The pre-pack asset sale plan: an effective tool for taking over a distressed French business

Taking over a distressed French business in the courts is a known (1985) and specific technique that has many advantages. This is known as a transfer of assets plan (“plan de cession”).

Advantages of the transfer of assets plan: cherry picking !

For the buyer, it represents an opportunity to acquire, on a turnkey basis, a complete and autonomous branch of activity under favorable conditions by derogation from ordinary law:

  • Directly or indirectly, by means of a new company created specially for the occasion
  • After due diligence work limited to the scope of the takeover
  • For an “entrance ticket” (purchase price), often low in comparison to traditional acquisition
  • By “cherry picking” among the following elements
    • number of employees
    • assets and inventories
    • contracts (those needed for the continuation of the activity: commercial leases, rental, leasing, distribution, supply of goods or services, etc.) by means of a so-called “forced” judicial assignment that does not require the other party’s consent
  • without debts and securities (with some exceptions and with the buyer’s consent)
  • without having to bear the dismissal costs of the employees not taken over: these costs are covered by the insolvency procedure (advance payments made by the national guarantee fund “AGS”)
  • without having to follow the specific procedure for informing employees under the “Loi Hamon” (not applicable in the case of pre-insolvency or insolvency proceedings)

The 5 drawbacks of the transfer of assets plan

Before making a formal offer, the buyer must be aware of the following 5 constraints:

  1. A tight schedule: the deadline for submitting offers is often very short, which reduces the timeframe for preparing the project
  2. Low level of information: especially if the management is preparing a continuation plan and is unwilling to collaborate
  3. An open and public process: risk of attracting competition from other buyers
  4. Risk of operational deterioration and loss of value
  5. No guarantee: the assets are taken over as they are

The implementation of a pre-pack asset sale plan strongly mitigates the first 4 drawbacks.

The pre-pack asset sale plan is a tool inspired by practice and American law

Created by the executive order of March 12, 2014, which codifies practice (example of the “CHAPITRE” bookstores), the pre-pack asset sale plan is American-inspired (pre-arranged sales) and illustrates the contractualization and the wealth of French bankruptcy law by consecrating such prevention tools as the “Mandat ad hoc” and, more particularly “Conciliation”.

Examples of pre-pack asset sale plans

  • FRAM in 2015
  • NEXTIRAONE in 2015
  • LA PATATERIE in 2017
  • WILLIAM SAURIN in 2017
  • TATI in 2017
  • DOUX in 2018: even if the Commercial Court of Rennes preferred to dismiss the request to implement a pre-pack asset sale plan, the fact remains that offers were prepared in the framework of amicable proceedings that significantly sped up the timetable for the court approval of the transfer of assets plan

The trend of pre-packs = bridging prevention tools and insolvency proceedings

Pre-pack asset sale plans complete the family of pre-pack plans, which includes the Accelerated Safeguard (“Sauvegarde Accélérée”) and its derivative, the Accelerated Financial Safeguard (“Sauvegarde Financière Accélérée”).

Pre-packs have transformed Conciliation: from a stand-alone preventive procedure (finding an agreement with major creditors), it went to being a compulsory preliminary phase for the treatment of difficulties. The preparation of the reorganization at the amicable and confidential stage is thus a full-fledged technique for improving the efficiency of insolvency proceedings. Pre-packs are bridges between (i) amicable and confidential pre-insolvency proceedings (prevention of business difficulties) and (ii) public bankruptcy proceedings. The trend is toward an increasing porosity between amicable and judicial tools for dealing with business difficulties.

The purpose of pre-pack asset sale plan = pre-negotiated transfer of assets plan

The pre-pack asset sale plan is designed to prepare, at the prevention-procedure stage (Conciliation or Mandat Ad Hoc) a total or partial transfer of assets, which will then be implemented in a “flash” bankruptcy procedure, which most often consists in judicial liquidation (“Liquidation Judiciaire”) with continuation of activities or in the context of a receivership procedure (“Redressement Judiciaire”), and more rarely in a Safeguard procedure or in an addition to a pre-pack plan (Accelerated Safeguard or Accelerated Financial Safeguard proceedings). The Commercial Court is able to approve a pre-negotiated transfer of assets plan (“Plan de Cession”).

There are therefore 2 distinct steps:

  • Step 1 : preparation of the takeover project by “Mandat Ad Hoc” or Conciliation
  • Step 2 : implementation of the takeover via bankruptcy proceedings

Different approach and purpose as compared to pre-pack plan

The pre-pack plan is a default solution, implemented in the event of failure of conciliation when it becomes impossible to reach a unanimous agreement with major creditors. To launch a pre-pack asset sale plan, however, it is not necessary to demonstrate the failure of an agreement with creditors. Indeed, the pre-pack plan leads to a safeguard plan (debt restructuring, maximum repayment of creditors over 10 years), whereas the pre-pack asset sale plan results in a partial or total transfer of assets plan (sale of a complete and autonomous branch of activity).

Phase 1 of the pre-pack asset sale plan: preparation of the takeover project in a “Mandat Ad Hoc” or Conciliation (confidentiality required)

Timeline for phase 1 of the pre-pack asset sale plan

  1. The executive officer meets with the ad hoc Agent (“mandataire ad hoc”) or the Conciliator (“conciliateur”) of the company’s choosing to present the difficulties and the mission the company wishes to entrust to the Agent or Conciliator
  2. Request by the executive officer to the president of the Commercial Court to request the opening of a “Mandat ad hoc or Conciliation procedure. Usually, the mission of the ad hoc Agent or the Conciliator is to facilitate the conclusion of an agreement with the creditors. Conciliation is limited to 5 months maximum. It is possible to start with a “Mandat Ad Hoc” and then to continue with Conciliation
  3. Order of the president of the Commercial Court appointing the ad hoc Agent or opening the Conciliation procedure
  4. Request by the executive officer to extend the mission of the ad hoc Agent or Conciliator to “a mission the purpose of which is the organization of a transfer of all or part of the business that could be implemented, if applicable, in the framework of a subsequent safeguard, receivership or judicial liquidation procedure. This is a voluntary act on the part of the executive officer. Neither creditors nor the Conciliator may make this request. The pre-pack asset sale plan may be anticipated from the very opening of the “Mandat Ad Hoc” or Conciliation, and in this case, it is not necessary to request an extension of the mission
  5. Consultation of creditors to gather their opinions on the extension of the mission. Their agreement is not necessary
  6. Approval of the ad hoc Agent or the Conciliator to integrate into its mission the organization of a pre-pack asset sale plan
  7. Request by the executive officer to the president of the Commercial Court to request this extension of mission
  8. Order of the president of the Commercial Court approving this extension of the mission
  9. Search for potential bidders by the ad hoc Agent or the Conciliator (confidentiality required). Often, in practice, the Agent or Conciliator seeks out contact with potential bidders (in the DOUX case, 430 potential bidders were identified, 130 were contacted, 3 engaged in discussions and only 1 made an offer. Then, 5 other bidders appeared just before phase 2) and publishes, anonymously (the name of the company and the type of mutual agreement procedure are not revealed), a call for tender with a deadline for filing an offer (for example in the newspaper “Les Echos” each Friday, on the “AJMJ” web site, etc.)
  10. Opening of the data room and negotiations with identified potential bidders
  11. Each potential bidder prepares its offer (legal conditions of admissibility).
  12. Filing of the offers with the ad hoc Agent or the Conciliator

Phase 2: implementation of the takeover via bankruptcy proceedings

A judicial sale in a closed-door process?

If the offers filed in the context of the process managed by the Agent or Conciliator fulfil the appropriate legal conditions and are satisfactory (in light of the report made by the ad hoc Agent or the Conciliator), the Court may (simple faculty) decide, after having sought the opinion of the public prosecutor, not to issue a call for tender nor to set a deadline for filing offers.

The objective of the bidder(s) having filed an offer in phase 1 is to avoid being in competition with other bidders (kind of primacy but no exclusivity) and to ensure that the Court quickly choose the buyer(s) (having the effect of limiting the loss of value). The fact that the court-appointed receiver does not publish a call for tender and that no deadline for filing offers is fixed contribute to this double objective of efficiency and speed. That is the principal advantage to the bridge created by the pre-pack asset sale plan between amicable and bankruptcy proceedings.

Timeline for phase 2 (public procedure)

1. Request by the executive officer to the Commercial Court to request the opening of a bankruptcy procedure and to implement the pre-pack asset sale plan. To open receivership or judicial liquidation procedures, the company must be insolvent

2. Hearing before the Commercial Court with the participation of the ad hoc Agent or the Conciliator (who has previously filed a report)

3. The Court must seek the advice of the Public Prosecutor prior to any approval of the pre-pack asset sale plan. The role of the Public Prosecutor is justified: it is intended to avoid abuse (opacity, connivance, exclusivity, etc.) in the implementation of the pre-pack asset sale plan; it is a guarantor of the legality of the operations (transparency, general interest, quality of the third party, etc.). For example, in the DOUX case, offers had been prepared by various bidders as part of an amicable procedure (phase 1). After the filing of offers in phase 1, the executive officer of the Group asked the Commercial Court of Rennes to open a judicial liquidation procedure with continuation of activities and the implementation of a pre-pack asset sale plan (phase 2). In its judgment of April 4, 2018, the Commercial Court of Rennes agreed to open a judicial liquidation procedure with continuation of activity, but rejected the option of the pre-pack asset sale plan, thereby taking note of the requisitions of the Public Prosecutor, according to which: “the current offers, although interesting, are not complete, accordingly he wants the search for bidders to be opened more widely for a sufficient amount of time” (extract of the minutes of the court decision)

4. Before opting for the pre-pack asset sale plan, the Court must also verify that the ad hoc Agent or the Conciliator has duly taken steps to ensure “sufficient advertising” of the preparation of the sale in light of the “nature of the activity”. This notion of sufficiency in relation to the nature of the activity is laconic and vague. For example, in practice, given a competitive market that requires a quick assignment (emergency to avoid a deterioration of operations and an impairment of assets), the requirement as to the level of advertising undertaken will be lower than in the case of a closed market with a low probability of finding bidders (need to make maximum efforts to find a buyer).

5. Court decision opening the bankruptcy procedure and confirming the option of a pre-pack asset sale plan. In its decision, the Court must set the date of the next court hearing where the offers are to be reviewed. In practice, there is a delay of 3 to 5 weeks between the opening of the bankruptcy procedure and the next court hearing. The appointment of the ad hoc Agent or the Conciliator as court-appointed receiver or liquidator is preferable to ensure effective continuity. In this case, only fees calculated in respect of the bankruptcy procedure remains applicable to the Agent or Conciliator (no double fees), which is likely to encourage the court to appoint the Conciliator as a liquidator or receiver. In the case FRAM, the receivership procedure was opened on October 30, 2015 and the court hearing for the review of offers was set for November 18, 2015

What happens if the Court refuses to apply the pre-pack asset sale plan?
 
In this case, the Court or the court-appointed receiver sets a deadline for filing offers (in practice, between 2 weeks and 2 months) and, if applicable, a court hearing for the review of the offers. This is what happened in the DOUX case: in its decision of April 4th, 2018 opening the judicial liquidation procedure with continuation of activity, the Commercial Court of Rennes fixed the deadline for filing offers for April 14th, the date for the court hearing to review the offers for May 15th, and the date of the court decision for May 18th.

6. 8 days at the latest before the court hearing to review the offers, other bidders who did not participate in phase 1 may file their offers. In practice, these new offers are often hostile to those already filed in phase 1, sometimes not credible or even unconfirmed. This is what happened in the DOUX case. In any case, these new offers may force the bidders involved in phase 1 to amend their offers in phase 2.

7. Report of the court-appointed receiver or liquidator on the offers and information of employees

8. No later than 2 working days before the court hearing to review the offers: last chance for bidders to improve their offers

9. No later than 1 working day prior to the court hearing to review the offers: opinion of the representative bodies.

10. Court hearing to review the offers

11. Court decision approving the transfer of assets plan. The Court’s procedure for selecting the buyer(s) is exactly the same as that which normally applies in the framework of a regular transfer of assets plan. The criterion of safeguarding employment remains, by far, the top priority of the commercial courts. Then come the criteria of the sustainability of the project and the price offered

The decision of the Court authorizing the pre-pack asset sale plan does not mean that it approves upstream the offer(s) filed in phase 1. Indeed, when deciding subsequently whether or not to validate the transfer of assets plan, the Court may decide to reject all offers, even those that were prepared and filed in phase 1. It can postpone the hearing to a later date, for example, if a new offer deemed serious but not finalized, and therefore out of order at in the current phase, is filed within the 8-day period.

Advantages of the pre-pack asset sale plan: doing things better in phase 1 and faster in phase 2

Confidentiality in phase 1 = preservation of the value of the company on its market

In theory, with the pre-pack asset sale plan, the takeover is negotiated and prepared in a confidential framework. Despite its difficulties, the target company preserves its reputation, its image and the confidence of its partners (customers, suppliers, landlords and creditors). It does not suffer the destructive side effects of economic value traditionally seen in public bankruptcy proceedings, which are amplified by the length of the implementation of a traditional assignment plan (which includes all the phases of preparation of offers).

In practice, however, this confidentiality is difficult to enforce, especially if employees are informed of the ongoing efforts to find a bidder. However, the risks of image and value deterioration are less important as compared to bankruptcy proceedings.

As for the creditors, the pre-pack asset sale plan also allows them to obtain a higher sale price and avoid the depreciation of assets. The pre-pack asset sale plan thus optimizes the offers.

Full cooperation of the target’s executive officer: a requirement and an advantage in phase 1

The transfer of assets plan may, however, be experienced by the executive officer as an expropriation: the risk is that he or she does not support the takeover project and challenges it by presenting a draft safeguard or continuation plan, often incompatible with a transfer of assets plan, even partial. The executive officer is the only one to be entitled to request that a mission of pre-pack asset sale plan be entrusted to the ad hoc Agent or the Conciliator. He or she therefore becomes a partner and not an opponent of the future transfer of assets plan. The pre-pack asset sale plan allows for the active participation of the executive officer in the takeover project. The climate is more serene, the executive officer collaborates closely and the quality of the information provided to the bidders is optimized. The takeover is prepared without tension, it is overseen by the ad hoc Agent or the Conciliator and is quickly implemented in transparency under the control of the Commercial Court and the public prosecutor.

Acceleration of the implementation of the transfer of assets plan in phase 2

This acceleration occurs during the switch into bankruptcy proceedings (phase 2) because the search for bidders has been undertaken in the context of an amicable procedure (phase 1), upstream from the judgment opening the bankruptcy proceedings. If the Court takes the path of the pre-pack asset sale plan (taking into account the opinion of the public prosecutor), it immediately sets the date for the hearing to review the bids. There is therefore no call for tender or deadline for filing an offer. This acceleration reduces the usual time for negotiations and sometimes allows the court-appointed receiver to obtain the substantial improvement of the offers filed in phase 1.

In practice, to meet the deadlines, the court-appointed receiver may decide to communicate a summary of the offers directly to all bidders: those having already come forward in phase 1 and those having made their appearance in phase 2.

For groups of companies, the prepack asset sale plan may be part of a tailor-made solution
 
A conciliation agreement applicable to the parent company and some subsidiaries may be combined with the pre-pack asset sale plans of other less strategic subsidiaries.

Requirements for the pre-pack asset sale plan

  • The ad hoc Agent or the Conciliator, often assisted by a merchant bank, must reconcile the duty of confidentiality (Article L.611-15 of the French Commercial Code), in practice illusory because difficult to enforce strictly, with “sufficient advertising”.
  • All the Agents of the project must ensure close collaboration between them to reach a consensus
  • To justify the pre-pack asset sale plan, bidders must be able to offer a truly complete and satisfactory offer on all its elements:
    • A binding offer with no conditions precedent
    • A complete offer with no missing items remaining to be completed
    • A scope as broad as possible with a preference for a full and not partial transfer of assets plan
    • A level of employment maximally preserved
    • A truly viable, coherent and serious project ensuring the sustainability of the activity
    • A purchase price usually higher as compared to a traditional transfer of assets plan
    • A perfect guarantee of payment of the sale price: bank wire transfer, first demand bank guarantee or a bank guarantee check
    • A strong and justified financing solution for the takeover project
    • While retaining some leeway, if necessary, to improve the offer in pahse 2, especially if new potential bidders come forward: increased purchase price, coverage of the entitlements to paid leave without prorating, financing the social plan, reclassification offers made to employees that are not taken over, etc.

How to improve the pre-pack asset sale plan

  • Apply to the receivership procedure all Articles of the Commercial Code pertaining to the pre-pack asset sale plan
  • Take better account of the notion of a group of companies
  • Reduce the period of 15 days for convening co-contractors and holders of securities, which is incompatible with the period of 8 days for other potential buyers to bid
  • Ensuring better coordination with labor law would also be useful to avoid slowing down the process of implementing the pre-pack asset sale plan
Pedron-Arnaud-1
Arnaud Pédron

Arnaud is Director at Taj, a Deloitte network entity, in the Restructuring service line. He has more than 15 years of experience at Taj and Deloitte, being fully dedicated to […]