Andrew S. Brown, Breaking Up and Making Out (Rich): Recommendations for Revision of the Bankruptcy Code Provisions Governing Break-Up Fees Used by Stalking Horse Bidders in § 363 Bankruptcy Asset Sales

62 Fla. L. Rev. 1463 (2010) | | | |

INTRODUCTION :: Since December 2007, the United States has suffered through a “Great Recession.” The stock market had plummeted more than 40% from its peak as investors pulled their money from investments seeking safety under their mattresses. Companies and individuals have struggled as bankruptcy filings increased to 1,306,315 nationwide during the twelve-month period that ended on June 30, 2009-a 35% increase since the end of June 2008. Americans’ investment funds have not vanished, however, as funding sources wait on the sidelines ready to reinvest in America’s future. According to the Federal Reserve, Americans currently hold $ 8.85 trillion in cash, bank deposits, and money market funds. This $ 8.85 trillion in liquid assets equals 74% of the market value of all U.S. companies, the highest ratio since 1990.

America’s economic recovery depends upon the quick and efficient reinvestment of this sidelined money back into corporate America by healthy corporations, individuals, and private equity funds. An essential component of this recovery will be to encourage private equity funds back into the market by providing incentives to buy either the assets of or the entire bankrupt companies pursuant to § 363 of the United States Bankruptcy Code (bankruptcy code). Section 363 authorizes debtors to “use, sell, or lease” their assets in “the ordinary course of business” and upon notice to stakeholders and with court approval, to do the same with those assets outside “the ordinary course of business.” Section 363 also provides the statutory framework for the sale of companies in bankruptcy. The sale of companies under § 363 of the bankruptcy code comes with many advantages to the purchaser, including, among others, that such companies may leave bankruptcy free and clear of any liens and are protected from fraudulent transfer claims. In addition, break-up fees encourage private equity funds to venture into the bankruptcy court system and acquire bankrupt companies in whole or in part.


A break-up fee “is an incentive payment to a prospective purchaser with which a company fails to consummate a transaction.” A stalking horse bidder is the “initial bidder with whom the debtor negotiates a purchase agreement.” In simpler terms, a break-up fee is a termination fee paid by the bankruptcy estate to the stalking horse bidder if “the proposed sale [is] not consummated through no fault of the [bidder].” The break-up fee compensates the unsuccessful initial bidder through a fee greater than the initial bidder’s actual due diligence expenses. Bankrupt companies often find it difficult to acquire a stalking horse bidder because most bidders prefer to wait and simply bid over the stalking horse. Stalking horse bidders rightly worry that their due diligence, and the significant expense it entails, will simply be used by either the bankruptcy estate to solicit higher offers or by subsequent bidders to simply bid over a well researched and now entrenched bidder. Many times, debtors lure stalking horse bidders, who are hoping to buy the bankruptcy estate for pennies on the dollar, only to use them for higher bids and to maximize the value of the assets.

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