14 Dec Section 363 Sales and the FTC – Caveat Emptor
One of the historical attractions of the Bankruptcy Code as a vehicle for restructuring is the ability to sell the debtor’s assets quickly, cleanly, and with finality pursuant to a sale under Section 363.
So-called “section 363 sales” have been the subject of much recent interest and debate, as evidenced by the discussion surrounding 2009’s “section 363 sales” of both Chrysler LLC and General Motors Corporation (see, for example, blog posts here and here). In California, the effectiveness of such sales has been limited where the assets are worth less than the aggregate liens against them, and a lienholder objects to the sale.
Earlier this month, “Section 363 sales” received yet another potential challenge in California, this time from the Federal Trade Commission, which sought to undo Laboratory Corporation of America (“LabCorp”)’s acquisition of Westcliff Medical Laboratories, Inc. (“Westcliff”). According to the agency’s December 1 complaint to enjoin furtherance of the merger, filed in Washington DC and transferred to California’s Central District (redacted copy available here), the merger will substantially lessen competition among providers of capitated clinical laboratory testing services to physician groups in southern California.
LabCorp and Westcliff are clinical laboratory testing companies serving physician groups here in Southern California. In May 2010, Westcliff agreed to sell substantially all of its business assets to LabCorp for $57.5 million. As part of the sale, Westcliff agreed to file a voluntary petition for relief under Chapter 11 of the US Bankruptcy Code. The transaction was therefore subject to the approval of the US Bankruptcy Court for the Central District of California. In June, after a hearing at which no other bidder emerged to top the LabCorp offer, the court approved the sale, the parties closed the deal, and life went on – until the FTC stepped in.
Though after-the-fact challenges to mergers are not unknown, they have been – at least until recently – comparatively rare. Even rarer is the challenge to an acquisition completed with approval by the US Bankruptcy Court. The FTC claims Westcliff wasn’t a “failing firm,” whose assets otherwise would have exited the market absent the merger (and would therefore be exempt from anti-trust enforcement). Instead, the FTC alleges Westcliff was generating operating profits at the time of its sale and that there were other potential buyers available to purchase the company. According to the FTC, the reason these buyers didn’t show up was because none would have matched LabCorp’s $60 million “stalking horse” bid.
Counsel for LabCorp attempted to preempt the FTC’s action by filing an adversary complaint in Bankruptcy Court, seeking declaratory relief as well as an injunction against the FTC, arguing that the agency’s enforcement action constituted a “collateral attack” on the Bankruptcy Court’s prior sale order. The FTC responded with its own motion to dismiss and an argument that its enforcement action was limited merely to prospective violations of antitrust laws, and did not seek to disturb the bankruptcy sale. Bankruptcy Judge Theodor Albert abstained, and transferred the matter to the US District Court where the FTC’s action remains pending.
Though the Bankruptcy Court’s order authorizing the Westcliff acquisition remains undisturbed, the FTC’s action raises some important and often-overlooked questions about “363 sales”: Does counsel advising on the sale or purchase of a distressed business need to conduct or provide due diligence on the potential anti-trust effect of the transaction, despite the transaction’s failure to meet the Hart-Scott-Rodino reporting threshold? Is it necessary (or good practice) for bankruptcy counsel to obtain factual findings commensurate with the sale which would insulate the transaction from subsequent attack?
In any event, 363 sales in now carry another important caveat emptor.
- FTC to challenge LabCorp buy of small rival (reuters.com)
- FTC Challenges Acquisition of Westcliff Labs by LabCorp In Southern California-Why? (ducknetweb.blogspot.com)
- FTC Challenges LabCorp’s Acquisition of Rival Clinical Laboratory Testing Company (ftc.gov)
- FTC Challenges Acquisition by LabCorp (online.wsj.com)
- FTC Targets Yet Another Done Deal (legaltimes.typepad.com)
- 4 tips for buying a bankrupt competitor (venturebeat.com)