ANALYSIS: Battling the Antitrust Monster in Chapter 11

The recent approval of the sale of bankrupt energy drink maker Bang Energy LLC to its rival Monster Beverage Corp. for $362 million illustrates how an antitrust review can severely complicate a bankruptcy case.

And the Federal Trade Commission’s proposed changes to the Hart-Scott-Rodino Act’s reporting process for mergers and acquisitions will further complicate Chapter 11 sales and may exacerbate the conflict between the goals of antitrust and bankruptcy law.

Chapter 11 debtors’ counsel and prospective buyers’ counsel should therefore strategize in advance to address antitrust issues—and contemplate the potential impact of the FTC’s proposed changes on bids and valuations.

Laws with Dueling Purposes

The goal of Chapter 11 bankruptcy is to provide a financially distressed debtor with relief from creditors and an opportunity to reorganize. The debtor and the creditors’ committee (if one is appointed) both seek to maximize the value of the bankruptcy estate. They may do so through a Chapter 11 plan that restructures debts or through a company sale under section 363 of the Bankruptcy Code.

Antitrust on the other hand, seeks to preserve competition—and bankruptcy transactions are not exempt. Accordingly, when a sale of assets under section 363 is to a direct competitor of the debtor, antitrust enforcers may view the deal with skepticism. They may demand more information about the transaction, or may insist that specific assets go to a different purchaser than the highest bidder.

And it shouldn’t be surprising that often the highest and best offer for assets—which would provide the greatest recovery for the debtor’s creditors—might result in industry consolidation that could have an anticompetitive result.

Presently, any merger or acquisition in excess of $111.4 million will trigger filing and waiting requirements under the Hart-Scott-Rodino Act. In other words, if your Chapter 11 bankruptcy case is big enough, chances are you will have to deal with antitrust concerns.

Because time is money in bankruptcy, the Bankruptcy Code offers abbreviated timelines for certain HSR-reportable transactions. If a debtor sells its assets under section 363, the initial 30-day HSR waiting period is shortened to 15 days. The waiting period doesn’t commence until both the buyer and seller have filed notifications with the FTC. Indeed, in 363 sales, the “stalking horse bidder” (an initial bidder who sets the minimum price for the assets) will often file its notification early in the process and have an advantage over competing bidders as a result.

Bankruptcy Battles Antitrust in Vital Pharmaceuticals

The tension between antitrust and bankruptcy was most recently illustrated in the Monster-Bang acquisition.

Vital Pharmaceuticals Inc. (parent of Bang Energy) and its affiliates filed Chapter 11 bankruptcy on October 10, 2022. The move was spurred in large part by a $293 million jury award against the company for false advertising and other alleged claims in favor of its bitter rival, Monster.

The debtors filed a motion for a sale of substantially all of the debtor’s assets under section 363 in January. It’s typical for Chapter 11 debtors to have a stalking horse bidder lined up when filing a motion for a 363 sale; however, the Bang Energy debtors had no stalking horse when they filed their sale motion. This may have had an effect on the FTC’s review, as explained further below. The bankruptcy court approved bidding procedures, and set May 22 as the deadline for parties to submit bids.

There were multiple bids, but the debtors determined that only one was acceptable for substantially all of the debtors’ assets—and it came from a subsidiary of Monster. In connection with the sale, Monster agreed to settle its litigation. Because of the value of the proposed transaction, it was subject to the Hart-Scott-Rodino Act’s pre-merger notice and waiting requirements.

On June 22, the FTC indicated that it was going to issue a second request as part of its HSR review, a process that could take up to a year. Because the debtors had no other viable options and their post-petition financing was going to mature on June 30, the debtors informed the bankruptcy court that they would be forced to liquidate if the HSR waiting period didn’t terminate early. Accordingly, the debtors teed up an emergency motion to convert the case to Chapter 7.

It’s likely that the FTC ran out of time in its review because of the abbreviated 15 days, and thus saw the need to issue the second request to gain additional time. If there had been a stalking horse bidder, the FTC may have had more time to complete its review.

The debtors sought other bids while continuing discussions with the FTC. Ultimately, the FTC backed down and issued an early termination letter to debtors’ counsel on June 30, effectively ending the review process. The sale was approved at a court hearing on July 12, and should close no later than August 3.

It appears that the debtors and the buyers in the Vital Pharmaceuticals case were able to convince the FTC to terminate its review by successfully asserting the failing firm defense. In limited situations, parties to a transaction can completely avoid an antitrust review if the elements of the defense are satisfied. Bankruptcy alone, however, is not enough for this defense to apply.

More Disclosures, More Friction

On June 27, the Justice Department and the FTC announced proposed changes to the disclosures required from merging parties for pre-merger notification under Section 7 of the Clayton Act. The proposals add whole categories of information to the disclosures, and are anticipated to add substantial time and cost to compliance.

Acquisitions under section 363 of the Bankruptcy Code are likely to become thornier as a result. That’s because the new, beefed-up disclosures in the proposed HSR regulations pose problems for both parties and enforcers when time is tight.

The problem is two-fold. First, practitioners estimate that the new HSR disclosures will take months to pull together. That delay will put a premium on beginning the process of assembling the HSR notification well before a bid is finalized.

Second, the new disclosures make a 15-day review period all but unworkable. If it was tight for antitrust regulators to review a section 363 purchase under the old disclosures, it may be impossible to review a much larger disclosure in the same short time.

In reviewing a proposed 363 sale, therefore, the FTC will likely have to seek a timing agreement or make a second request to secure enough time to do so. Monster’s purchase of Bang Energy out of bankruptcy shows the friction that can result, and why debtors and prospective purchasers in 363 sales should start planning for enhanced disclosures and longer review.

As a result, the FTC’s heightened requirements may lead to lower recoveries for unsecured creditors in affected Chapter 11 cases—heightening the conflict between the goals of antitrust and bankruptcy law. Potential stalking horse bidders may factor the cost of the HSR review into their offering price and also argue that this warrants stronger bidding protections such as larger break-up fees and higher minimum bidding requirements.

At the same time, the debtors may see the need to heighten requirements for qualified bidders so that they will be well on their way to satisfying the new requirements. Competing bidders will also be at a greater disadvantage compared to the stalking horse because the stalking horse will likely have had a longer time to have its HSR review completed. Ultimately, this all may result in fewer competitive bids and reduced opportunities to enhance the value of the bankruptcy estate.

Additionally, the new requirements threaten to multiply administrative expenses (predominantly attorney fees of the debtor and creditors’ committee counsel) that must be borne by the bankruptcy estate. The new requirements will lengthen the time of the bankruptcy case and create a need for lenders to extend DIP financing when they would ordinarily prefer a speedy sale.

Tight Deadlines Getting Tighter

The FTC has suspended its early termination program, but continues to grant early termination where necessary to permit certain deals to close. For example, where the FTC has issued a second request, then determined the deal poses no risk before the acquirer has responded, an early termination is the only way to permit the deal to close (due to the technicalities involved in how the waiting period runs).

That’s what happened in the Monster-Bang acquisition: The FTC issued a second request and then reconsidered. Indeed, this scenario might wind up happening regularly if the agency is forced to issue second requests to avoid waving through potentially harmful consolidation under an unrealistic statutory deadline.

Obviously, under that circumstance, the parties would save themselves time and money by agreeing to an extension of the 15 days, or pulling and refiling their HSR forms. Even beginning to pull together a response to a second request is a costly endeavor, so parties should plan ahead to avoid a second request if possible.

Given estimates that HSR filings could take months to assemble under the proposed new rules, potential bidders for assets in 363 sales could be required to get a jump on the process by certifying that they’ve substantially begun assembling their materials for an HSR filing before placing a bid. Because speed matters in 363 sales, if an acquisition is likely to trigger an HSR filing, parties are well advised to plan ahead.

Bankruptcy Strategies for a Bigger Antitrust Monster

Debtors in bankruptcy and their secured lenders often favor a 363 sale over a traditional Chapter 11 plan due to its simpler process and shorter timeline. However, given the proposed changes to HSR disclosures, if the debtor has the ability to conduct a standalone reorganization, this may avert an HSR inquiry altogether. It’s possible that this may not be the most value-maximizing transaction, but cost or timing concerns might make avoiding HSR the better option.

Alternatively, the debtors might want to work with antitrust counsel on ways to structure the transaction so that it falls below the HSR reportable amount, to prepare ahead for disclosures, or to negotiate before filing with antitrust regulators to streamline the process.

Debtors and buyers’ counsel should also acquaint themselves with the failing firm defense, which, along with its compatriots the flailing and ailing firm defenses, can apply in bankruptcy sales. While the FTC’s Bureau of Competition proclaimed in May of 2020 that this defense is “often made, but rarely accepted,” it’s difficult to measure its real effect because the HSR negotiations are secret.

In any case, if a transaction potentially triggers the HSR filing and waiting requirements, debtors’ and buyers’ counsel should involve antitrust counsel as early as possible in the process.

Bloomberg Law subscribers can find related content on our Bankruptcy Practice Center and Chapter 11 resources, as well as our Antitrust Practice Center page.

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