On September 30, 2010, in In re American Safety Razor, LLC, et al, Case No 10-12351 (MFW), the United States Bankruptcy Court for the District of Delaware ruled that the debtors’ proposed bid procedures for the sale of the business were unfair and unreasonable. The bid procedures, among other things, provided too much discretion to the debtors in the auction process.
363 Sales in General
Section 363 of the Bankruptcy Code provides authority to sell a debtor’s assets. Sales under Section 363 are often referred to as 363 Sales. In 363 Sales, assets can be sold free and clear of any interest in the assets under certain circumstances. By eliminating the risk that another party later claims an interest in the assets that are sold, 363 Sales can maximize the price parties are willing to pay for the assets.
In 363 Sales, courts generally encourage open, robust and competitive bidding in order to maximize the sale price of the assets to be sold. Because many courts require that the sale process be subjected to a market test, an open market auction is believed to be a reasonably efficient way to market test the value of the assets being sold.
When an interested buyer agrees to serve as an initial bidder, referred to as the “stalking horse bidder,” this interested buyer sets the floor for bidding. The existence of a stalking horse bidder tends to increase other potential bidders’ interest in the assets and thus encourages competitive and spirited bidding.
Stalking horse bidders generally seek stringent bidding procedures in order to discourage other bidders from driving up the sale price at an auction. Conversely, sellers generally like having an acceptable floor for bidding while at the same time seeking flexible bidding procedures in order to obtain competitive bidding and thus drive up the sale price at auction above the floor.
Sellers derive value from stalking horse bidders because the stalking horse bid encourages interest in the auction and the assets to be sold. Thus, sellers generally agree to certain demands by the stalking horse bidder regarding bid procedures in order to encourage a party to serve as the stalking horse bidder.
ASR’s Bankruptcy and Bid Procedures
On July 28, 2010, American Safety Razor Company, LLC and numerous of its affiliates (collectively, “ASR”) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. ASR was in the shaving razor business.
On the same day that ASR filed bankruptcy, it filed a motion seeking approval of bid procedures and the sale of substantially all of its assets free and clear of encumbrances. The hearing on the bid procedures and sale motion was intentionally scheduled by ASR to take place only after the auction concluded.
Prior to its bankruptcy filing, ASR had negotiated with its First Lien Lenders for the sale of ASR’s business to them. The First Lien Lenders’ stalking horse bid consisted of a credit bid of $243.6 million and assumption of all of ASR’s liabilities.
ASR’s bid procedures required that only “Qualified Bids” from “Qualified Bidders” would be accepted. The deadline for Qualified Bids was September 20, 2010.
To become a Qualified Bidder, ASR required that interested parties submit an indication of interest that included a purchase price. ASR was not required to provide any due diligence materials until after a party became a Qualified Bidder. ASR had until September 15, 2010 to determine if a party was a Qualified Bidder. Therefore, under the proposed bid procedures, a Qualified Bidder might have only five (5) days to review due diligence materials before the deadline to submit a Qualified Bid. The bid procedures further provided ASR with discretion to require a deposit from any particular bidder.
Generally, debtors first seek approval of bid procedures before going forward with an auction process. ASR collapsed the typical steps in 363 Sales and proceeded with the bidding process so as to consolidate the hearing for approval of both the bid procedures and the sale of the business. A hearing was scheduled for September 28, 2010 to consider approval of the bid procedures and sale of the business.
Competing Bid for ASR’s Business
Between the bankruptcy filing and the deadline for submission of Qualified Bids, Energizer Holdings, Inc. (“Energizer”) expressed an interest in bidding on ASR’s assets. An affiliate of Energizer owns the Schick brand of razors.
ASR opposed Energizer bidding on the assets because any sale to Energizer would be subject to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”). The HSR Act requires a waiting period prior to a merger or acquisition involving competitors. The waiting period under the HSR Act seeks to protect against anti-trust concerns by allowing an opportunity for further investigation by federal regulators.
Because Energizer was a competitor of ASR in the razor business, any sale was subject to the HSR Act. Whereas, the First Lien Lenders were not in the razor business and were not subject to the HSR Act requirements.
ASR was concerned that compliance with the HSR Act would delay the closing of the contemplated sale. ASR believed that any delay in the sale would result in ASR’s business suffering lost value.
Notwithstanding the bid procedures, ASR did immediately provide Energizer with substantial due diligence materials. ASR, however, withheld materials relating to its customers and processes because it did not want to disclose such materials to a potential competitor.
Energizer submitted a $301 million cash bid for ASR’s business. Energizer’s bid contained a provision allowing Energizer to refuse to close in the event it did not receive approval from federal regulators to consummate the sale under the HSR Act. ASR found this provision unacceptable and deemed that Energizer’s bid was not a Qualified Bid. Therefore, the only Qualified Bid for the business was the First Lien Lenders’ bid.
Hearing to Approve Bid Procedures and Sale
On September 28, 2010, the Court commenced a hearing to consider approval of the bid procedures and sale motion. ASR, along with the Official Committee of Unsecured Creditors (the “Committee”), requested that the Court approve the sale to the First Lien Lenders. Energizer, along with ASR’s Second Lien Lenders, requested that the Court approve the sale to Energizer. Over a span of three (3) days, the Court heard evidence and argument in support of both positions. At the conclusion of the hearing, on September 30, 2010, the Court denied the bid procedures motion and verbally issued its ruling from the bench.
First, on a procedural standing issue, the Court held that any party, including a disgruntled bidder, always has standing to object to the “process” of a sale. The Court noted that it was unusual for ASR to request approval for an auction process after the fact.
Second, the Court rejected ASR’s argument that, under the so called “business judgment rule,” the Court was required to accept ASR’s business judgment in determining whether to accept the bid procedures and sale. The Court held that the bid process was not subject to the business judgment rule. Rather, the Court held that it has the duty to determine if sale procedures are “fair and reasonable” without regard to the company’s business judgment.
Third, the Court held that the bid procedures were unfair and unreasonable because the procedures: (i) required potential bidders to submit a price without due diligence materials; (ii) allowed only five (5) days for due diligence; and (iii) allowed ASR discretionary authority to require deposits from bidders. The discretionary deposit requirement was found unfair because ASR could discriminate among bidders by requiring a larger deposit from one bidder than another.
Fourth, with regard to Energizer’s bid specifically, the Court stated that ASR’s refusal to consider the bid unless any HSR Act contingency was removed was unreasonable. The Court stated that ASR could address the risk in a fairer manner. The Court suggested that ASR provide that it can sell to the First Lien Lenders, as back-up bidder, by a date certain to the extent Energizer does not receive HSR Act clearance. Alternatively, the Court suggested that ASR could require a deposit that could be used to pay damages incurred, if any, by ASR resulting from Energizer’s failure to close due to the HSR Act.
Based on the foregoing, the Court postponed the sale hearing and modified the bid procedures to allow for Energizer to perform due diligence over a span of forty-eight (48) hours regarding HSR Act matters and submit a Qualified Bid within a week. The Court scheduled an auction in open court to take place on October 8, 2010. The Court also scheduled a hearing to consider approval of the sale to the winning bidder at the conclusion of the auction.
Ultimately, Energizer revised its bid to mirror the First Lien Lenders’ bid but provide for cash consideration of $301 million. In addition, Energizer provided in its revised bid a $7.5 million deposit that could be used to pay damages, if any, incurred by ASR to the extent Energizer failed to close. Energizer’s revised bid also provided that ASR could terminate the sale agreement and proceed with any back-up bidder to the extent Energizer failed to close by November 23, 2010.
At the October 8, 2010 auction, Energizer and the First Lien Lenders did not change their bids. ASR and the Committee again argued that the First Lien Lenders bid was the best bid given the certainty of closing as compared to the Energizer bid. The Court disagreed and approved the sale to Energizer with the First Lien Lenders serving as the back-up bidder.
Bid procedures often determine the outcome of an auction. For this reason, bid procedures can be a battleground to further your goals in the process. It is important to be involved early in the bid procedures process and scrutinize the procedures. Any objection to the process should be raised. As the proponent of bid procedures, court approval at the beginning of the process improves the chance of a Court requiring parties to respect the approved procedures.