Insolvency: Distressed Business & Asset Sales, and Title Insurance

Contents

• Distressed Business and Asset Sales – Tips and Pitfalls

• Title Insurance – Benefits for external administrators

Distressed Business and Asset Sales – Tips and Pitfalls

In the current economic and financial climate, external administrators including receivers, liquidators, voluntary administrators and deed administrators are under increasing pressure to quickly sell under-performing businesses or assets under their control.

These external administrators will face a myriad of competing demands from interested stakeholders including secured and unsecured creditors, equity and quasi-equity investors, the purchaser and the purchaser's financiers. Set out below is a brief list of some tips external administrators can employ and some pitfalls they should be aware of to help address such demands when selling distressed businesses and assets.

1. Exclusion or limitation of liability

The exclusion of any meaningful warranties with respect to the quality, condition, type or amount of the assets being sold is probably the first and most routinely used method to avoid liability for external administrators when selling distressed business and assets. Typically, this involves an acknowledgement by the purchaser that it purchases the relevant assets on an "as is, where is" basis.

This disclaimer is often supported by some or all of the following:

• express formal releases and post completion indemnities from the purchaser
• express representations that the purchaser has inspected and conducted all relevant due diligence enquiries in respect of the assets being sold and that the purchaser is satisfied as to the results of such enquiries
• monetary caps (high thresholds, low ceilings) and time caps with respect to any claims a purchaser may make against the vendor.

1. Due diligence

If the external administrator is unable to provide meaningful warranties (see below article by Jon Downes of First Title for a way around this), the purchaser will place added reliance on a rigorous due diligence process to be conducted by it and its advisers. Such due diligence may in fact be required, and seek to be relied upon, by the purchaser's financiers before acquisition funds will be lent.

This process may be lengthy, complex and involve multiple parties with rapidly changing commercial agendas. Such a due diligence process may not even ultimately result in a sale.

External administrators may use an extensive and methodically-presented on-line data room to promote speed, transparency and security in this process. In certain circumstances, external administrators may also consider undertaking (or engage a third party to undertake) a form of vendor legal due diligence prior to any expressions of interest being sought. Such legwork may serve to:

• identify sources of turnaround in the distressed business, which increases the value for potential purchasers (including option to renew a major supply contract, engagement of key personnel, critical assets which could be reclaimed through retention of title clauses)
• identify and then minimise the scope of any non-financial concerns a potential purchaser may raise in the course of negotiating the purchase price for the business.

The sale may be completed faster, have more competitive tension and result in a greater return to the vendor and its creditors if purchasers and their advisers merely need to confirm the results of such vendor due diligence.

1. Non-excludable warranties and obligations

Even if a purchaser is willing to accept an exclusion of all warranties and liabilities, external administrators should be aware of statutory obligations (in addition to s 420A of the Corporations Act obligations) which cannot be contracted out of when conducting a distressed asset sale - for example, the requirement to not engage in misleading and deceptive conduct under the Trade Practices Act.

These obligations may require external administrators to depart from the usual scenario of merely offering the business and assets for sale, saying as little as possible and putting the onus on a potential purchaser to make all relevant enquiries. This is because it can be misleading and deceptive to be silent. It is clear that misleading and deceptive conduct by silence will only arise in certain factual situations as there is no general duty to disclose information in an arm's length commercial transaction.

An example where such silence may be a problem is if the external administrator attempts to sell assets which are the subject of competing claims as to title which are communicated to the external administrator and it does not disclose the presence of such claims to the purchaser. This silence may amount to a representation which is misleading and deceptive and the purported sale could amount to a misrepresentation.

Accordingly, a tip for an external administrator in this circumstance is to request evidence from the third party in order to assess competing claims, put that third party on notice of the need to provide evidence or the administrator will seek to claim against them and to disclose all such claims to the purchaser of such assets.

1. Speed

In the current market environment, the perspectives of the purchaser, the external administrators, the secured creditors, the purchaser's financier and other stakeholders may change rapidly. The timeframes for preparing and executing a distressed M&A deal are more compressed than ever before.

External administrators may employ term sheets or MOUs in order to quickly bind the parties on substantive elements of the sale and avoid the risk of any delay in the sale process. More peripheral elements of the deal can then be set out in the sale documentation to be finalised at a later date.

It may also be possible to stagger the timing of the sale of different assets. Assets which can be sold without condition may be sold before those that are subject to conditions being satisfied – e.g. the need to obtain consents from secured creditors, contractual counterparties or regulatory bodies. In this way, at least part of the consideration for the relevant business can be paid quickly to the vendor.

1. Public company issues

As the downturn in the economy endures, larger and more complex entities are under stress. External administrators should remember that in addition to other non-excludable obligations, they may need to comply with certain specific requirements of the Corporations Act depending upon the characteristics of the parties (and their stakeholders) involved in a distressed M&A transaction. Such requirements may include those with respect to:

• any sale of businesses or assets to related parties of the vendor
• compliance with the takeovers provisions of the Corporations Act
• if the public company is and remains listed, compliance with relevant provisions of the ASX Listing Rules.

Clearly, the relevance of these requirements will depend upon the characteristics of the parties (and their stakeholders) involved in a distressed M&A transaction.

1. Confidentiality and exclusivity

In order to maintain the value of the business being sold, an external administrator should ensure that any disclosure to potential purchasers is permitted under existing commercial contracts between the vendor and its counterparties. These contracts may be the source of significant value of the business being sold.

At a minimum, external administrators should seek confidentiality undertakings from potential purchasers conducting due diligence on the vendor's business.

Often, such confidentiality obligations are coupled with an acknowledgement by the external administrator that the recipient of the information has an exclusive right to view that information for a definite period of time and on clearly prescribed conditions. Such exclusivity may generate a better price for the administrator for the distressed assets. Other pro-vendor provisions such as break-fees may also be included in such confidentiality and exclusivity deeds.

1. Use of DOCA

The various and sometimes competing agendas of various stakeholders can be managed through the use of a Deed of Company Arrangement (DOCA). A DOCA is binding on the company, its creditors, its officers and the deed administrator and may provide the certainty required to empower the deed administrator to quickly sell businesses and assets as part of a broader re-organisation of the vendor.

It may also be the appropriate vehicle to re-organise a distressed entity in more complex situations where the time frame afforded by the voluntary administration process may be too short and stakeholders do not wish to take the value-destroying step of placing a company into liquidation.
by Clive Cachia

Title Insurance – Benefits for external administrators

Where external administrators are selling property assets, whether individually or as a portfolio, difficulties are often faced as the administrator is generally unable to provide vendor title warranties. This typically impacts on the price a purchaser is willing to pay. It can also result in the purchaser carrying out its own lengthy due diligence as its lawyers have to take extra care in trawling through each and every title document. This can in turn lead to delay, further causing a devaluation of the property assets, especially where the real estate market is in a downturn and property prices are dropping quickly.

Title insurance provides a means of overcoming such difficulties. This specialised form of insurance can be tailored to meet the needs of external administrators. Coverage can be provided against the lack of vendor title warranties, guaranteeing property ownership for purchasers of individual property assets or entire portfolios, at the same time speeding up the legal elements of the transaction. This makes the assets more saleable. The cost of the policy can typically be included in the costs of the administration, with the potential uplift in the price prospective purchasers are willing to pay well exceeding the premium.

First Title is an Australian general insurance company providing title insurance and is a subsidiary of First American Corporation, a NYSE Fortune 500 company and the world's leading title insurance company.
by Jon Downes

For more information, please contact Mr Jon Downes, General Counsel jdownes@firsttitle.com.au

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.