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On Break Up Fees

posted by Stephen Lubben

Or "break fees," as Pottow would call them. The 3d Circuit is just out with a new opinion that's primary contribution will be to add a dozen words to the asset purchase agreement.

In the case, the debtor entered into an asset purchase agreement whereby it agreed to try to get the deal approved without competitive bidding, but if the court required an auction, the debtor was obliged to seek approval of a break up fee.

The bankruptcy court orders an auction, and the debtor sought approval of the fee -- but the court denied it. After another bidder wins, frustrated initial bidder seeks payment of the break up fee and appeals.

The Circuit essentially says:  the debtor's obligation was to seek approval of the fee, the deal was not predicated on approval of the fee, and the bankruptcy court acted consistent with existing 3d Circuit caselaw.

So the next APA that you draft, won't you simply add "The buyer's obligations are predicated on approval of the break up fee"?  Am I missing something?

90 page law review article to follow.


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I don't think there is anything out there to protect the parties from risk, absent the pre-approval of the break free provision.

The bidder is seeking to avoid some risk when making a bid. In this case, the risk assurance is being paid by the bankruptcy estate. And the bankruptcy court is in charge of how the estate spends its money.

The bidder in this case is in the same boat as experts (lawyers, accountants) who perform work for the estate.

My guess is that initial bidding will go away without some statutory fix.

Maybe we will finally see a statutory fix. Until then, I suspect there will be an exodus to the Southern District of NY, where the 3rd Circuit decisions aren't a problem.

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