90 Second Lesson: Stalking Horse Bid, Yay or Neigh?

The Pros and Cons of a Stalking Horse Bid

Question: Why Be A Stalking Horse Bidder?

A stalking horse bid is an initial bid on a distressed company’s assets made by an interested party that the bankrupt company (debtor) chooses to participate in a 363 sale. The stalking horse bidder agrees to purchase the specific assets unless the bankruptcy estate receives a higher, better bid.

Jamie S. emailed us, asking, “Can you please sum up the pros and cons of serving as the ‘stalking horse’ in a bankruptcy sale?”

Answer: A Stalking Horse Agreement Sets the Stage, But Being First Isn’t Necessarily Best

Yes, Jamie, we can. A stalking horse bidder plays an important role in many bankruptcy acquisitions, and one of the most important decisions confronting a purchaser in a bankruptcy acquisition is whether to become the stalking horse.

Advantages to being the stalking horse include the following:

• The stalking horse determines the structure of the transaction (e.g., which assets are being sold).
• The stalking horse will be comfortable with the terms of its asset purchase agreement (e.g., the amount of any deposit).
• The stalking horse negotiates with the seller to set the bidding procedures, including the protections for the stalking horse.

On the other hand, there are reasons not to want to be the stalking horse.

• The stalking horse bid is first and typically public. Some purchasers may prefer to wait to see the stalking horse bid before deciding if they will participate in the auction.
• Some purchasers may prefer not to be the stalking horse as a way to limit up-front costs and, instead, rely on the stalking horse to conduct initial financial and legal due diligence on the target.

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[Editors’ Note: this is an updated part of our irregular series in which we answer readers’ questions, originally published in March 2014. If you have a question, submit it to [email protected] and we will try to answer it.]

This 90 Second Lesson is based, in substantial part, in material reprinted from Commercial Bankruptcy Litigation 2d and Strategic Alternatives for and Against Distressed Businesses, with permission of Thomson Reuters. For more information about these publications, please visit www.legalsolutions.com.

To learn more about this and related topics, you may want to attend the following webinars: The Nuts & Bolts of a 363 Motion and Opportunity Amidst Crisis- Buying Distressed Assets, Claims, and Securities for Fun & Profit. This is an updated version of an article originally published on February 22, 2019.]

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