In three recent decisions, the U.S. Bankruptcy Court for the District of Delaware and the Southern District of New York reined in debtors and other interested stakeholders following their submission of asset sale bidding procedures that unfairly tilted the playing field in favor of certain preferred bidders or sought to exclude certain bidders. While debtors are often afforded reasonable discretion to craft procedures as they see fit, these cases test the boundaries of permissible bidding procedures and demonstrate that when it comes to approving bidding procedures, courts will generally favor procedural fairness over increased execution certainty with a favored bidder.
Asset Sales Under the Code
Section 363(b) of the Bankruptcy Code permits a debtor, after notice and a hearing, to sell property of the estate outside the ordinary course of business.1 Asset sales in Chapter 11 generally are effected in a two-phase bidding process, which is memorialized in a court-approved set of bidding procedures. When a debtor has negotiated a baseline asset purchase agreement with a lead or “stalking horse” bidder, the resulting bidding procedures reflect a balancing of the core bankruptcy objective of maximizing value for the benefit of estate creditors and granting incentives to the stalking horse bidder to commit its time and resources to an opening bid. Examples of these incentives or “bid protections” include an expense reimbursement cap and a break-up fee.
