It's international deal time here at the M&A Advisor, but what if the deal is not only a cross-border deal, but also a distressed deal? To answer that question and more, we spoke with Janice Sharry and Robin Phelan Partners at the law firm of Haynes and Boone. Haynes and Boone ranks among the 50 best corporate law firms in the country by Fortune 1000 corporate counsel, surveyed by the BTI consulting group.
The firm's Mergers and Acquisitions Practice Group assists clients in structuring, negotiating, documenting and closing transactions involving mergers, stock or asset acquisitions and dispositions, recapitalizations and reorganizations of public and private companies, in both domestic and cross-border transactions.
Janice Sharry has more than 30 years of experience in diverse areas of corporate finance, including mergers and acquisitions, public offerings, private placements, and other securities offerings, including representation in international offerings.
Robin Phelan's practice is exclusively devoted to insolvency, reorganization and related areas. Phelan is a frequent speaker on panels and programs throughout the United States and internationally regarding developments in bankruptcy and insolvency law and is the author of numerous publications, several relating to tax, governmental and environmental claims.
M.A.: How have the 363 process and DIP financing impacted international deals?
J.S. & R.P.: If you are not a secured claim holder that generally possesses the right to credit bid at an auction, then you will have to bring money to the table in order to close. You will likely have to bring money to even get a seat at the table. In the context of a bankruptcy sale under Section 363, your window to obtain financing can be a small one, particularly if you are not the stalking horse bidder. The bid procedures may call for a swift process that limits the ability of other bidders to do diligence and further hampers their ability to obtain adequate financing. Cash is certainly "king,' but if you need financing, obtaining commitments needs to be a priority. Or, as an alternative, you could consider becoming a DIP lender to the bankrupt entity. In the TWA acquisition, American Airlines used its position as the sole DIP lender to become the stalking horse bidder, thus tying up the assets of TWA in order to preclude other bidders.
DIP financing is an area that is being discussed a lot in international circles?the problem is that a lot of regimes do not have a specific provision that provides for DIP financing, so it is very difficult to do DIP financing in some of these various countries. Many countries are looking at changing in their insolvency regimes to provide for DIP financing. Such filings are a lot more accepted in Europe, particularly in the United Kingdom. Many of the filings under the EU convention are being done in the UK. Some South American countries are making great strides in the insolvency regimes, and China has issued new a bankruptcy code that will allow for these types of reorganizations.
In most bankruptcy sales, the debtor and its creditor constitutiences will not consider any proposed sale that includes a financing condition to closing. The debtor generally does not have time or the cash to bind itself to a transaction that may not go forward if the buyer cannot obtain third-party financing. This paradigm can make it particularly difficult for some private equity funds to participate in a fast-moving bankruptcy sales process, as many private equity acquisitions leveraged transactions. Although they are becoming more flexible and have more liquidity available to them, many private equity firms simply cannot or will not (because of fiduciary duty concerns) agree to purchase without a liberal financing condition and without a complete due diligence review. As a result, some do not participate in 363 sales as a matter of policy.
M.A.: What are the real costs of distressed deals and what are the associated costs dealmakers should look for in cross-border deals?
J.S. & R.P.: Distressed acquisitions appear at first glance like a bargain. Out-of-pocket costs associated with consummating an acquisition through a bankruptcy plan can be huge. Buyers typically view asset transactions consummated under Section 363 as being beneficial because the court is authorized to approve the sale free and clear of any other lien or interest in the assets of the debtor target. However, buyers must be familiar with potential successor liability risks that can exist after closing of a distressed sale, even in an asset sale consummated under Section 363. This is especially the case where there is a possibility of continuing product liability or environmental claims. A Section 363 call will not eliminate either of these risks. The Clear Channel decision (In re PW, LLC, 391 B.R. 25, 9th Cir. BAP 2008) also recognized that there may be limited ability to strip junior liens from real estate assets sold. Further, the risk of post-closing litigation, particularly in an acquisition outside of bankruptcy, can be a large cost for an acquirer.
Dealmakers have to weigh and in-court acquisition versus and out-of-court acquisition because if there is an in-court acquisition, either domestically or internationally, the order approving should be as broad as possible, relieving the buyer of as much liability as possible. In an international situation, with international entities involved in a proceeding, there will almost always be a trustee of some type rather than management team of the entity itself.
Fraudulent transfer actions can be extremely costly and can result in dire consequences to a buyer. So it is advisable to make sure your bankruptcy approval order includes a restriction on future fraudulent conveyance challenges so that situations like the Tousa, LLC $500 million claw back can be avoided. Additionally, the expenses of a 363 sale may include the costs of the auction since the credit bidder has been held responsible for the fees if there are no remaining assets in the bankrupt entity to pay these costs. (Borrego Springs Bank v. Skuna River Lumber, LLC (N.D. Miss., Jan. 30, 2008).
M.A.: What should dealmakers be aware of in terms of timing the 363 process and how does this differ in cross-border deals?
J.S. & R.P.: Because a Section 363 process can be implemented simply upon the target debtor's motion to the court, the sale process can be significantly less painful and quicker than an acquisition through a plan of reorganization. Consider the Chrysler acquisition, which was completed in only 42 days utilizing 363. Also, consider the General Motors bankruptcy, which used the 363 process to reach a quick, decisive sale. But if you acquire a company through a plan process, the buyer can exercise more control over the process because the court may not always throw open the sale to competitive bids or credit bids from other lenders. However, recent 363 transactions, namely Chrysler and GM, show that competitive bidding can be avoided if the rules of bidding are made competitively restrictive.
Consummating an acquisition through a plan will almost certainly be a longer and more expensive process, since it involves a very intricate system of rules, timetables and requirements. The disclosure statement required to be filed with the bankruptcy court in connection with a plan of reorganization is a thick document and no plan may be solicited until this disclosure statement receives bankruptcy court approval.
The disclosure statement is subject to the objections of third parties with standing, all of which can have the effect of imputing further delays into an already complicated process. Once the disclosure statement is approved, the interest holders of the target are typically given over 30 days to review, consider and vote on the plan. At the conclusion of this period the plan still may not be confirmed ? unlike a Section 363 sale, the plan must receive support from creditors in order to be confirmed. Rather than selling under an auction process, Delphi Corporation utilized a plan process ? the result: Delphi was in bankruptcy for nearly 4 years, with a smaller recovery for many of Delphi's senior stockholders.
With regard to the reorganization timetable overseas?in light of what has transpired?we are not going to see a lot of large reorganizations. Greece, for example, is simply not use to the process and their regime does know how to manage the process. When dealing in foreign jurisdictions things tend to be slower than in the United States, because their laws are not quite as developed in this area. Therefore, the timing in international deals is much harder. Internationally, however, there are evolutionary things happening. And it will really vary from country to county, and whether it is a reorganization proceeding or a liquidation proceeding. In some countries, the timing for liquidation can be very quick. In the Netherlands, for example, we were involved with a Japanese company in a liquidation engagement and the process took 24 hours.
Transparency can also be an issue overseas, whether in the UK, or China, or anywhere else. Oaktree, for example, had a significant investment in Indonesia; and in order to receive any relief, had to return to US jurisdiction. Dealmakers will likely find more transparency in Europe than in the Far East. South America is sort of in between, depending on the country. Brazil, for example, is still not great for transparency, but they have some very sophisticated insolvency practitioners. Argentina's regime has also been recognized by the US as adequate. So, it really varies from country to country.
M.A.: Thanks, Janice and Robin.
