What Does 363 Sale Mean?
A 363 sale is the sale of the assets of an organization under Section 363 of the U.S. Bankruptcy Code. The assets that come under this section can include anything from the sale of office furniture, under Chapter 7, to the sale of all substantial assets, under Chapter 11; though, in most cases, 363 sale refers to the latter.
This asset sale is relevant only when an organization has declared bankruptcy because of its inability to repay its creditors.
Divestopedia Explains 363 Sale
The Great Recession pushed many companies into bankruptcy and, as a result, a clear pattern has been identified as to how 363 sales transpire. As a first step, the debtor enters into an asset purchase agreement with one or more proposed buyers who act as a stalking horse bidder. The idea behind choosing this stalking horse bidder is that the starting value offered by these buyers is high, so there is a higher possibility for the debtor organization to fetch a higher purchase price for its assets. In return, the stalking horse bidder may get certain favors and discounts pertaining to the asset in question.
Once the stalking horse bidder is identified, the organization starts a normal auction process in which bids are requested for the assets. If there are other bidders who express interest in the assets, then they are all called upon for the auction. The auction will proceed according to the laws that govern this process and at the end of the auction it will be sent to bankruptcy court. This court will determine if the auction was valid and, accordingly, will approve or reject the sale of that asset to the highest bidder.
Though a 363 sale sounds lucrative to struggling companies, it comes with many drawbacks. Primarily, the court may not approve the sale and this could end up being a big blow for the organization. In general, courts use the "horizontal test" and a "business judgment" test to determine whether the sale is valid. Deep investigations can lead to disapproval, too, if the sale does not justify the need for a standalone 363 sale. Finally, the beneficiaries of the sale may have a bearing in the court's decision.