On May 1, 2009, Magna Entertainment (“Magna”) filed a motion in the United States Bankruptcy Court for the District of Delaware whereby it sought authority to schedule an auction, receive approval of auction bid procedures and proceed with the sale of assets (the “Sale Motion“). I have previously written about bankruptcy sale motions on this blog, however, I wanted to devote this post to the auction procedures that are often used in bankruptcy proceedings. Specifically, this post is intended to address questions that arise when a chapter 11 debtor seeks to auction of assets. Among them, how do debtors go about auctioning assets while in bankruptcy, how long does the auction process take, and finally, what are common requirements imposed on parties wishing to bid on a debtor’s assets? Recognizing that no two bankruptcies are the same, this post will look at the auction procedures proposed in Magna in an effort to shed light on the bankruptcy auction process in general.
The Sale Motion Magna filed on May 1st was not its first sale motion. Magna filed its first and second sale motions on March 10 and March 17, 2009 (the “Original Sale Motions”). Under the Original Sale Motions, Magna sought to sell substantially all of its assets under an auction process that included the establishment of bidding procedures for interested parties. As is common in bankruptcy, various parties objected to the Original Sale Motions, which in turn resulted in Magna filing an amended Sale Motion addressing some of the concerns raised by the objecting parties. This post focuses on the auction procedures within the amended Sale Motion.
The Objectives of an Auction
The reason a debtor seeks to auction off assets is relatively simple – to generate cash for the bankruptcy estate. According to Magna’s Sale Motion, “the sale of [Magna’s] assets will generate the maximum value for the Debtors’ estates.” To insure debtors receive “maximum value” from the sale of the assets, parties in interest in a bankruptcy proceeding often scrutinize an auction to insure the process is open and fair. Doing so increases the likelihood that the auction will result in a sale of assets at market value. If the debtor’s assets are not properly marketed to potential buyers, the resulting sale may be for less than full market value.
In order to have a competitive auction, debtors will often hire a financial adviser to help market the assets. In the Magna bankruptcy, both the Debtors and the creditors’ committee hired financial advisers to create a process to solicit and review bids from potential purchasers.
The Auction Process
Under the Sale Motion, parties wishing to participate in the Magna bankruptcy auction must submit an “expression of interest” to Magna declaring a party’s desire to bid on assets. Specifically, parties wishing to bid on Magna’s assets must sign a confidentiality agreement regarding the information that will be made available to the bidder. Next, bidders must designate which assets they wish to bid on and assign a range of value to these assets. Finally, potential bidders must demonstrate to the debtor’s satisfaction that the bidder has the financial means by which to complete the purchase of assets.
After submitting an expression of interest as outlined above, the Magna Sale Motion requires bidders to submit bids to Magna on or before 5:00 EST, on July 31, 2009. Under the Sale Motion, Magna provides potential bidders with approximately 90 days from the time it filed the amended Sale Motion to submit full or partial bids on its assets.
Magna’s Sale Motion requires bidders to submit “definitive bids.” To constitute a definitive bid, bidders must submit a signed copy of a form agreement provided by Magna representing an “irrevocable and binding contract.” To qualify as a “definitive bid,” Magna requires that bidders satisfy the following criteria:
- Bids cannot be contingent on the bidder receiving financing, nor may bids be contingent on a bidder receiving approval from its board of directors or a regulatory body;
- Bidders must identify the entity participating in the auction;
- Bidders must state that the offer submitted is irrevocable until closing of the sale of assets;
- Bidders must state that they do not request any transaction or break-up fee, expense reimbursement, etc.;
- Bids must be accompanied by a 10% deposit of the definitive bid amount, delivered by certified or wired funds which funds will be available to fund the purchase price in the event the bidder prevails at the auction;
- Bidders must provide financial information about the bidder such as the latest unaudited financial statement of the bidder. Magna reserves the right to waive this requirement on a case-by-case basis.
Once bids are submitted, the debtor will conduct an auction. Auctions are often held in the office of the debtor’s attorney. Under the Magna Sale Motion, the debtors propose scheduling the auction on September 8, 2009 – 4 months after Magna filed its amended Sale Motion.
On May 11th, the Court entered the Order approving the Sale Motion. It remains to be seen whether Magna will have the competitive auction its procedures were intended to create.