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Repeating the scenario of the early 1990s, political and economic pundits are squabbling over the state of the U.S. economy. The issue is whether the economy is slipping into a recession or just in a temporary respite from the robust economy that prevailed up until June 2000. Many companies have deferred merger and acquisition activity to focus on the downward pressure on margins and restatement of earnings projections. As the debate proceeds, savvy strategic and financial players, including Fortune 500 companies, private equity funds and others, are capitalizing on the effects of the current downturn by focusing on acquisition and growth opportunities. A consequence of the economic decline is the creation of a buyers’ market for businesses that cannot find refinancing sources. With more frequency than over the past decade, distressed companies are finding themselves compelled to sell their businesses or major assets in an effort to realize going-concern values for the benefit of their creditors and, hopefully, stockholders. In that scenario, a larger number of distressed companies have found it necessary to resort to the provisions of Chapter 11 of the U.S. Bankruptcy Code to consummate a sale. Through June 9, 2001, 110 public companies with assets approximately in excess of $80 billion commenced Chapter 11 cases. This number of Chapter 11 cases represents an increase of over 35 percent in the number of filings and a more than 100 percent increase in the reported value of the assets of the Chapter 11 debtors as compared with all of 2000. The recent bankruptcy court-approved sale of substantially all the assets of Trans World Airlines Inc. to American Airlines Inc. illustrates the constructive use of Chapter 11 to bridge a difficult, complex and multifaceted acquisition. The Chapter 11 process provides the acquirer with the imprimatur of a court order determining that the particular sale has been made in good faith, is not challengeable and is often free and clear of liens, security interests and most liabilities. By ignoring or penetrating the shroud of stigma and uncertainty that looms ominously over a bankruptcy process, astute acquirers are successfully expanding their businesses and investments by bidding for and purchasing the businesses or assets of distressed debtors in a manner that offers protection to all parties in interest and avoids future litigation. Economic downturns always necessitate the restructuring of troubled enterprises. The staggering amounts of public debt issued over the past eight or more years, however, and the extent to which that market, as well as the public equity market, are now off limits, coupled with the decline in the value of the assets of many businesses, have resulted in the upsurge of Chapter 11 cases this year. Many of these Chapter 11s have been commenced by debtors without established, viable exit strategies. As a consequence, opportunities have been created for potential acquisitions. In prior recessionary periods, distressed debtor companies used the Chapter 11 process to deliver their balance sheets, divest underperforming assets and operations, and rehabilitate core operations to enable emergence from Chapter 11 as reorganized, standalone, viable enterprises, e.g., Global Marine Inc., Federated Department Stores Inc. While the objective of stand-alone reorganization remains a primary goal of debtors seeking the protection of Chapter 11, the economic environment has changed. The depth of the economic decline in particular industries, coupled with the increasingly high costs of financing, has compelled debtors to the more draconian solution of selling their operations or assets as soon after commencing their Chapter 11 case as is practical. The objective is to avoid more erosion in value, and the sale often is urged by creditor constituencies. As a result of the increasing frequency of such sales, strategic and financial buyers have become increasingly comfortable with the Chapter 11 process for major acquisitions as demonstrated by the TWA case. Indeed, use of the Chapter 11 process is frequently sought by all parties, as it often has the effect of sanitizing the purchase and affording all the parties protection against hindsight re-evaluations as to the fairness of the transaction. THE CHAPTER 11 PROCESS Historically, the acquisition of a Chapter 11 debtor or its assets was realized through the purchase of the target’s debt or equity securities and the obtaining of control through the confirmation of a Chapter 11 plan of reorganization. This was the method used by Federated Department Stores Inc. to acquire R.H. Macy & Co. and by Japonica Partners to acquire Allegheny International Inc. However, the traditional use of a Chapter 11 plan confirmation process to consummate an acquisition is subject to the delays incident to the statutory notice and timing requirements of the Bankruptcy Code. These include the preparation, approval and distribution of a disclosure statement for the purposes of soliciting acceptances of the Chapter 11 plan, as well as the confirmation of the plan in compliance with the requirements of Bankruptcy Code � 1129. In addition, and notwithstanding that the reorganization value of a distressed debtor may be insufficient to enable any participation in the reorganization by junior or subordinated creditors and stockholders as part of the plan confirmation process, such out-of-money creditors and stockholders may seek to create value where none exists by using litigation tactics to cause delay and expense. The possibility of such tactics and the time value of money may inhibit a potential purchaser from proceeding with a desired acquisition when prosecuted in the context of a plan or reorganization, to the detriment of the debtor, its employees and those creditors who may hold the economic stakes in the debtor’s assets. ADMINISTRATIVE POWER TO APPROVE BANKRUPTCY SALES As a result, to limit the negative aspects of the Chapter 11 confirmation on an acquisition, parties have turned to the use of an administrative power under the Bankruptcy Code, i.e., � 363(b). Pursuant to � 363(b), the business or assets of a debtor may be sold at any time after the commencement of a Chapter 11 case and independently of a Chapter 11 plan, with substantial protections for the purchaser. Sec. 363(b) provides that after notice and a hearing, a debtor may sell property of the estate, though outside the ordinary course of business. This statutory provision has been construed by the bankruptcy court to enable the sale of all or substantially all a debtor’s assets and operations without the requirement of the confirmation of a plan of reorganization. Such a sale may be achieved within the first 30 to 90 days of the commencement of a Chapter 11 case. BENEFITS, PROTECTIONS AND FINALITY OF BANKRUPTCY SALES This expeditious and less expensive acquisition process generally avoids the delay and litigation that may be associated with the plan confirmation process. If a debtor establishes that the proposed sale, in the exercise of its business judgment, accomplishes a business purpose and that the parties are acting in good faith, the purchase and sale should be approved by the bankruptcy court. For the acquirer, it presents an opportunity to “cherry pick” only those assets it desires. Moreover, pursuant to � 363(f), many � 363(b) sales are free and clear of most liabilities, including liens and encumbrances, as well as claims against the sale property, with few exceptions. As a result, the purchaser may have protection against successor liability claims, including employment, environmental, tax and products liability claims, as well as expedited Hart-Scott-Rodino review and clearance. The proposed acquirer, in addition to being able to acquire the sale assets free and clear, may obtain deal protection and finality. Generally, prior to the actual sale, a debtor will seek approval of the bidding procedures that will govern the sale. The sale, in substance, is an auction of the property and, in most circumstances, the named proposed acquirer occupies the role of a stalking horse and, hence, the entitlement to a breakup fee, expense reimbursements, no-shop provisions and incremental bidding requirements. Finality is achieved once a sale is approved as reinforced by � 363(m). Sec. 363(m) provides, in effect, that once a good-faith sale is consummated, any appeal from the sale order that results in a reversal or modification of such order may not affect the validity of the sale, whether or not the purchaser knew of the pendency of the appeal. As the 3rd U.S. Circuit Court of Appeals noted a few months ago, � 363(m)’s “blunt finality is harsh but its certainty attracts investors and helps effectuate debtor rehabilitation.” Cinicola v. Scharfenberger, 248 F3d 110, 122 (3rd Cir. 2001). PROTECTION OF THE INTERESTS OF THE DEBTOR’S ESTATE, ITS CREDITORS AND EQUITY INTEREST HOLDERS A prime objective of a Chapter 11 case is to maximize the value of the debtor’s estate. In the context of a � 363(b) sale, the bankruptcy court is sensitive to the need to protect the interests of the debtor’s estate, including its creditors, equity interest holders and other parties in interest. Consequently, the objective of any sale pursuant to � 363(b) is to get the best offer for the debtor’s estate. To achieve that most effectively, all proposed sales under � 363(b) require court approval, a noticed and advertised hearing and are subject to higher or better offers for the property to be sold. The Bankruptcy Code contemplates that the debtor will appropriately advertise and other offers for the assets and operations will be entertained. A � 363(b) sale, if it involves a Delaware corporation, will implicate the sale marketing obligations and requirements specified in Revlon Inc. v. MacAndrews & Forbes Holdings Inc., 506 A.2d 173 (Del. 1985). Sec. 363(b) provides an orderly, expeditious means for accomplishing the acquisition of a debtor’s operations and assets with significant protections for the acquirer. It also protects the interests of the debtor, its creditors and other interested parties. This strategy enables debtors to obtain going-concern values for assets that might otherwise be subject to substantial value deterioration. As more distressed debtors are unable to obtain refinancing or sufficient liquidity to continue operations, � 363(b) provides an alternative means to enable a beneficial sale of the distressed debtor’s operations and assets. As such, � 363(b) enhances the acquisition opportunities that might be pursued by strategic and financial buyers. Harvey R. Miller is a partner in New York’s Weil, Gotshal & Manges. Shai Y. Waisman is an associate in the firm. Weil Gotshal represents the acquirer in the TWA case.

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