Sale Processes & M&A in Distressed Situations Flashcards

Under Section 363 of the U.S. Bankruptcy Code, which of the following best describes a 'free and clear' asset sale?

Answer: A sale where assets transfer without liens, claims, or encumbrances attaching to the property

Section 363(f) allows a debtor to sell assets free and clear of liens and claims, with such interests attaching to the sale proceeds instead of the transferred property, shielding buyers from successor liability.

What is the primary purpose of a 'stalking horse' bid in a Section 363 bankruptcy auction?

Answer: To give the debtor a guaranteed buyer while establishing a floor price for competitive bidding

A stalking horse bid is a pre-negotiated agreement with an initial bidder that establishes a floor price and deal terms, incentivizing higher competing bids at auction while guaranteeing the debtor a minimum sale value.

Which of the following best defines 'credit bidding' in a distressed asset sale under Section 363(k)?

Answer: A secured creditor submitting a bid using the face value of its debt rather than cash

Credit bidding allows a secured creditor to bid the outstanding amount of its secured claim rather than cash, up to the full face value of its lien, as provided under Section 363(k) of the Bankruptcy Code.

In a distressed M&A context, what is the typical range for a stalking horse 'break-up fee' as a percentage of the purchase price?

Answer: 1% to 3%

Break-up fees in Section 363 sales are typically 1% to 3% of the purchase price, designed to compensate the stalking horse for due diligence risk while not chilling competitive bidding.

Which of the following is a key advantage of a Section 363 sale over a plan of reorganization for selling a distressed business?

Answer: It can be completed more quickly with assets sold free and clear of claims

A 363 sale can typically be completed in 30-90 days versus 12-18 months for a plan of reorganization, and provides free and clear title—critical in time-sensitive turnarounds where going-concern value erodes rapidly.

In a distressed M&A transaction, what does 'successor liability' primarily refer to?

Answer: The risk that an asset buyer inherits the seller's pre-existing legal liabilities

Successor liability is the legal doctrine where an asset buyer may be held responsible for the seller's pre-existing obligations, which a Section 363 'free and clear' sale is specifically designed to eliminate.

What is a 'going concern' sale in the context of distressed M&A?

Answer: A sale of a business as an operating entity, preserving its operations and workforce

A going concern sale transfers the business as an operating entity, preserving enterprise value through continued operations, workforce retention, and customer relationships rather than piecemeal asset liquidation.