The asset purchase agreement provided for a breakup fee and expense reimbursement. However, the bankruptcy court did not approve the deal protection terms before the auction. Nevertheless, the court approved the breakup fee and expense reimbursement because it resulted in a successful auction that brought an additional $500K to the bankruptcy estate.
M&A Stories
June 14, 2022
Introduction
It is common for distressed businesses to be sold out of bankruptcy in an auction. The auction is often seen as the best way to obtain the greatest recovery for the creditors of the bankrupt business.
The deal
The seller in this deal was an operator of petroleum barges. The seller began losing customers in the years following a 2017 explosion and fire on one of its barges, which occurred off the coast of Port Aransas, Texas, and killed two crew members. The pandemic worsened the situation by lowering demand for services. The seller filed for bankruptcy to block multiple foreclosure sales of its vessels in Louisiana, Florida, Texas, and New York.
The plan was for the seller to sell the business in an auction. In the weeks leading up to the auction, the sellers failed to secure significant interest in the purchase of the vessels. By the deadline for bidders to submit stalking-horse bids, no bidder had emerged. The seller was concerned about having a “naked auction”—an auction without a floor price set by the stalking-horse bidder—because the seller did not “know what the opening bid would be,” given the lack of interest in purchasing the vessels.
Then, the seller contacted a company that earlier provided post-petition bankruptcy financing to the business, to see if it had any interest in serving as a stalking-horse bidder. The company ultimately agreed to act as the stalking horse bidder and bid $110 million for 17 tugs and 12 barges. To compensate the stalking horse bidder for its time and expense, the asset purchase agreement provided that if another bidder successfully purchased the assets in the auction, that the stalking horse bidder would receive a $3.3 million breakup fee, and expense reimbursement of $900,000.
The agreement also required other bidders to bid at least $500,000 more than the stalking horse bidder’s proposed $110 million purchase price plus the breakup fee and expense reimbursement, setting a floor price of $115.3 million. However, due to time constraints, the seller did not seek the bankruptcy court’s approval of the stalking-horse bid agreement, as required by the bankruptcy court’s bidding procedures order.
Another company purchased the assets for the minimum bid of $115.3 million.
The lawsuit
The creditors of the seller claimed that the stalking horse bidder was not entitled to the breakup fee and costs because this had not been approved by the bankruptcy court before the auction. The bankruptcy court disagreed, and the creditors appealed to the Houston federal district court.
The district court agreed with the bankruptcy court. It found that the stalking horse bid created a floor for the auction that brought in an additional $500,000 for the bankruptcy estate. Furthermore, the failure to obtain bankruptcy court approval for the stalking horse deal protection of the breakup fee and expense reimbursement, was understandable given that on auction day the price of oil dropped from $72 to $56. It was the largest one-time drop in the price of oil since the beginning of COVID.
This case is referred to as In Re Bouchard Transportation Co., Civil Action No. H-21-2844, United States District Court, S.D. Texas, Houston Division, (May 31, 2022).
Comment
The lesson for a buyer of a distressed business out of bankruptcy is to get the bankruptcy court’s prior approval of the deal protection of breakup fees and expense reimbursements. Waiting until after the auction invites creditor pushback.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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