Tag: asset purchase agreement

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

RECEIVER APPOINTED BY COURT: 16 KEY INGREDIENTS TO ENSURE COURT APPROVAL OF A RECEIVER

Post author By Brandon Smith
Post date February 7, 2022

As the COVID-19 pandemic continues, we hope that you, your family, and your friends are safe, healthy, and secure. Ira Smith Trustee & Receiver Inc. is fully operational, and both Ira and Brandon Smith are readily available for phone or video consultations.

**A receiver appointed by court: What is a receiver in Canada?**

In the event that a company has financial difficulties, a Receiver may be appointed to take over its assets and manage them until its assets can be sold. The receivers are third parties appointed to supervise the liquidation process and remit the proceeds in accordance with legal priorities. A judge appoints a court-appointed receiver, and a secured creditor appoints a privately appointed receiver under a simple appointment letter. In Canada, for a court-appointed receivership, a receiver appointed by court must be a licensed insolvency trustee (formerly known as a bankruptcy trustee).

In this Brandon Blog, I focus on the factors to be considered by the Court when determining an application for a receiver appointed by court.

receiver appointed by court

**The receiver appointed by court: What happens when a receiver is appointed?**

The licensed trustee acting as receiver’s first duty is to take possession and control of the assets covered by the secured creditor’s security, or of all the assets identified in the court order in a court appointment. The receiver can decide if it can sell the assets for a higher price if it operates the business.

Senior management and the Board of Directors lose most of their decision-making authority when the company goes into receivership. Their advice and assistance are only needed if requested by the receiver.

The source of authority for the receiver appointed by court is appointed in Ontario under two statutes:

Section 101 of the provincial Ontario Courts of Justice Act; and
Section 243(1) of the federal Bankruptcy and Insolvency Act (Canada).

The receiver appointed privately has a duty of care to only the appointing secured creditor. Court-appointed receivers are responsible to all creditors.

receiver appointed by court

Receiver appointed by court: When can a court appoint a receiver?

Under Section 101 of the Courts of Justice Act (Ontario), the court considers whether the appointment “is just or convenient” under the circumstances. When deciding the origin of authority on whether or not to appoint a receiver as the court-appointed officer, the court must consider a variety of factors. Among them leading to the authority for decision making when there is an application for authorization for the appointment of a receiver are:

in spite of not having to prove it, will there be irreparable harm if the court does not appoint a receiver?;
the risk to a secured creditor and the equity the company owns in the assets, while litigation continues;
types of assets that would be subject to possession with respect to the receiver’ acts in its appointment;
it is necessary to balance the interests of the parties and to consider their rights;the preservation and protection of the property through the receivership proceeding pending judicial determination;
under its security, the creditor has the right to appoint a receiver;
when a creditor expects that the debtor will resist the enforcement of its security agreement;
it is an extreme measure which should be authorized sparingly, but less so if the applicant is a secured creditor who has that right under its security document;
in order to allow the receiver to perform its duties more effectively, a court appointment is necessary;
effects of the receivership order on the various parties;
actions taken by the parties and the litigation against properties;
duration of the Court-Approved receivership;
the costs incurred by each party;
it is likely that the receiver appointed by the court will maximize the return to the parties when the assets are sold under a receivership asset purchase agreement with the purchaser of assets;
facilitating the receiver’s duties and activities for its asset plan by a court order; and
a secured creditor’s good faith, the commercial reasonableness of the proposed Court-Appointed receivership and any equity questions.

A decision will usually turn on whether it is necessary to incur the expense and formalities of naming the third party to exercise neutral, transparent, and accountable stewardship of the debtor’s assets, while interested parties argue about the merits of the dispute and the receiver, attempts to maximize the recovery under an asset purchase agreement.

The court will usually intervene if the parties’ dispute puts the business assets at risk or where realizing the debtor’s assets or indemnifying a private receiver could impair the secured creditor’s recovery options. Often, simple default on the secured debt will be sufficient to attract a receivership where the risk to the business is implicit in the nature of the business or the dispute between the creditor(s) and the debtor(s). However, as with all equitable remedies, context is everything and each case turns on its own facts.

receiver appointed by court

**A receiver appointed by court summary**

I hope you found this receiver appointed by court Brandon Blog informative. Although nothing is guaranteed, managing your debt in a way that will allow you or your company in a way to be able to afford it, will lead to your financial success. It will also give you the best shot at having a financially stress-free life.

Are you or your company in financial distress and a debt crisis? Are you embroiled in costly litigation or a crushing debt load and need a time out in order to restructure? Do you not have adequate funds to pay your financial obligations as they come due? Are you worried about what will happen to you? Do you need to search out what your debt relief options and realistic debt relief solutions for your family debt are? Is your company in financial hot water?

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 of Canada-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 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.

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.

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