Can a Lower Bid for a Debtor’s Assets Be Approved as “Better” Because It Saves More Jobs than the Higher Bid?

Summer 2021

Publication| Bankruptcy & Corporate Restructuring

Bidding procedures orders entered by bankruptcy courts typically state that offers attempting to top a stalking horse bid must be “higher and better” than any competing bids. Offers have been found to be “better” even though they have a lower cash “headline” dollar value, where (1) the lower cash offeror also agrees to assume certain liabilities; (2) the lower cash offeror can close more quickly, resulting in a reduction of the debtor’s cash burn; or (3) the lower cash offeror is more certain to close because the higher offer contains a financing contingency, the need to complete due diligence, potential antitrust issues, proposed closing requirements that the debtor cannot meet, or other delays that take the debtor beyond its available liquidity.

Every one of these long-recognized rationales can be conceived of as an argument that what seems higher might not actually be higher. If the lower bid assumes certain liabilities, or closes a month sooner so as to stem operating losses, it might be higher on a net basis. The closing risk cases present a similar economic paradigm: a theoretically higher offer will not actually be higher if the deal never closes. One could therefore conceive of the analysis as still asking what is the higher offer, this time on a risk-adjusted rather than a net basis.

But can an offer be considered better even if there is no way to characterize it as higher or providing the best economic outcome for the estate, but it saves more jobs than the higher offer? The only reported opinion addressing this issue is dicta in a twenty-seven year-old case. But the theory has been asserted in recent bankruptcy cases, especially in the current environment when so many people are out of work.

This article explores what standards a court should apply if faced with this argument and analogizes to fiduciary duty caselaw in the field of mergers and acquisitions of solvent corporations organized in states that (unlike Delaware) have a constituency statute, thereby permitting the court to consider what is in the best interests of constituencies other than just stockholders.

The article also explores how these issues would be analyzed if the entity is a public benefit corporation, or if the Protecting Employees and Retirees in Business Bankruptcies Act of 2020 were adopted.

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