Courts Approve stalking Horse Bids
Adam Maerov and Tobias Whitfield for The Lawyers Weekly
March 19, 2010
Recent proceedings under the Companies' Creditors Arrangement Act (CCAA) involving Nortel and the Canwest newspaper and publishing businesses are clear evidence that the Ontario courts have accepted "stalking horse" processes as one option for disposing of the assets or business of insolvent companies.
A stalking horse bid is a binding commitment to purchase assets or a business in the event that an auction or other process does not produce a superior offer. If a superior offer is accepted, the stalking horse bidder may be compensated by way of a break-up fee and/or may receive reimbursement of its expenses.
There is no express statutory provision for stalking horse bids in the Canadian insolvency statutes. However, such processes have been common features of U.S. Chapter 11 proceedings for some time. As a result, stalking horse processes initially appeared in Canada as part of cross-border cases involving companies or groups of companies with assets in Canada and the U.S. In more recent cases, stalking horse bids have been allowed in Canadian proceedings that lack any connection with the U.S.
One advantage of these processes is that they can help reassure suppliers, customers, employees and other stakeholders of an insolvent company that the debtor will successfully emerge from its restructuring and continue to be a customer, supplier and employer. Some believe that establishing a minimum expected outcome or "floor" helps to increase the value of the estate for the benefit of creditors.
However, unless such processes are properly structured, there can be legitimate concerns about the fairness of stalking horse bid processes from the perspective of other bidders. There may also be concerns about maximizing value under such processes. Parties that are asked to invest material resources on financial and legal due diligence in developing a bid should be entitled to uniform, transparent treatment and to expect that if they put forward the best offer, they will acquire the assets.
Because the stalking horse bidder negotiates the initial purchase agreement against which other bids are evaluated, the agreement may be tailored to the specific needs and advantages of the stalking horse bidder. And since a stalking horse bidder may get privileged access to the assets and management, other bidders may perceive the sale as a "done deal." In structuring a sale process, care needs to be taken to ensure that other bidders are not discouraged from investing the resources necessary to make a competing bid. Specific concerns can also arise where the stalking horse bidder is an insider and has access to confidential information or is in a position to influence the selection of the successful bid.
Stalking horse bids have been used in the recent Nortel restructuring. Nortel initiated concurrent proceedings under the CCAA and Chapter 11 of the U.S. Bankruptcy Code. When it became apparent that a restructuring of Nortel was impractical, the company began selling individual business units, in certain cases using stalking horse processes.
In one of the earlier sales, Nortel entered into an agreement that saw Nokia Siemens Networks B.V. make a stalking horse bid for part of Nortel's CDMA wireless business. The process began with Nortel and Nokia entering into a binding purchase and sale agreement, following which the Canadian and U.S. courts approved bidding procedures based on s. 363 of the U.S. Bankruptcy Code.
The transaction approved by the Canadian and U.S. courts provided that Nokia would receive a break-up fee and expense reimbursements in the event it did not win the auction. Although other bids could propose some different terms from the Nokia purchase agreement, bids needed to be substantially similar to the Nokia purchase agreement, or on terms that were no less favourable. In the Nortel auction, Telefonaktiebolaget LM Ericsson made a bid of $1.13 billion and successfully purchased the assets, significantly exceeding Nokia's $650 million stalking horse bid.
The CCAA proceedings involving Canwest's newspaper and publishing businesses are intended to lead to a new home for those businesses. In Canwest, the existing senior lenders provided a stalking horse bid in the form of a credit acquisition. If no superior bid emerges as part of the court approved sale and investor solicitation process, substantially all of the assets of the Canwest print entities will, subject to court approval, be acquired by a new company owned initially by the existing senior lenders. Unlike Nortel, no break-up fee is contemplated and the sale is not part of a joint proceeding under the U.S. Bankruptcy Code.
While stalking horse bids are increasingly becoming part of the landscape in Canadian restructuring proceedings, they must be structured in a manner that is fair to prospective bidders, respects the legitimate interests of all stakeholders and maximizes recoveries for creditors. As a result, certain terms of stalking horse bid processes, including those that affect certainty of closing, break-up fees, minimum bid increments and the submission of topping bids late in the process will likely continue to be subject to close scrutiny.
About the authors:
Adam Maerov is a partner in the Corporate Restructuring Group at McMillan LLP in Toronto. He has advised Canwest Media Inc. and Canwest Limited Partnership. Tobias Whitfield is an associate in the Corporate Restructuring Group at the same firm. He has advised Canwest Limited Partnership. Their firm has represented interested parties in the Nortel proceedings on matters unrelated to the sale process discussed in this article, and is counsel to the agent for the senior secured lenders in the Canwest Limited Partnership proceedings discussed in this article.