COVID-19: Key US Antitrust Issues In Bankruptcy And Distressed Sales

• Published date: 02 July 2020
• Subject Matter: Corporate/Commercial Law, Anti-trust/Competition Law, Insolvency/Bankruptcy/Re-structuring, Coronavirus (COVID-19), M&A/Private Equity, Corporate and Company Law, Insolvency/Bankruptcy, Antitrust, EU Competition , Operational Impacts and Strategy
• Law Firm: Arnold & Porter
• Author: Mr Michael B. Bernstein, Rosa J. Evergreen and Justin P. Hedge

The COVID-19 pandemic has created significant financial distress for many businesses and there have been a number of bankruptcy filings recently,¹ with more likely on the horizon. As a result, there is likely to be an increase in acquisitions of companies or assets out of bankruptcy.² Companies considering bankruptcy sale-transactions need to consider the structure that best suits their needs'e.g., a "363 sale" offering a separate sale process and potentially speed, or a sale as part of the plan of reorganization or liquidation plan, which allows for the sale to be incorporated into the plan process. It also is important to recognize that just because a target has filed'or is likely to file'for bankruptcy, does not mean that the transaction is immune from the antitrust laws. Parties to transactions meeting certain thresholds must file notification with the Federal Trade Commission and Antitrust Division of the Department of Justice and observe a waiting period prior to closing. And, the US antitrust authorities will continue to scrutinize and investigate transactions raising substantive antitrust issues'whether meeting the threshold for filing or not. Both the filing and substantive review occur independent of the bankruptcy court's approval.

Below is a summary of the key issues to consider when contemplating acquisitions in bankruptcy, especially those that may raise antitrust issues.

Bankruptcy Overview

There are a number of considerations for a company when contemplating acquiring the assets of a distressed company; one is whether to acquire the assets pursuant to a section 363 sale or a sale under a confirmed plan of reorganization/liquidation.

363 Sale

In a sale pursuant to section 363 of the Bankruptcy Code, a buyer typically negotiates a purchase and sale agreement (PSA) pursuant to which the buyer agrees to acquire all or certain of the assets of the target company, and agrees on the liabilities that the buyer is willing to assume in connection with the acquisition of the identified assets. The parties also agree upon the contracts that will be assumed and assigned to the buyer in connection with the acquisition of the identified assets. In connection with the negotiation of the PSA, the buyer and target company also negotiate the terms and conditions of bidding procedures that will be operative in connection with the sale of the assets pursuant to the PSA. These procedures generally include, among others, a "break-up fee" and "expense reimbursement" that will be payable to the buyer if a third-party outbids the buyer at any auction.

Under the sale process described above, the buyer is often referred to as the "stalking horse bidder" and the requisite PSA and associated bid procedures to be implemented in connection with the sale of the assets to the stalking horse bidder are generally fully negotiated between the buyer and the target company prior to the commencement of the bankruptcy proceedings. In this scenario, the fully negotiated PSA and bid procedures, and the motions seeking the approval of the PSA and the bid procedures, are then submitted to the bankruptcy court for approval at the same time (or close in time) to the commencement of the bankruptcy proceedings.

In other cases, typically where a company has not identified an agreed-upon buyer prior to its bankruptcy filing, the company (now a debtor in bankruptcy) instead seeks approval of bid procedures without an identified stalking horse bidder and attempts to use the process of soliciting bids as a way to find a potential buyer during the bankruptcy.

In either case'that is, with a stalking horse bidder or simply the debtor seeking to establish bid procedures separately during the bankruptcy case, upon receipt of the bankruptcy court's approval of the bid procedures'the debtor can conduct the auction process to ascertain if there are any qualified bidders or any qualified competing bidders, as applicable, and to the extent any such bidders are identified, conduct an auction to determine the ultimate winning bidder. Once the winning bidder has been determined, the actual sale of the assets is submitted to the bankruptcy court for approval, and subject to receipt of the bankruptcy court's approval (and any closing conditions in the PSA), the sale may be consummated.

Some benefits of an acquisition of assets pursuant...