363 Sale

It allows the debtor to sell some or almost all business assets to meet the demands of their creditors, subject to certain conditions

Author: Osman Ahmed
Osman Ahmed
Osman Ahmed
Investment Banking | Private Equity

Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology. He's currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.

Osman holds a Bachelor of Science in Computer Science from the University of Southern California and a Master of Business Administration with concentrations in Finance, Entrepreneurship, and Economics from the University of Chicago Booth School of Business.

Reviewed By: Andy Yan
Andy Yan
Andy Yan
Investment Banking | Corporate Development

Before deciding to pursue his MBA, Andy previously spent two years at Credit Suisse in Investment Banking, primarily working on M&A and IPO transactions. Prior to joining Credit Suisse, Andy was a Business Analyst Intern for Capital One and worked as an associate for Cambridge Realty Capital Companies.

Andy graduated from University of Chicago with a Bachelor of Arts in Economics and Statistics and is currently an MBA candidate at The University of Chicago Booth School of Business with a concentration in Analytical Finance.

Last Updated:February 14, 2024

What Is A 363 Sale?

A 363 Sale, governed by Section 363 of the U.S. Bankruptcy Code, allows the debtor to sell some or almost all business assets to meet the demands of their creditors, subject to certain conditions.

In a 363 Sale, the debtor-in-possession holds greater control over asset disposition than in Chapter 7 liquidation bankruptcy, where a trustee is typically responsible for selling assets.

The bankruptcy court oversees the sale process, and the debtor-in-possession has the authority to set conditions for bidders at an auction. Although the precise steps for each organization's sale may differ, and each bankruptcy court may choose to follow its protocol, the process of a 363 deal is simple.

Creditors can support or oppose any motions the debtor submits to the court as essential participants in the bankruptcy process. Secured creditors can make a credit bid at a 363 sale to have a part or all of the obligations owed to them by the debtor eliminated.

The secured creditor is not limited to placing a cash bid for the collateral asset when a loan the debtor received is up for auction as security.

Key Takeaways

  • A 363 Sale, governed by the U.S. Bankruptcy Code, allows debtors to sell business assets to meet creditor demands, with the debtor-in-possession overseeing the sale process, offering potential advantages such as streamlined asset disposition.
  • Initiated by the debtor, a 363 sale involves marketing assets, court approval, open bidding, and auction, with the highest bidder securing the purchase under court oversight, fostering transparency and competitive bidding.
  • Empowering debtors with asset control, ensuring fairness and efficiency through transparency, and providing recourse for dispute resolution are among the benefits of 363 sales, creating mutual benefits for stakeholders.
  • Challenges include limited buyer participation due to public bidding, complexities with multiple buyers and stalking horse bids, stringent regulatory compliance, increased due diligence efforts, and time constraints impacting decision-making processes.

Understanding 363 Sale

A 363 sale is a bankruptcy process where assets are sold under Section 363 of the U.S. Bankruptcy Code, allowing the debtor to control the initial bidding.

After court approval, open bidding commences, leading to an auction where the highest bidder purchases the assets. Court oversight ensures fairness, with the right to approve or dismiss the sale.

It is preferable for any business considering bankruptcy to carefully consider the benefits and drawbacks of a 363 Sale compared to a planned sale and the credit bidding process in Chapter 7.

Buyers may face increased competition in 363 sales, potentially resulting in lower offers than closed bidding processes. Furthermore, the presence of multiple prospective buyers may hinder the feasibility of stalking horse bids, which are pre-arranged agreements.

Additionally, the court will only permit the sale of assets if they are carried out in a way that complies with the bankruptcy court's rules.

For purchasers who are informed about the sales process, commercial bankruptcies present ideal opportunities to score a bargain on the assets of a faltering company.

Despite frequently utilizing Section 363, meticulous planning and proper documentation remain essential to ensure the buyer receives their intended assets.

The 363 Sale Process

In the context of bankruptcy proceedings, a 363 sale follows a structured process outlined by the law. It begins with either the debtor or a creditor initiating the process by filing a petition as per the legal framework. Here's a simplified breakdown of how it works:

  1. Initiating the Sale: The debtor kicks off the sale by putting the assets up for sale to potential buyers in the market
  2. Assistance and Preparation: The debtor may enlist the support of investment consultants or bankers to help market the assets and handle the necessary legal documentation for the sale
  3. Stalking Horse Bid: The debtor may arrange for a 'stalking horse bid,' establishing a minimum offer to deter lower bids from other buyers
  4. Debtor Control: A 363 sale grants the debtor increased control over the initial bidding phase
  5. Court Approval: Once a bid is accepted, it must receive approval from the bankruptcy court, ensuring fairness and legality
  6. Open Bidding: After court approval, the sale is opened to other potential buyers in the market
  7. Auction: An auction is conducted to facilitate a transparent and competitive bidding process
  8. Winning Bidder: The bidder with the highest offer wins the auction and proceeds with the purchase
  9. Court Oversight: The court maintains authority throughout the process, reviewing objections and proposed adjustments by other bidders before approving or rejecting the sale

Benefits of a 363 Sale

Some of the benefits 363 sale offers are:

  1. Empowerment for Debtors: Section 363 sales provide debtors with enhanced control over asset disposition, potentially leading to streamlined processes and increased returns
  2. Transparency and Efficiency: By promoting a transparent bidding system, Section 363 sales ensure fairness and facilitate smoother transactions for all parties involved
  3. Appeal to Courts: The structured framework of Section 363 sales offers recourse to courts for resolving contentious debtor demands, facilitating dispute resolution
  4. Mutual Benefit: Properly conducted Section 363 sales should ideally benefit all stakeholders, fostering a win-win situation for debtors, creditors, and other involved parties

Limitations of a 363 Sale

On the other hand, the limitations include:

  1. Public Nature of Sales: Despite transparency, the public nature of Section 363 sales may deter potential buyers uncomfortable with bidding publicly, thus limiting participation
  2. Complexity with Multiple Buyers: In situations with multiple buyers, establishing a stalking horse bid can be challenging, with a looming risk of being outbid
  3. Strict Regulatory Compliance: Debtors must adhere meticulously to U.S. Bankruptcy Code requirements during Section 363 sales, facing potential repercussions for non-compliance or deviations
  4. Increased Due Diligence Efforts: Parties involved in Section 363 sales may face increased costs and efforts, especially during the establishment of stalking horse bids and due diligence processes
  5. Time Constraints: Debtors often face limited timeframes to complete due diligence, adding pressure to adhere to lenders' schedules and potentially impacting decision-making processes

363 Sales and Taxation Example

Most sections of the 363 sales are taxable. However, under some circumstances, the sale of Section 363 may qualify as a G-reorganization, often known as a tax reorganization.

In this scenario, the purchasing firm will essentially take over the debtor company's position and inherit the debtor's tax characteristics. An example is when General Motors Corporation was sold during its 2009 bankruptcy.

The assets of the automaker General Motors and several of its subsidiaries were sold in 2009 under Chapter 11 of General Motors, and the United States Bankruptcy Court in the Southern District of New York carried this out.

Note

NGMCO Inc. bought the assets of the old G.M. thanks to the transaction backed by the U.S. government.

Routine activities, such as employee compensation, warranty, and other customer services, continued throughout the bankruptcy procedures. Court filings do not contain transactions conducted outside of the United States.

The business acquired a debtor possession finance of $33 billion to accomplish this procedure. General Motors filed for Chapter 11 restructuring in the New York Federal Bankruptcy Court in Manhattan in June 2009. 

At the latest, the U.S. Treasury needed to receive an approved feasibility plan by June 1, 2009. Assets of $82.29 billion and liabilities of $172.81 billion were included in the paper.

Following the Chapter 11 filing, which became effective on Monday, June 8, 2009, Cisco Systems assumed General Motors' seat in the Dow Jones Industrial Average.

The old shares of General Motors started trading over the counter on June 2, 2009. On July 10, 2009, a new business successfully acquired the going concern, assets, and trademarks of G.M. as part of Chapter 11 of "Pre-packing" restructuring.

Note

General Motors' bankruptcy is one of the worst corporate failures in American history, ranking third in total assets.

This case became the one with the fourth-largest amount of money transaction in American history, after Lehman Brothers Holdings Inc., Washington Mutual, and WorldCom Inc.

A new business was created, based on General Motors, with the attempt of the U.S. Department of Finance by Article 363 of the Bankruptcy Law to purchase profitable assets.

This new business had its initial public offering (IPO) in 2010. The former company's assets should be used to satisfy the remaining creditors' rights before the application.

363 Sales in Bankruptcy Asset Management

Deciding how to handle company assets is critical for businesses and judges in bankruptcy proceedings. The available alternatives vary significantly from one another.

The insolvency law's article 363 provides a helpful provision that permits the sale of the company's assets with the court's permission.

Due to the possibility of idle or depreciating assets, the company can opt for a rapid sale instead of formulating and accepting a reorganization plan under Chapter 11.

Note

Even though a quicker solution has advantages, 363 transactions remain a viable option because certain claimant types, particularly shareholders and unsecured creditors, may miss out on crucial opportunities to wait and see if the asset values increase.

Secured creditors seek to sell immediately rather than liquidate before any value is lost. Still, stockholders and unsecured creditors are the last to get paid, so they may gain if the asset's value rises.

However, it is challenging to put a number on the wealth loss experienced by shareholders and unsecured creditors due to the removal of lottery-like waiting chances. This value is intangible if there is no active market for these rights.

363 sales may sometimes result in stockholders losing ownership of the company's assets. If stockholders are prompt to act, the shareholder value could decrease significantly, from nearly a quarter of the company's assets to virtually nothing.

Example

For example, Lionel Corporation was a toy manufacturer and holding company of retailers founded as an electrical novelties company in the United States.

In the Lionel case, the firm's assets were worth around $170 million, wiping away almost 45 million dollars in shareholder capital. This value is given to claimants with higher priority.

The absence of the wait-and-see option significantly impacts shareholder wealth and lower-priority creditors, even under more modest projections. A significant wealth may be shifted from owners to creditors by selling assets months in advance.

The volatility and value of the assets to be sold and the time difference between the time needed to arrange the sale of investments and the time required to finalize the reorganization plan are factors that could affect the extent of wealth loss.

Note

The court should consider the hidden wealth impact while evaluating whether to authorize 363 transactions to understand the parties' motivations and interests better.

How to Reduce the Risk of 363 Sales

A bankruptcy sale can facilitate reorganization when executed appropriately within a suitable framework by the debtor.

A successful practitioner will be aware of the procedures for the local and federal bankruptcy administration sales process and pertinent case law, in addition to analyzing the commercial aspects of sales.

Practitioners utilizing 363 sales and relevant case law should ensure equitable treatment of all transaction parties. This indicates that there has been adequate notice and disclosure of all material facts. Therefore, each party is allowed to speak and have a fair hearing.

These fundamental principles serve as the cornerstone of a successful bankruptcy sale. A market sale ensures a final transaction resistant to appeals.

Ways to reduce

To mitigate risks associated with post-sale obligations, sales orders should include the following:

  • The buyer is responsible for fact-finding and legal verbiage succession
  • Specific mention of the buyer's efforts to clear liens, claims, and encumbrances
  • Preventing legal action against the buyer regarding any claims, liens, or interests held by claimants, lienholders, or interested parties
  • The buyer's written acknowledgment of confidence in the purchase without assuming additional liabilities
  • Indication of the responsibility wording and the obligations the buyer does not accept
  • The buyer's status as a "bona fide" purchaser
  • Implementing sales orders drafted in compliance with the jurisdiction of the bankruptcy court

Reviewed and Edited by Parul Gupta

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