Increasing the Odds of Winning in an Insolvent Corporation Auction

Usually, when there is a bidding process for the purchase of an insolvent corporation’s activity, the highest bid wins. The logic here is simple: the insolvent corporation should aim for the highest price in order to pay off creditors. However, in the recent ISBECO  (Israel Beverages Company Ltd.) case, the administrators of the debt arrangement gave preference to Hacarem Spirit’s offer to acquire the company’s operations over a competing offer. This was despite the fact the competing offer was higher in some components and the overall potential consideration of the competing offer was higher. Nevertheless, the fixed-price component of Hacarem’s offer (guaranteed minimum payment) was higher, facilitating its win.

Acquiring an insolvent corporation’s operations during a legal proceeding (rehabilitation, recovery, or debt settlement) presents numerous business opportunities. However, the holding of an insolvency auction, an integral part of the sale, may threaten these opportunities. During a sale, the insolvent corporation’s trustee (or the administrators) needs to maximize proceeds from the auction to pay creditors. Therefore, the trustee must consider offers from additional bidders before accepting a proposal. In such instances, a potential investor/buyer must compete against various competitors, some of which may have superior financial resources. However, as noted, the bid amount is not the only consideration for officials in the insolvent corporation.

Are Bidding Results Decided Solely on the Basis of the Highest Bid?

Ostensibly, a potential investor has a limited ability to influence bidding results through amount alone, as the highest bid usually wins. However, court rulings over the years have introduced various strategies that may tip the scales in favor of a particular bidder. These strategies allow a bidder to win even without the highest bid. At the least, such strategies should give an investor a significant advantage over other bidders during the auction.

How Can You Improve Your Chances of Winning an Auction?

1. Direct contact with the corporation’s former controlling shareholder

The key source of information about a corporation’s operations is its former controlling shareholder. Although a trustee is now managing the insolvent corporation, directly contacting the former controlling shareholder may prove beneficial. Working out a proposal that also benefits the former controlling shareholder, such as offering post-acquisition employment, facilitates a better flow of information and data, from him. This improved information flow gives the investor an advantage when assessing acquisition risks. Consequently, it allows for more precise pricing of the offer, increasing the chances of winning.

2. Determining a preliminary outline for the offer

Often, the trustee determines the auction outline for an insolvent corporation, particularly when its operations are not complex. However, when the sale is urgent due to a lack of funding to continue operations, an agile investor can formulate and submit a particular offer outline to the trustee. The investor will then submit an offer according to its outlined terms, gaining a commercial advantage.

For instance, an investor may highlight an aspect in its offer that gives it a relative advantage over other bidders. Alternatively, the investor may make its offer contingent upon suspending conditions it fulfills and that other potential investors do not. Due to time constraints, there is a chance the trustee will not have enough time to formulate an alternative outline and will therefore accept the outline the swift bidder presented as the basis for the auction. Consequently, other bidders must conform to this outline, potentially placing them at a disadvantage compared to the swift bidder’s offer.

3. Accelerating timetables for holding the auction

When financing a corporation’s operations proves challenging, the trustee will aim to hold the auction as soon as possible. A swiftly submitted offer can accelerate the auction timeline, leaving competitors little time to formulate an alternative.

Moreover, once the trustee declares an auction winner, it typically does not accept further bids, in accordance with case law. This is because the administrator is conducting the auction as part of a legal proceeding. Therefore, in addition to the principles of equality and fairness, the principle of finality of the sale proceedings also applies, which prevents reopening the auction after declaration of a winner.

If a potential investor tenders a swift offer, it should be sure to limit its validity to as short a time as possible. The investor should also insist on submitting the offer to the court for immediate approval after the administrator accepts it.

4. Ensuring certainty with regard to the offer and its validity

An offer to acquire a corporation’s operations may consist of several different components. Each of them can be priced separately by the bidder (either a fixed offer, a percentage of the revenues, minimum and maximum sums, etc.). When it comes to insolvency proceedings, the administrator has a clear preference for components offering financial certainty (fixed and unconditional consideration).

Therefore, we recommend pricing fixed-priced components in the offer at a relatively high rate, at the expense of variable-priced components. Certainty about the validity of the offer itself will also confer preference to a bidder. That’s why potential investors must avoid including complex suspending conditions to the extent possible. In relevant instances, we also recommend seeking a prior opinion that exempts the acquisition from Israel Competition Authority approval.

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Barnea Jaffa Lande’s insolvency practice is at your service if you have any questions about auction proceedings or other issues.

Adv. Idan Miller is a partner in our firm and heads our insolvency practice.