the unsuccessful bid. If the compensation, commonly known as a break fee, is fair and reasonable, it will not dissuade other purchasers from coming forward in the sales process, and it will also be fair to the stalking horse bidder if they are unsuccessful. The Court in considering the approval of a stalking horse bid also considers if the break fee, and the entire stalking horse bid, has been negotiated between arms’-length parties and has the support of the stakeholders involved in the insolvency proceeding.
If your Company is experiencing financial difficulties, don’t waste your time stalking horses or any other animal. Seek the advice of your professional advisers. The earlier you seek financial help the more options will be open to you. Contact Ira Smith Trustee & Receiver Inc. today. We’ll review your corporate issues and come up with a sound plan so that Starting Over, Starting Now you can enjoy financial peace of mind.