Questions from text book Mergers, Acquistions and Other Restructuring Activities
ID: 443575 • Letter: Q
Question
Questions from text book
Mergers, Acquistions and Other Restructuring Activities, 7th Edition
ISBN-13: 9780123854872
Author(s): DePamphilis, Donald
Case Study 17.1 Blockbuster Acquired by Dish Network in a Section 363 Sale (text book page 634 - 637)
1: What are the primary objectives of the bankruptcy process?
2: What types of businesses are more appropriate for Chapter 11 reorganization, Chapter 7 liquidation, or a Section 363 sale?
3: The Blockbuster case study illustrations the options available to the creditors and owners of a failing firm. How do you believe
creditors and owners might choose among the range of available options? Explain your answer.
4: Financial buyers such as hedhe funds clearly are motivated by the potential profit they can make by buying distressed debt. Their actions may have both a positive and negative impact on parties to the bankruptcy process. Identify how parties to a bankruptcy may be helped or hurt by the actions of the hedge funds?
5: Do you believe that a strategic bidder like Dish Network has an inherent advantage over a financial bidder in a 363 auction? Explain your answer.
6: Speculate as to why Blockbuster filed a motion with the Court to initiate a Section 363 auction rather than to continue to negotiate a reorganization plan with its creditors to exit Chapter 11.
Explanation / Answer
Answer
1)
Objectives
The main objectives of the law of bankruptcy are to protect the public and to help the debtor. The public is protected because bankruptcy law provides for a just and equitable distribution of the debtor’s available property among his creditors, and the debtor shall be relieved of his debts and be able to make a fresh start after being discharged by the court.
Primary goal is to maximize the value of the distressed firm’s assets » Liquidation » Reorganization
Maximizing asset value also maximizes aggregate value available to be distributed to stakeholders
» Suppliers » Employees » Creditors » Shareholders
Cost of bankruptcy, and length of bankruptcy cases, are driven by disagreements among stakeholders
2) Chapter 11 is typically used to reorganize a business, which may be a corporation, sole proprietorship, or partnership. A corporation exists separate and apart from its owners, the stockholders. The chapter 11 bankruptcy case of a corporation (corporation as debtor) does not put the personal assets of the stockholders at risk other than the value of their investment in the company's stock. A sole proprietorship (owner as debtor), on the other hand, does not have an identity separate and distinct from its owner(s). Accordingly, a bankruptcy case involving a sole proprietorship includes both the business and personal assets of the owners-debtors. Like a corporation, a partnership exists separate and apart from its partners. In a partnership bankruptcy case (partnership as debtor), however, the partners' personal assets may, in some cases, be used to pay creditors in the bankruptcy case or the partners, themselves, may be forced to file for bankruptcy protection.
3) An asset sale in bankruptcy is the debtor’s sale or transfer of estate property to a third party outside of the ordinary course of business, which requires notice to creditors and interested parties, a hearing, and court approval. The problematic asset sales are those that sell substantially all of the debtor’s assets.
The debtor’s property may be sold “free and clear of any interest in such property” under 363(f), but only if:
(1)Applicable non-bankruptcy law permits the sale free and clear of the interest;
(2)Entity holding the interest consents;
(3)The interest is a lien and the sale proceeds are greater than the value of all liens on the assets sold;
(4)An interest is in bona fide dispute; or
(5)An entity could be forced to accept monetary satisfaction of the interest .
Expansive Interpretation. Courts broadly construe 363(f) to find certain governmental interests to be “interests in such property” from which the assets can be sold “free and clear” - when those interests are statutory requirements and are not per se interests in the assets being sold.
Sale for Purpose of Eliminating Liability. Asset sales are being specifically used for the purpose of eliminating a range of the debtor’s and the purchaser’s compliance obligations and liabilities, including products and environmental liabilities, contractual, pension, labor, and tax obligations.
3)Such Sales allows buyers to purchase assets at avery reasonably potentially bargaining prices.
4)They are helped by the actions of the hedge funds as that time preserving asset values when failing firms are having hemorrhaging cash flow.
5) Money, Cash or Cash equivalents of a company that are subject to a security agreement or a control agreement is in favour of Dish Network.
6)Section 363 are common means of reseving asset values when firms are having minimum cash flows,it is without risk and more effecient way rather than reorganising plan.
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