Oldco M Corporation and Oldco M Corporation (f/k/a Metaldyne Corporation)

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re
Metaldyne Corporation, et al.,
Debtors.
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Chapter 11
Case No. 09-13412 (MG)
(Jointly Administered)
MEMORANDUM OPINION (I) GRANTING DEBTORS’ SECOND EMERGENCY
MOTION TO AMEND THE BIDDING PROCEDURES ORDER AND DESIGNATE HHI
HOLDINGS, LLC AS STALKING HORSE BIDDER AND (II) DENYING DEBTORS’
MOTION TO CONSTRUE FIRST BIDDING PROCEDURES ORDER TO REFLECT
AMENDMENTS TO ASSET PURCHASE AGREEMENT WITH RHJI
A P P E A R A N C E S:
JONES DAY
Attorneys for the Debtors in Possession
901 Lakeside Avenue
Cleveland, Ohio 44114-1190
(216)586-3939
By: 	Heather Lennox, Esq.
Ryan T. Routh, Esq.
222 E. 41st St.
New York, NY 10017
(212) 326-3939
By: 	Richard H. Engman, Esq.
Harold K. Gordon, Esq.
2727 North Harwood Street
Dallas, Texas 75201-1515
(214) 220-3939
By: 	George T. Manning, Esq.
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REED SMITH LLP
Attorneys for the Official Committee of Unsecured Creditors
599 Lexington Avenue
New York, NY 10022
(212) 521-5400
By: 	Mark D. Silverschotz, Esq.
FRIED FRANK HARRIS SHRIVER & JACOBSON
Attorneys for the Prepetition Term Lenders
One New York Plaza
New York, NY 10004
(212) 859-8000
By: 	Gary L. Kaplan, Esq.
PROSKAUER ROSE LLP
Attorneys for HHI Holdings, LLC
70 W. Madison St.
Chicago, Illinois 6602-4342
(312) 962-3550
By: 	Mark K. Thomas, Esq.
CRAVATH, SWAINE & MOORE LLP
Attorneys for RHJ International, S.A.
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019-7475
(212) 474-1000
By: 	Richard Levin, Esq.
Antony L. Ryan, Esq.
Robert H. Trust, Esq.
MARTIN GLENN,
United States Bankruptcy Judge
INTRODUCTION
Pending before the Court are two motions by the Debtors. First, there is the confusingly
titled “Motion of Debtors and Debtors in Possession for an Order Construing Definition of
‘Agreement’ in Bidding Procedures Order to Reflect Amendment to the Purchase Agreement
with RHJ International, S.A. Relating to the Sale of Certain Assets of the Debtors’ Powertrain
Group” (or, for brevity’s sake, the “Motion to Construe”). (ECF Doc. #349.) The motion was
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filed on July 3, 2009, was supplemented on July 17, 2009 (ECF Doc. #443), with a hearing
originally scheduled for July 20, 2009. That hearing continued on July 23, and then again on
July 27. In addition, there is the “Second Emergency Motion of Debtors and Debtors in
Possession to Amend Order (A) Approving Bid Procedures for the Sale of Certain Assets
Related to the Debtors’ Powertrain Group, (B) Approving Certain Bidder Protections and (C)
Scheduling a Final Sale Hearing and Approving the Form and Manner of Notice Thereof” (the
“Motion to Amend Bidding Procedures”). (ECF Doc. #504.) The motion was filed on July 24,
2009. It too was heard on July 27.
While the complete procedural background of this dispute is fully explained below, the
Court is in essence faced with a choice between two conflicting motions filed by the Debtors.
The Court either approves the Motion to Construe and one potential bidder, RHJ International
S.A. (“RHJI”), becomes the stalking horse bidder for the Debtors’ Powertrain assets and enjoys
bidder protections. Or the Court approves the Motion to Amend Bidding Procedures and HHI
Holdings, LLC (“HHI”) becomes the stalking horse bidder for the same assets and enjoys the
identical bidder protections. For the reasons explained below, the Court DENIES the Motion to
Construe and GRANTS the Motion to Amend Bidding Procedures. 1
BACKGROUND
The Court has detailed the facts of this case in a previous opinion and order, familiarity
with which is assumed. (See ECF Doc. #294.) The dispute revolves around the Debtors’
decision to sell its Powertrain assets as part of a § 363 sale in a public auction. Shortly after the
chapter 11 filing, the Debtors filed a motion to approve bidding procedures for the auction of its
1 The Prepetition Term Lenders initially supported the Motion to Amend Bidding Procedures, but
then filed an objection to both motions, arguing that neither party should receive bid protections. (ECF Doc. #524.)
The Court OVERRULES the objection. The testimony at the hearing established that the HHI bid provides a floor
for the auction. For the reasons explained below, the Court finds that the Debtors and HHI have satisfied the
standards for approval of bid protections.
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Powertrain assets, and to approve bidder protections for the proposed stalking horse bidder,
RHJI. (ECF Doc. #214.) 2 RHJI is an insider; it owns approximately 60.1% of the Debtors’
indirect parent company. (ECF Doc. #6 ¶ 8.) The proposed Asset Purchase Agreement attached
to the motion contained a due diligence “out,” providing that the agreement would terminate
unless RHJI delivered to the Debtors a due diligence satisfaction notice by July 2, 2009. (ECF
Doc. #214, at Ex. 1 § 6.02(l).) The APA also granted RHJI bidder protections in the form of a
break-up fee and expense reimbursement. (Id. § 7.03.) The Prepetition Term Lenders objected
to granting RHJI bidder protections on the grounds that (i) as an insider, RHJI should not receive
bidder protections, and (ii) since the due diligence out had not yet passed, the APA was illusory.
(ECF Doc. #293.) At the hearing, the Court granted the motion with a reduced break-up fee3 on
the grounds that a stalking horse bidder would bring value to the estate. (ECF Doc. #314 (the
“Bidding Procedures Order”).)
On July 3, 2009, the day after the due diligence period expired, the Debtors filed a new
motion seeking to “construe” the Bidding Procedures Order as reflecting an amendment to the
APA. (ECF Doc. #349.) Specifically, the Debtors indicated that before July 2, RHJI informed
them that it needed more time to conduct its due diligence, and so the parties agreed to extend
RHJI’s deadline to deliver the due diligence satisfaction notice to July 16, 2009. A hearing on
the Motion to Construe was scheduled on July 20, by which time all parties were supposed to
know whether RHJI had delivered the satisfaction notice. (ECF Doc. #356.) On July 17, the
Debtors filed a supplement to that motion, seeking approval of a further amendment to the APA
2 The Debtors engaged Lazard Freres & Co., LLC (“Lazard”) as investment bankers to market the
Powertain assets. (ECF Doc. #278.) Lazard’s marketing efforts began well before the chapter 11 filing.
3 The original APA contained a break-up fee of $2 million and an expense reimbursement of
$750,000. During the hearing to approve the bidding procedures and bidder protections, RHJI agreed to reduce its
break-up fee to $1.5 million.
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extending the deadline a second time, this time to July 23, 2009, three days after the scheduled
hearing. (ECF Doc. #443.) The Debtors also filed a motion seeking to reschedule the auction
for the Powertrain assets for August 5, 2009, with a sale hearing on August 7, 2009. (ECF Doc.
#446.)
The Court held the hearing on July 20, as originally scheduled. With all parties
consenting, the Court granted the motion to reschedule the auction. (ECF Doc. #464.) 4 As with
the original bidding procedures motion, the Prepetition Term Lenders objected to the Motion to
Construe, arguing that RHJI was not providing a floor for bidding if it could just walk from the
agreement before July 23. The Prepetition Term Lenders further argued that the Court should
deny the motion, because RHJI had already sought two extensions, and so there was no reason to
assume they would not do so again. Two witnesses testified at the hearing, both agreeing that
RHJI was not a formal stalking horse bidder, because it was not providing a floor for the bidding
because it retained a due diligence out; but both witnesses testified that RHJI nevertheless
brought value to the sale process. At the hearing, counsel for HHI, another potential bidder,5
also objected to the amendment and informed the Court that it was prepared to submit a higher
and better bid for the Debtors’ Powertrain assets. All counsel consented to an adjournment to
July 23, 2009, at 4:00 p.m., at which point the due diligence out included in the second amended
APA would have expired and the parties would know whether RHJI had delivered the
satisfaction notice. The Court also directed Debtors’ counsel to confer with HHI’s counsel to
determine whether it was prepared to make a higher and better offer.
4 Contrary to RHJI’s suggestion, the Order merely moved the auction. It did not, nor did it purport
to, approve any amendments to the RHJI APA. Indeed, the bidding procedures attached to the Order only reference
the original agreement with RHJI and none of the amendments.
5 Testimony revealed that HHI had in fact been interested in the Debtors’ Powertrain assets for quite
some time, dating back to Lazard’s prepetition marketing efforts. The testimony also revealed that HHI ramped up
its due diligence efforts in the period leading up to the July 20 hearing.
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Over the next several days, the parties engaged in intensive due diligence and numerous
rounds of negotiations. By the evening of July 22, RHJI submitted a revised bid and HHI
submitted its bid. When contacted by the Debtors’ advisors, RHJI orally indicated that it
intended to waive the due diligence requirement, but it did not send the Debtors the written
satisfaction notice required by the APA until the next day, July 23, at 2:11 p.m. 6 (ECF Doc.
#523, at Ex. A.) The following morning, on July 23, the Debtors’ special committee, consisting
of two independent directors, met with its financial advisors and the Debtors’ financial and legal
advisors. Lazard presented a spreadsheet comparing the two offers showing that the RHJI bid
was superior. Consequently, the special committee voted in favor of the amended RHJI bid as
the stalking horse bid for the Debtors’ Powertrain assets and agreed to seek Court approval of an
amended Bidding Procedures Order and bid protections later that day. Later that morning,
however, HHI submitted a revised bid, upping the cash portion to $78 million. The special
committee met again in the early afternoon. Lazard presented a revised spreadsheet showing that
the revised HHI bid was superior to the revised RHJI bid by approximately $3.5 million. (ECF
Doc. #521, at Ex. 1.) When RHJI was advised that its revised bid had been topped by HHI and
that the Debtors would seek approval of HHI’s stalking horse bid, RHJI sent the Debtors the due
diligence satisfaction notice, but stopped work on certain financial disclosure schedules.
At the hearing on July 23, the Debtors’ counsel informed the Court that HHI had offered
a higher and better bid for the Powertrain assets, and that they were prepared to move forward
with HHI as a stalking horse.7 Neither RHJI’s revised bid nor HHI’s revised bid contained a due
6 Ciara Donohoe, a managing director with RHJI, testified that RHJI determined that it would be
preferable to wait until closer to the July 23 hearing to deliver the satisfaction notice. While the Court does not
doubt RHJI’s good faith in refusing to send the satisfaction notice earlier, it is undisputed that RHJI did not send the
satisfaction notice until 2:11 p.m. on July 23, after RHJI was notified about HHI’s bid that had no due diligence out.
7 As is further explained below, while the Court does not substitute its business judgment for the
Debtors’, based on the evidence presented, the Court agrees that HHI’s bid was superior to RHJI’s.
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diligence out. Because the parties were unsure how to proceed, HHI filed a formal objection to
the Motion to Construe, and argued that because it had submitted a higher and better bid, it
should be substituted for RHJI in the Bidding Procedures Order. The Debtors provided the Court
with a demonstrative purporting to show that the HHI bid was a higher and better offer.8
RHJI objected to the Debtors’ selection of HHI, arguing that it had been the only Court-
approved stalking horse bidder, and that the Debtors inappropriately conducted an auction before
the actual scheduled auction. In addition, RHJI argued that the Court could not approve the
Debtors’ request, because the Debtors had not filed a motion seeking approval of, or supplied the
Court and other interested parties with, the HHI APA containing HHI’s bid protections. The
Court directed the Debtors to file a new Motion to Amend Bidding Procedures by noon the next
day (July 24, 2009), and scheduled a hearing on that motion, along with the Motion to Construe,
for Monday, July 27, 2009. The Court also informed the parties that the hearing would be an
evidentiary hearing pursuant to Local Rule 9014-2(a).
DISCUSSION
A. 	The Motion to Construe Was an Improper Procedural Maneuver to Resurrect an
Agreement to Provide Bid Protections that No Longer Had Court Approval
As an initial matter, the Court must first identify what the two motions pending before it
actually seek to accomplish. The Motion to Amend Bidding Procedures is easy: the Debtors
seek to amend the Court’s prior Bidding Procedures Order to substitute HHI as the stalking horse
bidder in RHJI’s place. The Motion to Construe, however, as belied by its confusing name, is
not so straightforward. RHJI contends that the Motion to Construe just seeks an order approving
8 This was the same spreadsheet presented to the special committee at the second meeting earlier
that day. The two bids were based on the same APA (HHI’s bid was submitted as a mark-up of the RHJI APA). As
explained in greater detail below, the two bids were similar in all respects except three, most critically that the RHJI
bid consisted of a $32 million cash component, while the HHI bid consisted of a $78 million cash component. The
spreadsheet was also subsequently revised over the weekend of July 24, although at all times the spreadsheet
showed that HHI’s bid was superior to RHJI’s bid.
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an amendment to the original Court-approved Bidding Procedures Order granting it bidder
protections as the stalking horse. RHJI points to the fact that it and the Debtors agreed to the two
due diligence extensions before the deadlines expired, so the agreement never expired on its own
terms. In essence, RHJI argues that the Motion to Construe is just a formality to approve what
the Debtors and RHJI had already done, and to thus give effect to the Court’s original Bidding
Procedures Order. Since the original Bidding Procedures Order remains in effect, RHJI argues
that it remains the stalking horse bidder.
The essential flaw in RHJI’s logic is that the Motion to Construe is not merely a motion
to amend the Bidding Procedures Order. It is actually a motion to approve bidding protections
under a new agreement between RHJI and the Debtors. The Bidding Procedures Order was
based on an agreement that contained a July 2, 2009 deadline for RHJI to deliver to the Debtors a
notice of its satisfaction with its due diligence. That agreement was the basis for Court approval
of the bidder protections for RHJI. While the Debtors and RHJI may have agreed to extend the
deadline twice, the Court never approved those amendments. As of July 3, therefore, RHJI was
not entitled to any bidder protections. In short, once the July 2 deadline passed without Court
approval for further extensions, the Debtors were back at square one vis-à-vis their stalking
horse, and the break-up fee was once again “fair game.” (ECF Doc. #494 at 25.) 9
RHJI argues that notwithstanding the fact that its amended agreement still required Court
approval, it is still binding on the Debtors and therefore the Debtors are bound by the agreement
to pursue the break-up fee on behalf of RHJI. (See ECF Doc. #214 at Ex. 1 § 4.06(b) (requiring
the Debtors to “diligently prosecute expedited approval of the Bidding Procedures Order,
9 Indeed, how could it be otherwise? RHJI sought Court approval of the amendments. If it believed
they were enforceable without Court approval, there would be no need to file the motion. Indeed, Donohoe testified
that the amendments were subject to Court approval for purposes of obtaining bidder protections.
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including the approval of the Break-up Fee and Expense Reimbursement”).) There is a split in
authority whether contracts subject to court approval are binding before court approval. See In
re Frye, 216 B.R. 166, 173-74 (Bankr. E.D. Va. 1997). The Frye court explained that those
courts that view such agreements as binding reason that contract formation and court approval
require different analyses (the court adopted that view). Id. at 173; see also In re United
Shipping Co., 1989 WL 12723, at *5 (Bankr. D. Minn. Feb. 17, 1989) (“The considerations a
court looks at in approving a settlement are entirely different than whether or not there was an
agreement at all.”). On the other hand, other courts look to the Code and reason that if “judicial
approval [is] necessary to go forward, an agreement could not be binding absent the required
approval.” Id.; see also In re Sparks, 190 B.R. 842, 843 (Bankr. N.D. Ill. 1996) (holding that
contracts are not binding before court approval, because “[t]he debtor-in-possession operates as a
fiduciary; any actions taken by the debtor are to be in the best interests of the creditor body as a
whole. For that reason . . . [the debtor’s] actions are subject to . . . review by the creditors of the
estate and the bankruptcy court.”).10 But this split only addresses the parties’ obligations; it does
not address the Court’s role in adjudicating the dispute, and even those courts that adopt the view
that contracts subject to court approval are binding on the parties pre-court approval, still hold
that a court may reject a binding contract because of the presence of a better and higher offer, a
situation that mirrors the one here:
It may be that at the hearing on court approval, a party that wishes
to withdraw may have sufficient reason to show that the contract
should not be approved by the bankruptcy estate. The most
common reason from the debtor-in-possession’s point of view . . .
10 It does not appear that the Second Circuit has weighed in on this split. At least two bankruptcy
judges in this jurisdiction have held that contracts subject to court approval are not binding before court approval.
See In re Asia Global Crossing, Ltd., 326 B.R. 240, 256 (Bankr. S.D.N.Y. 2005) (holding that because § 363 sale
was subject to court approval, debtor was not bound to perform until then and could withdraw the application to
approve and abandon the contract); In re Leslie Fay Cos., 168 B.R. 294, 303 (Bankr. S.D.N.Y. 1994) (agreement
subject to § 363(b)(1) “is not enforceable absent notice and a hearing”).
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is a better offer. When the court is faced with two offers that are in
all respects comparable except for price, the court can reject the
first one if it is of a lower amount.
In re Barry D. Wood, 2008 Bankr. LEXIS 1783, at *9 (Bankr. E.D. Va. May 30, 2008) (finding
that the debtor could proceed on breach claims based on contract that was subject to court
approval) (emphasis added). To put it another way, the Debtors had the option to walk away
from the bidder protections granted to RHJI up until the moment the Court approved them. That
is exactly what the Debtors are proposing to do here. Unless and until amended and approved by
the Court, the Bidding Procedures Order only entitled RHJI to the bidder protections if it
delivered its notice of satisfaction with due diligence on or before July 2, 2009. It did not do so.
Therefore, the Debtors are not obligated to pay a break-up fee and expense reimbursement to
RHJI. 11
B. 	The Debtors Exercised Reasonable Business Judgment in Choosing the HHI Offer
Once the Motion to Construe is properly seen as a motion to approve a new agreement
with RHJI, this dispute is actually a very narrow one and presents a classic question under §
363(b): have the Debtors exercised their reasonable business judgment in choosing HHI as its
stalking horse bidder over RHJI? In answering this question the Court is guided by the decisions
in this jurisdiction emphasizing that the Court should not substitute its business judgment for that
of the Debtors’. See, e.g., Comm. of Equity Security Holders v. Lionel Corp. (In re Lionel
Corp.), 722 F.2d 1063, 1071 (2d Cir. 1983); Off. Comm. of Subordinated Bondholders v.
Integrated Res., Inc. (In re Integrated Res., Inc.), 147 B.R. 650, 656 (S.D.N.Y. 1992); In re
Global Crossing Ltd., 295 B.R. 726, 742-43 (Bankr. S.D.N.Y. 2003). The Court is mindful that
“the fiduciary obligations of directors pervade bankruptcy administration.” In re Biderman
11 Indeed, Donohoe testified at the July 27, 2009 hearing that RHJI would only be entitled to the
break-up fee and expense reimbursement if the Court granted the Motion to Construe.
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Indus. U.S.A., Inc., 203 B.R. 547, 551 (Bankr. S.D.N.Y. 1997). It is the overarching objective of
sales in bankruptcy to maximize value to the estate. See Integrated Resources, 147 B.R. at 659
(“It is a well-established principle of bankruptcy law that the objective of bankruptcy rules and
the [Debtor’s] duty with respect to such sales is to obtain the highest price or greatest overall
benefit possible for the estate.”).
Judge Gerber’s decision in Global Crossing, in which the debtor faced a similar decision
as the Debtors do here, is instructive in this regard. In re Global Crossing Ltd., 295 B.R. 726
(Bankr. S.D.N.Y. 2003). There, the debtor Global Crossing entered into a purchase agreement
whereby two parties—Hutchison and STT—would pay Global Crossing a combined $250
million for a 61.5% stake in a new company. The agreement contained a deadline of April 30,
2003, by which point Hutchison and STT had to have obtained regulatory approvals from certain
federal agencies, or else the agreement could be terminated by any party without penalty. On
April 30, 2003, Hutchison exercised its contractual rights and withdrew from the purchase
agreement because it knew it could not obtain the necessary approvals. STT then exercised its
contractual rights and stepped into Hutchison’s position. STT and Global Crossing retained the
right to terminate the agreement at any time until regulatory approvals were obtained.
Thereafter, Global Crossing learned of another potential purchaser, XO Communications,
a company controlled by investor Carl Icahn. Over the next several months, XO made several
proposals to purchase Global Crossing, each time changing the cash and debt portions of its
proposal. After each proposal, Global Crossing’s board and financial advisors, as well as the
advisors to the Creditor’s Committee, considered the proposal, and decided that the existing deal
with STT was superior. Global Crossing thereafter filed a motion seeking approval of the
amended purchase agreement substituting STT for Hutchison.
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As is the case here, Judge Gerber framed the issue whether Global Crossing may amend
its agreement as a “classic” issue under § 363(b): did it exercise reasonable business judgment in
doing so? 295 B.R. at 729-30. In answering in the affirmative, Judge Gerber focused on the
disinterestedness of the board, the extent of the board’s deliberations, and their lengthy
consideration of the relevant facts and their options. Id. at 744-45. The decision therefore
passed the business judgment test. Id. at 746. Judge Gerber also found that Global Crossing’s
response to XO’s overtures “was fully consistent with their fiduciary duty, which called for them
to consider XO’s expressions of interest . . . , but not, necessarily, to embrace XO as a bidder or
abandon their other options . . . .” Id. at 745. Judge Gerber concluded, in words that apply with
equal force to this case: “If this Court were to believe, for half a second, that the Debtors
spurned a better offer to the detriment of their fiduciary duties, this Court would not hesitate to
invoke its powers.” Id. This Court agrees.
The Second Circuit has similarly recognized that in the context of § 363 auctions
bankruptcy courts must have “broad discretion and flexibility . . . to enhance the value of the
estates before it.” In re Fin. News Network, Inc., 980 F.2d 165, 169 (2d Cir. 1992). Financial
News Network involved a similarly fluid auction process with a competing bidder entering the
fray during a hearing to approve purchaser CNBC’s bid to buy the debtor’s assets. CNBC,
which ultimately won the debtor’s assets with a higher bid, appealed the bankruptcy court’s
subsequent approval of CNBC’s higher bid on the ground that the bankruptcy court should not
have reopened the bidding to consider a higher proposal from another party. The Second Circuit
affirmed the district court (which affirmed the bankruptcy court). It cautioned that courts should
not follow “such rigid adherence to the procedures that govern the sale as to elevate them over
the substance of a bankruptcy court’s principal responsibility, which is to secure for the benefit
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of creditors the best possible bid.” Id.12 “To hold otherwise would seriously compromise the
necessarily broad discretion of the bankruptcy court.” Id. at 170. 13 The Court follows the same
approach here.
There is little doubt that deciding to enter into a stalking horse agreement with HHI was a
reasonable exercise of the Debtors’ business judgment, consistent with the Debtors’ fiduciary
obligations to their stockholders and creditors, and consistent with the overall objective of
maximizing value to the estate. The July 27 testimony of a member of the board’s special
committee and of the Debtors’ investment banker supports this conclusion. Once another bidder
entered the fray with a potentially higher and better offer, the Debtors had to consider the offer;
failure to do so would have been a breach of their duties to the estate and its creditors. Once they
had done so, it is clear from the facts presented here that the decision to seek approval of HHI’s
bid as the stalking horse bid was a reasonable exercise of business judgment.
The evidence presented shows that the two bids are substantially similar in all respects
but three. First, and most critically, RHJI proposes to pay $32 million in cash and issue a $50
million note (worth substantially less than $50 million), while HHI proposes to pay $78 million
in cash. Second, RHJI proposes to pay all cure costs in excess of $4 million, while HHI would
pay all cure costs in excess of $6 million. And third, the two parties agreed to purchase differing
amounts of accounts receivables and inventory, with RHJI agreeing to purchase all of it while
HHI committed to purchase less with an option to purchase all of it. According to Michael
Macakanja, the Debtors’ investment banker at Lazard, the net difference between the two bids is
12 See also In re Wintex, Inc., 158 B.R. 540, 545-47 (D. Mass. 1992) (holding that bankruptcy court
properly considered competing bid that topped initial offer by less than 5%, even though the topping bid did not
comply with bid procedures order requiring counteroffers to exceed the initial offer by at least 10%).
13 See also In re Broadmoor Place Invs., L.P., 994 F.2d 744, 746 (10th Cir. 1993) (holding that a
bankruptcy court “does have the power to disapprove a proposed sale recommended by a [debtor] if it has an
awareness there is another proposal in hand which, from the estate’s point of view, is better or more acceptable”).
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between $0.3 million and $3.5 million in HHI’s favor, depending on whether HHI exercises its
option. (ECF Doc. #521 ¶ 37; Ex. 2.) 14 The special committee, consisting only of disinterested
independent directors, met twice to consider the proposals, both times with the committee’s and
the Debtors’ financial and legal advisors present. The unrebutted evidence is that the HHI bid is
in fact a better and higher offer for the Debtors’ Powertrain assets. Under the business judgment
standard, it was thus a reasonable decision by the independent directors to accept HHI’s stalking
horse bid over RHJI’s, because it brought more value to the estate.
C. 	The Bid Protections Are Reasonable and Appropriate
Bidder protections are granted when a bidder provides a floor for bidding by expending
resources to conduct due diligence and allowing its bid to be shopped around for a higher offer.
Integrated Resources, 147 B.R. at 659. The court in Integrated Resources adopted a three-part
test for evaluating break-up fees: (1) is the relationship of the parties who negotiated the break-
up fee tainted by self-dealing or manipulation; (2) does the fee hamper, rather than encourage,
bidding; and (3) is the amount of the fee unreasonable relative to the proposed purchase price.
Id. at 657. An analysis of those three factors here supports awarding a bidding protections to
HHI.
First, HHI is not an insider. There has been no allegation or evidence of any self-dealing
or manipulation. In fact, the losing bidder, RHJI, is the majority shareholder of the Debtors’
indirect parent corporation. Second, there is no evidence that the fee will hamper bidding. There
have already been competing bids between HHI and RHJI, and the testimony at the hearing was
that the stalking horse bid brings value to the estate by setting a floor on the price and providing
14 Macakanja’s calculations assumed a 10-20% discount on RHJI’s $50 million note, giving it an
economic value of $42.5 million. While the Court accepts this testimony as true, the Court has doubts that the
note—whose capital structure is unknown, and is issued by the owner of an auto parts supplier when that sector of
the economy is significantly depressed—is worth even that much. The evidence also showed that the ABL Lenders
and the Prepetition Term Lenders both thought that Lazard overvalued the note.
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a structure for potential competing bids. The evidence also showed that the stalking horse bid
would provide comfort to the Debtors’ employees and customers that the company was entering
the auction with a locked-in bid. Third, the fee amount is not unreasonable relative to the
proposed purchase price. The total amount of the proposed break-up fee and expense
reimbursement is less than 3% of the total purchase price. This falls within the range of what
courts in this jurisdiction have found to be acceptable break-up fees.
CONCLUSION
The Court “walks a tightrope between, on the one hand, providing for an orderly bidding
process, recognizing the danger that absent such a fixed and fair process bidders may decline to
participate in the auction; and, on the other hand, retaining the liberty to respond to differing
circumstances so as to obtain the greatest return for the bankrupt estate.” Fin. News Network,
980 F.2d at 166. The Bidding Procedures Order entered by the Court granting bid protections to
RHJI was predicated on RHJI delivering the satisfaction notice on or before July 2, 2009. That
did not happen. Whatever agreements RHJI negotiated with the Debtors to give it more time
never received Court approval. RHJI cannot turn to this Court for retroactive approval of private
agreements reached with the Debtors when such agreements may harm the estate because of the
presence of a better and higher offer.
/ / / / /
/ / / / /
/ / / / /
/ / / / /
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The Motion to Amend the Bidding Procedures Order, and appoint HHI as the stalking
horse bidder, is GRANTED. The Motion to Construe the original Bidding Procedures Order to
apply to the Second Amended APA with RHJI is DENIED.
Separate Orders to this effect will be entered.
Dated: New York, New York
July 28, 2009
_____/s/Martin Glenn____________
MARTIN GLENN
United States Bankruptcy Judge
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