In the very early hours on September 20, 2008, the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") entered an order (the "Sale Order") approving the sale of substantially all of the assets of Lehman Brothers Holdings, Inc. ("Lehman"), LB 745 LLC and Lehman Brothers, Inc. (collectively, the "Lehman Sellers") to Barclays Capital, Inc. free and clear of all liens claims, encumbrances and other interests.
As has been widely reported, on September 15, 2008, Lehman filed for protection under chapter 11 of the Bankruptcy Code in the Bankruptcy Court. Except for LB 745 LLC, which is the Lehman entity that was formed to own Lehman's headquarters in New York, the other subsidiaries (the "Lehman Subsidiaries") of Lehman did not file for bankruptcy protection. This is significant because substantially all of Lehman's actual operations were conducted through its subsidiaries which are not debtor entities. Based on reports from New York, the Lehman Subsidiaries have continued to operate generally unaffected by Lehman's bankruptcy filing.
On September 16, 2008, Lehman filed a motion (the "Sale Motion") for Bankruptcy Court approval of a sale of certain of the Lehman Sellers' assets. Under the terms of the proposed purchase agreement (the "Purchase Agreement"), filed with the Bankruptcy Court, Barclays has agreed to pay $1.7 billion plus the assumption of certain obligations and expenses. Lehman proposed that the purchased assets of Lehman Brothers, Inc. will be transferred to Barclays under a separate Securities Investor Protection Act ("SIPA") proceeding to which Lehman Brothers, Inc. will consent.
On September 19, 2008, Lehman Brothers, Inc., consented to the commencement of a SIPA proceeding, and the SIPA trustee and court approved the sale of Lehman Brothers, Inc.'s assets pursuant to the terms and conditions set forth in the Purchase Agreement.
Although it has been reported that Barclays is buying the Lehman Sellers' U.S. investment banking and capital-markets businesses, it is unclear from the Purchase Agreement and Sale Order exactly what assets and liabilities are being transferred to Barclays due to the vague provisions of the Purchase Agreement regarding the definition of purchased assets. This uncertainty is compounded by the fact that Barclays has been granted the authority under the Purchase Agreement to have a period of 60 days after the closing of the sale to determine which of the Lehman Seller's contracts it will assume. That being said, the Depository Trust Clearing Corporation ("DTCC") has required Barclays, and Barclays has agreed, to assume all liabilities in their entirety of Lehman Brothers, Inc. to the DTCC and its subsidiaries (including the Depository Trust Company, the National Securities Clearing Corporation and the Federal Income Clearing Corporation).
Based on testimony at the September 19 sale hearing before the Bankruptcy Court, the following details were reported to the Bankruptcy Court regarding the purchased assets and the consideration to be paid by Barclays:
- Due to the market fluctuations last week, the value of securities to be purchased by Barclays has been reduced from $72B to $47.5B, and the amount of liabilities to be assumed by Barclays under the Purchase Agreement has been reduced from $68B to $45.5B.
- The Lehman Sellers agreed to include the assets of LB Canada, Inc., LB Sudamerica SA and LB Uruguay SA in the sale to Barclays. No additional consideration is being paid by Barclays for these assets.
- Lehman's (i) over the counter derivatives, (ii) international swaps and derivatives agreements, (ii) repo agreements, (iv) loan servicing section, and (v) master netting agreements are not included in the proposed sale to Barclays.
Under the terms of the Purchase Agreement, the closing must occur by September 24. On September 21, 2008, Bay Harbour Management L.C. and certain affiliates (the "Appellants") filed an appeal of the Sale Order to the United States District Court for the Southern District of New York. Notwithstanding the appeal, the Lehman-Barclays transaction should close unless the Appellants can convince either the Bankruptcy Court or Appellate Court to issue a stay of the Sale Order pending appeal.
Given the scope of the proposed sale, its effect on the global market and the unprecedented pace at which the sale has proceeded, it is imperative that parties with contractual relations with Lehman and its subsidiaries stay on top of the proceedings to protect their rights.