A "stalking horse agreement" is an agreement between a bidder looking to make a bid on a bankrupt company's assets and the bankrupt company itself in which the bidder agrees to assume the role of the "stalking horse" and make an initial bid on the company's assets. These types of agreements are complex, and have pros and cons for both the bidder and the company, so they should not be taken lightly.
Origin
The term "stalking horse" is an old hunting term that refers to the hunting technique of hiding behind the silhouette of a horse in order to sneak up on the animal being hunted. In a stalking horse agreement, this term is used as a metaphor to describe the parties involved in a bankruptcy auction: the company stands in as the hunter, using the "stalking horse" bidder to raise the bidding price for the rest of the bidders.
Roles of the Parties Involved
A stalking horse agreement is, essentially, an agreement between a bankrupt company and a potential bidder. The bidder that agrees to be the stalking horse makes an initial bid on the company's assets with the hopes of winning the assets. The company's hopes, however, are that the initial bid will drive up the cost of the assets when they go to auction. In every bankruptcy auction, a stalking horse agreement must be in place before the auction can commence.
Pros of a Stalking Horse Agreement
A stalking horse agreement has a number of benefits for both parties involved. The stalking horse has the opportunity to make the first bid on the assets and is often compensated for his risk through the reimbursement of expenses, break-up fees and the ability to help set bidding procedures. The company has the benefit of setting a price for its assets with the hopes that it will fetch an even higher price at auction.
Cons of a Stalking Horse Agreement
A stalking horse agreement is not without risks, however. A definite possibility exists that the stalking horse bidder could spend his time and money upholding the agreement and making the first bid, only to be outbid and lose the assets. It may also be difficult for the stalking horse to lower the price offered if the assets prove to have a lesser value. If it accepts a stalking horse agreement, the company faces the risk of selling its assets at a price that is lower than it had hoped for, though few, if any, companies would enter into such an agreement.
Tags: stalking horse, bankrupt company, company assets, horse agreement, horse agreement, stalking horse
