Stalking Horse Bidder
A stalking horse bid is a court-supervised process under Chapter 11 whereby a bidder makes an initial offer as part of a larger auction process. The term originated as an old hunting expression referring to the use of a horse to hide behind to get closer to the prey.
Before a bankruptcy court approves the sale of a debtor’s assets, a competitive bidding process culminating in a court-supervised auction is usually required. The debtor/seller will seek a potential purchaser willing to make a lead bid, or become the stalking horse. This method allows the distressed company to avoid low bids on its assets. Essentially, the stalking horse sets the floor for other bidders.
The stalking horse bidder is afforded certain protections including a break up or termination fee (typically ranging from 1% - 3% of the purchase price) if another offer is ultimately approved by the court. Other conditions of the bid include (i) a restriction in time for the other bidders, (ii) a restriction to cash only bids, (iii) a deposit, and (iv) the requirement that bids be made in minimum increments. These protections offset the risk and expense a stalking horse bidder must incur in making the first bid. The process can be used in a variety of situations from the sale of no-core operations to the sale of the entire business as a going concern.