Mergers and Acquisitions: How They Interact with the Changing World of Chapter 11

A few months ago this author^[1] wrote about “The Changing World of Chapter 11," referencing his earlier article about “COVID-19’s Impact on Chapter 11 Cases.” He now wants to address how the changes in Chapter 11 induced by the pandemic have also led to more businesses finding merger partners.

The complexities, uncertainties, and expenses of the Chapter 11 process were addressed in the prior article as follows:

“As we attorneys advise our clients about Chapter 11 . . . we should keep in mind the legal and factual difficulties of confirming Chapter 11 reorganization plans generally and the relative ease legally and factually of sales of substantially all assets of the Debtor in Chapter 11 cases.

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In addition, extensive discussions between and among the Debtor, its secured lenders, its major unsecured creditors, and its major equity interests are usually important and can often lead to constructive results in terms of the best path forward for everyone.

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Indeed, it may well turn out as a result of all these extensive discussions that a sale of all of the Debtor’s assets as a going concern and operating business to a third-party purchaser is the best path forward for everyone under the circumstances. Or, a sale of some of the Debtor’s assets, and a reorganization of the remainder of the Debtor’s assets and business through a plan of reorganization in the Chapter 11 case, may be the best path forward. If a broader consensus among the Debtor, its secured lenders, its major unsecured creditors, and its major equity interests can be reached, that is usually a better result and path forward for everyone.

The possible alternatives to discuss and consider are usually many, and extensive candid discussions where the pros and cons of each alternative are carefully considered and evaluated are usually beneficial.”

Another of the alternatives to consider seriously and carefully is a merger with another company. This alternative, however, is best considered before the Debtor has had any discussions with its secured lenders, its major unsecured creditors, and its major equity interests.

Most businesses (“Companies”) should want to maintain the image of stability (without making false statements of course) with its secured lenders and unsecured creditors until they have devised a plan going forward. Otherwise, even more instability may follow with the Company’s important constituencies, including for example the following:

(a)    Customers or clients: They will likely become skittish if they have reason to believe the Company has become unstable financially and thus the Company may not be able to deliver its products or services to them. This may lead them to consider alternative more stable businesses for the Company’s products or services for them to use.

(b)    Vendors: Suppliers of goods and services to the Company generally have two objectives for their products or services being supplied to the Company – namely, to have their products or services available in the markets where the Company operates and, of course, to be paid by the Company. Naturally these vendors will become skittish too if they come to believe the Company has become unstable financially, and they will also look for alternative more stable businesses for their products or services.

(c)    Key employees: This group of course wants to continue to be gainfully employed by the Company. They too will become skittish if they hear their employer is not financially stable, leading them to explore alternative employment elsewhere.

In short, the loss of customers, suppliers and key employees of a Company which is financially unstable already can accelerate the Company’s further decline.

Hence, for Companies which are in trouble financially, whether due to the pandemic or for other reasons, planning ahead to try to avoid a total collapse is important.

Prior articles have discussed the alternatives of pre-Chapter 11 workouts with lenders and creditors, as well as the Chapter 11 reorganization processes of plan confirmation and/or asset sales, but often the best alternative can be to merge with another company for the mutual advantage of both.

In those situations where a merger is feasible and best, the list of issues to be negotiated between the merging companies can seem to be endless. But in realty the price to be received and the control of the merged companies (that is, management and decision-making) are usually the most important by far. The other issues really become details to be worked out by the accountants and attorneys.

As the merger discussions proceed forward for the distressed Company, and as those discussions can often continue for many weeks and even months sometimes until agreement is reached, the financial problems for the Company can exacerbate. If that occurs, the Company may need to consider a Chapter 11 alternative to “buy” more time for itself, which in and of itself can of course affect the negotiations with the potential merger partner, including the price to be paid. The timing of everything for the Company becomes important, and such timing issues should be part of the discussions with the merger partner early in the process.

To state the obvious, most Companies prefer the relative certainty of the alternative of a merger partner (if feasible) over the Chapter 11 world of litigation. The increased consolidation of businesses in the same industries can be viewed a healthy byproduct of the pandemic, at least so far. After all, hindsight is 20/20 and is more certain than trying to predict the future.