WHAT IS A STALKING HORSE?
A COMPLETE PROCESS THE CHEF NEEDED TO USE.
What is a stalking horse bid? In the 16th century, the term originated.
It originally was a replica of a horse or
something that looked like a horse that was set out by hunters in an area
they wished to Hunt in by hiding behind it.
The hunters wouldn't have to worry about
scaring away whatever was being hunted today.
It means anything that is put forward or
proposed to test the waters or mask the true nature of the proposal.
It is much more recent to think about a stalking horse bid.
Its name comes from the fact that it is a way to draw other bidders out
of the woods and test their level of seriousness in participating in a sale
process and making a bid for the assets being sold.
In this Brandon Blog,
I describe an Ontario court decision denying the request of a company under
bankruptcy protection to sell its assets and if the company only had known what is
a stalking horse bid and used it. The company of celebrity chef Mark McEwan
files for creditor protection on September 28, 2021.
McEwan Enterprises Inc. (MEI)
a premier hospitality company based
in Toronto, Ontario, obtained protection under the
Companies' Creditors Arrangement Act with a list of more than $10 million in liabilities.
The company was founded by chef Mark McEwan.
In his early career,
Chef McEwan worked as an executive chef at Toronto's Sutton Place Hotel.
In addition to mentoring budding chefs
in his kitchens. Chef McEwan is also a judge
on Food Network's hit series Top Chef. MEI, at one time ran multiple dining
establishments and gourmet grocery stores in addition to a catering service.
Due to the negative impact
on the hospitality industry of the coronavirus,
MEI experienced significant losses and business challenges and found itself
filing for bankruptcy protection under the CCAA.
The owner of the Bloor-Yonge location
opposes the CCAA restructuring by celebrity Chef Mark McEwan.
MEI's restructuring plan, presented for bankruptcy court approval
would involve Fairfax Financial Holdings Limited
and McEwan repurchasing the business under a specific asset purchase agreement
by a new numbered company with fewer grocery and restaurant locations.
The business would retain its 268 employees and reduce lease obligations.
The company's restructuring plan
in the CCAA proceedings focuses on affecting a going concern sale
transaction. That is, selling and transferring substantially all of its
assets and many of its liabilities to a new entity formed by MEI's current
shareholders, Fairfax Financial Holdings Ltd.
and chef McEwan. One of MEI's creditors,
the landlord of the Bloor-Yonge grocery store, opposed the plan.
Based on its analysis of the situation, the court found that the proposed
transaction did not meet the CCAA's requirements for approval.
Consequently, the sale, the centrepiece of the restructuring plan,
failed to get bankruptcy court approval from the bankruptcy judge.
What is a stalking horse?
Why did MEI's proposed bankruptcy sale process fail?
MEI's legal and financial advisers are excellent.
They probably told chef McEwan the MEI
restructuring plan, as presented to the court, had little chance of success.
It would shock me if they didn't. Because I am not involved in the MEI CCAA proceeding.
I can only guess that Chef McEwan ignored his advisers' counsel, ignored financial
and legal advice, rolled the dice and lost.
Chef McEwan swore affidavits as part of MEI's court application.
According to him, MEI's value and success
are dependent upon his continued involvement.
The MEI brand has become synonymous
with his personal brand and television projects.
By inference, he implied that he would not
cooperate with any third party buyer who would therefore not have his
involvement, and in his view, a third party sales process was not
necessary and could negatively affect the company's operations.
I think it is never wise to go into court
with a smug attitude or threaten non-cooperation with a third party.
In addition to the legal issues
I will explain shortly,
if MEI had used a real bankruptcy auction
process and a higher bidder was able to pay the amount of the purchase,
the court would not care whether chef McEwen would work for the new
owner if it was not a condition of the potential purchaser's offer.
Section 36 of the CCAA was at issue.
Section 36 refers to the factors
that a court should consider when considering a specific sale transaction.
They are: a reasonable process led to the proposed sale or disposition
in the circumstances;
did the Monitor approve the process?;
is the Monitor submitting a report to the court indicating that a sale or
disposition would be more beneficial to the creditors than a sale or
disposition under a pure bankruptcy liquidation;
to what extent have the creditors been consulted?;
how the proposed sale or disposition will affect creditors and other interested
parties; and considering their market value, determine whether the consideration to be
received for the assets is reasonable and fair.
In this case,
the purchaser was a related party. As described in Section 36 of the CCAA,
according to the law,
a court could grant MEI authorisation only if it is satisfied that the assets were tried
to be sold or otherwise disposed of to nonrelated parties in good faith
in accordance with the process leading to the proposed sale or disposition,
and it offers a greater consideration than any other offer.
This was not the case with MEI.
I won't go into all the reasons for MEI's CCAA bankruptcy sale failure
in this what is a stalking horse Brandon Blog, as you can
read all about them here. The bankruptcy judge determined
that the facts of the case do not meet the requirements of section 36.
Thus, the proposed transaction cannot be approved.
Accordingly. It was dismissed.
What is a Stalking Horse?
The competitive bidding process
chef McEwan should have used.
The fatal flaw in MEI's application for approval of the offer was their
inability to prove to the court that there was not an even better offer
in the marketplace because there was no sales process,
possibly being an auction process.
Chef McEwan should have used his offer as a stalking horse bid.
In a competitive auction process,
he would have sought court approval for a court-supervised auction type process.
As long as they were fair
he could have set the bidding procedures,
the bidding process timelines, and the bidding range through his stalking
horse offer and have the court approve it all
at the bidding procedures hearing.
His offer would be exposed to the market and he might be outbid.
However, he was still in control of setting his offer.
In terms of his approach, he chose to put MEI under the CCAA
process, but once there, he had to adhere to the rules of that process.
How could a stalking horse bidding process possibly work?
Let's find out what is a stalking horse.
A court-supervised auction for bankruptcy sales.
Typically, the debtor executes a binding stalking horse agreement with a purchaser
against which higher and better offers can be solicited and which stipulates
that the stalking horse will be considered the highest and best offer
if no competing bids are received.
In order to achieve that goal, the debtor will ask the bankruptcy court
to approve a competitive auction process and related bidding procedures.
An organization in distress can use the stalking horse bid method to avoid
receiving low bids when selling its assets.
Stalking horse bids are initial bids on insolvent company assets.
Setting a low end bidding bar prevents other bidders from under bidding
the purchase price.
Those wishing to participate
in the stalking horse bid process and submit an offer after performing due
diligence must submit a better offer than the stalking horse bid.
What is a stalking horse and what are
the advantages and disadvantages of a stalking horse bid?
There are certain advantages
for a stalking horse bidder since the stalking horse bidder is the opening
offer that sets the floor price for the assets or company.
The insolvent company usually provides
several incentives to begin with. The stalking horse bidder has
the opportunity to negotiate the legal and financial terms of an asset purchase
agreement with the debtor that will serve as the floor price.
Thus, the stalking horse bidder does not simply enter into an agreement negotiated
by someone else that might not be exactly what it needs.
In addition, the stalking horse bidder MEI,
negotiates bidding options that discourage competitors from bidding,
although the entire process needs to be fair to all parties.
Thirdly, a stalking horse bidder gets to perform its due diligence
first. The due diligence process involves
verifying, investigating, or auditing all relevant facts
and financial information of a potential deal or investment opportunity.
However, there is still a chance that someone else outbids the MEI stalking
horse offer, and if they want the assets badly enough, they may even bid more than
the liquidation value. In the MEI case MEI failed to prove that accepting its offer
would be better than liquidation through a receivership or bankruptcy proceeding.
This was another MEI flaw. Even if that were to happen
stalking horse offers always contain a break fee.
When someone else wins, this money will be awarded to the stalking horse bidder.
It must be possible to pay the break fee and still have a better offer than what
the stalking horse bidder offered as part of the stalking horse bidding process.
The break fee is meant to compensate the stalking horse bidder for the time
spent and is an expense reimbursement for the professional fees spent on doing
their due diligence and allowing their offer to sit out there for everyone to see.
All the remaining steps, follow a typical auction where the highest
bidder wins the distressed company's assets.
What is a stalking Horse?
Recent, well-known, Canadian example? Thanks for asking.
The court-supervised auction of insolvent entertainment company Cirque du Soleil was
conducted based on an offer made by Cirque du Soleil's secured creditors.
That creditor proposal replaced a shareholder offer as the stalking horse
bid, which set the minimum requirements for potential rival bids.
Also included in the successful bid was Cirque's commitment to maintaining its
headquarters in Montreal for at least five years.
The stalking horse sales process is well known in Canada bankruptcy courts.
As you can see in this process,
the stalking horse bidder gains certain advantages while the distressed company
and its assets are exposed to the market after a public auction sale,
the court is able to determine if there is or is not a better offer out there under
a previous bankruptcy court approved sales process.
So I hope that you can now answer the question, what is a stalking horse?
What next for the chef?
I guess it's time to start fresh.
Most of the time and money spent so far has been in vain.
If MEI wants to make another shareholder
offer, it will have to prove to the court that it met all the CCAA requirements.
What is a stalking Horse Summary? I hope
you found this what is a Stalking Horse Brandon Blog informative.
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