Anonymised, illustrative composite. A distressed company's monitor could have simply accepted the first real offer on the table. It ran a competitive process instead — and paid a price, quite literally, to make sure the process was real.
At a glance
A company filed for protection under the Companies’ Creditors Arrangement Act, with an initial stay of proceedings granted for the statutory maximum of 10 days under CCAA s.11.02(1) and extended as the process required. The court-appointed monitor, rather than simply accepting the first credible offer, ran a sale and investment solicitation process built around a stalking horse bid — an asset purchase agreement from a strategic buyer at $4.2 million, submitted before the auction and used to set the floor for everything that followed.
A stalking horse bid only works as a floor if bidders believe the process is real. This file’s stalking horse agreement carried the customary bid protections negotiated for it — a break fee of $150,000 and expense reimbursement of up to $60,000, payable to the stalking horse bidder if it was outbid, plus a minimum overbid increment of $150,000 for anyone wanting to top it at auction. Those protections cost money regardless of who ultimately won — the risk the monitor and the court had to weigh was whether running the auction, and paying for those protections, would still leave the estate better off than simply taking the $4.2 million on offer.
At auction, a second bidder topped the stalking horse’s floor, and bidding closed at a final price of $5.1 million. Out of those proceeds, the outbid stalking horse bidder was paid its $150,000 break fee plus $60,000 of documented expenses — $210,000 in total, the direct cost of having run a competitive process at all. Net of that cost, the estate collected $4,890,000 ($5,100,000 − $210,000). Compared against simply accepting the original $4.2 million stalking horse bid with no auction and no break fee payable to anyone, the process produced a net benefit to creditors of $690,000 ($4,890,000 − $4,200,000) — after, not before, paying for the protections that made a second bidder show up at all.
Canada has no bespoke statute for a stalking horse process; the sale ran through CCAA s.36’s general sale-approval test. Section 36(1) lets the court authorize a sale of assets outside the ordinary course of business, overriding any requirement for shareholder approval. Section 36(3) sets the six factors the court weighs: whether the sale process was reasonable, whether the monitor approved of the process, whether the monitor reported the sale would be more beneficial to creditors than a bankruptcy sale, the extent of creditor consultation, the effect on interested parties, and “whether the consideration to be received… is reasonable and fair, taking into account their market value.” The court applied those same six factors to approve the final $5.1 million sale to the winning bidder, not the stalking horse.
The monitor could have recommended the court simply approve the original $4.2 million stalking horse bid without running an auction at all — s.36 does not require a competitive process, only that the six factors are satisfied. Doing so would have avoided the $210,000 cost of the bid protections entirely, but it would also have left $690,000 on the table relative to what the auction actually produced net of that cost. The protections were not overhead on top of the deal; they were the price of finding out whether a better one existed.
The tell sits inside the stalking horse agreement itself, at the process-approval stage, before any auction happens: whether the break fee is sized to actually deter a serious second bidder, or so large it chills competing bids before they are made. A break fee scaled to roughly 3.6% of the stalking horse price in this file was large enough to compensate the first bidder for its diligence costs, but not so large that a $900,000 improvement in price could not comfortably absorb it — the sizing question the monitor and the court both scrutinized before approving the SISP itself, not only at final sale approval.
The court approved the $5.1 million sale to the winning bidder under s.36(3), the break fee and expense reimbursement were paid to the outbid stalking horse out of the proceeds, and the balance was distributed through the CCAA process to creditors — a materially better outcome than the process the monitor could have skipped straight past.
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