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STALKING HORSE INSOLVENCY PROCESS: OUR BEST GUIDE TO GET YOUR M&A DEAL DONE - YouTube
Channel: Ira Smith
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stocking horse insolvency process our
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best guide to get your m
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a deal done the ira smith trustee team
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as absolutely operational and ira
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in addition to brandon smith is readily
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available for a telephone consultation
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or video meeting
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we hope that you and your family are
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safe and healthy stalking horse
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introduction i have written before
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about a stalking horse in the insolvency
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context
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two things recently happened that
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suggested that i should write about it
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again
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from a slightly different perspective
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the first thing was that iris smith
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recently did a zoom webinar presentation
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for the m
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a club canada the topic they wanted the
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webinar on and the title of the webinar
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was insolvency restructuring to get your
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m
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a deal done second i see that there has
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been an increase in online searches for
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that term
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so the purpose of this brandon's blog is
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to describe what a stalking horror says
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and provide you with some insight as to
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how an insolvency process can be used to
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get an m a deal done
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what is a stalking horse in the
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insolvency and m a world
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in the distressed m a context a stalking
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horse refers to a possible buyer
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participating in a stocking horse
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auction to purchase the assets of an
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insolvent debtor as a going concern
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in a stocking horse public auction of a
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financially troubled business
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an initial bid by the stocking horse
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bidder as divulged to the marketplace
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and becomes the minimum quote or floor
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cost that potential purchasers can then
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outbid
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it was first extensively utilized in the
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usa and currently as a routine part of
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the canadian insolvency landscape
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the stocking horse process is different
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than the sealed tender sale approach
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that is traditional in canada
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the stocking horse sales process has
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been used in canada many times
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the case study that ira presented in his
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webinar and gone over below
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was one that the ontario superior court
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of justice approved
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the stalking horse participates in the
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process understanding that it might be
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outbid
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accordingly it negotiates a break fee to
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cover its costs
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this includes its due diligence costs to
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put together the first offer
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typically for a competing bid to knock
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out the stocking horse offer
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it will certainly have to be more than
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the stocking horse bid plus the break
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fee
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described below the competing offer will
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certainly likewise need to be on the
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exact same terms as the stocking horse
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bid
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and cannot include any kind of
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burdensome conditions
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why would anyone want to become a
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stocking horse so
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why would someone want to be a stocking
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horse initially
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as a stocking horse you will certainly
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have the most effective opportunity of
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discussing the terms of a purchase that
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are customized to satisfy your specific
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issues
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also as the first prospective buyer you
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will have even more time to evaluate and
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comprehend the insolvent debtors company
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you will also have a chance to develop
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connections with management
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vendors and key stakeholders in the
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sales process
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this gives the stocking horse bidder a
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leg up their expenses of participating
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in the sales procedure
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are covered by the break fee that you
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will negotiate
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that break fee is generally secured by a
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unique court ordered charge against the
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assets of the insolvent debtor
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however you will need to consider the
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ranking of this charge against other
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charges that may have been already
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granted by the court
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how a stocking horse bid works the
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stocking horse method permits a
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distressed company to prevent receiving
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reduced proposals as it sells its assets
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when the stocking horse prospective
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buyer has made its deal
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the court has accepted that quote and
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all other conditions of the court
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supervised sale
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other prospective purchasers may send
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contending bids for the company's assets
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by setting the low end of the bidding
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process the insolvent firm wishes to
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realize a greater price
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yet understands it cannot obtain a lower
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one
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insolvencies are public the general
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public nature allows for the disclosure
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of even more information about the
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opportunity and the company than what
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would certainly be available in a
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private deal
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because of this in this case study i
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explained below
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i can mention some names stalking horse
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prospective buyers can typically bargain
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which specific assets it wishes to
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obtain
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it likewise does not have to acquire any
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of the insolvent businesses liabilities
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it may however choose for business
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reasons to take some on voluntarily
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examples would be amounts owing to
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critical suppliers or employment-related
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liabilities for employees of the
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insolvent company they may wish to
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retain
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mph graphics stocking horse bid process
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case study mph
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graphics inc mph was an insolvent
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company
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they had a potential purchaser who was
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willing to stand as a stocking horse
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bidder
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we ran a successful stocking horse
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process in this case
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this case happened quite a few years ago
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but since then
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we have used the identical technique in
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other cases
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when a similar kind of case comes up in
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the future we would use the same process
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so although the case is older the steps
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taken are still well suited today
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mph was a company that provided printing
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design and finishing for canadian and
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u.s customers
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mph printed a variety of products such
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as business cards
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direct mail pieces annual reports and
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marketing materials and primarily
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serviced government agencies
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not-for-profit organizations and unions
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mph grew by acquisitions and required
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additional capital equipment financed by
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debt
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the business also had to change because
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the industry was changing from
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traditional printing presses to digital
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that changeover required further capital
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investment
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mph was insolvent mph's line of business
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primarily serviced government agencies
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not-for-profit organizations and unions
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absorbing the acquisitions produced
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inefficiencies and redundancies
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it also needed to move to larger
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premises which meant moving costs and
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higher ongoing rent costs were being
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incurred
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at the same time the industry was
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extremely pricing competitive
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gross margins were squeezed overhead
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costs
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especially sales salaries and
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entertainment expenses increased
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there was now a history of losses the
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technical staff was very experienced to
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get the union business
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mph's technical side had to be a union
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shop
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mph had a blue chip client list which is
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what was really of interest to the
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stocking horse bidder
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receivable collections were slowing down
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and the bookkeeper had to put payable
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checks that were printed every month in
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a drawer
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the checks could not be released because
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there was not enough money to pay their
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liabilities as they become due
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the stocking horse bidder came knocking
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the bidder was an industry consolidator
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they came knocking to try to buy the mph
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assets
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the consolidator did its due diligence
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and issued a non-binding letter of
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interest
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after further discussions that interest
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turned into a binding agreement to
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purchase the assets
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one of the terms of the deal was that
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the stocking horse bidder required court
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approval of the purchase and a vesting
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order from the court to vest the assets
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out of mph into the acquiring
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corporation
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notwithstanding there were tax losses
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the purchaser did not want to purchase
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shares and have to deal with all the
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creditor issues
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the company could not on its own give
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the purchaser the certainty it wanted by
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way of a vesting order
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so an insolvency process was required
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what kind of stocking horse insolvency
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process
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there are generally three insolvency
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options some are not necessarily
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mutually exclusive
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they are receivership bankruptcy and
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restructuring
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receivership as a remedy for secured
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creditors
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in a receivership the company loses
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control of the sales process
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bankruptcy is a remedy for unsecured
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creditors
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in bankruptcy likewise the company loses
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control
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it needed a process where the company
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stays in control
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the insolvent company's requirements
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were stay in control of the process
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do that specific transaction or a better
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one and get court protection for both
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the sales process
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and the sale so neither receivership nor
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bankruptcy would work
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so what would allow the company to meet
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its requirements and run a stocking
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horse bid process
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a stocking horse process works best in
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an insolvency restructuring process
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what is needed as a debtor in possession
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option in the united states
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it is called a chapter 11 proceeding in
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canada
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there are two federal statutes that
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apply and can accommodate the needed
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process
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liquidating proposal under the
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bankruptcy and insolvency act canada bia
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liquidating plan of arrangement under
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the company's creditors arrangement act
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canada ccaa the benefits of this
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approach are
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the company stays in control of the
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process
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it allows for the stocking horse
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transaction or a better one to be
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completed
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allows the insolvent company to get
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protection from its creditors through
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the automatic stay of proceedings
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this gives it the time to run the
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stocking horse process
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go back to court for approval and to
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complete a transaction
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liquidating proposal under the bia to
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run the stocking horse process we chose
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the strategy of a proposal filing under
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the bia
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the main reason was that the ccaa is for
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companies that owe 5 million
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or more mph owed under that threshold
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so only the bia process was available
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the strategy would have been the same
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even if mph qualified for a ccaa process
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and we decided to go under that statute
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as time was of the essence we mph first
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filed a notice of intention to make a
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proposal noy
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this quickly got them the stay of
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proceedings they needed an access to the
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court
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before needing to draft the definitive
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proposal document
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the company filed the noy to implement a
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sale of its assets
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properties and undertaking in order to
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attempt to preserve as much value as
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possible for the company's stakeholders
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while preserving as many jobs as
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possible
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as trustee we then wrote a report to the
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court in support of the company's motion
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to get the purchaser's agreement of
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purchase and sale to be approved as a
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stocking horse bid and for approval of a
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sales process we would run
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as trustee we worked with mph the
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purchaser and their respective legal
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counsel
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to draft the sales process and the terms
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and conditions of sale
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these would be the rules that would
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allow for the marketplace to become
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aware of the opportunity to purchase all
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or substantially all of the assets
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properties and undertaking of mph
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key elements of the stocking horse sales
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process the key elements of the stocking
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horse sales process were
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the break fee payable to the stocking
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horse bidder if they turned out to not
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be the successful purchaser was set at
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the amount of 100 000
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the overbid amount as described in the
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stocking horse agreement of purchase and
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sale was reduced to the amount of one
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hundred thousand dollars
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if an auction was to be held between
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parties that all qualified as successful
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bidders
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each bid had to be at least five
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thousand dollars higher than the last
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one
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the outcome of the stocking horse sales
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process the process we recommended to
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the court was a five-week process
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the court approved our recommendations
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and ran the sales process
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the process included advertising the
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opportunity in a national newspaper
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preparing and distributing a teaser
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non-confidential information circular to
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distribute to anyone who requested it
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along with the terms and conditions of
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sale
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preparation and distribution of a
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confidentiality agreement to those who
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wished more detailed financial
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information
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receipt of signed confidentiality
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agreements and distribution of the
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confidential information memorandum we
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prepared
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receiving non-binding letters of intent
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from potential purchasers and deciding
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which ones we chose to provide access to
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our electronic data room
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potential purchasers performed due
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diligence and submitted their final
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binding offers with deposit funds
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we then reviewed all offers received to
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make sure that they met the terms and
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conditions of sale
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we did receive a better offer but that
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purchaser's offer was conditional on
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them obtaining financing
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they could not waive the condition so
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the stocking horse bitters agreement of
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purchase and sale
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turned out to be the winning bid court
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approval of the stocking horse bid as
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trustee
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we then prepared our report to court to
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provide all the information as to the
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steps we took and the results of the
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process
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we obviously recommended that the
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company be allowed to complete the
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stocking horse agreement
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the court agreed and issued the vesting
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order there were enough funds to pay out
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the government trust claim and all the
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secured creditors in full
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there was also enough cash left over to
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pay for all the costs of the process
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unfortunately there was not enough money
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to do any sort of proposal
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so the company filed an assignment in
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bankruptcy and we became the trustee in
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bankruptcy
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moving from our role as proposal trustee
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to the bankruptcy trustee
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we informed all the creditors the
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details of the sale and the outcome
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the business and many jobs were saved as
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a result
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