How to Execute Distressed M&A

How to Acquire Companies in Bankruptcy: M&A Strategies with Mimi Wu

Mimi Wu: I graduated from Columbia in 2015 with a JD/MBA. I summered here at Sullivan & Cromwell and have been here ever since. Now, I'm a partner at S&C in what we call our general practice group, which is our corporate group specializing in mergers and acquisitions of all sorts.

I do a lot of traditional M&A—public, private, whole company sales, joint ventures, minority investments—the whole gamut. But one of the things I specialize in is distressed M&A. I've done a number of deals in the distressed space.

We have what we call primaries and secondaries for our associates. My secondary was restructuring, which basically means I get parachuted in whenever we've got a Chapter 11 case, and they need something sold.

Kison: That's a long time in a law firm. That’s a lot of deals you've touched.

Mimi Wu: Yeah, we're a unique law firm in that a lot of people start here and stay their entire careers. I'm only 10 years in, but I'm looking forward to however long comes next.

[00:05:00] What is Chapter 11? What are 363 Sales?

‍Kison: When you say distressed and restructuring, are they the same thing, or do you look at them differently? Is distress an umbrella term, and restructuring gets more specific?

Mimi Wu: We tend to use them fairly interchangeably, but you’re right—there is a slight difference. We might have clients that are generally in financial distress and have a number of options open to them. Chapter 11 restructuring, which is a court-mandated process, is a more specific avenue they have to reorganize the business.

But companies could also restructure outside of Chapter 11 by getting forbearance from their lenders or selling assets. However, when you reach a certain level of distress or are looking for those court tools that we'll talk about today, you might opt for a formal court filing. It’s an expensive process that can take months or even years, but it’s also a very powerful one. Many companies see it as a critical tool when facing financial distress.

Kison: The Chapter 11 process is basically the main tool you would use to restructure the business and get it into a different place.

Mimi Wu: Yes.

Kison: I'm familiar with the 363 asset sale because I've worked on a handful of those deals. Where does that fit in the picture?

[00:06:00] Mimi Wu: 363 refers to Section 363 of the Bankruptcy Code, which governs the use of a debtor's assets outside of the ordinary course, including the sale of all or substantially all of a debtor's assets.

Typically, a company might look at a 363 sale when they have a going concern business or assets that they can monetize. They want to do that either at the outset of the case or earlier in the case than it might take to reorganize everything else. The 363 process is a public process, but it allows the sale of assets in bankruptcy so they can continue operating under new ownership, while the company deals with creditors separately.

Kison: Is that the main way to sell during a bankruptcy—through a 363 asset sale?

Mimi Wu: It is one of a couple of ways to reorganize. It’s a very common way to sell because it’s often faster than negotiating a full restructuring plan.

But there are other ways too. You could sell assets as part of a broader plan or a prepackaged plan where you've already arranged the deal with creditors. In some cases, debt holders may choose to convert debt into equity and take over the company, instead of selling the business outright.

I'll continue formatting the transcript with timestamps in increments, keeping speaker labels bold and correcting grammar.

[00:07:00] Kison: We just got complicated quickly. So we have different flavors of this. A 363 sale would be selling the asset without any attachments?

Mimi Wu: Yes, and it's broader than that. One of the most valuable things about a 363 sale is that the assets get sold and blessed by the court in a sale order as free and clear of all interests. That’s interpreted very broadly—it’s free and clear of claims, liens, attachments, and even historical liabilities.

Buyers typically love 363 sales because they can acquire assets without taking on the debt that encumbered the business. They can also “skinny” the business by going through contracts and rejecting certain ones—like large leases that impair the business’s value. Additionally, they can leave behind liabilities tied to prior ownership.

Kison: And then if you do a sale that includes debt, that wouldn't fall under 363?

Mimi Wu: Typically, you don’t do a sale that includes debt. Buyers usually want to acquire an operating business free of liabilities so they can introduce their own capital structure.

[00:08:00] Kison: And then there’s another option you mentioned where debt can turn into equity?

Mimi Wu: Yes. Sometimes creditors will decide they want to run the business themselves. They may initially look to sell it but determine the market isn’t right. In those cases, debt holders may equitize their holdings, take over operations, and plan to sell the business in the future when conditions improve.

Kison: Okay, let’s take a step back. Why do companies end up in these situations where they have to leverage Chapter 11?

Mimi Wu: Often, it’s because of issues with their capital structure. They might have taken on too much debt, or their operational liabilities—such as significant lease obligations—become unmanageable.

Sometimes, the business itself is deteriorating. I worked on deals like LSC Communications, one of the largest print magazine and book publishers in the U.S. They had too much debt, and their industry was shrinking. They needed a way to right-size the business.

[00:09:00] Kison: So essentially, they can’t pay their debt due to business factors—whether it’s operational decline or other market conditions?

Mimi Wu: Yes, that’s typically what happens. But you also have cases like FTX, where there was an insolvency crisis due to fraud.

Kison: Did you work on FTX?

Mimi Wu: I did.

Kison: That must’ve been a lot of fun.

Mimi Wu: It was a lot of fun. But it was not a typical M&A sale. Normally, in Chapter 11, existing management continues running the company as the debtor-in-possession. That didn’t happen with FTX. New management had to come in and figure out what the company actually owned—and, in some cases, whether they even owned what they thought they did.

Kison: Wow. That’s interesting. So we’ve established that financial distress happens when companies can’t pay their debt. What’s the first step when a company realizes they’re in trouble?

[00:10:00] Mimi Wu: Usually, companies see distress coming well in advance. There are emergency situations like FTX or Silicon Valley Bank, where liquidity dries up overnight. But most companies have some time to prepare.

The first step is to engage financial advisors and legal counsel. Companies often pursue multiple options simultaneously—renegotiating debt with creditors, exploring asset sales, or preparing Chapter 11 filings in the background in case those alternatives don’t work.

Kison: So the first move is to try and negotiate with creditors?

Mimi Wu: Yes. If a company has upcoming debt maturities or is struggling with liquidity, they will usually approach creditors first to see if there’s room to renegotiate terms.

[00:11:00] Kison: What does forbearance mean in this context?

Mimi Wu: Forbearance means that creditors agree to delay enforcing debt repayment for a specified period. It gives the company breathing room to stabilize.

Kison: If negotiating with creditors doesn’t work, what’s the next step?

Mimi Wu: Other options include raising additional capital or selling off parts of the business. If the market conditions are favorable, those strategies can generate cash to cover obligations.

Kison: But if capital is hard to raise, and asset sales don’t generate enough liquidity, that’s when Chapter 11 comes into play?

Mimi Wu: Yes. If a company reaches a point where it can't meet obligations and creditors aren’t willing to negotiate, filing for Chapter 11 can provide critical protection.

Once the Chapter 11 petition is filed, an automatic stay goes into effect. This prevents creditors from seizing assets, filing new lawsuits, or interfering with the business. It gives the company time to figure out a reorganization plan.

[00:12:00] Kison: How much time does Chapter 11 buy a company?

Mimi Wu: Typically, a debtor has 180 days of exclusivity to file a reorganization plan. But in practice, most companies try to move as quickly as possible.

Even though Chapter 11 provides breathing room, the business is still under strain. Employees are uncertain about the company’s future, vendors may hesitate to continue doing business, and customers may look elsewhere. So speed matters.

Kison: Does filing Chapter 11 give the company more leverage to negotiate with creditors?

Mimi Wu: It does, because now all creditors have to be considered in the restructuring process. But it also makes things more complex because multiple stakeholders—secured creditors, unsecured creditors, contract counterparties, and employees—now have a say in what happens.

[00:13:00] Kison: If a company files for Chapter 11, does that mean they’re guaranteed to sell through a 363 process?

Mimi Wu: Not necessarily. A company may still explore multiple options after filing. They could sell through a 363 auction, negotiate a structured asset sale, or even restructure their debts and continue operating.

Kison: When does a company decide between a 363 sale and other restructuring options?

Mimi Wu: It depends on several factors. If a company has valuable assets that can be sold quickly to preserve value, a 363 sale may be the best option. If creditors believe they can recover more value by restructuring the business instead of selling, they may push for that route instead.

[00:13:30] Kison: So, if creditors think they can get more by holding onto the business rather than selling assets, they may push back against a 363 sale?

Mimi Wu: Yes, exactly. Sometimes creditors see more long-term value in reorganizing rather than liquidating. They might believe they can turn the business around and sell it for a higher price later. Other times, the business may be in such distress that selling quickly is the best option.

Kison: Once the decision is made to go through with a 363 sale, what does the process look like?

Mimi Wu: The process starts with filing for Chapter 11, which allows the company to operate as a debtor in possession. Then, the company and its advisors, including bankers and lawyers, prepare bidding procedures. These procedures outline the rules for the sale, such as deadlines for bids and auction dates.

[00:14:30] Kison: And those bidding procedures need court approval, right?

Mimi Wu: Yes, everything in Chapter 11 has to go through the court. The bidding procedures are designed to create a fair and transparent process. Once approved, the company markets the assets to potential buyers and solicits bids.

Kison: How does the auction process work?

Mimi Wu: If there are multiple interested buyers, the company holds an auction. Each bidder submits offers, and the highest and best offer wins. The auction process is designed to maximize value for creditors by creating competitive tension among buyers.

[00:15:30] Kison: What happens after a winning bidder is selected?

Mimi Wu: Once the highest and best bid is chosen, the sale must be approved by the court. The court reviews the sale to ensure it’s in the best interest of the creditors and follows all legal procedures. Once approved, the transaction closes, and the buyer takes ownership of the assets free and clear of prior claims and liabilities.

Kison: That "free and clear" aspect is really attractive to buyers, right?

Mimi Wu: Absolutely. It’s one of the biggest advantages of buying assets through a 363 sale. Buyers don’t have to worry about taking on legacy liabilities, which makes it easier to integrate the assets into their existing business.

[00:16:30] Stalking Horse Bidders

‍Kison: That makes sense. So, when does a stalking horse bidder come into play?

Mimi Wu: A stalking horse bidder is usually selected before the auction process begins. The debtor negotiates a purchase agreement with an initial bidder, setting a floor price for the auction. This bidder is called the stalking horse because they establish the baseline offer that other bidders must exceed.

Kison: Why would a company want to be the stalking horse?

Mimi Wu: There are a few advantages. First, they get bid protections, such as a breakup fee and expense reimbursements if they don’t win. Second, they set the terms of the purchase agreement, which can make the deal more favorable for them. However, they also risk being outbid at the auction.

[00:17:30] Kison: So, even if they don’t win, they still get paid?

Mimi Wu: Yes, if they are outbid, they receive a breakup fee, which is typically around 3% of the purchase price, plus reimbursement for their due diligence expenses. This compensates them for setting the floor and making the process competitive.

Kison: That sounds like a good strategy for buyers.

Mimi Wu: It can be, but they have to be prepared to actually buy the business if no one else bids higher. It’s a commitment, not just a way to make money on the breakup fee.

[00:18:30] Kison: What happens if there are no other bidders?

Mimi Wu: If no one submits a higher bid, the stalking horse wins by default. The company then proceeds with the sale to the stalking horse, and the court approves the transaction.

Kison: Is there ever a situation where a better offer comes in after the auction is over?

Mimi Wu: It’s rare, but it can happen. Once the court approves the sale, the deal is typically final. However, if someone comes in with a significantly better offer before the sale closes, the debtor and creditors might have to consider it. The court’s role is to ensure the best possible outcome for creditors.

[00:19:30] Kison: So, in this process, when I want to determine market value, would I retain a banker?

Mimi Wu: Yes, you would retain a banker.

Kison: Are these usually bankers that specialize in this situation, or are they just general bankers?

Mimi Wu: A lot of them are boutique shops, but they’re the same places that typically have an M&A team. They’ll often have a restructuring team and an M&A team—places like Guggenheim, Evercore, and Perella. They all have teams that do this.

Kison: But they’ll bring on their M&A folks to sell the business?

[00:20:00] Mimi Wu: Yes, exactly.

Kison: And they’re used to it. They’ll have their restructuring group, and they may work with an industry-focused group as well. They bring the business out to interested buyers, get some preliminary indicators of interest, and then you mentioned a qualified bid. What does that mean?

Mimi Wu: Usually, the way bid procedures work is you have a couple of different stages. After the indications of interest, similar to a typical M&A auction, you provide a purchase agreement and due diligence materials. Then, you set a deadline for qualified bids.

In bankruptcy, it’s a little different. To be a qualified bidder, you typically need to put in a deposit upfront—kind of a "pay-to-play" requirement. You must show you're a serious bidder by submitting a deposit, signing a binding purchase agreement, and confirming financing. Then, assuming multiple bidders qualify, you proceed to an actual auction.

[00:21:30] Kison: And that’s where it gets competitive?

Mimi Wu: Yes. The idea is that by running a structured auction, you can get multiple bidders competing to drive up the price.

Kison: Does the winning bid usually win, or do creditors sometimes decide to keep the business?

Mimi Wu: Usually, the winning bid does win because you’ve conducted a full market check. Creditors have had the opportunity to observe the process, and they know the highest bid reflects fair market value.

That said, creditors can sometimes object if they believe another outcome would be better. But if they wanted to take over the business, they likely would have participated in the bidding process.

[00:22:30] Bankruptcy vs. M&A Sale Process

‍ Kison: What are the key differences between going through the sale process in bankruptcy versus a traditional M&A process?

Mimi Wu: One of the biggest differences is the publicity of the process. In a traditional M&A deal, most negotiations happen behind closed doors, and buyers can be selective about who they approach. In a bankruptcy sale, everything is public, and the debtor has an obligation to seek the highest and best bid.

The court must approve the sale process, which means bid procedures are publicly filed, and all creditors are given notice. The process is designed to be as competitive as possible to maximize value.

[00:23:30] Kison: And once you have multiple bidders, how does the auction work?

Mimi Wu: If there are multiple bidders, they will typically be invited to a live auction. It’s like a Sotheby’s-style auction—you put bidders in separate rooms, and the debtor’s advisors go back and forth between them.

Each round, bidders must either increase their bid or drop out. There are usually minimum bid increments to keep things moving. The goal is to drive up the price as much as possible.

[00:24:00] Kison: That sounds intense. How do you determine the winner?

Mimi Wu: The highest bid typically wins, but it’s not always just about price. The court and creditors will also consider deal certainty. For example, a bid with fewer contingencies or faster closing terms may be preferred over a slightly higher bid with financing risks.

[00:24:30] Kison: Does the stalking horse bidder usually win?

Mimi Wu: Not always, but they do have an advantage because they’ve set the terms of the deal. Other bidders must at least match their contract and bid higher in price. However, if the market is competitive, other bidders may be willing to go much higher than the stalking horse.

[00:25:00] Kison: What happens if the stalking horse loses?

Mimi Wu: They get their breakup fee and expense reimbursement. That’s why many bidders like being the stalking horse—it’s a win-win situation. Either they buy the business at their bid price, or they get compensated for their effort.

[00:25:30] Kison: That’s fascinating. So, if I’m a buyer, how do I find good deals in bankruptcy sales?

Mimi Wu: There are a few ways. First, you can monitor public filings—when a company files for Chapter 11, it will usually disclose whether it’s planning a sale. Second, you can work with bankers who specialize in distressed M&A. They often know about deals before they hit the market.

Finally, you can position yourself as a stalking horse bidder. This gives you a first-mover advantage and some deal protections.

[00:26:00] Kison: So, if I get a customer that goes bankrupt and I start receiving all these bankruptcy notices from the attorneys, what should I be doing?

Mimi Wu: You should call your own lawyers to figure out what your options are. One of the most powerful tools that a debtor has in bankruptcy is the ability to assume or reject contracts.

The debtor will review its contracts and decide which ones it wants to keep and which ones it wants to reject. If they assume a contract, they have to cure any pre-petition defaults, meaning they must pay what they owe under that contract. If they reject a contract, it essentially becomes an unsecured claim, and you may recover only a fraction of what you’re owed.

[00:27:00] Kison: So, if I have a contract with a company that goes bankrupt, they can just walk away from it?

Mimi Wu: Yes, but they’ll have to treat your damages as an unsecured claim. You won’t be able to enforce the contract, but you may receive some portion of the claim depending on how much money is left in the bankruptcy estate.

Kison: What if I’m a vendor still providing goods or services?

Mimi Wu: That’s a different situation. The debtor will likely want to keep receiving essential goods and services, so they may continue paying post-petition invoices in the ordinary course. However, you should be cautious and make sure you’re protected—especially if the debtor’s financial situation worsens.

[00:28:00] Kison: That makes sense. So, as a buyer, do I get to pick and choose which contracts I take on?

Mimi Wu: Yes, and that’s a huge advantage of a 363 sale. Buyers can "cherry-pick" contracts, meaning they can assume only the agreements that are beneficial and leave behind any burdensome ones.

For example, if the debtor has a long-term lease at an above-market rate, the buyer can reject it and negotiate a new lease. That flexibility is one of the main reasons buyers like 363 sales.

[00:28:30] Kison: What happens to the remaining liabilities after a 363 sale?

Mimi Wu: The buyer purchases the assets free and clear of all claims and liabilities. Those liabilities remain with the bankruptcy estate and attach to the sale proceeds. The creditors then fight over how the proceeds are distributed, based on their priority.

[00:29:00] Kison: Do unsecured creditors ever get anything?

Mimi Wu: Sometimes. It depends on how much money is left after paying secured creditors, administrative claims, and other priority debts. In some cases, unsecured creditors recover pennies on the dollar—or nothing at all.

That said, there are exceptions. For example, in the FTX case, unsecured creditors are expected to recover their full claims because of how much value was preserved in the estate.

[00:29:30] Kison: Interesting. So, is the payment plan for creditors determined ahead of time, or is it negotiated after the sale?

Mimi Wu: It’s negotiated as part of the bankruptcy plan. The waterfall of payments is based on statutory priority, but creditors may negotiate how much of a haircut they’re willing to take. These negotiations can take months, sometimes longer than the actual sale process itself.

[00:30:00] Kison: So, if we have a sale process happen, the highest bidder wins, the proceeds are already allocated, and the creditors are paid off—does that mean everything is done at close?

Mimi Wu: Not necessarily. The creditors get their money as part of the plan of reorganization, not necessarily at the time of closing.

After the sale, the proceeds sit in the bankruptcy estate, and then the creditors negotiate how those funds will be distributed. That process can take months, sometimes even years, depending on the complexity of the case.

[00:30:30] Kison: So, the business gets sold, the employees move over to the new owner, but the fight over the money continues?

Mimi Wu: Exactly. The advantage of doing a 363 sale early is that it allows the business to continue operating under new ownership, without the burden of legacy liabilities. Meanwhile, the bankruptcy court handles the process of distributing the proceeds among the creditors.

[00:31:00] Kison: If I get a bankruptcy notice for a customer that owes me money, what’s my best course of action?

Mimi Wu: First, assess whether your contract is likely to be assumed or rejected. If it’s a critical contract, the debtor may assume it, and you’ll get paid in full. If it’s rejected, you’ll have an unsecured claim.

Second, you should file a proof of claim to make sure you’re included in the creditor pool. Your claim will be reviewed and, depending on the estate’s assets and the priority of other claims, you may recover some portion of what you’re owed.

[00:31:30] Bankruptcy as a Strategic Move

‍Kison: Got it. So, what about vendors? If I’m still providing services to a company in bankruptcy, what should I do?

Mimi Wu: Be very cautious. You need to determine whether the debtor has court authorization to pay post-petition invoices. Typically, the debtor will seek court approval to continue paying vendors who are essential to its operations.

But if you’re not considered an essential vendor, you may want to negotiate for better terms or insist on prepayment to minimize risk.

[00:32:00] Kison: Do you have a case study example of how this plays out in the real world?

Mimi Wu: Sure. Earlier this year, I worked on the sale of Kidde Fenwal, a subsidiary of Carrier that had significant PFAS-related environmental liabilities.

The business was viable, but the environmental liabilities created substantial financial uncertainty. Carrier used the bankruptcy process to sell Kidde Fenwal through a 363 sale while leaving the liabilities behind in the estate.

[00:32:30] The sale process launched about a year and a half ago. Ultimately, Kidde Fenwal was sold to Pacific Capital, a private equity firm. The proceeds from the sale, along with contributions from Carrier, were used to settle environmental claims.

This was a great example of how bankruptcy can be a tool to separate a viable business from overwhelming liabilities while ensuring that claimants still have a recovery pool.

[00:33:00] Kison: That sounds like a well-executed plan. So, bankruptcy can be a strategic move, not just a last resort?

Mimi Wu: Absolutely. It’s not always a sign of failure—it’s often a way to restructure, preserve value, and ensure that a business can continue operating under

[00:33:30] Kison: We didn’t talk about this yet, but lawsuits can also trigger a bankruptcy, right?

Mimi Wu: Yes, absolutely. Large-scale litigation can be a major driver of bankruptcy filings. If a company faces massive legal liabilities—like product liability claims, environmental lawsuits, or mass tort cases—it might use bankruptcy to manage those claims.

For example, we’ve seen companies file for bankruptcy due to asbestos liabilities, opioid-related claims, and other mass litigation issues. Bankruptcy provides a structured way to address those liabilities while maintaining business operations.

[00:34:00] Kison: What was that high-profile case in the news recently?

Mimi Wu: Are you thinking of Alex Jones and InfoWars?

Kison: Yeah, that one.

Mimi Wu: InfoWars filed for bankruptcy due to the massive defamation lawsuits against them. That was a case where litigation forced a company into bankruptcy, and the process was used to manage the claims and determine how the plaintiffs would be compensated.

[00:34:30] Kison: So, if someone is being sued and they file for bankruptcy, does that mean they automatically get out of paying?

Mimi Wu: No, not necessarily. Bankruptcy doesn’t make the claims disappear, but it does allow the debtor to restructure and potentially negotiate settlements with claimants.

In some cases, a bankruptcy court will set up a claims trust—like we’ve seen in mass tort cases—where plaintiffs receive a portion of their claims from a fund instead of pursuing the company directly.

[00:35:00] Kison: Let’s talk about creditors again. We covered secured versus unsecured creditors, but are there other factors that determine how much influence a creditor has in a bankruptcy?

Mimi Wu: Yes. One key concept in bankruptcy is the "fulcrum creditor."

The fulcrum creditor is the one that is sitting right at the dividing line between value and no value—meaning they may recover something, but it’s not guaranteed. These creditors often have the most influence in negotiations because their recovery depends on how the restructuring plays out.

[00:35:30] Typically, secured creditors get paid first, followed by priority claims, then unsecured creditors. But within those groups, there’s a hierarchy. Some secured creditors may be oversecured—meaning they’ll get paid in full—while others may only recover a portion of their claims.

Meanwhile, unsecured creditors may have a committee that represents their interests, even though they’re often the last in line for recovery.

Kison: So, the fulcrum creditor is the one that has the most at stake in deciding whether to push for a sale, a restructuring, or some other resolution?

Mimi Wu: Exactly. They’re the ones who will negotiate the hardest because they have the most to gain—or lose—depending on the outcome.

[00:36:00] Kison: There’s usually a main group of creditors that lobby together, right?

Mimi Wu: Yes, there is typically a main group of creditors that plays a significant role in the case. These creditors—often the fulcrum creditors—tend to drive the case forward.

In addition to them, unsecured creditors will often have a committee that represents their interests. This committee is formed by statute and includes various creditors like vendors, landlords, or customers. They get access to all case materials, receive notices, and have a voice in court proceedings.

[00:36:30] Negotiating with Creditors

‍Kison: What’s the best approach for negotiating with these creditors?

Mimi Wu: It really depends on the case. Every situation is different. The best approach varies based on the company’s financial structure, the creditor mix, and how much leverage each side has.

For instance, if you’re dealing with secured creditors who are fully covered by collateral, they may be less flexible. If you’re dealing with unsecured creditors who know they might get little to nothing, they may be more open to creative solutions.

[00:37:00] The key is to understand where the leverage is in the negotiations. Sometimes, it takes months to determine how much value each creditor group will recover and what kind of restructuring makes sense.

Kison: Can a company just avoid talking to its creditors?

Mimi Wu: No, that’s not an option. Once you’re in a court-supervised bankruptcy process, everything is public. The creditors will be actively involved, and they have a right to be heard.

Even before bankruptcy, avoiding creditors isn’t a smart move. If creditors believe they’re being ignored, they can file an involuntary bankruptcy petition against the company. It’s rare in large corporate cases, but it does happen.

[00:37:30] Kison: Let’s talk about stalking horse bids. It’s one of those cool M&A slang terms. Can you explain what that is?

Mimi Wu: A stalking horse bidder is essentially a buyer who agrees to set the floor price for a bankruptcy auction.

When a company files for Chapter 11 and plans to sell its assets, it often wants to secure a lead bidder before running the auction. That lead bidder—the stalking horse—negotiates a purchase agreement in advance. Then, the auction process allows other bidders to come in and try to top that offer.

[00:38:00] The advantage of having a stalking horse is that it sets a minimum price, ensuring that the debtor doesn’t walk away with nothing. It also gives the debtor a baseline contract that competing bidders must work from.

In exchange for being the stalking horse, the bidder typically gets protections like a breakup fee (usually around 3% of the transaction value) and expense reimbursement. These incentives compensate the stalking horse for doing the initial due diligence and setting the price.

Kison: So, if I’m a stalking horse bidder, I either get the company at a price I’m comfortable with, or I get paid a breakup fee if someone outbids me?

Mimi Wu: Exactly. That’s why a lot of buyers want to be the stalking horse—it’s a win-win for them.

[00:38:30] Kison: Could I just make a business out of placing stalking horse bids?

Mimi Wu: Well, theoretically, yes. But you have to actually be a credible buyer. The court has to approve the stalking horse, and you must show that you have the financial ability to close the deal if no higher bids come in.

Kison: That makes sense. So, as the debtor, I’d want to have a stalking horse if I’m worried about not getting enough bids?

Mimi Wu: Right. If you think the business will attract multiple bidders, you might skip the stalking horse and just run a “naked auction” to let the market drive up the price. But if the business is struggling or the market is weak, having a stalking horse can create a safety net.

[00:39:00] Kison: That’s fascinating. There’s a lot of strategy involved in structuring these auctions. The court has to approve the stalking horse, right?

Mimi Wu: Yes, because you’re using estate proceeds to grant bid protections, the court must approve the stalking horse selection and any associated breakup fees or expense reimbursements.

There’s a balance to strike. You want to offer enough protection to attract a strong stalking horse bidder, but you don’t want to discourage other bidders by making the bid protections too expensive.

[00:39:30] Kison: What about managing expenses during bankruptcy? It sounds like it could get really costly.

Mimi Wu: It definitely can. Bankruptcy is expensive, and courts oversee the company's expenditures closely.

For any significant expenses outside of normal business operations, the company has to seek court approval. This includes things like legal fees, financial advisor fees, and major payments to vendors.

One of the first things a company does after filing for Chapter 11 is go to court for permission to continue paying employees, vendors, and other essential expenses. This ensures that the business can continue running while going through the restructuring process.

[00:40:00] Kison: What happens if a company can’t even cover payroll during bankruptcy?

Mimi Wu: If a company is administratively insolvent—meaning it doesn’t have enough cash to operate even after filing—then it’s likely heading toward liquidation.

Without enough liquidity, it becomes impossible to maintain the business, and the case will often transition to a Chapter 7 liquidation. That’s when a trustee steps in and sells off whatever is left to pay creditors as much as possible.

[00:40:30] Kison: So, the goal is to stay in Chapter 11 and avoid getting pushed into Chapter 7?

Mimi Wu: Yes. Chapter 11 is designed to help companies reorganize and continue operating. But if they run out of cash and can’t meet their basic obligations, liquidation becomes the only option.

That’s why companies usually work with financial advisors to structure financing before filing for Chapter 11. They might secure debtor-in-possession (DIP) financing to keep the business running during bankruptcy.

[00:41:00] Kison: What are some do’s and don’ts we haven’t covered yet?

Mimi Wu: The biggest "don't" is—don’t panic. Bankruptcy sounds scary, but it’s a structured process with clear rules.

A lot of companies hear "bankruptcy" and assume it means total failure. But it’s actually a powerful tool that can help a business shed liabilities, restructure, and emerge stronger.

The key is to approach it strategically. Work with good advisors, understand your options, and don’t rush into decisions based on fear.

[00:42:00] Bankruptcy Deals from the Buy-side

‍Kison: How about from the buy-side? I always get excited when I hear about bankruptcy deals. I’ve worked on a handful, mostly real estate-oriented, where clients were able to buy assets at 50 cents on the dollar. That was great for them.

If someone’s interested in finding distressed M&A opportunities, what’s the best approach?

Mimi Wu: There are several ways to identify distressed companies and potential opportunities.

First, networking with bankers is crucial. Most distressed companies engage financial advisors to explore their options. Bankers typically control the sale process, so if you're looking to acquire distressed assets, they’re the best point of contact.

[00:42:30] Kison: What about attorneys? Would it help to know the attorneys involved in these deals?

Mimi Wu: It can, but attorneys typically route everything through the bankers.

Lawyers handle the legal structuring and process compliance, but the actual sale negotiations, marketing, and outreach are led by financial advisors. If you want access to distressed deals, your best bet is to build relationships with restructuring bankers.

[00:43:00] Kison: Are there ever situations where a company sells its assets without a banker?

Mimi Wu: It’s unusual. Most Chapter 11 cases involve a financial advisor or banker to run the process and maximize value.

That said, in smaller cases or in situations where a buyer is already lined up, a company may try to handle the sale themselves. But in most cases, a banker is involved to ensure competitive bidding and a structured auction.

[00:43:30] Kison: What about tracking public bankruptcy filings? There are third-party services that list bankruptcy cases. Would that be a good way to find deals?

Mimi Wu: It’s one way, but by the time a company is in bankruptcy, the sale process is already underway, and competition may be high.

Most strategic buyers don’t rely on bankruptcy listings. They track their industry, know which companies are struggling, and position themselves early. By the time a company files, you’re often too late to be a stalking horse bidder or to influence the process in your favor.

[00:44:00] Kison: What about buying the debt and using that as leverage in a restructuring?

Mimi Wu: That’s a very common strategy, especially among distressed debt funds and hedge funds.

If a company's secured debt is trading at a discount, investors can buy it and become a key creditor in the bankruptcy process. That can give them influence over the restructuring and even allow them to credit bid for the company’s assets.

[00:44:30] Kison: So, let’s say I’m a buyer looking for distressed deals. What’s my best move?

Mimi Wu: Get in early. If you can identify distressed companies before they file for bankruptcy, you have much more leverage.

If you wait until the company is in Chapter 11, you’re competing against other bidders in a structured process, which may drive up the price. But if you engage with a struggling company beforehand, you may be able to negotiate directly with management and creditors.

[00:45:00] Kison: That makes sense. You also mentioned being a stalking horse bidder earlier—what’s the advantage of that?

Mimi Wu: Being a stalking horse can be very beneficial. You get to set the floor price, negotiate the purchase agreement on your terms, and receive bid protections like a breakup fee if someone outbids you.

It gives you a significant advantage in the process, but you also have to be prepared to follow through on the deal if no one else bids higher.

[00:45:30] Kison: So, essentially, if I position myself correctly, I either get the deal on favorable terms or I get paid a breakup fee if someone outbids me.

Mimi Wu: Exactly. That’s why a lot of buyers want to be the stalking horse. It’s a win-win if you structure it correctly.

[00:46:00] Kison: You mentioned that bankruptcy is expensive. How do companies budget for it?

Mimi Wu: It’s tough to budget accurately because it depends on the complexity of the case.

If a company has a pre-negotiated deal with creditors and a clear exit plan, the process might last only a few months, making costs more predictable. But if it’s a free-fall bankruptcy with litigation and creditor disputes, legal and advisory fees can escalate quickly.

One thing to keep in mind is that all professional fees—lawyers, financial advisors, restructuring experts—are subject to court approval. The judge reviews these fees to ensure they’re reasonable.

[00:46:30] Kison: So, all these fees get paid before creditors see any money?

Mimi Wu: Yes, professional fees are considered administrative claims, which means they get priority over most other debts.

This can be frustrating for unsecured creditors because they may see their recoveries shrink after court-approved fees are deducted from the estate. That’s why bankruptcy is a last resort—it’s not just expensive, but it can also reduce what’s available for creditors.

[00:47:00] Kison: It sounds like the moral of the story is: avoid bankruptcy if you can.

Mimi Wu: Exactly. If you have other options—renegotiating debt, raising capital, selling assets outside of bankruptcy—those should be explored first.

Once you’re in Chapter 11, everything becomes more complicated and expensive. That said, if bankruptcy is the only way to preserve value and continue operations, then it’s a powerful tool.

[00:47:30] Kison: What’s the craziest thing you’ve seen in distressed M&A?

Mimi Wu: Other than FTX, which is in a league of its own, one of the wildest cases I worked on involved a last-minute bidding war in the courtroom.

We had an auction lined up, but one of the expected bidders didn’t show. So, we went to court to approve the sale to the only remaining buyer. Just as we were about to finalize everything, another party came rushing into the courtroom with a higher bid.

We had to pause the hearing and negotiate on the spot. It completely changed the outcome of the sale. That kind of last-minute drama doesn’t happen often, but when it does, it makes for an exciting day in court.

[00:48:00] Kison: That’s insane. So, even after an auction, someone can still swoop in last minute and make a better offer?

Mimi Wu: Yes. Until the court formally approves the sale, there’s always a chance for another bidder to come in with a higher offer.

That’s why it’s crucial for buyers to move quickly and close deals as soon as they can. You don’t want to leave a window open for someone else to outbid you at the last minute.