Tag: stalking horse

STALKING HORSE BIDDER: OUR SIMPLE YET GREAT STEP-BY-STEP GUIDE FOR SELLING DISTRESSED COMPANY ASSETS

Post author By Brandon Smith
Post date September 5, 2022

What is a stalking-horse bidder?

A stalking horse bidder is basically a potential buyer who’s interested in making a public bid for an insolvent company’s assets. The stalking horse bidder gets to be the first one to check out the assets and enter into an agreement to purchase them. The agreement negotiated with the licensed insolvency trustee acting as the court-appointed officer sets the lowest price the company’s creditors would get if sold in the receivership or bankruptcy.

If the stalking horse bidder enters into an agreement, and no better offers come in, they’ll be able to purchase the company’s assets. If someone offers more than the stalking horse bidder during the auction and that higher offer is the one that gets court-approved and completed, then the stalking horse bidder is entitled to receive compensation for allowing their bid to be public.

In this Brandon’s Blog post, I describe a case we are currently working on that describes what the stalking horse process is all about, and how the stalking horse bidder either ends up with the assets it bid on or gets paid for not being the successful bidder.

What are the benefits of being a stalking horse bidder?

There are several key benefits and potential advantages to being a stalking horse bidder. For one, you get to negotiate the sale terms (both legal and financial) with the seller, compared to other potential bidders who are presented with a court-approved form of agreement that has already been negotiated for the assets for sale. As the stalking horse bidder, you also have the advantage of being the first bidder in line, which could give you a better chance of winning the auction.

The stalking-horse bidder is allowed to complete due diligence before any other competing bidders, giving them the advantage. This is a privileged position that allows them to make a bid they believe gives them the best chance of success. This includes taking the time to review the company’s financial records and talk to the management and employees, in order to gain a better understanding of the business.

The stalking horse bidder also has the opportunity to engage critical suppliers and large customers to gauge their willingness to work with the stalking horse bidder if its bid is successful.

The stalking-horse bidder is protected from incurring costs as the first bidder. It can negotiate the terms of its break-up fee and expense reimbursements for costs incurred to hire legal and financial advisors, conduct due diligence, and other expenses incurred in formulating its offer.

The costs of the stalking horse bidder are reimbursed from the sale of the assets of the company, but this is subject to the approval of the court. If the stalking horse bidder is not a successful purchaser, the reimbursement will take place.

When is it appropriate to use the stalking horse bidder as an option?

My firm has been appointed by the court as the receiver of a green technology financially distressed company. We are currently in the process of developing a stalking horse sales process in order to sell the assets of the company. Once we have received court approval, we will be able to implement the plan.

We are still developing the entire sales process, including the bidding procedures. As we don’t have court approval yet, I can only describe how we’ll recommend it to the court, and I can’t mention any real names.

As the court-appointed receiver, we took possession of the assets and found that a fair amount of deferred maintenance limited the revenue-generating capability of the assets. However, we were able to borrow certain funds from the secured creditor Applicant in the court process. The cash flow generated from running the business, combined with the borrowing, allowed us to take the time to have a fair amount of the deferred maintenance completed.

Now that we had done as many revenue-improving activities as funding allowed, it was time to develop a sales process to take to the court for approval. The main value of the assets is a function of their revenue-generating capability over their useful life and what the maintenance costs in the future will be. At the same time, we had a party who operates in the same industry approach us advising us they wish to be a purchaser.

We have improved the assets to a fair degree, we are aware of other potential purchasers, and we have the luxury of time to run the business. We thought that a stalking horse bid process would work well to set a floor purchase price for the assets. We did our own calculations for what we thought the purchase price could be, but we wanted to see what an experienced industry player would say. They of course usually build in their own discount, so we were curious.

After some discussion, we decided that proceeding with a stalking horse bid process would be best if an industry player was willing to act as a stalking horse bidder. So we asked them if they would be willing to take on that role, and after giving it some thought, they agreed.

This stalking horse bidder has now completed their due diligence and we have received their letter of intent. We are now negotiating all the terms to come up with an asset purchase agreement. The agreement will set out the sales price and other terms and conditions, including the break-up fee and reasonable expenses reimbursement for its due diligence costs if they are not the successful bidder. Before being able to sign the asset purchase agreement we will need bankruptcy court approval.

We will also have to prepare the terms and conditions of the sale. A stalking horse bidding process is a competitive bidding process where the stalking horse bidder‘s sale price is the auction sale process reserve price. The stalking horse is the winner of this auction-type process if its bid remains the best one.

We will select the bid that provides the greatest value for the assets if there are higher bids. In such a scenario, the stalking horse bidder has the choice to participate in a competitive auction process round to see if it will end up being the purchaser at a higher price than its initial bid. If the stalking horse bidder chooses not to get into a further auction additional bidding and therefore its offer is not accepted, they are entitled to a break-up fee to compensate them for its time and costs.

The court must first approve all of these terms and conditions, including the break-up fee as well as the sales process itself.

The stalking horse bidder: Why would the court approve a stalking horse receivership sale process?

When applying to the Court for authorization of this sort of sales process, the stalking horse agreement is just one part the Court must look at. There are numerous variables the Court thinks about when being asked to approve a specific sales process.

The main considerations are:

Is a sale warranted at this point in the court-supervised insolvency administration?
Will the entire “economic community” benefit from such a proposed sale?
Do any of the debtor’s creditors or major stakeholders have a valid reason to object to a sale procedure for the business?
Does a better sensible alternative exist?

A stalking horse sales process may be recommended by a receiver in situations where the receiver believes it would be advantageous. The benefits generally are:

It cuts down on delays and expenses, which helps out the main stakeholders.
The court-appointed receiver will be able to oversee the sales process and make sure that any superior bids are known, thus protecting the fairness of the process.
A well-advertised sales process will determine the pool of prospective bidders who will ask to see the initial sales package and perhaps may even choose to invest time and money in performing due diligence within the bidding process timeline.
There are bidding protections because If higher bids come in, the conditions for closing the deal proposed by the stalking horse bidder won’t be met, and the receiver will have to tell the court. So, approving the deal wouldn’t prejudice any stakeholders.
If there aren’t any better offers, then there won’t be a need for the time delay and extra cost associated with another sale approval hearing.

Although our specific situation is a receivership administration, a stalking-horse bid process and its terms and conditions, including a breakup fee, could also work for a bankruptcy estate in a bankruptcy proceeding. In a bankruptcy, bankruptcy court approval is required for this kind of bankruptcy sale.

Some important things to remember

I hope you enjoyed this Brandon’s Blog on what a stalking horse bidder is and this kind of court-supervised auction. Are you or your company in need of financial restructuring? Are you or your company unable to survive the COVID pandemic and its aftermath? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt. You are worried because you are facing significant financial challenges.

It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. We know that we can help you the way we take the load off of your shoulders and devise a debt settlement plan.

We realize that people and businesses in financial difficulty need practical advice and a workable solution in an easy-to-understand financial plan. The Ira Smith Team knows that not everyone has to file for bankruptcy in Canada. Most of our clients never do, as we are familiar with alternatives to bankruptcy. We assist many people in finding the relief they need.

Call or email us. We can tailor a new debt restructuring procedure specifically for you, based on your unique economic situation and needs. If any of this sounds familiar to you and you’re serious about finding a solution, let us know.

Call us now for a no-cost initial consultation.

Tags asset purchase agreement, auction process, bankruptcy court approval, bidding procedures, bidding process timeline, break-up fee, breakup fee, competitive bidding process, court-appointed officer, court-supervised auction, distressed company, Ira Smith Trustee, potential bidders, prospective bidders, stalking horse, stalking horse bid, stalking horse bidder, successful bidder

Brandon Blog Post

WHAT IS A STALKING HORSE: A COMPLETE PROCESS THE CHEF NEEDED TO USE TO SUCCEED

Post author By Brandon Smith
Post date November 22, 2021

what is a stalking horse

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

If you would prefer to listen to the audio version of this Brandon Blog, please scroll to the very bottom of the page and click play on the podcast.

What is a stalking horse bid?

In the 16th century, the term originated. It originally was a replica of a horse or something that looked like a horse, that was set out by hunters in an area they wished to hunt in. By hiding behind it, the hunters wouldn’t have to worry about scaring away whatever was being hunted.

Today, it means anything that is put forward or proposed, to test the waters or mask the true nature of the proposal. It is much more recent to think about a stalking horse bid. Its name comes from the fact that it is a way to draw other bidders out of the woods and test their level of seriousness in participating in a sale process and making a bid for the assets being sold.

In this Brandon Blog, I describe an Ontario court decision denying the request of a company under bankruptcy protection to sell its assets and if the company only had known what is a stalking horse bid and used it.

The company of celebrity chef Mark McEwan files for creditor protection

On September 28, 2021, McEwan Enterprises Inc. (MEI), a premier hospitality company based in Toronto, Ontario, obtained protection under the Companies’ Creditors Arrangement Act (CCAA) with a list of more than $10 million in liabilities. The company was founded by chef Mark McEwan.

In his early career, Chef McEwan worked as an executive chef at Toronto’s Sutton Place Hotel. In addition to mentoring budding chefs in his kitchens, Chef McEwan is also a judge on Food Network’s hit series Top Chef.

MEI at one time ran multiple dining establishments, and gourmet grocery stores, in addition to a catering service. Due to the negative impact on the hospitality industry of the coronavirus, MEI experienced significant losses and business challenges and found itself filing for bankruptcy protection under the CCAA.

what is a stalking horse

The owner of the Bloor-Yonge location opposes CCAA restructuring by celebrity chef Mark McEwan

MEI’s restructuring plan presented for bankruptcy court approval would involve Fairfax Financial Holdings Ltd and McEwan repurchasing the business under a specific asset purchase agreement by a new numbered company. With fewer grocery and restaurant locations, the business would retain its 268 employees and reduce lease obligations. The company’s restructuring plan in the CCAA proceedings focuses on effecting a going-concern sale transaction. That is, selling and transferring substantially all of its assets and many of its liabilities to a new entity formed by MEI’s current shareholders, Fairfax Financial Holdings Limited and Chef McEwan.

One of MEI’s creditors, the landlord of the Bloor-Yonge grocery store, opposed the plan. Based on its analysis of the situation, the court found that the proposed transaction did not meet the CCAA’s requirements for approval. Consequently, the sale, the centrepiece of the restructuring plan, failed to get bankruptcy court approval from the bankruptcy judge.

What is a stalking horse? Why did MEI’s proposed bankruptcy sale process fail?

MEI’s legal and financial advisers are excellent. They probably told Chef McEwan the MEI restructuring plan as presented to the court had little chance of success. It would shock me if they didn’t. Because I am not involved in the MEI CCAA proceeding, I can only guess that Chef McEwan ignored his advisors’ counsel, ignored financial and legal advice, rolled the dice, and lost.

Chef McEwan swore affidavits as part of MEI’s court application. According to him:

MEI’s value and success are dependent upon his continued involvement;
the MEI brand has become synonymous with his personal brand and television projects;
by inference, he implied that he would not cooperate with any third-party buyer, who would therefore not have his involvement; and
in his view, a third-party sales process was not necessary and could negatively affect the company’s operations.

I think it is never wise to go into court with a smug attitude or threaten non-cooperation with a third party, in addition to the legal issues I will explain shortly. If MEI had used a real bankruptcy auction process and a higher bidder was able to pay the amount of the purchase, the court would not care whether Chef McEwan would work for the new owner if it was not a condition of the potential purchaser’s offer.

Section 36(4) of the CCAA was at issue. Section 36(3) refers to the factors that a court should consider when considering a specific sale transaction. They are:

a reasonable process led to the proposed sale or disposition in the circumstances;
did the monitor approve the process;
is the monitor submitting a report to the court indicating that a sale or disposition would be more beneficial to the creditors than a sale or disposition under a pure bankruptcy liquidation;
to what extent have the creditors been consulted;
how the proposed sale or disposition will affect creditors and other interested parties;
considering their market value, determine whether the consideration to be received for the assets is reasonable and fair.

In this case, the purchaser was to a related party as described in section 36(4) of the CCAA. According to the law, a court may grant authorization only if it is satisfied that:

the assets were tried to be sold or otherwise disposed of to non-related parties in good faith;
in accordance with the process leading to the proposed sale or disposition, it offers a greater consideration than any other offer.

This was not the case with MEI. I won’t go into all the reasons for MEI’s CCAA bankruptcy sale failure in this what is a stalking horse Brandon Blog, as you can read all about them here. The bankruptcy judge determined that the facts of the case do not meet the requirements of section 36(4), thus the proposed transaction cannot be approved.

Accordingly, it was dismissed.

what is a stalking horse

What is a stalking horse? The competitive bidding process Chef McEwan should have used

The fatal flaw in MEI’s application for approval of the offer was their inability to prove to the court that there was not an even better offer in the marketplace because there was no sales process, possibly being an auction process. Chef McEwan should have used his offer as a stalking horse bid in a competitive auction process. He would have sought court approval for a court-supervised auction-type process. As long as they were fair, he could have set the bidding procedures, the bidding process timelines, and the bidding range through his stalking horse offer, and have the court approve it all at the bidding procedures hearing.

His offer would be exposed to the market, and he might be outbid. However, he was still in control of setting his offer. In terms of his approach, he chose to put MEI under the CCAA process, but once there, he had to adhere to the rules of that process. How could a stalking horse bidding process possibly work? Let’s find out.

What is a stalking horse? A court-supervised auction for bankruptcy sales

Typically, the debtor executes a binding stalking horse agreement with a purchaser against which higher and better offers can be solicited, and which stipulates that the stalking horse will be considered the highest and best offer if no competing bids are received. In order to achieve that goal, the debtor will ask the bankruptcy court to approve a competitive auction process and related bidding procedures.

An organization in distress can use the stalking horse bid method to avoid receiving low bids when selling its assets. Stalking horse bids are initial bids on insolvent company assets. Setting a low-end bidding bar prevents other bidders from underbidding the purchase price. Those wishing to participate in the stalking horse bid process and submit an offer after performing due diligence must submit a better offer than the stalking horse bid.

what is a stalking horse

What is a stalking horse and what are the advantages and disadvantages of a stalking horse bid?

There are certain advantages for a stalking horse bidder. Since the stalking horse bidder is the opening offer that sets the floor price for the assets or company, the insolvent company usually provides several incentives. To begin with, the stalking horse bidder has the opportunity to negotiate the legal and financial terms of an asset purchase agreement with the debtor that will serve as the floor price. Thus, the stalking horse bidder does not simply enter into an agreement negotiated by someone else that might not be exactly what it needs.

In addition, the stalking horse bidder may negotiate bidding options that discourage competitors from bidding, although the entire process needs to be fair to all parties. Thirdly, a stalking horse bidder gets to perform its due diligence first. The due diligence process involves verifying, investigating, or auditing all relevant facts and financial information of a potential deal or investment opportunity.

However, there is still a chance that someone else may outbid the stalking horse offer and, if they want the assets badly enough, they may even bid more than the liquidation value. In the MEI case, MEI failed to prove that accepting its offer would be better than liquidation through a receivership or bankruptcy proceeding. This was another MEI flaw.

Even if that were to happen, stalking horse offers always contain a break fee. When someone else wins, this money will be awarded to the stalking horse bidder. It must be possible to pay the break fee and still have a better offer than what the stalking horse bidder offered. As part of the stalking horse bidding process, the break fee is meant to compensate the stalking horse bidder for the time spent and as an expense reimbursement for the professional fees spent on doing their due diligence and allowing their offer to sit out there for everyone to see.

All the remaining steps follow a typical auction where the highest bidder wins the distressed company‘s assets.

What is a stalking horse recent well-known Canadian example?

Thanks for asking. The court-supervised auction of insolvent entertainment company Cirque du Soleil was conducted based on an offer made by Cirque du Soleil’s secured creditors. That creditor proposal replaced a shareholder offer as the stalking horse bid, which set the minimum requirements for potential rival bids. Also included in the successful bid was Cirque’s commitment to maintaining its headquarters in Montreal for at least five years.

The stalking horse sales process is well known in Canada bankruptcy courts, as you can see. In this process, the stalking horse bidder gains certain advantages while the distressed company and its assets are exposed to the market. After a public auction sale, the court is able to determine if there is or is not a better offer out there under a previous bankruptcy court-approved sales process. So I hope that you can now answer the question, what is a stalking horse?

what is a stalking horse

What next for the chef?

I guess it’s time to start fresh. Most of the time and money spent so far has been in vain. If MEI wants to make another shareholder offer, it will have to prove to the court that it met all the CCAA requirements.

What is a stalking horse summary?

I hope you found this what is a stalking horse Brandon Blog informative. Are you in financial distress and a debt crisis? Do you not have adequate funds to pay your financial obligations as they come due? Are you worried about what will happen to you in retirement? Do you need to find out what your debt relief options and realistic debt relief solutions for your family debt are?

Call the Ira Smith Team today. We have decades and generations of experience assisting people looking for life-changing debt solutions through a debt settlement plan and AVOID the bankruptcy process.

As licensed insolvency professionals, we are the only people accredited, acknowledged and supervised by the federal government to provide insolvency advice and to implement approaches to help you remain out of personal bankruptcy while eliminating your debts. A consumer proposal is a government-approved debt settlement plan to do that. It is an alternative to bankruptcy. We will help you decide on what is best for you between a consumer proposal vs bankruptcy.

Call the Ira Smith Team today so you can eliminate the stress, anxiety, and pain from your life that your financial problems have caused. With the one-of-a-kind roadmap, we develop just for you, we will immediately return you right into a healthy and balanced problem-free life.

You can have a no-cost analysis so we can help you fix your troubles.

Call the Ira Smith Team today. This will allow you to go back to a new healthy and balanced life, Starting Over Starting Now.

what is a stalking horse

Brandon Blog Post

STALKING HORSE INSOLVENCY PROCESS: OUR BEST GUIDE TO GET YOUR M&A DEAL DONE

Post author By Brandon Smith
Post date September 21, 2020

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

If you would like to listen to an audio version of this stalking horse insolvency process Brandon’s Blog, please scroll to the bottom and click on the podcast.

Stalking horse introduction

I have written before about a stalking horse in the insolvency context. Two things recently happened that suggested that I should write about it again, from a slightly different perspective. The first thing was that Ira Smith recently did a Zoom webinar presentation for the M&A Club Canada. The topic they wanted the webinar on and the title of the webinar was “Insolvency restructuring to get your M&A deal done”. Second, I see that there has been an increase in online searches for that term.

So, the purpose of this Brandon’s Blog is to describe what a stalking horse is and provide you with some insight as to how an insolvency process can be used to get an M&A deal done.

**What is a stalking horse in the insolvency and M&A world?**

In the distressed M&A context, a stalking horse refers to a possible buyer participating in a stalking horse auction to purchase the assets of an insolvent debtor as a going concern. In a stalking horse public auction of a financially troubled business, an initial bid by the stalking horse bidder is divulged to the marketplace and becomes the minimum quote, or floor cost, that potential purchasers can then outbid.

It was first extensively utilized in the USA and currently is a routine part of the Canadian insolvency landscape. The stalking horse process is different than the sealed tender sale approach that is traditional in Canada. The stalking horse sales process has been used in Canada many times. The case study that Ira presented in his webinar and gone over below, was one that the Ontario Superior Court of Justice approved.

The stalking horse participates in the process understanding that it might be outbid. Accordingly, it negotiates a break fee to cover its costs. This includes its due diligence costs to put together the first offer. Typically, for a competing bid to knock out the stalking horse offer, it will certainly have to be more than the stalking horse bid plus the Break Fee (described below). The competing offer will certainly likewise need to be on the exact same terms as the stalking horse bid, and cannot include any kind of burdensome conditions.

**Why would anyone want to become a stalking horse?**

So, why would someone want to be a stalking horse? Initially, as a stalking horse, you will certainly have the most effective opportunity of discussing the terms of a purchase that are customized to satisfy your specific issues. Also, as the first prospective buyer, you will have even more time to evaluate and comprehend the insolvent debtor’s company. You will also have a chance to develop connections with management, vendors, and key stakeholders in the sales process. This gives the stalking horse bidder a leg up.

Their expenses of participating in the sales procedure are covered by the break fee that you will negotiate. That break fee is generally secured by a unique court-ordered charge against the assets of the insolvent debtor. However, you will need to consider the ranking of this charge against other charges that may have been already granted by the court.

**How a stalking horse bid works**

The stalking horse method permits a distressed company to prevent receiving reduced proposals as it sells its assets. When the stalking horse prospective buyer has made its deal, the court has accepted that quote and all other conditions of the court-supervised sale, other prospective purchasers may send contending bids for the company’s assets.

By setting the low end of the bidding process, the insolvent firm wishes to realize a greater price, yet understands it cannot obtain a lower one. Insolvencies are public. The general public nature allows for the disclosure of even more information about the opportunity and the company than what would certainly be available in a private deal. Because of this, in this case study, I explain below, I can mention some names.

Stalking horse prospective buyers can typically bargain which specific assets it wishes to obtain. It likewise does not have to acquire any of the insolvent business’s liabilities. It may however choose for business reasons to take some on voluntarily. Examples would be amounts owing to critical suppliers or employment-related liabilities for employees of the insolvent company they may wish to retain.

**MPH Graphics stalking horse bid process case study**

MPH Graphics inc. (MPH) was an insolvent company. They had a potential purchaser who was willing to stand as a stalking horse bidder. We ran a successful stalking horse process in this case. This case happened quite a few years ago, but, since then, we have used the identical technique in other cases. When a similar kind of case comes up in the future, we would use the same process. So, although the case is older, the steps taken are still well suited today.

MPH was a company that provided printing design and finishing for Canadian and US customers. MPH printed a variety of products such as business cards, direct mail pieces, annual reports, and marketing materials and primarily serviced government agencies, not for profit organizations, and unions.

MPH grew by acquisitions and required additional capital equipment financed by debt. The business also had to change because the industry was changing from traditional printing presses to digital. That changeover required further capital investment.

MPH was insolvent

MPH’s line of business primarily serviced government agencies, not for profit organizations, and unions. Absorbing the acquisitions produced inefficiencies and redundancies. It also needed to move to larger premises which meant moving costs and higher ongoing rent costs were being incurred.

At the same time, the industry was extremely pricing competitive. Gross margins were squeezed. Overhead costs, especially sales salaries and entertainment expenses increased. There was now a history of losses. The technical staff was very experienced. To get the union business, MPH’s technical side had to be a union shop. MPH had a blue-chip client list, which is what was really of interest to the stalking horse bidder.

Receivable collections were slowing down and the bookkeeper had to put payable cheques that were printed every month in a drawer. The cheques could not be released because there was not enough money to pay their liabilities as they become due.

stalking horse

**The stalking horse bidder came knocking**

The bidder was an industry consolidator. They came knocking to try to buy the MPH assets. The consolidator did its due diligence and issued a non-binding letter of interest. After further discussions, that interest turned into a binding agreement to purchase the assets. One of the terms of the deal was that the stalking horse bidder required court approval of the purchase and a vesting order from the court to vest the assets out of MPH into the acquiring corporation.

Notwithstanding there were tax losses, the purchaser did not want to purchase shares and have to deal with all the creditor issues. The company could not on its own give the purchaser the certainty it wanted by way of a vesting order. So an insolvency process was required.

**What kind of stalking horse insolvency process?**

There are generally three insolvency options. Some are not necessarily mutually exclusive. They are:

receivership;
bankruptcy; and
restructuring.

Receivership is a remedy for secured creditors. In a receivership, the company loses control of the sales process. Bankruptcy is a remedy for unsecured creditors. In bankruptcy, likewise, the company loses control. It needed a process where the company stays in control.

The insolvent company’s requirements were:

stay in control of the process;
do that specific transaction or a better one; and
get court protection for both the sales process and the sale.

So neither receivership nor bankruptcy would work. So what would allow the company to meet its requirements and run a stalking horse bid process?

**A stalking horse process works best in an insolvency restructuring process**

What is needed is a debtor in possession option. In the United States, it is called a Chapter 11 proceeding. In Canada, there are two federal statutes that apply and can accommodate the needed process:

Liquidating Proposal under the Bankruptcy and Insolvency Act (Canada) (BIA).
Liquidating Plan of Arrangement under the Companies’ Creditors Arrangement Act (Canada) (CCAA).

The benefits of this approach are:

The company stays in control of the process.
It allows for the stalking horse transaction or a better one to be completed.
Allows the insolvent company to get protection from its creditors through the automatic stay of proceedings. This gives it the time to run the stalking horse process, go back to court for approval, and to complete a transaction.

**Liquidating proposal under the BIA to run the stalking horse process**

We chose the strategy of a proposal filing under the BIA. The main reason was that the CCAA is for companies that owe $5 million or more. MPH owed under that threshold, so only the BIA process was available. The strategy would have been the same, even if MPH qualified for a CCAA process and we decided to go under that statute.

As time was of the essence, we MPH first filed a Notice of Intention to Make a Proposal (NOI). This quickly got them the stay of proceedings they needed and access to the court, before needing to draft the definitive proposal document.

The company filed the NOI to implement a sale of its assets, properties, and undertaking, in order to attempt to preserve as much value as possible for the Company’s stakeholders, while preserving as many jobs as possible. As Trustee, we then wrote a report to the court in support of the company’s motion to get the purchaser’s agreement of purchase and sale to be approved as a stalking horse bid and for approval of a sales process, we would run.

As Trustee, we worked with MPH, the purchaser, and their respective legal counsel, to draft the sales process and the terms and conditions of sale. These would be the rules that would allow for the marketplace to become aware of the opportunity to purchase all or substantially all of the assets, properties, and undertaking of MPH.

**Key elements of the stalking horse sales process**

The key elements of the stalking horse sales process were:

The break fee payable to the stalking horse bidder if they turned out to not be the successful purchaser was set at the amount of $100,000.
The Overbid Amount (as described in the Stalking Horse Agreement of Purchase and Sale) was reduced to the amount of $100,000.
If an auction was to be held between parties that all qualified as successful bidders, each bid had to be at least $5,000 higher than the last one.

**The outcome of the stalking horse sales process**

The process we recommended to the court was a 5-week process. The court approved our recommendations and ran the sales process. The process included:

Advertising the opportunity in a national newspaper.
Preparing and distributing a “teaser” non-confidential information circular to distribute to anyone who requested it along with the terms and conditions of sale.
Preparation and distribution of a confidentiality agreement to those who wished more detailed financial information.
Receipt of signed confidentiality agreements and distribution of the confidential information memorandum we prepared.
Receiving non-binding letters of intent from potential purchasers and deciding which ones we chose to provide access to our electronic data room.
Potential purchasers performed due diligence and submitted their final binding offers with deposit funds.

We then reviewed all offers received, to make sure that they met the terms and conditions of sale. We did receive a better offer, but that purchaser’s offer was conditional on them obtaining financing. They could not waive the condition, so the stalking horse bidder’s agreement of purchase and sale turned out to be the winning bid.

**Court approval of the stalking horse bid**

As Trustee, we then prepared our report to court to provide all the information as to the steps we took and the results of the process. We obviously recommended that the company be allowed to complete the stalking horse agreement. The court agreed and issued the vesting order.

There were enough funds to pay out the government trust claim and all the secured creditors in full. There was also enough cash left over to pay for all the costs of the process. Unfortunately, there was not enough money to do any sort of proposal. So the company filed an assignment in bankruptcy and we became the trustee in bankruptcy.

Moving from our role as proposal trustee to the bankruptcy trustee, we informed all the creditors the details of the sale and the outcome. The business and many jobs were saved as a result.

Stalking horse summary

I hope you have enjoyed this stalking horse Brandon’s Blog. Hopefully, you have better insight now into the fact that a sick insolvent company’s business can be saved by doing a sale of its assets to a healthy organization.

Do you have too much debt? Are you in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt.

You are worried because you are facing significant financial challenges.
It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. The way we take the load off of your shoulders and devise a debt settlement plan, we know that we can help you.

We know that people facing financial problems need realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team. That is why we can develop a restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious in finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.
Call us now for a free consultation.

We will get you or your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

Tags Bankruptcy, Bankruptcy and Insolvency Act, bankruptcy trustee, BIA, CCAA, Companies’ Creditors Arrangement Act, court approval, insolvent, Ira Smith Trustee, mph graphics, proposal, stalking horse, stalking horse bid, stalking horse bid process, stalking horse bidder, stalking horse offer, stalking horse sales process, trustee

Brandon Blog Post

STALKING HORSE CREDIT BID: WE NEED COURT APPROVAL BEFORE STARTING A COURT SUPERVISED SALES PROCESS

Post author By Brandon Smith
Post date April 11, 2018

Stalking horse credit bid: Introduction

In last week’s vlog, “STALKING HORSE ASSET PURCHASE AGREEMENT: THE WEINSTEIN COMPANY GALLOPS INTO A COURT SUPERVISED SALES PROCESS“, I described what a stalking horse asset purchase agreement is. I also defined and described the proposed stalking horse credit bid process of The Weinstein Company. That process was approved last Friday by a Delaware bankruptcy judge. The Court delayed the court sales auction by a couple of business days to May 4, 2018.

Stalking horse credit bid: Our earlier case studies

Over the last few weeks, I have provided some case studies from our files for both personal and corporate insolvency matters. As a refresher, these case study vlogs are:

Stalking horse credit bid: Our stalking horse sales process case study

This is the last vlog along our case study theme. The purpose is to show the decision making that the Court goes through in being asked to approve a stalking horse credit bid and a stalking horse sales process in a corporate insolvency file.

We were Court-appointed as Receiver and Manager of a club operating a golf course, restaurant and party function business. The first secured creditor filed its motion to appoint us. We were appointed very close to Christmas that year. Obviously, the golf course was not operating at the time of our appointment. The food and beverage facilities only had one remaining Christmas party and the annual club New Year’s party. No parties were booked yet into the New Year.

We did the normal things a Receiver does such as:

taking physical possession of the premises and the books and records;
identifying if there were any assets located off premises; and
arranging for property and liability insurance.

We were able to use the time to understand the business and the nature and extent of the assets.

There was already a purchaser ready to give an offer to purchase the Receiver’s right, title and interest in the operating assets comprising the club’s businesses. We arranged for an appraisal of the assets and business. We received and reviewed the appraisal. The secured creditor told us the form of offer they would support.

Armed with the appraisal information and the secured creditor information, we entered into a conversation with the potential purchaser. The amount this purchaser told us it was willing to pay was far more than appraised value and above the minimum threshold for acceptance from the secured creditor.

Stalking horse credit bid: Our stalking horse offer

We decided that a stalking horse bid process would be ideal. We doubted that any party would bid higher than the value this potential purchaser was discussing. It made sense to also have the court supervised sales process completed prior to April, so that it would be the purchaser opening up and preparing the course for play and running the food and beverage business, rather than the Court appointed Receiver.

The potential purchaser agreed to become a stalking horse bidder and to the timeline. We and our legal counsel worked with the potential purchaser and its legal counsel to prepare a draft stalking horse asset purchase agreement. The purchase price was the amount this now stalking horse purchaser was always discussing.

Stalking horse credit bid: We galloped off to Court

We filed our motion for approval of our activities to date, requested permission to enter into the proposed stalking horse agreement and sought approval for our proposed stalking horse sales process. The Court had no problem with our activities to date, or the stalking horse agreement, but did not like our truncated stalking horse sales process. We were not able to be in Court until February and we wished to complete the sale by March 31. The Court felt that was not enough time to run a sales process that was fair to all potential bidders. Our legal counsel attempted to persuade the Judge that comparing the appraisal (which the Court saw but our purchaser did not see) and the value of the stalking horse offer, we did not feel that there would be any other bidders.

We could not persuade the Court. The Judge approved everything, but he amended the timeline so that we would run a process that would last at least 5 weeks from the time we ran our advertisement for this business opportunity.

The Court considers various factors when asked to approve a receivership or bankruptcy sales transaction. The basis for this comes from a 1991 Court of Appeal for Ontario decision in Royal Bank of Canada v. Soundair Corp., 1991 CanLII 2727 (ON CA). In no particular order, the Court is concerned with:

Whether the Receiver has made enough effort to get the best price and has not acted improvidently.
Considering the interests of all parties.
The efficacy and integrity of the process used to get offers.
If there has been unfairness in the working out of the process.

In the Judge’s opinion, a 5 week sales process would ease any concerns he had.

Stalking horse credit bid: The outcome

We amended our sales process in accordance with the Judge’s instructions. We then:

ran the advertisement and issued our preliminary “teaser” sales document to all those that requested it; and
set up our online data room of pertinent business and other information about the assets and business operations.

Anyone who wished to do due diligence signed our confidentiality agreement. Everyone who signed our confidentiality agreement was then provided with a unique password to enter the online data room.

The due diligence period ended and since everyone knows the amount of the stalking horse offer, no other potential bidders submitted an offer. Nobody wanted to bid more.

We went back to Court to tell of the results and obtained Court approval to complete the transaction of the stalking horse bidder whose asset purchase agreement was already approved by the Court.

In the meantime, spring had arrived. We hired the necessary golf course superintendent and other maintenance and operating staff and opened up the golf course. We ran the golf club until the sale was completed near the end of June that same year. In the eyes of the Court fairness was achieved, we operated the golf club and the secured creditor was happy with the result of the sale.

Stalking horse credit bid: Is your business facing financial problems?

This case study shows how we were able to satisfy all stakeholders in a Court supervised sales process, to transfer the assets to a new business, remit funds to the secured creditor on a basis acceptable to them and meet the requirements of the Court.

Is your business facing financial problems? Perhaps your company is in need of a restructuring. The Ira Smith Team can develop a restructuring plan which may or may not include the need to file for bankruptcy protection.

The Ira Smith Trustee & Receiver Inc. Team understands the pain you are going through trying to keep your company alive while trying to negotiate with potential purchasers. We understand that you are playing beat the clock, and the pain and stress you are feeling thinking that you may just run out of time. The bankruptcy protection process can ease this stress and provide a level playing field so that no potential purchaser takes advantage of you.

The Ira Smith Team has a great deal of experience in running a stalking horse stalking horse asset purchase agreement. The stress placed upon you due to your company’s financial challenges is enormous. We understand your pain points. Call the Ira Smith Team today for your free consultation. We can end your pain and put your company back on a healthy profitable path, Starting Over, Starting Now.

stalking horse credit bid 0 — stalking horse credit bid

Tags bankruptcy protection, corporate insolvency, court appointed, court appointed receiver, court approval, court supervised sales process, insolvency, Ira Smith Trustee, personal insolvency, receiver, sales process, secured creditor, stalking horse, stalking horse asset purchase agreement, stalking horse bid process, stalking horse bidder whose, stalking horse credit bid, stalking horse credit bid process, stalking horse sales process

Brandon Blog Post

STALKING HORSE ASSET PURCHASE AGREEMENT: THE WEINSTEIN COMPANY GALLOPS INTO A COURT SUPERVISED SALES PROCESS

Post author By Brandon Smith
Post date April 4, 2018

Stalking horse asset purchase agreement: Introduction

In my July 2015 blog, “STALKING HORSE BID: DO YOU REALLY WANT TO STALK YOUR HORSE ANYWAY?”, I defined and described the stalking horse bid process in the Canadian insolvency context. In my November 2017 vlog, “FILING FOR BANKRUPTCY PROTECTION: THE WEINSTEIN COMPANY RETAINS ATTORNEYS FOR POSSIBLE BANKRUPTCY PROTECTION FILING”, I described the (then) financial condition of The Weinstein Company (TWC) and correctly predicted that it would have no choice but to ultimately file for bankruptcy protection. The purpose of today’s vlog is to provide an update on TWC’s bankruptcy protection filing. My expectation that on April 6, 2018, the US Bankruptcy Court will approve a stalking horse asset purchase agreement.

Stalking horse asset purchase agreement: Stalking horse agreement definition

As a refresher, the stalking horse bid process is, an effort by a company to look at the marketplace ahead of an auction. The intent is to make the most of the value of its assets. This is done as part of normally what is a court supervised public auction sale. It is common to being used in a bankruptcy case. stalking horse bidder

Stalking horse asset purchase agreement: How a stalking horse bid works

The insolvent company in bankruptcy protection, canvasses the marketplace. It comes up with what it determines to be, under the circumstances, the best possible offer. The insolvent company and the potential purchaser, enter into a stalking horse asset purchase agreement. The potential purchaser allows its stalking horse bid to go public.

While entering a stalking horse asset purchase agreement, the company can use bidding process protections. An example is breakup charges. This protects the stalking horse bidder prior to the public auction sale. These incentives improve the worth of the offering for the stalking horse buyer. This process may bring about a far better offer before the public auction starts. This greater deal is currently the beginning deal for the public auction. The aim is to produce the best possible offer.

Stalking horse asset purchase agreement: How did the stalking horse offer process get its name?

This type of bidding process gets its name from the use of a stalking horse in hunting. The hunter uses a horse, or a screen made in the shape of a horse. The hunter stays concealed when stalking prey.

The stalking horse bid becomes “the stalking horse”; the “animal” used to attract the “prey”, being other bidders.

The terms of the sales process would show by what minimum amount any other bid must beat the stalking horse bid. That minimum amount would have to be at least the amount of the break fee. The break fee is compensation for stalking horse bidder. It attempts to compensate for due diligence time and costs if they don’t win the deal.

Stalking horse asset purchase agreement: TWC bankruptcy case

In the evening of March 19, 2018, TWC filed for bankruptcy protection in a Delaware Bankruptcy Court. The reasons for the filing were twofold: (i) TWC had canvassed the marketplace and had obtained an offer to purchase its assets by a stalking horse buyer, Lantern Capital; and (ii) to have a Court supervised forum so that both a sale and transfer of the assets can take place and all claimants can make a claim against the resulting cash. TWC announced that anyone subject to a non-disclosure agreement (NDA) was now released. No doubt this will lead to more allegations and claims.

stalking horse asset purchase agreement

Stalking horse asset purchase agreement: The stalking horse purchase agreement

Variety reported that Lantern Capital, a Dallas based private equity firm, entered into the stalking horse asset purchase agreement with TWC. Variety stated Lantern’s bid offers $310 million in cash, plus assuming up to $114.5 million in liabilities connected with TV and film projects, for a total stalking horse bid of $424.5 million.

If approved by the Delaware Bankruptcy Court, this will serve as the floor for other bidders. There is a hearing scheduled for April 6 in Delaware, at which time the Bankruptcy Court is expected to approve this stalking horse bid and the entire stalking horse process. As currently drafted, all other bids must be submitted by April 30. The bids will then be vetted, discussions will take place and TWC will then appear again in Bankruptcy Court to recommend which offer is deemed to be the best and be approved and completed. No further information is available at this time.

Stalking horse asset purchase agreement: Does your company have a buyer but might need a Court-supervised process to finish a sale?

In next week’s vlog, I will provide a case study of how we used a stalking horse asset purchase agreement Bankruptcy Court supervised process to sell the assets of an insolvent company. The successful sale also continued employment for many people.

Is your company facing financial hardship, yet its assets are attractive to multiple potential purchasers? Perhaps you need to be thinking of using bankruptcy protection to maximize the value of the company’s assets through a sale. This process can also continue employment for both you the entrepreneur owner and for many of your current employees.

Brandon Blog Post

STALKING HORSE BID: DO YOU REALLY WANT 2 STALK YOUR ADORABLE HORSE?

Post author By Brandon Smith
Post date July 21, 2015

stalking horse bid

This blog was originally published on July 21, 2015. It was updated on March 22, 2021.

Bankruptcy Sales: What Is a Stalking-Horse Bid?

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 what will be the baseline that must be met and beaten by any other bids 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.

A stalking horse is a process that allows a potential buyer (the stalking horse bidder) to make a public bid for a company’s assets in order to set a floor price for the amount of money to be received by the company’s creditors in a (bankruptcy) sale. The stalking horse bidder will get to purchase the company’s assets if no other bidder comes forward. The stalking horse provision allows for the bidding process terms and conditions to be set in a court-supervised sale.

In this Brandon Blog, I describe the stalking horse bid process and how it works

What’s a stalking horse bid? Example of a stalking horse bid

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 an 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, the higher offers will be made for the assets and for the Court to consider for approval. Presumably, a higher offer will be approved, the purchaser will purchase the assets and the stalking horse bid will not prevail.

How a Stalking-Horse Bid Works

The stalking-horse bid method allows a distressed company to avoid receiving low ball bids as its assets are being sold. Once the stalking-horse bidder has made its offer and it has been negotiated and court-approved, other potential buyers may submit competing bids for the company’s assets.

By setting the low end of the bidding range, the insolvent company hopes to realize a higher price on its assets. Insolvency proceedings are public. The public nature allows for the disclosure of more information about the deal and the buyer than what would be available in a private deal.

Stalking-horse bidders can generally negotiate which particular assets and liabilities it hopes to acquire. After the stalking horse bid is negotiated resulting in an asset purchase agreement, 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 and requires “bankruptcy protection”, 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 an 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. In the case of bankrupt corporations, then it is the bankruptcy court that needs to approve the stalking horse bid, the entire sales process and approve the sale.

What does it take to get bankruptcy court approval?

When applying to the Court, approval for an entire sales process is being sought, a component of which is the stalking horse agreement. The Court has various considerations in determining if a stalking horse sale process should be approved. They are:

Is a sale transaction warranted at this time?
Will the sale benefit the whole “economic community”?
Do any of the debtors’ creditors have a bona fide reason to object to a sale process of the business?
Is there a better viable alternative?”

In the event the stalking horse bid is not the successful winner because of the other potential bidders at least one made a better offer, 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 unsuccessful bid. If the compensation, commonly known as break-up fees, 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. It is fair to the stalking horse bidder to have these bid protections incorporated into their offer.

The Court in considering the approval of a stalking horse bid also considers if the breakup 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.

The Pros and Cons of Being A Stalking Horse Bidder for Assets In Bankruptcy

There are various pros and cons to being a stalking horse bidder and making the stalking horse bid. First the advantages:

First to tie up the company’s management, perform due diligence thereby dealing exclusively with the company for the proposed purchase of its assets.
Gaining the advantage of time and access to the company’s financial information.
Having the time to be able to understand the company’s problems and challenges.
Getting under contract for the assets the purchaser wants to acquire.

The cons of making the stalking horse bid are:

Making sure that you set the break fee high enough to fully compensate the stalking horse bidder.
Not having too long a time period between approval of the stalking horse bid and the time when other bids must be submitted to avoid the assets or the company’s operations worsening through the process.
Would it have been better not to have been the stalking horse bidder and see how the company and its assets fare before having to submit a bid?
If the stalking horse bidder is not a secured lender, is there a likelihood the secured lenders will bid their security which will outbid yours?
If there is more than one acceptable bid, then an auction process is required to determine the successful bidder. The stalking horse bidder may not wish to participate in such an auction and will end up losing out.

Can a secured creditor credit bid? Cirque du Soleil agrees to ‘stalking horse’ takeover bid from lenders worth $375M

One of the most recent high-profile successful stalking horse bids was the Cirque du Soleil insolvency proceeding under the CCAA. In that case, a takeover proposal from the Cirque du Soleil’s secured creditors has been approved as the benchmark bid for a court-supervised auction of the insolvent entertainment company.

That is called a credit bid. When the secured creditor bids all or a portion of its outstanding loan. This will be done in situations where the secured creditor believes that the value of the assets to be sold is less than the amount owed, yet the company’s assets can be used to run a viable business. In that situation, the secured creditor would rather bid its security with the company debt to take over the assets.

By making a credit bid, the secured creditor potential purchaser does not need to come up with cash for the purchase price. However, cash will be required to make certain payments to parties the company business cannot operate without and to have working capital going forward.

If they bid the full amount of their loan and get outbid in other purchase agreements, it means they get fully paid out. Otherwise, they get the assets to run the company, bring it back to financial good health and profitability. Eventually, then they will sell the healthy company to recoup their money plus make a profit.

Stalking horse bid summary

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.

stalking horse bid

Tags Bankruptcy, Bankruptcy and Insolvency Act, BIA, CCAA, Cirque du Soleil, Companies’ Creditors Arrangement Act, corporate insolvency, court, insolvency, monitor, Park Lane Circle, proposal, receiver, restructuring, stalking horse, stalking horse bid, stalking horse bidder, starting over starting now, trustee