Here's IBM'S Objection to Debtor's Motion for an Order (I)(A) Establishing Sale and Bid Procedures, (B) Approving Form of Asset Purchase Agreement, and (C) Approving the Form and Manner of Notice of Sale; and (II) Approving (A) Sale of
Certain Assets Free and Clear of Interests and (B) Assumption and Assignment of Executory Contracts and Unexpired Leases [PDF], as text.
~ Groklaw Team
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re:
The SCO GROUP, INC., et al.,
Debtors.
|
Chapter 11
Case No. 07-11337 (KG)
(Jointly Administered)
Hearing Date: February 25, 2009 at 11:00 a.m.
prevailing Eastern Time
Objection Deadline: February 18, 2009 at 4:00 p.m.
prevailing Eastern Time
Related Docket No.: 695
|
IBM'S OBJECTION TO DEBTOR'S MOTION FOR AN
ORDER (I) (A)
ESTABLISHING SALE AND BID PROCEDURES, (B) APPROVING FORM OF
ASSET PURCHASE AGREEMENT, AND (C) APPROVING THE FORM AND
MANNER OF NOTICE OF SALE; AND (II) APPROVING (A) SALE OF
CERTAIN
ASSETS FREE AND CLEAR OF INTERESTS AND (B) ASSUMPTION AND
ASSIGNMENT OF EXECUTORY CONTRACTS AND UNEXPIRED
LEASES
International Business Machines Corporation ("IBM"), a
creditor in this Chapter 11 case, objects to the "Motion for an
Order (I) (A) Establishing Sale and Bid Procedures, (B) Approving
Form of Asset Purchase Agreement, and (C) Approving the Form and
Manner of Notice of Sale; and (II) Approving (A) Sale of Certain
Assets Free and Clear of Interests and (B) Assumption and
Assignment of Executory Contracts and Unexpired Leases," filed with
this Court by the debtors and debtors in possession, The SCO Group,
Inc. ("SCO Group") and SCO Operations, Inc.
("Operations", and, collectively, with SCO Group, the
"Debtors"), on February 5, 2009 (the "Motion").
(1)
Preliminary Statement1
1. The Motion and attached documents do not answer basic
questions about the Debtors' proposed asset sale: What is the
urgency to approve the terms of the asset sale, particularly if the
Debtors are not presently entertaining any proposed bids on the
assets? What products and services are included in the assets
proposed to be sold? is the proposed procedure the right one? How
will the bidder protections be applied? The burden should not be on
creditors or this Court to search for the facts and justifications
for a sale. Rather, the Debtors must set forth this and other
required information before even bid procedures may be
approved.
2. The Motion (i) lacks a justification for approving the
proposed asset sale now, (ii) lacks adequate information describing
the assets to be sold or the proposed sale process; (iii) lacks
adequate information about the proposed method for choosing a
"stalking horse" bidder; and (iv) lacks adequate information about
the proposed bidding procedures. The Motion, form of asset purchase
agreement, proposed bidding procedures and sale notice are all
deficient in themselves and should not be approved. (See
Section A below.) The proposed bidder protections are inadequately
described and misleading. (See Section B below.) Finally,
the Debtors' proposed sale notice fails to identify the products
and services comprising the assets being sold, and it fails to
provide an accurate description of the terms and conditions of the
proposed asset sale. (See Section C below.)
3. For these reasons, as explained more fully below, this Court
should deny the Motion.
(2)
The Debtors' Proposed Sale of the
Assets
4. The Debtors filed with the Court both the Amended Joint Plan
of Reorganization (the "Plan") [Docket No. 654] and the
related Disclosure Statement (the "Disclosure Statement")
[Docket No. 655] on January 8, 2009.
5. The Debtors filed the Motion "in furtherance of the Plan"
with the Court on February 5, 2009, seeking, among other things,
approval of the proposed (free and clear) sale by auction (the
"Asset Sale") of (i) some or all of the Debtors' assets
relating to its "Mobility Products" and (ii) its "OpenServer
Business" (collectively with the Mobility Products, the
"Assets"). (Mot. Prelim. Stmt., ¶ 1.) The Motion notes
that the "Retained Litigation", as defined in the Motion, would be
retained by reorganized SCO Group for the benefit of the Debtors'
creditors and equity security holders and is expressly excluded
from the Assets proposed to be sold. (Mot. ¶ 4.)
6. The Motion also seeks approval of (i) the form of an asset
purchase agreement (the "APA") attached to the Motion
proposed to be used for the Asset Sale (if no "stalking horse"
bidder is selected), (ii) the form and manner of notice of the
Asset Sale (the "Sale Notice") attached to the Motion and
(iii) the bidding procedures proposed to govern the Asset Sale (the
"Bidding Procedures") attached to the Motion, which provide,
among other things, a potential cash break-up fee and expense
reimbursement if the Debtors designate a "stalking horse" bidder
who is not the successful bidder at the auction or if any of the
Assets are purchased by anyone other than the designated "stalking
horse" bidder (whether i the auction or otherwise). (Mot.
¶¶ 6, 9.)
7. The Motion proposes the following minimum reserve prices:
(3)
Asset |
Minimum Bid |
Subtotal |
Total |
(a) |
Mobility Products and OpenServer
Business (combined) |
|
$6,000,000 |
$6,000,000 |
(b) |
Mobility Products (aggregate) |
|
$2,000,000 |
|
|
|
FCmobilelife (or Me Inc. mobile) |
$1,000,000 |
|
|
Hipcheck |
$500,000 |
|
|
Shout Postcard |
$250,000 |
|
|
Shout Marketing |
$250,000 |
|
|
Cloud Server |
$1,000,000 |
|
|
Mobility Products (separately) |
$3,000,000 |
|
(c) |
OpenServer Business |
$5,000,000 |
|
Mobility Products
(aggregate) and
OpenServer Business |
$7,000,000 |
Mobility Products
(separately) and
OpenServer Business |
$8,000,000 |
(Mot. ¶ 6, APA at Ex. A-2.)
8. The Motion further seeks authority for the Debtors to select
a "stalking horse" bidder (the "Stalking Horse Bidder"),
which would be a potential purchaser of the Assets that:
(a) commits to the purchase prior to the [a]uction, so
that its stalking horse bid can be communicated to other potential
bidders, (b) agrees to pay at least the minimum (reserve) price for
the Assets, (c) posts a non-refundable deposit in the amount of at
least 10% of the proposed purchase price for the Assets, and (d)
executes a definitive agreement for the purchase of the Assets that
does not have a due diligence or financing contingency
...
(Mot. ¶ 7.) If the entity selected as the Stalking Horse
Bidder is not the successful bidder at the auction or if any of the
transferred assets in the sale are purchased by any party other
than the designated Stalking Horse Bidder (whether in the auction
or otherwise), then the Stalking Horse Bidder would be entitled to
receive from the Debtors a cash break-up fee in an amount
(4)
of up to 3% of the purchase price under the APA for the Asset
Sale to such other purchaser (the "Breakup Fee") and
reimbursement of up to $30,000 of the fees and expenses incurred or
to be incurred by the Stalking Horse Bidder in connection with the
consummation of the purchase of the Assets (the "Expense
Reimbursement"). (Mot. ¶¶ 7,8.) Further, the proposed
Bidding Procedures provide that if there is a Stalking Horse
Bidder, then at auction the initial minimum overbid must be at
least $25,000 plus the sum of the Breakup Fee and maximum
Expense Reimbursement. (Mot. ¶ 9.)
* * *
9. As more fully described below, the Motion lacks sufficient
information or justification to approve the proposed Asset Sale;
the proposed bidder protections are inadequately described and
misleading and the proposed Sale Notice fails to identify properly
the products and services constituting the Assets. Therefore, this
Court should not approve the Bidding Procedures, the form of the
APA or the Sale Notice.
Argument
THE MOTION, FORM OF APA, BIDDING PROCEDURES
AND PROPOSED SALE
NOTICE ARE DEFICIENT AND SHOULD NOT BE APPROVED.
A. The Motion Lacks Sufficient Information or
Justification to Approve the Asset Sale.
10. Where a debtor in possession seeks approval of a sale or
disposition of property of the estate outside of the ordinary
course of business, "there must be some articulated business
justification" before the court may order such disposition under
section 363(b) of the Bankruptcy Code. In re Lionel Corp,
722 F.2d 1063, 1070 (2d Cir. 1983); In re Del. & Hudson Ry.
Co, 124 B.R. 169, 176 (D. Del 1991); In Re Montgomery Ward
Holding Corp, 242 B.R. 147, 153 (Bankr. D. Del. 1999). The
court must scrutinize a sale of a
(5)
substantial portion of a debtor's assets under section 363 of
the Bankruptcy Code closely because of the danger that such a sale
might deprive parties of substantial rights inherent in the chapter
11 plan confirmation process. 3 Alan N. Resnick & Henry J.
Sommer, Collier on Bankruptcy, ¶ 363.02[2] (15th rev.
ed. 2008).
11. In examining a sale under section 363 of the Bankruptcy
Code, the court should consider "all salient factors pertaining to
the proceeding", including "the likelihood that a plan of
reorganization will be proposed and confirmed in the near future,
the effect of the proposed disposition on future plans of
reorganization ..." and "whether the asset is increasing or
decreasing in value." In re Lionel Corp, 722 F.2d at 1071;
see also In Re Montgomery Ward Holding Corp, 242 B.R.
at 153-54 (citing In re Lionel Corp, 722 F.2d at
1071).
1. The Motion Lacks Any Justification for Its Timing.
12. The Debtors have proposed a Plan that provides for the Asset
Sale as one of the means of implementing the Plan, to generate cash
with which to pay some creditors' claims. The proposed Disclosure
Statement summarizes the Plan's terms as follows:
"(i) sale by public auction of the Mobility [Products]
and OpenServer [Business], with proceeds of such sale being used
to pay Allowed Claims on [the date the Plan becomes effective];
and/or in addition, if the sale does not generate an amount deemed
sufficient by the Debtors, in their sole discretion, to pay all
Allowed Claims other than the Allowed Claims subject of the
[Retained] Litigation in full ..., (ii) the Debtors will pursue a
go-forward business model ..."
(Disclosure Statement at 21 (emphasis added); Plan at 11.)
Proceeding with the Asset Sale now would not be a means of
implementing the Plan but instead would be a means of
short-circuiting the Plan.
(6)
13. The Motion's sole stated reason in support of conducting a
sale process now is, "the Debtors' revenues have been declining
over the past several years and the Debtors may not have the
liquidity to sustain their operations for a prolonged period of
time", along with this conclusory statement: "[t]he Debtors have
determined, in their reasonable business judgment, that [an auction
of the Assets] at this time is warranted and necessary and seek
approval of the [Asset Sale] as a means for implementing the Plan."
(Mot. ¶¶ 1, 11.) The Motion proposes procedures that
would result in a sale by April 30, 2009. The Debtors' Plan process
proposes a confirmation hearing before then. The Motion fails to
explain the need for the Asset Sale before confirmation. If the
Plan is not confirmed, then there is reason to question whether the
Asset Sale in the manner proposed in the Plan and the Motion should
proceed at all. If it should, then the Motion could be revisited
then.
14. The Motion does not suggest that the Debtors have received
any bids for the Assets or that any prospective purchaser has
expressed an interest in purchasing the Assets. The Motion does not
describe what, if any, potential bidders the Debtors have contacted
or whether there have been any indications of interest in the
Assets that would make bidder protections such as a break-up
necessary. Nor does the Motion provide any evidence that there is a
good business opportunity presently available, as long as the
Debtors act quickly. Thus, independent of the proposed Asset Sale's
overlap with the Plan process, the Motion suggests no apparent
reason for pursuing an Asset Sale process now.
15. Finally, the Motion does not assert that the Debtors have
had declining revenues and limited liquidity. To the contrary, the
Disclosure Statement and the Plan express high expectations from
the Mobility Products' future revenues and extol the virtues of
(7)
the Debtors' going forward business model. Based on the
information provided in the Disclosure Statement, the Plan, and the
Motion, and Debtors describe the Assets as expected to generate
value going forward, which is at odds with the haste with which the
Debtors are seeking to divest themselves of the Assets. For these
reasons, the Motion provides nothing to suggest that the Asset Sale
should proceed now.
2. The Motion Lacks Adequate Information About the Assets To
Be Sold and the Process for Selling Them.
16. The Motion and the APA do not adequately identify the
products and services that comprise the Assets. Key details and
provisions of the Assets and of the Plan described in the Motion
and the APA are inconsistent with the Plan and Disclosure Statement
themselves. For example, the APA implies that the Mobility Products
are owned by a non-debtor subsidiary or an affiliate of the
Debtors, identifying Mobility Products in the following way:
"Me Inc. (or Mobility) Products" means the
source and object code for the (i)Me Inc. Platform, (ii) the Me
Inc. Mobile Server, (iii) the Me Inc. Client Framework, (iv) Me
Inc. Shout, (v) Me Inc MI4 time management, calendaring, and task
management solution, (vi) Shout Hosted Platform, (vii) Shout
Postcard, and [sic] (viii) Vote/Shoutback, (ix) Grassroots, (x)
Order Entry, (xi) SCO Mobile Server, (xii) SCO Mobile Client
Framework, (xiii) Edgeclick and (xiv) Edgeclick SDK, and all
related Technology, Intellectual Property and Products of Sellers,
as of the Closing, but excluding all Technology, Intellectual
Property and Products relating to the OpenServer
Business.
(APA at § 1.1.) In addition, the Motion says the "Mobility
Products have been developed by Me, Inc., a wholly-owned subsidiary
of The SCO Group, Inc." (Mot. at 1 n.2.) However, the Disclosure
Statement and the Plan say that these assets are actually owned by
the Debtors. In addition, the APA contemplates that SCO Global,
Inc., a non-debtor subsidiary
(8)
of the Debtors, will act as a potential signatory on behalf of
the sellers, without explaining in what manner or to what extent
SCO Global, Inc. would be involved in the Asset Sale.
17. The description of Hipcheck is similarly confusing. The APA
defines "OpenServer" as follows:
"OpenServer" means all assets and business of
Sellers, the Subsidiaries and the Sellers' Affiliates, relating to
the design, manufacture, marketing, distribution, sale and related
operations and functions of Operating System Products (other than
the Unix operating system), the Layered Operating System Products
and Hipcheck, and excluding the Me Inc. Products and
Excluded Assets.
(APA at § 1.1, (emphasis added).) However, the Disclosure
Statement, the Plan, the Motion and the APA itself (under Exhibits
A-1 and A-2 which set forth a list of the Assets) all describe
Hipcheck as a component part of the Mobility Products.
18. The Motion also does not describe the process the Debtors
intend to follow to market the Assets, whether its financial
advisor will participate in the process and, if so, how and to what
extent. The full extent of the marketing procedures described in
the Motion are set forth as follows: the Debtors shall provide
notice of the Bidding Procedures and auction to "... (vi) all
persons or entities known to the Debtors that have asserted an
interest in all or any portion of the Assets; and (vii) all
potential bidders known to the Debtors"; and:
[w]ithin five business days after the entry of the Bid
Procedures Order, or as soon thereafter as is practicable, the
Debtors or their authorized agent shall cause to be published a
notice, substantially in the form of the Sale Notice, in the
national editions of the Wall Street Journal and/or such
other publications as the Debtors and their advisors determine will
promote the marketing and sale of the Assets to other interested
parties whose identities are unknown to the Debtors.
(9)
(Mot. ¶ 16.) Because the APA contemplates that the Asset
Sale would be consummated by April 30, 2009, a mere 64 days after
the hearing on the Motion, the Debtors should have already
established and the Motion should describe a thorough and detailed
plan to market the Assets and solicit and evaluate potential bids
and bidders. (See APA at §4.1.) Newspaper notices will
not likely be sufficient to generate meaningful participation in
the auction, especially where there is no evidence that any
potential bidders have indicated any interest in the Assets.
19. The Motion lacks any meaningful description of the due
diligence process for potential bidders. The Bidding Procedures do
not provide any additional detail or discussion of the proposed due
diligence process, providing only that the Debtors shall "[a]ssist
Potential Bidders in concluding their respective due diligence
investigations ... and that the Debtors will "coordinate the
efforts of Potential Bidders in conducting their respective due
diligence investigations regarding the [Assets]." (B.P. at 1, 3.)
Neither of these statements describe anything approximating a
carefully considered plan for due diligence procedures that would
allow prospective purchasers to evaluate the Assets swiftly and
efficiently and participate in the Asset Sale in accordance with
the schedule the Debtors propose. The due diligence process is of
special importance here, as prospective purchasers will have the
opportunity to select from a menu of assets. Consequently, if there
are any prospective purchasers, the Debtors may need to provide
access to confidential information relating to the Assets in a
customized fashion organized individually for each prospective
purchaser based on the Assets in which such prospective purchaser
has indicated an interest. Further, because of disputes over rights
to certain intellectual property that is at the heart of the
Retained Litigation, the Debtors must take care to maintain
confidentiality of property
(10)
rights that are the subject of any such pending claims. The
Motion provides for none of these procedures.
20. Without a clear and consistent description of the Assets and
the sale process, creditors and the Court cannot evaluate how the
Asset Sale relates to the Debtors' business as a whole or how it
may affect the Debtors' reorganization. They cannot evaluate
whether the proposed sale is a sound exercise of business judgment
and complies with the other requirements of section 363. Therefore,
they cannot evaluate whether pursuing a bid process is a wasteful
diversion. Further, because the Assets' description is inadequate,
potential bidders will be left in the dark about what property they
are bidding for and may be reluctant to bid. Similarly, the
deficiencies and inaccuracies in the APA, including the ambiguous
description of whether equity interests in any of SCO Group's
subsidiaries will be deemed excluded assets or will constitute a
portion of the Assets to be purchased2, will leave any potential purchaser of
the Assets uncertain about its ownership. The Motion should not be
approved without resolution of these matters.
3. The Motion Lacks Information About the Criteria for
Selecting a "Stalking Horse" Bidder.
21. The Motion does not describe the criteria the Debtors will
use to select a Stalking Horse Bidder. The Motion also does not
describe whether a Stalking Horse
(11)
Bidder must bid for all the Assets or may bid for individual
assets constituting less than all the Assets. The Motion provides
that a Stalking Horse Bidder "would be a potential purchaser of
the Assets that (a) commits to the purchase prior to the
Auction, so that its stalking horse bid can be communicated to
other potential bidders ... ." (Mot. ¶ 7, (emphasis added).)
Assets are defined in the Motion as "(i) some or all of the
Debtors' assets relating to its mobility products ('Mobility
Products'); and (ii) its 'OpenServer' business ('OpenServer
Business') ...." Strict application of this definition of
Assets to the standard described in the Motion for selecting a
Stalking Horse Bidder would result in a requirement that a
prospective Stalking Horse Bidder be a potential purchaser of, at a
minimum, the OpenServer Business and at least some of the
assets constituting the Mobility Products. However, the APA
contemplates that there may be more than one Stalking Horse Bidder,
stating that the stalking horse exhibit "will be appended to those
[APA]'s submitted by prospective Purchaser(s) who are accorded by
th3e Debtors Stalking Horse status pursuant to the Sale Motion and
the Bid Procedures ...." (APA at Ex. "I", ¶ 2.) Further, the
Bidding Procedures also appear to contemplate multiple Stalking
Horse Bidders, providing that "the Debtors shall designate any
Stalking Horse Bid(s) and file a notice of such designation(s) with
the [Court] no later than 24 hours prior to the commencement of the
Auction." (B.P. at 3.) The Motion should not be approved without
additional detail and clarification of the basis for selection of a
Stalking Horse Bidder, including whether there is a possibility
that there may be more than one Stalking Horse Bidder.
4. The Motion Lacks Adequate Information About the Proposed
Bidding Procedures.
22. The Motion does not provide any basis on which creditors and
the Court can evaluate the Bidding Procedures. Moreover, the
proposed procedures contemplate
(12)
that "[t]he Debtors may modify the bid procedures set forth in
the proposed order at any time prior to or during the Auction if
the Debtors determine, in their judgment, that such modifications
will better promote the goals of the auction process and are in the
best interest of the bankruptcy estates and the creditors thereof
...." (Mot. ¶ 5 n. 5; see also, B.P. at 5.) The Debtors
effectively seek to reserve unfettered discretion to modify the
Bidding Procedures. They do not even attempt to provide information
about what will inform their "judgment" or any limitations or
qualifications on exercising such judgment.
23. The Motion asserts, "The Debtors have determined that the
[Asset Sale] will enable them to obtain the highest and best offer
for the Assets (thereby maximizing the value of their estates) and
is in the best interests of the Debtors, their estates, creditors
and holders of equity interests." (Mot. ¶ 15.) The Bankruptcy
Code, however, leaves that determination to this Court, not to the
Debtors. The Motion provides no support for the claim that the
Bidding Procedures will attract prospective purchasers and produce
the highest and best offer. To the contrary, the Motion's
aggressive timeframe and the apparent lack of any prospective
bidders, of any marketing process, of any specific due diligence
procedures and of any basis on which to select one or more Stalking
Horse Bidders may chase away bidders or hasten their exit from the
process. Without some meaningful indication that the Bidding
Procedures will produce bidders and the highest and best offer,
there is no basis upon which this Court should grant the Motion and
authorize an auction.
B. The Motion Lacks Adequate Information in Support of the
Bidder Protections.
24. To obtain a bidding procedures order and approval of bidder
protections such as a break-up fee and expense reimbursement, the
requesting party must show that such protections are "necessary to
preserve the value of the estate". In re O'Brien
(13)
Envir. Energy, Inc., 181 F.3d 527, 535-37 (3d Cir. 1999);
In re Integrated Res., Inc., 147 B.R. 650, 657 (S.D.N.Y.
1992); In re SpecialtyChem Prods. Corp., 372 B.R. 434,
439-40 (E.D. Wis. 2007).
25. Where the debtors in possession seek approval of bidding
procedures that include a break-up fee and expense reimbursement,
courts should "highly scrutinize" any such fees. In re Hupp
Indus., Inc., 140 B.R. 191, 195 (Bankr. N.D. Ohio 1992); see
also In re Integrated Res., Inc., 135 B.R. 746, 750-51
(Bankr. S.D.N.Y. 1992). Therefore, approval of bidder protections
as part of a proposed section 363 sale should be denied if the
debtors in possession provide "insufficient information upon which
to evaluate the merits of the proposed sale". In re Hupp,
140 B.R. at 195; In re Twenver, Inc., 149 B.R. 954, 956
(Bankr. D. Colo. 1992).
26. The amount of a break-up fee and expense reimbursement must
constitute a fair and reasonable percentage of the proposed
purchase price and must not be so substantial as to produce a
chilling effect on other potential bidders. See, e.g., In
re O'Brien, 181 F.3d at 534; In re Integrated Res.,
Inc., 147 B.R. at 657; In re Hupp, 140 B.R. at 194. In
determining what is reasonable, courts will generally approve fees
and expenses "limited to one to four percent of the purchase
price", but are reluctant to approve anything higher absent
extraordinary circumstances. In re Tama Beef Packing, Inc.,
321 B.R. 496, 498 (8th Cir. B.A.P. 2005).
1. The Motion Does Not Adequately Describe the Proposed
Method of Application of the Proposed Bidder Protections and
Fees.
27. The Motion provides inconsistent descriptions of the
proposed bidder protections, including the Breakup Fee and Expense
Reimbursement, and fails to answer
(14)
critical questions relating to contingencies flowing from the
bidder protections that could threaten the integrity of the auction
process.
28. The Motion does not describe the treatment of competing bids
for non-identical packages of less than all of the Assets and how
and to what extent such competing bids may trigger a payment of the
Breakup Fee and Expense Reimbursement to a Stalking Horse Bidder.
The Motion says that the Breakup Fee and Expense Reimbursement will
be payable "if either (a) a Stalking Horse Bidder is not the
Successful Bidder or (b) any of the Assets are transferred
by Debtors to any party other than a Stalking Horse Bidder (whether
pursuant to the [Asset Sale] or otherwise) ...." (Mot ¶ 8,
(emphasis added).) The description does not say whether the
transfer of Assets triggering the payment obligations is limited to
only those transfers that involve an overlap of some or all of the
specific assets that are the subject of the Stalking Horse Bidder's
proposed bid.
Furthermore, the Bidding Procedures provide that if there is a
Stalking Horse Bidder, then at the auction the initial overbid must
be at least $25,000 plus the sum of the Breakup Fee and
Expense Reimbursement.3 (B.P. at 4.) As drafted, the Motion and
the Bidding Procedures provide no information to describe how the
bidder protections (including the initial overbid calculation) will
operate if a competing bidder bids for less than all of the assets
that are the subject of a bid from a Stalking Horse Bidder,
i.e., whether such competing bidder will be required to
comply with an initial overbid amount that includes the full
Breakup Fee or whether the applicable Breakup Fee in such instance
will be determined on
(15)
the basis of the proportional value assigned by the Stalking
Horse Bidder for each asset it proposes to purchase. The Bidding
Procedures say only that "[t]he Debtors also retain discretion with
respect to how to conduct the Auction of Bids are received in
differing packages of [Assets]." (B.P. at 4.) Quite simply, the
Motion provides the creditors, this Court and any potential
competing bidders with no guidance on the process to be followed
for the application of bidder protections to competing bids for
non-identical portions of the Assets.
2. The Proposed Bidder Protections and Fees Are
Unreasonable.
30. The Motion is inconsistent as to the calculation of any
"Breakup Fee". At one point, the Motion says the "Breakup Fee" is
up to 3% of the purchase price under the APA for the Asset Sale
to another purchaser. (Mot. at ¶ 8 (emphasis added).) At
another point, the Motion says "the maximum amounts payable by the
Debtors as a result of the [bidder protections] is 3% of the
purchase price offered by a Stalking Horse Bidder as Breakup
Fee plus $30,000 as Expense Reimbursement ...." (Mot. at ¶ 26
(emphasis added).) The Motion should not be approved without
reconciliation of this conflict.
31. To the extent that the Motion reveals the basis for, and the
proposed application of, the bidder protections including the
Breakup Fee and Expense Reimbursement, there is a risk in some
circumstances that bidder protections will exceed acceptable
levels. For example, if a Stalking Horse Bidder bid solely on
"Shout Postcard" or "Shout Marketing", each of which have a
$250,000 minimum reserve price, the proposed Breakup Fee of 3%
would amount to $7,500. The Expense Reimbursement of up to $30,000
would amount to an additional 12% of the total sale price.
Together, they would total 15% of
(16)
the sale price, well above what is reasonable, and would likely
have a chilling effect on competing bids.
C. The Proposed Sale Notice Does Not Adequately Describe
the Assets To Be Sold or the Proposed Sale Process.
32. Federal Rule of Bankruptcy Procedure 2002(c) requires the
trustee or debtor in possession to give notice of a proposed sale.
Although the Rule provides that the notice is sufficient if it
generally describes the property to be sold, the description must
describe it so that one can reasonably determine what is to be
sold. 10 Alan N. Resnick & Henry J. Sommer, Collier on
Bankruptcy, ¶ 6004.03[2] (15th rev. ed. 2008); see
also In re Lowe, 169 B.R. 436, 440 (Bankr. E.D. Okla.
1994) (notice is not inadequate if a simple inquiry would reveal
defect). The Rule also requires an accurate description of the
terms and conditions of the sale, including price. See In
re Ryker, 301 B.R. 156, 167-69 (D.N.J. 2003). Failure to
satisfy either of these requirements will justify invalidating any
sale conducted under the defective notice. See Wintz v.
Am. Freightways, Inc. (In re Wintz Cos.), 219 F.3d 807, 813
(8th Cir. 2000); In re Ryker, 301 B.R. at 167-69; In re
American Freight Sys., Inc., 126 B.R. 800, 803-05 (D. Kan.
1991).
33. The proposed Sale Notice reflects the Motion's lack of
information about the proposed sale process and the Assets proposed
to be sold. As described above, the description of the assets to be
sold is so ambiguous and uncertain that the inadequacy cannot be
cured by a simple inquiry. Additionally, the Sale Notice, by
incorporating the terms of the APA and the Bidding Procedures,
fails to identify properly and adequately whether each of the
Assets proposed to be sold are owned by the Debtors or by their
non-debtor subsidiaries and further fails to provide adequate
information as to when and to what extent equity interests in
subsidiaries of the Debtors may be included in the transferred
assets. The
(17)
inadequate notice will defeat a fair auction and prevent
creditors and other parties in interest from protecting their
interests during the sale process.
(18)
Conclusion
For the foregoing reasons, IBM respectfully requests that this
Court deny the Motion as premature and without adequate basis. If
this Court determines to grant the Motion, however, it should
require SCO to revise the APA, the Bidding Procedures and the Sale
Notice to provide: (i) adequate information about the matters set
forth above and (ii) practicable solutions to address the issues
highlighted above.
Dated: February 18, 2009
POTTER ANDERSON & CORROON LLP
By: (signature)
Laurie Selber Silverstein (No. 2396)
Gabriel R. MacConnaill (No. 4734)
[address]
[phone]
[fax]
- and -
CRAVATH, SWAINE & MOORE LLP
Richard Levin
David R. Marriott
[address]
[phone]
[fax]
Of Counsel:
INTERNATIONAL BUSINESS MACHINES CORPORATION
Alec S. Berman
[address]
[phone]
Attorneys for Creditor International Business Machines
Corporation
(19)
|
References to SCO's Motion are given as "Mot. ¶ __".
References to SCO's proposed bidding procedures are given as "B.P.
at __". References to the Debtors' form of asset purchase agreement
are given as "APA at § __". |
|
Exhibits A-1 and A-2 to the APA, which set forth the available
Assets for sale, state that the transferred assets include, with
respect to each of the OpenServer Business and the Mobility
Products, "the [e]quity [i]nterests owned by SCO Group or any of
the [s]ubsidiaries in and to SCO Operations and the
[s]ubsidiaries involved in [the OpenServer Business or the Mobility
Products, as applicable] ..." In addition to being facially
inconsistent with the description of "Excluded Assets" provided in
Section 2.3(f) of the APA (even after taking into account Section
2.6 of the APA which provides that the equity interests in
foreign Subsidiaries will be transferred to the purchaser),
Exhibits A-1 and A-2 to the APA suggest that SCO Operations would
be sold as part of the Asset Sale to the extent it is involved in
the OpenServer Business or the Mobility Products. Consequently, if
there are two separate bidders, one if which purchases the
OpenServer Business and one of which purchases the Mobility
Products, it is possible that both may have a claim to the same
equity interests. |
|
Notably, the "Initial Overbid and Subsequent Bidding
Increments" section of the summary of key provisions of the Bidding
Procedures set forth in the Motion at ¶ 9 provides that the
initial overbid requirement applies only to a "competing bid for
the Assets that are subject to the [Stalking Horse Bidder's bid]
..." The Bidding Procedures do not include such a
qualification. |