What Is a “Stalking Horse” Buyer in Bankruptcy?

A “stalking horse” buyer in bankruptcy is business-entity buyer that has prearranged to purchase a company’s assets during a Chapter 7 or Chapter 11 bankruptcy filing. Essentially, the company in bankruptcy is attempting to leave nothing to chance: they have already made plans to sell their business or property to another business entity usually BEFORE the bankruptcy case is filed. The bankruptcy itself is the mechanism to allow the “stalking horse” to make this very efficient, debt reducing transaction.

How Did Such a “Colorful” Term Originate?

Did you know this term is all about hunting for birds (fowl)? In medieval times, a horse (or just a fabric cover with the picture of a horse) was placed in front of a hunter as a blind (a hunting term) to conceal the hunter as he approached fowl. The hunter behind the stalking horse patiently waited to approach their prize – just as modern companies patiently wait in the shadows to approach with their offer on the bankrupt company’s assets.

The word “stalk” in modern English can be defined as “to pursue or approach stealthily.” It comes from Germanic roots that imply a “cautious walk.” When a company pursues and negotiates the terms of a “stalking horse” offer, they approach “stealthily” many times and walk cautiously in hopes of attaining their prized goal: acquiring valuable parts of a company without acquiring their heavy debt load.

The Value of S.H. Transactions in Bankruptcy: Foreseeable Outcomes and Restored Productivity

Regardless of the legitimacy or source of the offer, the prize of a successful transaction such as this in bankruptcy cannot be overstated. A “stagnant” debt situation with a company can potentially be replaced with restored or newly created productivity on every side. Creditors are repaid, the old company systems are no longer doomed for failure, and the buyer usually acquires very useful, debt-free assets.

Although this concept always seems a little “suspect” due to its prearranged nature, the transaction is VERY useful and fair to all parties usually if no fraud is involved. It provides a foreseeable mechanism for protecting existing employees and systems of a company. Company assets are thoughtfully “reassigned” and reorganized instead of ran into the ground. Remember, no S.H. offer is a 100% “done deal” before the bankruptcy filing: all offers must be both approved by the court and must compete with any other offer proposed to the court.

The Danger of S.H. Transactions in Bankruptcy: The Potential for Fraud and Insider Offers

By its very name, “stalking horse” implies a sense of danger and hidden intention. Although there are many appropriately used, productivity-restoring S.H. transactions, there are also instances of fraud and misuse. A good indicator for whether a stalking horse transaction may be fraudulent is simple: does the deal sound too good to be true for any party? If the deal is too good to be true, the creditors are very likely being cheated through the transaction.

With bad offers, the problem usually comes from some sort of “insider” situation. The most common of these problems is when an “alter ego” company attempts to buy out the bankrupt company’s assets and operations. Essentially, in such situations, the “old” company may be attempting to dump their debt with a very low price tag and then restart with a new name.

Such insider-style offers CAN be valid, but many times the “deal” in such a situations greatly undervalues the “bankrupt” company’s assets through the presentation of the offer and the bankruptcy schedules. Remember, in such situations, the two entities involved are so closely related that they could be considered the same party. Depending upon the severity of the situation, the result could be anywhere from an offer rejected by court parties or even a finding of bankruptcy fraud.

Other stalking horse problems in bankruptcy usually always stem from some sort of insider benefit situation or from lack of appropriate valuation and disclosure. High-level employees of corporations tend to support deals where they retain their employment. In addition, the incentive to appropriately value company assets is in the creditors’ favor only. The creditors may be very high in number with a lack of collective organization.

Even though competing offers and court supervision is required, a stalking horse is still a stalking horse. The agenda is very specific and prearranged: creditors need to review their position in such a pre-arranged agenda with healthy skepticism. Adequate research into the “bankrupt” company’s real intentions is paramount in protecting the creditors.

Conclusion: Good or Bad, A Stalking Horse is still a Stalking Horse

A horse waits patiently in approach of its prey concealing the intentions of the hunter behind it. Such is the picture of the stalking horse offer in bankruptcy: whether good or bad, fair or unfair, the “hunter” is dead-set on his prize. Because of the prearranged nature of stalking horse offers, it is very important that all parties involved thoroughly investigate the proposed offer to reveal the real intentions and identity of this “hunter.” The stalking horse offer always has a specific agenda behind it that needs to be reviewed by ALL potential parties to investigate whether it is the best solution (or offer) for resolving the “bankrupt” company’s debt situation.