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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.
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? 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 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 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?
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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.
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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.
what is a stalking horse
