Although the worldwide 2020 – 2021 COVID-19 pandemic disrupted the global economy for nearly two years, business bankruptcy filings declined by more than 33% in 2021, the last full year for which figures are available. The year 2021 saw 14K business bankruptcies, while each of the previous years was in the low-to-mid 20K range. Whether that number plummeted due to the breakdown of the COVID crisis or for another reason remains to be seen, but the recent changes in the world economy and other factors (overseas wars, energy shortages, supply chain issues and weather conditions) that are currently happening could easily trigger another spike in filings. However, challenges to the bankruptcy code may also change that percentage; like many other legal issues, there are often debates about the interpretation of the code, as demonstrated by this recent case involving Sears.
Even once-successful companies can go through a rough patch, whether it’s due to the type of industry it’s in, the economy, poor business decisions or just plain bad luck. In many instances, these companies file for bankruptcy, which is a legal proceeding that takes place when an entity (person or business) is unable to meet its outstanding debts or obligations. Similar to other types of business terms, there are many flavors of bankruptcy, and although they are similar in many ways, they all have plenty of differences. One of the common types of bankruptcies in the business world is a 363 sale.
What Is a 363 Sale?
A 363 sale is a sale of an organization’s assets, which allows the distressed company (generally referred to as the debtor) to honor its obligations to its creditors. A 363 sale gives the debtor the ability to sell its assets as well as the chance for a buyer to purchase these assets for prices that are generally lower than the current market value. Similar to Chapter 11, the name 363 sale comes from the section in the U.S. bankruptcy code that covers this type of proceeding, Section 363.
A typical 363 sale works something like this: The debtor puts its assets on the auction block to potential buyers. Once the negotiations are completed (what assets are being sold at what price), an acceptable offer is made and a tentative asset purchase agreement is drafted. At this point, the debtor files a motion with the bankruptcy court, to gain legal approval for the sale. Typically, the court will govern the rules and the process of the auction for the entire transaction. As with other forms of bankruptcy, there are a whole host of legal requirements that need to be satisfied.
Types of Assets Sold During 363 Sales
The assets that are sold in a 363 sale are typically up to the debtor company. Whether they are tangible assets (real estate, equipment or rolling stock) or intangible assets (trade secrets, patents, copyright licenses or intellectual property), nearly every type of asset can be included in a 363 sale. In most instances, any assets sold in a 363 sale are declared “free and clear” of liens and other interests.
363 Sale Use Cases
As a 363 sale is instigated as part of the bankruptcy process, it is typically used when the target company is in dire straits financially and needs to put itself on the market to meet its financial obligations. Typically, the debtor has a series of claims against it that it is unable to satisfy using due diligence or restructuring.
How 363 Sales Differ from Chapter 11 Bankruptcy
The biggest (and most advantageous for both the buyer and the seller) difference between 363 sales and Chapter 11 bankruptcy is the timeline, or more specifically the amount of time it requires to complete. A 363 sale can typically take two to three months; Chapter 11 proceedings generally take twice that time and often can stretch out over a year or more. That’s due to the more stringent requirements it takes to satisfy a Chapter 11 filing. Finally, the creditors involved in the transaction have much less say in the matter when using a 363 sale than they do in other types of bankruptcy proceedings.
Business Strategies for 363 Sales
A stalking horse bid is an initial bid on the assets of a company that has declared bankruptcy. It sets the lowest price for the assets, which prevents other bidders from going lower. In many instances, a stalking horse bid allows various incentives, such as expense reimbursements and refunds of other expenses, such as breakup fees. However, this isn’t always a guarantee of success; a subsequent bidder can up the ante, taking advantage of the due diligence performed by the initial bidder. But in most situations, the stalking horse bidder has the best chance to be successful.
A Vital Component
A virtual data room (VDR) is a crucial tool used in virtually every type of business dealing, including in 363 sales and in handling the liquidation of a company. A VDR provides a secure online location that enables all parties involved in the transaction to review financials and other confidential documents in a secure centrally located environment. The advanced features of a VDR include secure access, multiple layers of security and enterprise-level encryption, along with digital rights management (DRM) that will grant only certain users access to certain documents.
An industry leader like CapLinked provides VDRs that features a user-friendly interface that is compatible with virtually every OS, and, because of that, it gives users the ability to work on the transaction from anywhere in the world, using any type of computer, tablet or smartphone. To see how CapLinked can provide a vital tool for any type of bankruptcy or restructuring transaction, start a free trial today.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.