In a time of economic uncertainty, many corporate boards face the daunting task of trying to turn around a distressed business. Where no probability of shoring up the entity’s financial position exists, the board must consider other options in discharging its fiduciary duty to maximize value of the business for the benefit of relevant stakeholders. After evaluating the various possibilities, the board may conclude that the best way to maximize value is by liquidating the company’s assets through a commercially reasonable sale process. While bankruptcy is an option, it may be cost-prohibitive. As such, the board may decide that a more streamlined, efficient and cost-effective approach for maximizing value is appropriate – an assignment for the benefit of creditors (ABC).
An ABC is initiated by the distressed company (the assignor) that enters into an agreement to assign its assets to an unaffiliated, independent entity (the assignee) responsible for conducting the wind down, liquidation or going concern sale of the business. All of the assignor’s right, title and interest in, as well as custody and control of, the assets are assigned to the assignee in trust, and the assignee fulfills a role similar to that of a bankruptcy trustee in a chapter 7 proceeding. The assignee evaluates the relevant facts and circumstances, develops a strategy to maximize the value of the business, executes that strategy and distributes the sale proceeds to the assignor’s creditors. The assignee administers the ABC pursuant to the laws of the state where it is initiated, which may involve a court proceeding, and other applicable law.
Why an ABC?
An ABC is often a more efficient and cost-effective option for maximizing the value of a distressed business, especially when a reorganization is not possible. Distressed companies and their lenders should consider an ABC when evaluating alternatives to maximize recovery for stakeholders.
If a company is burdened with debt that makes a merger or acquisition unattractive, an ABC may be the optimal structure for effectuating a value enhancing transaction. In an ABC, the assignor and its lender(s) have more influence on direction and effect on outcomes than in a chapter 7 bankruptcy proceeding because in an ABC the assignor, often in consultation with its lender(s), is able to select an assignee with appropriate experience and expertise to maximize the value of the assignor’s business whether that be through a going concern sale or the wind down of the business and liquidation of assets. An ABC also relieves a company’s directors and officers of the responsibility of winding down the business and disposing of assets and provides protection against breach of fiduciary duty or other claims often threatened by creditors in connection with a cessation of business operations and inability to satisfy all claims. When unencumbered proceeds are realized, an ABC enables the assignor to administer a claim reconciliation process in which creditors are invited to submit proofs of claim and distributions are made in accordance with applicable priorities.
From a buyer’s perspective, acquiring a company or some of its assets in an ABC enables the buyer to move swiftly and negotiate a deal with an independent fiduciary and have additional comfort that the transaction will be viewed as the product of a commercially reasonable process. Fraudulent transfer and successor liability concerns are often lessened because the transaction has been negotiated by an independent fiduciary with the interests of all stakeholders in mind and frequently contemplates only the sale of assets and the assumption of only those liabilities expressly identified by the buyer. In situations involving secured debt, the assignee and the buyer seek the consent of the secured parties and procure lien releases so that the assets are conveyed free and clear of such liens.
Secured creditors should consider ABCs in many situations especially those in which the secured creditors have concerns about existing management’s ability to conduct a sale process and when other options are cost-prohibitive. As compared to a secured party sale under Article 9 of the Uniform Commercial Code, in which the secured party forecloses, conducts the sale, and conveys the assets to the buyer, in an ABC the responsibility for ensuring the sale process is commercially reasonable is on the assignee and it is the assignee that conducts the sale and transfers the assets to the buyer. Of course, in most situations there will be no sale in an ABC unless the secured creditor consents and agrees to release its liens because the buyer will not agree to acquire assets that are subject to a secured creditor’s existing liens.
In most states, executory contracts and leases with anti-assignment provisions cannot be assigned in an ABC without the counterparties’ consent. Accordingly, if the assignment of executory contracts and/or leases with anti-assignment provisions is a necessary part of the transaction and the counterparties to the contracts or leases do not consent, an ABC may not be the best option.
Our ABC Experience
Our Business Restructuring, Creditors’ Rights & Bankruptcy practice group regularly advises clients in a broad range of industries nationally on issues relating to financial distress, insolvency and the exercise of associated rights and remedies. Our extensive experience and substantial knowledge of the law enables us to develop innovative business strategies and solutions for our clients’ most difficult challenges.
In connection with representations involving the sale of distressed businesses, we have advised each of the key stakeholders including buyers, sellers, sponsors, lenders, directors and officers. Our clients in distressed business transactions include public and private companies, private equity firms and financial institutions. We understand the complexities and sensitivities in these matters and recognize that each transaction has a different mix of risk, certainty, speed and expense. Our job is to understand our client’s needs, master the facts, develop an optimal strategy for accomplishing our client’s business objectives that anticipates all potential challenges and identifies solutions in advance, and efficiently execute the agreed upon strategy to successful completion.
Client feedback lauds our practice group as “five-star” for providing “a very high level of client service” and for going “above and beyond to assist the client.” We are also known for being “proactive and attentive. Always accessible. Creative and forward with advice.”
A representative sample of our completed ABC transactions include:
Health, Life Sciences & Wellness
- Representing the assignee in the ABC for a life sciences company specializing in cancer treatment options.
- Representing the assignee in the ABC for a provider of musculoskeletal wellness and soft tissue illness treatment and prevention solutions to employers.
- Representing the assignee in the ABC for a manufacturer of radiation protective products for the health care, dental, veterinary and nuclear industries.
Technology & Software
- Representing the assignee in the ABC for a developer of three-dimensional long-range facial recognition technology.
- Representing an assignee in a motion technologies company’s ABC in the Delaware Court of Chancery.
- Representing the assignee in the ABC for a developer of technology in the cable television industry.
- Representing the assignee in the ABC for a developer of marker-less motion capture software and systems.
- Representing the assignee in the ABC for a developer of energy conversion systems for wind energy and industrial markets, including advising our client on liquidation of assets and distribution to creditors.
- Representing three assignees in the ABC for the world’s largest privately held designer, manufacturer and marketer of winch systems.
Media, Entertainment & Leisure
- Representing the senior lender in the ABC for a nationwide religious bookstore.
- Representing the assignee in the ABC for a developer of interactive video games and digital content.
- Representing the assignee in the ABC for a vacation rental distributor.
- Representing the assignees in multiple ABCs involving a national trampoline park.
- Representing a special purpose entity in the ABC for an online grocery provider.
- Representing the assignees in the ABCs for an online estate auction house.
Real Estate & Other Services
- Representing the assignees in the ABCs for an office leasing company with 22 U.S. locations.
- Representing a secured lender’s interest in an ABC involving a government contract-related dispute.
- Representing the assignee in the ABC for a provider of advertising material.
- Representing three assignees in the ABC for an SAS company.
- Representing the assignee in the ABC for a provider of a mobile delivery network software development kit.
- Representing the assignees in multiple ABCs for a software company based in Denver, Colorado.
- Representing the assignee in the ABC for a software company based in Missoula, Montana.