On March 15,2021, the Third Circuit held that a “stalking horse” bidder in a failed transaction may still be entitled to assert an administrative claim in the bankruptcy notwithstanding the fact that its “termination fee” was disallowed by the Court. In In re Energy Future Holdings Corp., 2021 U.S. App. LEXIS 7400, (3d Cir. 2021), the Debtors opted to terminate a merger agreement with NextEra Energy, Inc. ( “Bidder”) since the Bidder, which was a “stalking horse bidder”, failed to get the required regulatory approvals needed to meet its requirements under a Merger Agreement. The Delaware Bankruptcy Court denied the Bidder’s request for allowance and payment of its $275 million termination fee, which denial was subsequently affirmed by the Third Circuit in 2018. In the Third Circuit opinion, it recognized that the fee could be allowed as an administrative expense per 11U.S.C. Section 503(b)(1)(A) as it would foster competitive bidding in such a transaction.
Thereafter, the Bidder filed an application for allowance of an administrative claim which would allow for Debtor’s payment of all costs it incurred during its attempts to consummate the proposed merger. In this matter, the request for allowance of the administrative claim was for $60 million for such costs. Certain creditors filed a Motion to Dismiss and Motion for Summary Judgement, and the Bankruptcy Court granted both motions resulting in the denial of an allowed administrative claim and finding that the Bidder did not engage in any action to promote competitive bidding, but rather it forced the Debtor to seek other options at far less value. Thus, it found that the Bidder did not meet the standards as required for an allowed administrative clam under the Bankruptcy Code. This ruling was appealed to the District Court where it was affirmed. An appeal was taken to the Third Circuit.
The Third Circuit reversed the denial of the administrative claim and found that there existed a material issue of genuine fact as to the scope of the cost and expense provision in the Merger Agreement, and remanded the matter to District Court to vacate its orders with further remand to Bankruptcy Court. It found that the Merger Agreement itself allowed for recovery of the expenses per 503(b)(1)(A) and was addressed in the Debtor’s Chapter 11 Plan. The Third Circuit found that the Bidder plausibly alleged the requirements under Section 503(b)(1)(A), that the costs were actual, necessary costs and expended to preserve the estate. It further found that the Bidder had to make a showing (upon remand to Bankruptcy Court) that the benefit it provided to the estate exceeded any associated increased costs to the estate, which may include additional interest expenses while various appeals were being pursued. In doing so, the Third Circuit confirms that there is an alternate remedy for stalking horse bidders to seek reimbursement for out of pocket expenses, notwithstanding the fact that there may be no entitlement to a break-up fee.
Practice Note- A potential purchaser must memorialize, in a merger or similar agreement, its ability to seek an administrative claim in trying to consummate a failed transaction. The flip side to this position is that Debtors may be able to avoid paying any such claim if it specifically puts in the controlling documents that if a termination fee is not allowed, the Bidder is precluded from requesting an administrative claim under Section 503(b)(1)(A).