United States: Possible silver lining: targeted acquisitions

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Nearly two years into the coronavirus pandemic, as the automotive supply chain continues to be disrupted not only by the pandemic but also by port and logistics delays, shortages of materials such as semiconductors , steel, resin and foam, and rising costs (including labor in particular), there are opportunities for growth through acquisition. Businesses that may have been bolstered by government support at the start of the pandemic (through PPP loans or other government assistance) are beginning to feel increased pressure as they face financial challenges and operational. Lenders that previously offered credit extensions and default forbearance are increasingly active in asserting their rights and remedies in the event of default. The cash and credit issues facing these companies may translate into opportunities to buy them at depressed valuations. While these deals may seem difficult to come by, savvy investors will be well served by considering both out of court and bankruptcyacquisitions of distressed businesses that are under pressure due to the current environment.

Checklist of some key considerations for an amicable acquisition

  • Often structured like a normal asset transaction.

  • Due diligence is even more critical to understand in order to creatively avoid and manage potential liabilities.

  • Specify the liabilities assumed and the liabilities excluded.

  • Include indemnification and escrow where possible (but seller may not be able to act under indemnification).

  • Negotiations with creditor constituencies can reduce exposure.






BENEFITS

– Quickly; no court approval required.
– Cheaper than legal proceedings.
– Buyer can sometimes get more control/certainty and purchase protections than through legal process.
– Can obtain traditional M&A protections (e.g., receivership, representation and warranty insurance, indemnity).
– Generally does not require an auction with competitive bidding.
– Potentially helps support customer/supplier relationships (subject to contractual terms).






THE INCONVENIENTS

– Cannot “choose contracts” as easily as in bankruptcy.
– Cannot force support and bind unwilling creditors (eg, lenders).
– Risk of possible liability of the successor (vs. “free and quit” sale in the event of bankruptcy).
– Often need shareholder consent.
– Fraudulent transfer risk where seller does not receive reasonably equivalent/fair value while insolvent, but consider these protections:
– Arm’s length sale process with consent of major parties.
– Notice of assessment.
– Structure by amicable foreclosure/sale article 9.

Checklist of Some Key Considerations for Bankruptcy Sale

  • Buyers often seek to avoid potential successor liability and other risks, and require the sale to occur in a Chapter 11 to maximize buyer protections/rights.

  • Section 363 of the Bankruptcy Code permits a debtor to sell substantially all of its assets if supported by reasonable business judgment, free and clear of all liens, claims and encumbrances.

  • Section 365 of the Bankruptcy Code permits a debtor to assume and assign, or reject, certain unexpired contracts and leases notwithstanding the assignment restrictions in those contracts.

  • Upon a bankruptcy filing, the “automatic stay” occurs and protects the seller’s assets from creditor collection efforts and contract terminations to allow a transaction to occur.






BENEFITS

– The court-approved sale is “free and clear” of liabilities and the balance sheet is clean.
– Shareholder approval is not required.
– Eliminates the risk of fraudulent transfer.
– Enhanced successor liability protection.
– Contracts can be “cherry picked” and bad ones left behind, regardless of consent.
– Fast (sales can be approved within 30-60 days of filing for bankruptcy).
– Likely closure, regardless of opposing creditors.
– The buyer can benefit from the advantages of the “harassed horse”: improved information, protections of the offers to protect themselves and improve the prospects of purchase (for example, indemnity for breaking [~3-3.5%] and expense reimbursement, and bid increased similarly), minimum bid increments, and tight timeframe for the sale.
– Tactical: If the buyer has secured debt, they can credit the auction for increased control.






THE INCONVENIENTS

– The sale will be made at “the highest and best bid”; a bidding is usually required and, notwithstanding the advantages of the trail horse, the marketing process may result in another winning bidder.
– The secured lender can credit its debt to fix the floor.
– More expensive than an amicable acquisition.
– The committee of unsecured creditors named in Chapter 11 can delay the sale and seek to extract more value.
– Purchase is “as is” – reduced escrow/no indemnity.

The auto industry has faced incredible headwinds, many of which persist well into 2022. As companies seek to grow revenues and profits, these headwinds may well present opportunities for growth through acquisitions. .

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

POPULAR ARTICLES ON: Insolvency/Bankruptcy/Restructuring from the United States

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