COMPETITIVE SALES IN LIGHT OF RECENT ITALIAN BANKRUPTCY LAW AMENDMENTS

The recent reform of Italian Bankruptcy Law (“IBL”), by effect of Law Decree n. 83 of June 27, 2015, converted with amendments into Law n. 132 of August 6, 2015, introduced new institutes and rules to implement the efficiency of pre-insolvency procedures, with the aim to support the financing of distressed companies. This brief note describes and analyses the novelties introduced by the reform with specific regard to the new competitive sales in the procedures of composition with creditors (“concordato preventivo”), directed to maximize the value of the debtor’s assets and guarantee the creditors’ best interest and satisfaction.

New Article 163-bis of IBL provides that a financial plan of a “concordato preventivo” proposal (hereinafter, the “Plan”) including an offer by a designated third party to purchase all or part of the debtor’s assets or business units for a pre-determined price entitles the Court to look for other third parties interested in the purchase, providing the opening of a public and competitive bid procedure. The competitive procedure shall be opened even when the debtor has already entered into a binding contract for the (immediate or not immediate) transfer of the debtor’s company or of its business units or assets.

In particular, the Court shall open the mandatory bid procedure and issue a decree that determines the guidelines for the bid (the “Decree”). The Court’s decree shall provide: (i) procedure and criteria to present the competing offers, that shall be irrevocable; (ii) necessary requirements to participate to the auction; (iii) terms and time limits for bidders to access to the company’s relevant information; (iv) the date of the public hearing in which the offers will be disclosed and examined; (v) modalities and steps of the competitive procedure; (vi) warranties and guarantees which can be required to the bidders by the Court; (vii) forms of advertising of the competitive procedure; and (viii) the minimum increase of the price determined in the first offer included in the Plan.

The first offer included in the Plan will become irrevocable only when the same offer will be submitted again (modified and adapted) in accordance with the provisions of the Decree and the first bidder will grant the guarantee required by the Court.

All the offers shall be presented in secret form and comply with the provisions of the Decree and, in any case, shall not be subjected to conditions.

At the public hearing fixed in the Decree the offers are disclosed, made public and examined at the presence of the bidders and of all other interested parties.

When are presented new offers which are better than the first offer (“offerte migliorative”), the Court shall open an auction among the bidders. The auction can take place at the same hearing or in a immediately following hearing and shall be completed before the creditors’ meeting (“adunanza dei creditori” provided by Article 163 of the IBL for voting the Plan submitted by the debtor). The transfer of the auctioned assets or business units can take place also before the approval by the Court of the “concordato preventivo” (“decreto di omologazione”).

In any case, when the purchase is awarded to a bidder which is different from the bidder who presented the first offer included into Plan, the first bidder will be released from all the obligations entered into with the debtor and the judicial commissioner will dispose the reimbursement of the expenses and costs incurred by the first bidder in relation to its offer, within the limit of three percent of the total price indicated in the said offer.

When the bid process is completed and the best offer selected, the debtor shall amend the Plan in accordance with the offer selected in order to allow the creditors to vote the proposal as updated.

The discipline of Article 163-bis of IBL shall apply, mutatis mutandis, also to urgent and extraordinary acts that shall be authorized by the Court according to Article 161, seventh paragraph of IBL, and to the lease of one or more business units of the company.

QUESTIONS AND ANSWERS ON COMPETITIVE SALES IN COMPOSITIONWITH CREDITORS PROCEDURES (“CONCORDATO PREVENTIVO”)

1. Q.: Is the opening of the bid process mandatory for the Court according to Italian law?

A.: Yes.

The first question concerns whether or not the competitive bid process set forth by the Article 163-bis IBL is mandatory.

Article 163-bis IBL provides the Court to open on a mandatory basis the competitive bid process if the composition with creditors plan filed by the debtor includes a proposal by a third party to purchase the debtor’s assets or business units for a pre-determined price.

The answer is based on a literal interpretation of the Article 163-bis IBL, as finally introduced and amended by Law August 6, 2015, n. 132 and on the historical evolution of the rule its-self.

According to the original wording of Article 163-bis IBL (contained in Law Decree June 27, 2015, 83), the decision regarding the opening of the competitive bid was discretional and assigned to the judicial commissioner, which had to evaluate the fairness of the consideration for the debtor’s assets, as indicated in the third party’s proposal included in the composition with creditors filed before the Court. Hence, the judicial commissioner would have opened the competitive bid process only if the consideration offered by the third party was not consistent with the best creditors interest.

The current wording of Article 163-bis IBL, as amended by Law August 6, 2015, n. 132, do not provide any more for any discretionary power exercised by the judicial commissioner in order to open the competitive bid process, prescribing for a mandatory opening of such competitive bid process whenever debtor’s plan has already identify a third party, who has made an offer to buy, for valuable consideration, the company’s business, units or specific assets.

2. Q.: Is a third party’s proposal (to lease/purchase) included in the composition with creditors plan binding/irrevocable?

A.: Upon certain conditions and only until the issue of Court’s guide-lines

Article 163-bis, second paragraph, IBL provides that the Court issues a judicial decree in order to  set forth some guide-lines for the submission of the offers. The decree – which is the formal provision opening the competitive bid – is addressed to both the original offering party and other potential bidders.

Consequently, the original third party may modify its original offer accordingly and new bidders are required to do the same, submitting an offer consistent with Court’s requests.

The judicial decree issue determines the moment after which the original offering party cannot exit from the procedure, unless (of course) a new bidder will be then selected by the Court at the end of the process.

In light of the above:

1. a third party may preliminary include in the composition with creditors an offer expressly providing that the offer will be revocable;
2. the Court is then entitled by article 163-bis IBL to start a mandatory bid and to issue a judicial decree comprehensive of the guide-lines that must be followed for the submission of offers (e.g.: the minimum increase of the price determined in the first offer included in the Plan; guarantees, etc…). The guide-lines are directed to both the initial offering party and new potential bidders;
3. at this point in the time the original offering party may (i) adapt its initial offer to the guidelines issued by the Court and participate in the bid process; or (ii) withdraw its initial offer and step back from the procedure.

3. Q.: has the initial third party offeror a “right to match” the offer presented by another bidder?

A.: No, since the Court will have discretionary power to identify which is the best offer.

The Court decree providing for the opening of the competitive bid procedure shall schedule the date of a public hearing during which competitive offers are disclosed and examined. The best offer is selected by the Court following a single, or further, public hearings.

The bid procedure shall be completed before the creditors’ meeting (“adunanza dei creditori”), in order to permit the creditors to vote only upon the plan inclusive of the best offer selected by the Court during the competitive bid procedure.

Should only one competitive offer be presented the Court shall decide whether the original (first) offer can be included in the debtor’s plan. However, should the Court consider the competitive offer better than the first offer, the debtor shall modify its initial rescue-plan to include the competitive offer. Therefore, creditors’ meeting shall vote upon the plan as amended.

Should more competitive offers be presented and the Court consider that more than one of them are better than the first offer included in the debtor’s initial plan, the Court shall open an auction among the bidders. Only one offer will be selected by the Court as the best offer for creditors’ interests.

Therefore, it seems that two equivalent bids cannot exist simultaneously. The Court must always identify, among the offers presented during the competitive bid procedure, which is the best for the creditors’ interests.

A pre-emption right on which the debtor and the initial offering party have agreed upon in the initial offer does not entitle the bidder to be preferred to its competitors. However, the Court might take into account the existence of a pre-emption right in favour of the original offering party, in order to decide which is the best offer.

Finally, it is worth noting that should the purchase be awarded to a bidder which is different from the original offering party, the latter will be released from all the obligations entered into with the debtor and the judicial commissioner will dispose the reimbursement of the expenses and costs incurred by the first bidder in regard to its offer, within the limit of three percent of the total price indicated in its offer.

4. Q.: shall an initial third party offeror have a “right to exit”, grounded on legal provisions, once it has been selected by the Court as the best offeror?

A.: No.

Should the initial offering party be selected and the debtor composition with creditors plan approved by creditors and, after that, approved by the Court, the debtor will have to duly execute the plan and any agreements entered into with the selected creditor will become effective.

The judicial commissioner is entitled by IBL to monitor the execution of the whole plan (inclusive of the contractual arrangements provided by it) according to the final approval by Court(see: art. 185  IBL).

IBL will not grant to the initial offering party selected as the best offeror with any right of exit. Therefore the initial offering party may only trust on contractual provisions included in the lease agreement (e.g.: advanced termination of the agreement or other remedies due to the breach of the debtor).