Smart Business learned more from Albert P. Asatoorian and Jonathan R. Hodes, partners at Stubbs Alderton & Markiles, LLP, about how buyers and sellers can use ABCs to their benefit during tough times.
What is an ABC?
An ABC is a type of insolvency proceeding available under state law. California, Delaware, Florida and many other states have statutes governing ABC proceedings. In other states, ABCs are regulated by common law. The seller in an ABC will make an assignment for the benefit of its creditors to a third-party assignee (or trustee), and the buyer will purchase the assigned assets from the assignee. The assignee in an ABC acts as a fiduciary for the creditors. The assignee takes custody and control of the assigned assets and administers the liquidation of assets and distribution of proceeds to creditors.
The law and procedures governing ABCs vary from state to state. For example, in California, the seller and the assignee are required to enter into a written agreement, but a court filing is not required. Other states require court filings to commence the proceeding and complete a sale transaction.
The seller is generally entitled to select the assignee, although in most cases the assignee will require consent of secured creditors usually because they will finance the cost of the ABC. The assignee typically is a troubled company professional with significant experience in handling liquidations and ABC sales. Creditors will be required to follow specified claims procedures to be eligible for distributions. Unlike a bankruptcy filing, the commencement of an ABC proceeding usually will not automatically bar creditors from pursuing claims, although creditors will be unable to attach assets while the assignee is in the process of liquidating the assets. Additionally, the commencement of an ABC typically requires shareholder approval because the assignment involves the transfer of all or ‘substantially all’ of the debtor’s assets.
What are the primary advantages of an ABC?
In general, an ABC is a faster and less expensive alternative to a bankruptcy. Bankruptcy is a time-consuming process and a sale can take between 45 to 60 days or more to complete. By comparison, an ABC sale is usually preplanned and may be completed within a matter of days. This could significantly reduce the risk of employee departures, and enable the parties to preserve the ‘going concern’ value of the enterprise. The buyer, debtor and secured parties usually will prenegotiate the terms of the sale and clear them with the assignee in advance to ensure the assignee is comfortable that the assets are marketed fairly and the transaction would withstand subsequent scrutiny. The assignment can take place virtually at the same time as the subsequent sale.
Bankruptcy actions can be expensive, and the buyer may be required to finance the cost of the proceeding if the seller does not have the means to do so, which may be difficult to obtain in today’s environment. The costs of an ABC transaction are more predictable and manageable. Assignee fees will be negotiated and specified at the outset. These fees may be a fixed amount or a percentage of the gross proceeds derived from the ABC sale. The services of attorneys, accountants, brokers and other professionals also will be required in most cases.
The outcome in an ABC is significantly more predictable than in a bankruptcy due to the parties’ ability to control the process upfront by selecting the assignee and prenegotiating the terms of the sale before initiating the ABC. Although the buyer can negotiate breakup fees and overbid protection in a bankruptcy, the risk of higher offers can be minimized in an ABC and practically eliminated after the sale contract with the buyer is signed.
How can buyers and sellers best take advantage of ABCs and avoid pitfalls?
The decision to move forward with an ABC or other type of transaction or process can have significant economic implications on both buyers and sellers, and careful planning and preparation will be the key to ensuring a successful outcome. Parties should engage competent legal counsel and the services of a professional liquidation firm with experience in handling ABC transactions to properly assess the viability of alternative approaches.
The assignee should be knowledgeable with the debtor’s industry and the requirements for liquidating the debtor’s assets. Legal counsel can help with due diligence and prenegotiating the sale terms, and help to explain important legal implications, such as the effect of an ABC on debt covenants and other contractual obligations, as well as issues relating to successor liability, preferences and priorities, fiduciary obligations and requirements under the federal Worker Adjustment and Retraining Notification Act (WARN Act) and similar state statutes.
ALBERT P. ASATOORIAN is a partner with Stubbs Alderton & Markiles, LLP. Reach him at (818) 444-4506 or firstname.lastname@example.org.