Distressed Mergers and Acquisitions

Sales under section 363 of the Bankruptcy Code most often proceed with an initial purchaser providing the “stalking horse” bid or offer to be approved by the bankruptcy court. Because bankruptcy court approval is necessary for the debtor to be bound to the offer, the debtor will often conditionally accept the initial bid subject to obtaining such approval. This conditional acceptance also often allows the debtor to pursue any higher or better offers it may receive for its assets once the sale becomes publicly known through the bankruptcy process. Usually the motion to approve the sale anticipates an auction, or at least the opportunity to receive higher and better offers. Many times it will also include, as an interim request, bankruptcy court approval for bid protections and procedures for the selection and approval of the winning bid. Bidding protections are sought at the insistence of the stalking horse purchaser, and generally include deadlines, requirements for conforming offers, minimum overbid increments, reimbursement of expenses, and typically encompass a break-up fee. While sensitivity to the level of a break-up fee is largely addressed by reference to prevailing practice outside of bankruptcy, the propriety of such a fee remains a critical bankruptcy issue. The bankruptcy court must make an evidentiary determination that the break-up fee is an actual, necessary expense of preserving the debtor’s estate.¹

In a recent case, In re Reliant Energy Channel View LP,² the United States Court of Appeals for the Third Circuit issued a stark reminder that the bankruptcy threshold for break-up fees, which is that such fee be an “actual, necessary costs…of preserving the estate (emphasis added)”³ must always be met. Specifically, this evidentiary determination must be made by the bankruptcy court even when a solvent chapter 11 debtor agrees to pay a break-up fee and obtains the support of the official creditors’ committee for payment of that fee. In Reliant Energy, the Third Circuit affirmed the bankruptcy court’s denial of the requested break-up fee, but rather than signaling a change in law, stated that its conclusion was premised upon its earlier ruling in Calpine Corp v. O’Brien Env’t Energy Inc.⁴