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Distressed Mergers and Acquisitions

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Distressed Mergers and Acquisitions Wachtell, Lipton, Rosen & Katz DISTRESSED MERGERS AND ACQUISITIONS 2013 Summary of Contents Introduction ..............................................................................................................1 I. Out-of-Court Workouts of Troubled Companies ...............................................3 A. Initial Responses to Distress ........................................................................4 B. Out-of-Court Transactions ...........................................................................9 II. Prepackaged and Pre-Negotiated Bankruptcy Plans ........................................40 A. Prepackaged Plans .....................................................................................41 B. Pre-Negotiated Plans ..................................................................................46 C. Pre-Negotiated Section 363 Sales ..............................................................48 III. Acquisitions Through Bankruptcy ...................................................................48 A. Acquisitions Through a Section 363 Auction ............................................48 B. Acquisitions Through the Conventional Plan Process .............................101 IV. Acquisition and Trading in Claims of Distressed Companies .......................150 A. What Claims Should an Investor Seeking Control Buy? .........................150 B. What Rights Does the Claim Purchaser Obtain? .....................................154 C. Acquisition of Claims Confers Standing to Be Heard in a Chapter 11 Case .......................................................................................................162 D. What Enforcement Rights Does the Claim Have? ...................................166 E. Antitrust Considerations ..........................................................................203 F. Creditors and Tax-Free Reorganizations .................................................205 -i- Table of Contents Introduction ..............................................................................................................1 I. Out-of-Court Workouts of Troubled Companies ...............................................3 A. Initial Responses to Distress ........................................................................4 1. Forbearance ............................................................................................4 2. Waivers and Amendments .....................................................................5 a. Basics of Waiver and Amendment ..................................................5 b. Implications of Obtaining Consents .................................................5 c. Tax Implications ..............................................................................7 3. Costs to Borrowers of Forbearance, Waiver and Amendment ..............8 B. Out-of-Court Transactions ...........................................................................9 1. Sales of Assets Outside of Bankruptcy ................................................10 a. Fraudulent Transfer Risks ..............................................................10 b. Other Risks.....................................................................................14 2. Sales of Securities by Distressed Companies ......................................15 a. PIPEs ..............................................................................................15 b. Rights Offerings .............................................................................16 c. Shareholder Approval Requirements .............................................17 (i) Financial Viability Exception .................................................18 (ii) Issuing Securities That Do Not Require Shareholder Approval ............................................................................18 3. Debt Repurchases .................................................................................19 a. Issues in Bank Debt Repurchases ..................................................20 (i) Pro Rata Sharing Provisions and Eligible Assignees .............20 (ii) Dutch Auction and Open Market Repurchases; Sponsor Purchases............................................................................21 b. Other Repurchase Considerations ..................................................21 (i) Corporate Opportunity Doctrine ............................................21 (ii) Equitable Subordination and Recharacterization ...................22 (iii) Insider Trading .......................................................................22 4. Exchange Offers ...................................................................................23 a. Targeted Holders ............................................................................26 b. Inducements ...................................................................................27 c. Certain Mechanics .........................................................................27 d. Disclosure ......................................................................................28 e. Whether the Securities Must Be Registered ..................................29 f. Change-of-Control Concerns .........................................................30 g. Ratings Implications ......................................................................31 h. Tax Implications ............................................................................31 -ii- 5. Foreclosure Sales and Assignments for the Benefit of Creditors ........39 II. Prepackaged and Pre-Negotiated Bankruptcy Plans ........................................40 A. Prepackaged Plans .....................................................................................41 1. Generally ..............................................................................................41 2. Requirements .......................................................................................44 B. Pre-Negotiated Plans ..................................................................................46 1. Lock-Up Agreements ...........................................................................47 C. Pre-Negotiated Section 363 Sales ..............................................................48 III. Acquisitions Through Bankruptcy ...................................................................48 A. Acquisitions Through a Section 363 Auction ............................................48 1. Section 363 of the Bankruptcy Code Generally ..................................48 a. Standard for Approval of Sales Outside the Ordinary Course .......49 (i) Justification for the Sale .........................................................49 (ii) Other Requirements ................................................................55 b. The Sub Rosa Plan Doctrine ..........................................................56 c. The Good Faith Requirement.........................................................58 d. Prohibition on Collusive Bidding ..................................................60 2. Benefits and Risks of Using Section 363 .............................................63 a. Benefits of Using Section 363 .......................................................63 (i) Speed ......................................................................................63 (ii) Ability to “Cherry Pick” Assets .............................................66 (iii) Protections That Can Be Obtained from Bankruptcy Court’s Approval Order .....................................................68 (A) Finding of Good Faith—Section 363(m) Protection from Reversal on Appeal ............................ 68 (B) Insulation from Fraudulent Transfer Challenge ............. 70 (C) Successor Liability Issues: Purchasing Assets “Free and Clear” ........................................................... 70 (D) Scope of “Interests” Subject to Section 363(f) .............. 71 (E) The Five Triggers of Section 363(f) Protection ............. 73 (F) Other Potential Pitfalls in Cutting Off Purchaser Liability ........................................................................ 76 b. Risks and Disadvantages of Using Section 363 .............................78 (i) Public Auction Generally Required .......................................78 (ii) Potential for Delay ..................................................................78 (iii) Transfer Taxes ........................................................................80 3. The Auction Process ............................................................................80 4. Bidding Incentives ...............................................................................85 a. Types of Bidding Incentives and Protections ................................85 (i) Expense Reimbursement ........................................................86 iii (ii) Break-Up Fees ........................................................................86 (iii) Minimum Overbids ................................................................88 (iv) Other Terms of Sale ...............................................................88 b. When to Seek Bidding Protections ................................................89 5. To Be or Not To Be the Stalking Horse ...............................................93 6. Credit Bidding ......................................................................................94 a. Credit Bidding Existing Claims .....................................................94 b. Secured DIP Financing Debt as
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