Explore a recent M&A case where a stalking horse bid faced challenges due to disagreements over the value of a PPP loan. Gain insights into the legal intricacies and implications of this unique situation.
M&A Stories
November 17, 2020
Introduction:
In the world of mergers and acquisitions (M&A), distressed companies often resort to selling their businesses during bankruptcy proceedings. These sales occur through auctions based on pre-negotiated agreements, with a lead bidder known as the stalking horse.
The Background:
In a recent case, a financially troubled company that operated a lamb processing plant in Wyoming found itself in bankruptcy.
The Pandemic Payroll Protection Program (PPP) had granted the company a loan of $3.95 million. A person closely tied to the company had formed a separate entity to act as the stalking horse in the upcoming bankruptcy auction. This stalking horse and the company reached an agreement where the stalking horse would purchase the assets for $10 million in cash. This deal also required the stalking horse to take on certain obligations, including the PPP loan.
The PPP Loan Issue:
The PPP loan came with the possibility of forgiveness. However, when evaluating bids in the auction, the company assessed the value of the $3.95 million PPP loan at $1.25 million. Ultimately, the highest bid in the auction amounted to $14.25 million in cash.
The Legal Challenge:
The stalking horse bidder contested the company’s assessment of the PPP loan’s value. They argued that the value should be the full $3.95 million stated on the loan. The court, however, dismissed this challenge. The court ruled that the company’s evaluation of the loan’s value was reasonable and aligned with acceptable business judgment. This is important, as corporate law protects directors who exercise sound business judgment. Under the “business judgment standard,” the court reviewed the auction process and gave weight to the company’s selection of the winning bid.
Conclusion:
This case illustrates a significant M&A development in the summer of 2020. During the bankruptcy sale process, PPP loans played a novel role. Looking back, it’s clear that the stalking horse should have explicitly stated the purchase price as a combination of the cash amount and the full $3.95 million PPP loan amount.
Reference:
In Re Mountain States Rosen, Case No. 20-20111, United States Bankruptcy Court, D. Wyoming, (July 21, 2020)
By John McCauley: I help people manage M&A risks involving privately held companies.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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