Backing a stalking horse?
'Special' as our relationship may be,
there's more than just the Atlantic Ocean between us and our American
cousins. From footballs you throw to the impenetrable logic of the
electoral college system, smug Brits revel in observing the oddities
of the American way. But there are many areas of clear difference
where even the most fervent patriot would have to concede that our
own approach is not necessarily the best alternative.
One such area is the difference between how we approach the sale of an insolvent business. 'In Britain, the prepack has become almost standard over the last ten to fifteen years as a mechanism for selling businesses as going concerns and thus preserving value,' says George Jacobs, a Business Restructuring Principal at BDO. 'Opinion varies as to their merits, but most business recovery professionals think they're the preferred way of dealing with an insolvency, representing the best (and often the only) option for maximising value and maintaining a viable business during the process. The people who disagree tend, understandably, to be the ones who feel that they have suffered as a result – principally unsecured creditors who don't get paid.
'The real problem has been one of transparency – or rather the lack of it. The whole process is in the hands of a licensed insolvency practitioner, who makes all the running and can do whatever he thinks is appropriate, without having to tell people until after the event what he's doing and why – although consultation with major creditors before the sale is becoming more common. Of course, he can get sued if he gets things wrong, but even so the secrecy involved makes prepacks an easy target for politicians and the public.'
It's not an accusation that could be levelled across the pond. 'The US way is much more transparent,' continues Jacobs. 'Section 363 of the US Bankruptcy Code provides for a company that's entered Chapter 11 to sell its business or parts of it through a public auction, and the whole process is supervised by the courts.'
But it's not quite a free-for-all: the crucial ingredient here is the so-called 'stalking horse' bid. 'Before the auction process begins, the debtor will usually have signed a binding contract with a preferred bidder – a stalking horse – who agrees to buy the business for a given price. If this price is then exceeded at auction, the higher offer will prevail and the stalking horse will receive a ‘break-up’ fee approved in advance by the court.'
One major advantage of the US system is that the business for sale should remain relatively stable as a buyer will have already been identified, ensuring continuity for the future and thus making it more likely that it can retain its employees, customers and suppliers until the auction process has been concluded. This seems to guarantee a successful outcome: an assurance of stability whilst maximising the price for the benefit of creditors. In practice, achieving a higher price than the stalking horse bid is quite a frequent occurrence; but the stalking horse wins either way, either acquiring a business at an acceptable price, or receiving a fee that will more than compensate them for their trouble.
'The only secret part of the process is the negotiation with the potential stalking horse buyer,' Jacobs points out. 'When you're talking to a single party, information flow is relatively easy to control – it's a contrast to our own system, where the greater number of parties involved with a prepack make it much more likely the news will leak, making a bad situation much worse for the company in trouble.'
In short the improved trading stability, the potential to realise the best price, and the overall transparency of the process make the American approach to selling bankrupt companies attractive to many, although offset to some extent by the generally much higher costs of the process.
Where does this leave us in the UK? 'One interesting suggestion that has been mooted for the UK is the possibility of a "postpack", where the initial prepack deal would be subject to higher offers at a later date. The theory is an attractive one, although in practice the details would be very hard to resolve. But there is certainly scope for future development of the UK insolvency system to try to emulate some of the benefits of the US approach,' Jacobs concludes.
