Minutes for the Joint Meeting of
the Business Reorganization Committee and
the Investment Banking Committee
ABI Annual Spring Meeting, Washington, D.C., April 12, 2003

The meeting was called to order at 8:30 a.m. and Business Reorganization Committee Co-chair Robert Keach advised the attendees that the educational program was a joint presentation by the Business Reorganization Committee and the Investment Banking Committee. He then introduced Anthony Schnelling, co-chair of the Business Reorganization Committee, and welcomed Peter Kaufman, co-chair of the Investment Banking Committee.

Committee Business:

1. Keach discussed the success of the "News at 11" column in the ABI Journal and solicited authors with an interest in producing work for that column. He said the editorial slots are currently filled, and that editors are responsible for providing, not necessarily writing, the column for the months they are assigned. Interested authors were asked to contact Robert at 207-228-7334 or rkeach@mainelaw.com or Schnelling at 212-207-4710 or aschnelling@bridgellc.com. Any topic related to the business aspect of the reorganization practice is welcome and the editors are encouraged to find a slot for publishing it.



2. Next, Keach discussed the need for both authors and editors to help produce the E-newsletter each month. Interested participants were encouraged to contact Keach or Schnelling as the committee is trying to build on its early success with this vehicle and get a panel of editors in place. Content for this publication is much more informal than for a Journal piece. A case note on an interesting and cutting-edge decision, a topic of relevant interest involving problems related to DIP financing, case management, plan creation and confirmation are all sources of material that would be of interest to members of the committee. These need only be a few informal paragraphs as the formatting and production is handled by Caroline Milani and the rest of the able staff at the ABI.

Educational Program – Emergence of the "Chapter 363 Case"

Keach outlined the premise that more and more cases are apparently being filed with the specific purpose of organizing and consummating a sale or sales of all or substantially all of a debtors’ assets through a §363 sale under the auspices of the bankruptcy court. He pointed out that this has been fairly common in the hi-tech, dot com and telecom industries in recent years. He also pointed out that, notwithstanding Lionel, most courts have routinely approved these sales even though they commonly leave little for a debtor to accomplish through its plan but the liquidation of the proceeds left behind after the sale and the litigation remaining to the debtors and the unsecured creditors’ committees.

This trend has raised the level of importance of the investment banking function in the reorganization practice. He asked Kaufman to talk about the nuts and bolts issues and concerns of investment bankers pre- and post-petition and to discuss how he prepares a debtor for a sale and manages the process. Kaufman then discussed the investment banking process, without making specific distinction between pre- and post-petition engagements.

1. Creation of an engagement letter with the tasks, responsibilities and compensation clearly spelled out and agreed on;



2. Definition of goal with the client – usually achieve highest and best price for the assets. The factors involved in this definition are
:
1. How to maximize certainty?


2. What kind of consideration is wanted (stock/cash/other)?


3. Encouraging the client to realize that cookie-cutter solutions do not exist in reorganization.
   
3. Define the time line.
1. 30 days is too little time to do a good job


2. 90 days is an excellent amount of time


3. 60 days is probably the optimum time frame
   1. Factors involved here are:
   2. How much liquidity does the client have?
   3. What kind of relationship does the client have with its lenders?


4. Building Blocks for sale process are:
1. Define the buyer population


2. Assemble due diligence and marketing materials


3. Organize an effective due diligence process


4. Keep competitive dynamic effective through closing


5. Prepare draft contract


6. Identify key problems – key contracts to put out for potential buyers to review


5. Prepare and circulate confidentiality agreements:
1. How valuable are these?
2. How much time does one have to accomplish the sale?
3. How hard is it to get agreement?
4. How to resolve the internal questions that will get asked regarding “sharing information with competitors bidding in the 363 process” and how to clarify their motivation – competitive research or genuine interest in the assets or both?
5. Be aware of the collateral issues that potential buyers may also be trading claims and consider asking all 363 participants for a standstill on claims trading.
6. How tight Confidentiality needs to be depends on the context
   1. is a sale the only option?
   
   
   2. could the company emerge as a stand-alone entity from bankruptcy?
   
   
   3. How valuable is raw data to potential competitors
      
6. Issues to be aware of:
1. 1st week decisions are critical
1. Internal information flow may affect quality of Confidential Offering Memorandum (“COM”)


2. Building consensus with management or with crisis manager, if any, is key to getting good data together quickly for COM.
2. In the draft Asset Purchase Agreement, consider what protections the debtor may (i) want or (ii) have to offer buyers.


3. Is the buyer universe likely to be strategic or financial buyers
1. Short time frame drives process to strategic buyers because they know the industry and the deal (especially the warts).


2. How critical is it to attract financial buyers to get maximum value and how can this be accomplished?
4. Work with management and crisis manager, if any, to define roles and maintain focus
1. Who will run the business (no value will remain if everyone focuses on the sale and the business collapses)?


2. Who will assist the investment banker with the sale process – due diligence, negotiation, sourcing potential buyers?
5. Does the deal require an LOI (Letter of Intent ) stage? If time is short, going straight to contract is often more effective.


6. Maintain multi-track process
1. Identify best potential buyers


2. Identify price levels


3. Negotiate contracts simultaneously. Keep an eye on the need for apples-to-apples contract provisions.
7. Identify strategic and tactical considerations of what asset groupings the debtor wants/needs to sell or hold.


8. Identify any potential buyers in the “Home Boy Shopping Network” (those with explicit or hidden sweetheart follow-on
   1. How open does the process need to be to maximize value and how to maintain a level playing field?

The discussion then shifted to the role of Fairness Opinions as part of a sales transaction in or out of bankruptcy proceedings.

7. Fairness Opinions – Kaufman explained that outside of bankruptcy “fairness opinions” are routine and it is easy to understand that, in a litigious marketplace, boards of directors and officers of both buyers and sellers want the comfort of knowing that the assets they are buying or selling are being traded at a price which is fair to their constituents. Some obvious reasons are:
1. To avoid fraudulent transfer challenges in a future bankruptcy or under state law.
2. To validate value so as to ensure the full protection of the “prudent man rule” and protect indemnification rights.
3. To gain a level of comfort that the price is indeed fair in and of itself.

In a bankruptcy proceeding it is more difficult to understand the need for this form of assurance and protection for boards of directors and officers of selling debtors. There was an extensive discussion, with much audience participation, regarding the purpose of a 363 sale – cleansing the assets of unwanted liabilities and getting court approval for the process. The whole concept of requiring a Judge to validate the debtor’s decision as to the highest and best bid appears to immunize directors and officers from liability and obviate the need for a “fairness opinion.”

Keach offered for consideration the fact that investment bankers in cases he is in have been asked recently for “fairness opinions” in a 363 context notwithstanding the immunizing value of a bankruptcy court order. Schnelling offered the thought that in this context a “fairness opinion” might act to validate the process engaged in by the officers and directors of the debtor and assure them that their actions could not be attacked in that context. There was a general sense of the meeting that this might be a valid reason to use and request a “fairness opinion” in the context of a 363 sale, but that such opinions were of little use to anyone for a validation of the value of a transaction once a court had ruled on the fairness of value. Keach indicated, and Kaufman agreed, that the context in which they have seen or considered such opinions did relate to the process aspects of the sale and offered the thought that these opinions were and should be heavily qualified to be entirely fact specific:

1. under existing circumstances
2. considering existing liquidity

The thought was offered from the floor that if such opinions were to be requested, they should be bargained for in the engagement letter process with the investment banker because no banker would give this sort of opinion in this context without very specific parameters agreed to in advance. To request such opinion during the process was likely to meet with a refusal or an exorbitant fee.

8. Conducting the Auction Process
1. It is important to have auction procedures in place and blessed by the Bankruptcy Court well in advance of the auction. The bid procedures are routinely blessed by the court, but often the actual procedures for running the auction (timing of bids, interaction between bidders, closed or open process) are left to the debtor’s discretion and the buyers don’t have enough time to set their strategies accordingly. Also, some courts have definite views on auction issues and it is best not to be in court on an emergency basis fighting over the procedures for running the auction on the day of the auction.


2. On the Auction Day it is critical to provide:
   1. Maximum flexibility to the buyer
   
   
   2. Maximum flexibility to the seller
3. Auction-day Issues include:
1. Open outcry auction?


2. Sealed bid auction?


3. All participants meet together at all times or can there be provate interactions?


4. How to deal with the instantaneous valuation issue, particularly when there are bids that differ as to price, payment terms, contract terms, etc.


5. How to value non-cash component of bids?


1. Get opening bids from all potential buyers in advance to assist the debtor to understand any non-cash component prior to the auction taking place.
6. How does one recognize and deal with collusive bidding or side deals


7. Make certain creditors’ committee representatives are part of the process, especially if they are out of the money

The participation from the floor was lively throughout. Questions were not held until the end, but were entertained and answered during the flow of the discussion

There being no more business, Keach thanked Kaufman for his excellent presentation and thanked the attendees and the panel for their participation. The meeting was adjourned at 9:30 a.m.

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