When Électricité de France stepped in to buy Constellation Energy’s nuclear assets and help the company avoid bankruptcy, the Maryland Public Service Commission conditioned the sale on a set of...
Caveat Emptor: Bottom Fishing With No Regrets
- of personal services contracts or other contracts that are ordinarily with or without an express contract provision, which may include key intellectual property licenses.)
A buyer may not be interested in purchasing the seller's business if that business is built upon a critical supply agreement, lease, or license. Outside of a bankruptcy filing, such suppliers, lessors, and licensors would enjoy tremendous bargaining leverage, allowing them to ask for additional consideration in exchange for their consent to the assignment.
- Shedding of Contracts. A bankruptcy filing may also allow a seller to shed itself of undesirable contracts and make its business more attractive to a buyer. Over the past few years, for example, several large theater chains filed Chapter 11 cases designed primarily to reject leases of old money-losing theater locations. They then sold the downsized chain (typically by way of new ownership of the reorganized debtor).
- Public Filings. Shortly after the commencement of a Chapter 11 case, the debtor must file a list of all of its assets and liabilities, including all existing contracts with third parties. Absent special dispensation, the existence of contracts with existing suppliers and existing customers must be disclosed to the world.
Moreover, bankruptcy law allows the debtor to use cash proceeds in which lenders have a security interest only with the consent of those lenders or with permission from the court.
In essence, Chapter 11 means the debtor's budget will be subject to scrutiny and debate, especially if the debtor has secured lenders with a lien on inventory or accounts receivable. Secured lenders likely will try to keep the debtor on a short leash.
Often the seller will be concerned that competitors will gain leverage by the disclosures required by Chapter 11, and with good reason.
- Employees and Management. A Chapter 11 case also will increase scrutiny on any provisions made part and parcel of the sale that may include incentives for employees concerned about uncertainty or discontinuity. Severance and/or retention programs for rank-and-file employees are not usually controversial. But it goes without saying that offers to senior management are likely to be questioned, particularly in the current climate.
If there are multiple competing offers for the debtor's assets, members of senior management may be motivated to select the offer that provides them with the greatest severance benefits or new employment agreements, rather than the offer that provides the maximum distribution to creditors. This conflict of interest is likely to be particularly acute when a financial buyer that needs senior management to run the business is competing with a strategic buyer that intends to consolidate operations and terminate senior management. If one potential bidder is prepared to engage former management and another potential bidder is not, the bidder who is not may encounter inappropriate resistance from management, and this can severely impede its due diligence efforts. The unsecured creditors and bankruptcy court should seek to prevent management from imposing such resistance.
- Competing Bidders. If the seller reaches a deal with one bidder before the bankruptcy case is filed, the Chapter 11 filing will likely impose a second "overbidding"