Chapter II., B. The 363 Sale "Process": The "Eleven Steps"

• Jurisdiction: United States

B. The 363 Sale "Process": The "Eleven Steps"

In a 363 sale through a proceeding where there is a stalking-horse bidder, there is generally an 11-step process that is employed. The process would generally be as follows:

• Step One: Negotiation of Initial Term Sheet or Letter of Intent (LOI). If the potential acquiror is the stalking-horse bidder, then prior to the proceeding an LOI is negotiated and executed. The LOI provides for ultimate consummation through a 363 sale and puts the target on deadlines for filing the motion, court approval of sales procedures and bidder-protection devices, and the timing of the sale hearing — all of which are discussed more fully below.
• Step Two: Identification of Desired "Executory Contracts." Usually an integral part of any asset acquisition will be determining what existing, ongoing contracts the purchaser wishes to have assigned to it. These are known in bankruptcy parlance as "executory contracts" and may involve unexpired leases, supply agreements, etc. Identification of these contracts usually occurs as part of the due diligence phase. Such contracts must first be "assumed" by the debtor, then assigned to the purchaser.¹⁴ As part of the assumption, any monetary defaults must be "cured" or usually paid in cash (unless otherwise negotiated). The purchaser will usually insist that such "cure" amounts be specifically adjudicated by the court as part of the process.
• Step Three: Filing the Sale Motion. The target (as seller) would file a motion with the bankruptcy bourt asking for approval of the bidder-protection devices (discussed below), and either a sale (to the extent a potential acquiror has been specifically identified) or a marketing and sales procedure (to the extent that a potential acquiror has not yet been iden-tified).¹⁵
• Step Four: Negotiation of Bidder-Protection Devices. If a potential acquiror existed prior to a proceeding being filed, the target might be required to obtain court approval of certain "bidder-protection devices." That is usually required to be done as part of the motion described above, but in all events they must be approved in a separate court hearing held prior to the actual sale hearing.¹⁶ There are four bidder-protection devices commonly used in 363 sales:
1. "Bust-Up Fees." The potential acquiror may request advance court approval of a "bust-up fee" or termination fee. What this means is that to the extent that the potential acquiror is outbid, they will be entitled to be paid (as an administrative expense) a certain fee. This fee is usually tied to the size of the deal (1-3 percent of deal sizes), although many courts won't approve such fees unless they bear a relationship to the potential acquiror's due diligence costs. Bust-up fees can and do run the gamut, and some courts are more willing to approve them than others.
2. "Overbid Protections." Some potential acquirors require that the court approve minimum overbids so that they are not engaged in a small incremental bidding war. These are called "overbid protections." For example, the potential acquiror may make the initial bid and request that the court approve an auction protocol whereby the first higher bid must be a large one (for

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