What is a "Pretext" Bankrupt buyer?
A bankrupt “stalker” buyer is a business entity buyer who has previously agreed to purchase the assets of a business during a Chapter 7 or Chapter 11 bankruptcy filing. Essentially, the bankrupt business is trying to leave nothing to chance: You have already made plans to sell your business or property to another business entity, usually BEFORE the bankruptcy case is filed. Bankruptcy itself is the mechanism that allows the “stalking horse” to make this transaction very efficient in reducing debt.
How did such a “colorful” term originate?
Did you know that this term has to do with hunting birds (birds)? In medieval times, a horse (or just a cloth covering with the image of a horse) was placed in front of a hunter like a blind man (a hunting term) to hide the hunter when approaching the birds. The hunter behind the lurking horse waited patiently to approach his award, just as modern companies wait patiently in the shadows to approach with his offer on the assets of the bankrupt company.
The word “stalk” in modern English can be defined as “pursuing or sneaking up on you.” It comes from Germanic roots that imply a “cautious gait”. When a company pursues and negotiates the terms of a “stalking horse” offer, they “sneak up” many times and tread cautiously in hopes of achieving their prized goal: acquiring valuable parts of a business without acquiring its heavy burden of debt.
The Value of SH Transactions in Bankruptcy: Predictable Results and Restored Productivity
Regardless of the legitimacy or source of the offer, the prize for a successful transaction like this one in bankruptcy cannot be overstated. A “stagnant” debt situation with a business can potentially be replaced by newly created or restored productivity on all sides. Creditors are reimbursed, old business systems are no longer doomed, and the buyer often acquires very useful, debt-free assets.
Although this concept always seems a bit “fishy” due to its preset nature, the transaction is VERY useful and fair to all parties, generally if there is no fraud involved. It provides a predictable mechanism to protect a company’s existing employees and systems. The company’s assets are carefully “reallocated” and rearranged instead of going under. Remember, no offer from SH is a 100% “sealed deal” before filing for bankruptcy – all offers must be approved by the court and must compete with any other offer proposed to the court.
The Danger of SH Transactions in Bankruptcy: The Potential for Fraud and Insider Deals
By its very name, “stalking horse” implies a sense of danger and a hidden intention. Although there are many SH transactions that are used appropriately and that restore productivity, there are also instances of fraud and misuse. A good indicator of whether a lurking horse transaction may be fraudulent is simple: does the deal sound too good to be true for either party? If the deal is too good to be true, it is very likely that creditors will be misled through the transaction.
With bad deals, the problem usually stems from some kind of “insider” situation. The most common of these problems is when an “alter ego” company tries to buy the assets and operations of the bankrupt company. Essentially, in such situations, the “old” company may be trying to get rid of its debt at a very low price and then restart under a new name.
Such insider offers MAY be valid, but many times the “deal” in such situations greatly underestimates the assets of the “bankrupt” company through the submission of the offer and bankruptcy schedules. Remember, in such situations, the two entities involved are so closely related that they could be considered the same party. Depending on the severity of the situation, the result could be from an offer rejected by the courts or even a finding of bankruptcy fraud.
Other stalking horse problems in bankruptcy usually always stem from some type of internal benefits situation or a lack of proper valuation and disclosure. High-level employees of companies tend to support agreements in which they keep their jobs. Furthermore, the incentive to properly value the company’s assets only favors creditors. Creditors can be very numerous for lack of collective organization.
Although competitive bids and court oversight are required, a stalking horse is still a stalking horse. The agenda is very specific and preset: creditors should review their position on a preset agenda with healthy skepticism. Proper investigation of the true intentions of the “bankrupt” company is essential to protect creditors.
Conclusion: good or bad, a stalking horse is still a stalking horse
A horse waits patiently for its prey to approach, hiding the hunter’s intentions behind it. Such is the image of the bankrupt lurking horse’s bid: good or bad, fair or unfair, the “hunter” is determined to get his prize. Due to the preset nature of lurking horse offers, it is very important that all parties involved thoroughly investigate the proposed offer to reveal the true intentions and identity of this “hunter”. The lurking horse offer always has a specific agenda behind it that must be reviewed by ALL potential parties to investigate if it is the best solution (or offer) to resolve the debt situation of the “bankrupt” company.