CTP Sale Processes & M&A in Distressed Situations 1 — Questions and Answers
Question 1: Under Section 363 of the U.S. Bankruptcy Code, which of the following best describes a 'free and clear' asset sale?
- A sale where the buyer assumes all existing seller liabilities
- A sale where assets transfer without liens, claims, or encumbrances attaching to the property (Correct answer)
- A sale conducted entirely outside of court supervision
- A sale limited to intellectual property and intangible assets
Correct 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.
Question 2: What is the primary purpose of a 'stalking horse' bid in a Section 363 bankruptcy auction?
- To allow the court to set the minimum acceptable purchase price unilaterally
- To give the debtor a guaranteed buyer while establishing a floor price for competitive bidding (Correct answer)
- To prevent secured creditors from submitting competing bids at auction
- To convert secured debt into equity in the reorganized entity
Correct 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.
Question 3: Which of the following best defines 'credit bidding' in a distressed asset sale under Section 363(k)?
- A lender providing DIP financing to fund a competing buyer's acquisition
- A secured creditor submitting a bid using the face value of its debt rather than cash (Correct answer)
- A buyer offering seller financing as part of the purchase consideration
- A court-approved mechanism for unsecured creditors to participate in an auction
Correct 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.
Question 4: 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?
- 0.1% to 0.5%
- 5% to 10%
- 1% to 3% (Correct answer)
- 10% to 15%
Correct 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.
Question 5: Which of the following is a key advantage of a Section 363 sale over a plan of reorganization for selling a distressed business?
- It requires unanimous creditor approval providing maximum legitimacy
- It can be completed more quickly with assets sold free and clear of claims (Correct answer)
- It always maximizes recovery equally for all creditor classes
- It eliminates the need for court oversight entirely
Correct 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.
Question 6: In a distressed M&A transaction, what does 'successor liability' primarily refer to?
- A buyer's obligation to honor the seller's employment contracts post-closing
- The risk that an asset buyer inherits the seller's pre-existing legal liabilities (Correct answer)
- A lender's duty to fund a completed acquisition at the agreed price
- The obligation of new management to the existing shareholder base
Correct 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.
Question 7: What is a 'going concern' sale in the context of distressed M&A?
- A sale of individual assets at liquidation values to maximize creditor recovery
- A sale of a business as an operating entity, preserving its operations and workforce (Correct answer)
- A sale limited to real property and fixed equipment only
- A court-directed auction of intellectual property rights
Correct 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.
CTP Sale Processes & M&A in Distressed Situations 1
Under Section 363 of the U.S.
Bankruptcy Code, which of the following best describes a 'free and clear' asset sale?