A breakup or termination fee is commonly paid to a prospective purchaser if a contemplated transaction is not consummated for reasons specified in the purchase agreement, including the seller’s acceptance of a competing bid. It is intended both to reimburse a “stalking horse” bidder for costs incurred in connection with due diligence and to compensate for the time, resources, effort and lost opportunity costs and risks incurred by a disappointed purchaser. Although breakup fees are a common feature of many transactions outside of bankruptcy, bankruptcy courts have sometimes struggled to determine whether, and under what circumstances, such fees should be approved as priority administrative expenses in a bankruptcy case. The 3rd U.S. Circuit Court of Appeals recently revisited that issue in In re Reliant Energy Channelview LP .
The debtors in the Chapter 11 proceedings, Reliant Energy Channelview LP and Reliant Energy Services Channelview LLC, decided to sell their largest asset, a power plant in Channelview, Texas. With the assistance of consultants with expertise in the energy industry, the debtors contacted 115 potentially interested purchasers. This effort resulted in 38 potential bidders executing confidentiality agreements with respect to a possible purchase; 24 of those went so far as to conduct due diligence. Ultimately 12, including Fortistar LLC, made bids for the plant, as noted in the opinion. Many of these bids were contingent on the bidder obtaining financing. However, Kelson Channelview LLC submitted a complete bid of $468 million not contingent on financing, the opinion said. Kelson was selected as the winning bidder and subsequently entered into an Asset Purchase Agreement, or APA, with the debtors for the plant.
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