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What Is a "Stalking Horse" Buyer in Bankruptcy?

What Is a "Stalking Horse" Buyer in Bankruptcy?
"""A """"stalking horse"""" client in bankruptcy is a business entity that has prearranged to acquire a company's assets during a Chapter 7 or Chapter 11 filing. Essentially, the company in bankruptcy attempts to leave nothing to chance: typically, they have already made arrangements to sell their business or property to another business entity BEFORE filing for bankruptcy. The bankruptcy itself is the mechanism that permits the """"stalking horse"""" to conduct this highly effective debt-reduction transaction.

How Did This """"Colorful"""" Term Originate?

Did you know that this term refers to hunting animals (fowl)? In medieval times, a horse (or simply a fabric cover depicting a horse) was set in front of a hunter as a blind (a hunting term) to conceal him as he approached game birds. The hunter behind the stalking horse waited calmly to approach their prey, much like how modern companies wait patiently in the shadows to make an offer on a bankrupt company's assets.

The modern definition of the word """"stalk"""" is """"to pursue or approach covertly."" It has Germanic origins that suggest a """"cautious stroll."""" When a company pursues and negotiates the terms of a """"stalking horse"""" offer, it approaches """"stealthily"""" and walks cautiously in the hopes of achieving its prized objective: acquiring valuable portions of a company without assuming its heavy debt.

The Worth of S.H. Transactions in Bankruptcy: Predictable Results and Restored Productivity

Regardless of the legitimacy or origin of the offer, the value of such an effective bankruptcy transaction cannot be overstated. A company's """"stagnant"""" debt situation may be supplanted with restored or newly created productivity on all fronts. Creditors are repaid, old company systems are no longer destined to fail, and the buyer typically acquires highly valuable, debt-free assets.

Despite the fact that this concept always seems a little """"suspicious"""" due to its prearranged nature, the transaction is typically VERY beneficial and fair for all parties if no deception is involved. It provides a predictable mechanism for protecting current employees and company systems. The company's assets are """"reassigned"""" and reorganized with care, as opposed to being squandered. Remember that no S.H. offer is completely """"done"""" prior to the bankruptcy filing: all offers must be both approved by the court and compete with any other offer submitted to the court.

The Risk of S.H. Transactions in Insolvency: The Possibility of Fraud and Insider Offers

By its very designation, """"stalking horse"""" connotes danger and a hidden purpose. There are instances of fraud and misuse, despite the fact that many S.H. transactions are used correctly and improve productivity. A good indicator that a stalking horse transaction may be fraudulent is whether or not the offer sounds too good to be true. If the bargain is too good to be true, it is highly likely that the creditors are being defrauded.

Typically, a """"insider"""" situation is the source of the issue with poor offers. The most common of these problems occurs when a """"alter ego"""" company endeavors to acquire the assets and operations of a bankrupt company. In such cases, the """"old"""" company may be attempting to unload their debt at a very low price and then rebrand under a different name.

Such insider-style offers MAY be genuine, but the presentation of the offer and bankruptcy schedules frequently grossly undervalues the """"bankrupt"""" company's assets. Remember that in such circumstances, the two entities involved are so intertwined that they could be considered the same party. Depending on the gravity of the situation, the outcome could range from court parties rejecting an offer to a finding of bankruptcy fraud.

Other stalking horse issues in bankruptcy almost always originate from situations involving insider benefits or a lack of appropriate valuation and disclosure. High-level employees of corporations typically support agreements that ensure their continued employment. In addition, the incentive to properly value company assets is only in favor of creditors. There may be a large number of creditors with no collective organization.

A stalking horse is still a stalking horse even though competing proposals and court supervision are required. The agenda is extremely detailed and predetermined; creditors must examine their position within such a predetermined agenda with healthy skepticism. Protecting the creditors requires exhaustive investigation into the """"bankrupt"""" company's actual intentions.

Good or bad, a Stalking Horse is nonetheless a Stalking Horse.

A horse attentively awaits the approach of its prey while concealing the hunter's intentions behind it. Such is the depiction of a stalking horse offer in bankruptcy: whether the offer is good or poor, fair or unfair, the """"hunter"""" is intent on obtaining the prize. Due to the prearranged nature of stalking horse offers, it is crucial that all parties thoroughly investigate the proposed offer to determine the true intentions and identity of the """"hunter."""" The agenda behind the stalking horse offer is always specific, and ALL potential parties must investigate whether it is the best solution (or offer) for resolving the ""bankrupt"" company's debt situation.

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"What Is a "Stalking Horse" Buyer in Bankruptcy?" was written by Mary under the Finance / Wealth category. It has been read 192 times and generated 1 comments. The article was created on and updated on 31 May 2023.
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