Stalking-Horse Bid
A stalking horse bid is an initial bid on the assets of a bankrupt company. The bankrupt company will choose an entity from a pool of bidders who will make the first bid on the firm’s remaining assets. The stalking horse sets the low-end bidding bar so that other bidders can’t underbid the purchase price.The term “stalking horse” originates from a hunter trying to be concealed behind either a real or fake horse.
Stalking Horse Bid
Definition
A stalking horse bid refers to an agreement in bankruptcy proceedings where the bankrupt entity and an initial bidder (the “stalking horse bidder”) set a minimum bid price to ensure that the assets are sold for at least that amount. This initial bid is known as the “stalking horse bid.”
Origin
The concept of the stalking horse bid originated in U.S. bankruptcy law, particularly in Chapter 11 reorganization proceedings. The earliest cases of stalking horse bids date back to the 1980s, when this mechanism was introduced to improve the efficiency and transparency of bankruptcy asset auctions. Since then, this mechanism has been adopted and adapted by bankruptcy laws in other countries.
Categories and Characteristics
Stalking horse bids can be categorized into two types: conditional and unconditional stalking horse bids. Conditional stalking horse bids require the bidder to meet specific conditions, such as obtaining financing or regulatory approval; unconditional stalking horse bids do not have any such conditions. The main characteristics of stalking horse bids include:
- Setting a minimum bid price: Ensures that the assets are not sold at a low price.
- Attracting more bidders: By setting a benchmark price, it attracts more potential buyers to participate in the bidding.
- Increasing auction transparency: Makes the auction process more open and fair.
Case Studies
Case 1: In 2009, General Motors (GM) used the stalking horse bid mechanism when it filed for bankruptcy protection. The U.S. Treasury acted as the stalking horse bidder, setting a minimum bid price to ensure that GM's core assets were sold at a reasonable price. This successfully attracted other bidders and helped GM reorganize smoothly.
Case 2: In 2013, Kodak used the stalking horse bid mechanism during its bankruptcy reorganization. Kodak reached an agreement with a private equity firm to set a minimum bid price, which successfully attracted multiple bidders and ensured the high-priced sale of its patent assets.
Common Questions
1. Does a stalking horse bid make the bidding process unfair?
Answer: The purpose of a stalking horse bid is to increase auction transparency and efficiency, and it usually does not make the process unfair. However, if there is a conflict of interest between the stalking horse bidder and the bankrupt entity, it may cause disputes.
2. Does the stalking horse bidder always win the bid?
Answer: Not necessarily. The stalking horse bidder sets a minimum bid price, but other bidders can offer higher prices and ultimately win the bid.
