Type the word “bankruptcy” into a news search and you will see story after story of businesses entering and exiting bankruptcy every day. From franchises to railways to mattress companies, bankruptcy is a very common part of conducting business in the United States, and it doesn’t necessarily mean a company will vanish or stop operating. No matter your business beat, you will likely stumble upon a company filing for bankruptcy, so today let’s talk about some of the things to know and important resources for covering bankruptcy.
The various chapters of bankruptcy
Let’s start with the basics. When a company files for bankruptcy, it can do so in a number of ways. For starters, Chapter 7, which can be referred to as “straight bankruptcy,” is when a company liquidates all its assets to pay off creditors and effectively shuts down operations. When a company files for Chapter 7, a trustee is assigned by the court system to manage the case. Creditors are then paid in order of legal hierarchy, starting with secured creditors and continuing on down the chain. This often means that unsecured or general creditors may receive very little or nothing at all from the company once its assets are liquidated and divided up.
If a business wishes to continue operating, it will likely choose to file for Chapter 11 bankruptcy instead, which allows the company to reorganize its debts while remaining open for business. Under Chapter 11, a company develops a plan to repay creditors over time and may include downsizing, renegotiating contracts, or selling assets. The plan must be approved by the creditors and confirmed by the court system. During this time, a company is not allowed to “expand its operations, take on new debt, or sell assets not specified in the reorganization plan without court approval.”
While these two types of bankruptcies are the most common, there are several other types that are available for specific situations. For example, Chapter 12 allows a family farmer or fisherman to reorganize their debts and continue operating and Chapter 9 is specifically for municipalities. Chapter 13 is for individuals, but it can be applicable to those who are self-employed or operating an unincorporated business. Chapter 15 was added to the bankruptcy code in 2005 and allows for the recognition of foreign bankruptcy proceedings and access to the U.S. system by foreign representatives.
Stalking horse
The mattress company, Sleep Number, recently filed for Chapter 11 with a stalking horse bid of $415 million from a Canadian mattress and bedding company. UPSIDE Foods recently submitted a $50 million stalking horse bid for Believer Meats’ U.S. assets after the company filed Chapter 15 bankruptcy in April. So, what exactly is a stalking horse bid?
A stalking horse bid is an initial bid for a bankrupt company’s assets, chosen by the bankrupt company and approved by the court. Once approved, this bid becomes the minimum a company’s assets will be sold for, and any other buyer must submit a higher bid in order to purchase those assets. The benefit of a stalking horse bid for the bankrupt company means that not only do they have a sure buyer, they have a better chance of receiving higher offers than if no initial bid was placed. This also allows management to have a little more control over what happens to their company during the bankruptcy process as they negotiate with the stalking horse bidder for amenable terms. This may include a breakup fee if another company bids higher or an agreement to reimburse the bidder’s expenses.
A stalking horse bid can be risky for the bidder as it generally takes considerable effort to determine the fair value of the company’s assets, which could always end up being too high, or another bidder may outbid them after reviewing the information the stalking horse bidder already gathered and was publicly released during the bankruptcy proceedings.
Resources
To find more information on bankruptcy proceedings, there are a number of resources available at your fingertips to help you stay on top of every twist and turn. Websites such as Kroll, Veritas, and Stretto allow you to find more details on a particular case (predominantly for larger businesses) such as the next hearing date, what parties are involved, and many, many documents. Some may allow you to sort the cases by district which may help you find a local case or see where these cases are occurring.
If you want to connect with bankruptcy experts, the American Bankruptcy Institute and BankruptcyData.com are great places to start. If you are interested in learning more bankruptcy terms, there are several resources available online, including the bankruptcy glossary from the U.S. courts and The Devil’s Dictionary, which is more directed toward the average person dealing with bankruptcy proceedings than most other glossaries.
