When a debtor looks to maximize the value of their assets before a bankruptcy auction, there are few options available to test the market. However, a stalking horse agreement may be possible if they can find a third-party bidder to assist them. The idea of a stalking horse comes from hunting terminology, describing a horse that was specially trained to walk in front of hunters, obscuring the sight of fowl. As the birds believed the horses, being all they could see, were no danger, this tactic allowed hunters to get close enough for the kill.
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In bankruptcy terms, a stalking horse agreement achieves something of a similar goal, but one in which a high-paying bidder is the metaphorical prey. A third-party offer begins a bankruptcy auction, setting the lowest bid at a favorable price. Additionally, the presence of a viable bid can drive up interest in other bidders to acquire the debtor's assets. The agreement helps the debtor determine any high-level interest in their assets or establishes a high bid for the auction right away.
There are some protections available to potential stalking horse organizations or individuals. Considering that the process can be risky if there is no actual interest in a debtor's assets, agreements are usually made ahead of time to offer financial compensation for that stalking horse. The most direct is to simply compensate the third-party bidder for any legal fees or costs involved with placing the bid. As there may be some necessary formal action through the bankruptcy trustee tied to the auction for a bid, these costs can be provided for by the debtor.
Another potential protection is known as a break-up fee. These costs are a small percentage of the overall value of the assets, and give third-party groups some level of compensation when the debtor backs out of that original agreement.
To learn more about bankruptcy options in the auction process, contact a bankruptcy attorney.
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