November 2006, Volume 92, Issue 7
An Efficiency Model of Section 363(B) Sales
by Jason Brege
92 Va. L. Rev. 1639 (2006)
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Section 363(b) of the Bankruptcy Code allows a corporation to sell assets outside of the ordinary course of business without undergoing the rigorous process of confirming a Chapter 11 reorganization plan. Such a side door may encourage efficiency—enabling a quicker sale of assets that would diminish in value during the lengthy plan confirmation process—but may also encourage waste—enabling managers or creditors to advocate a hurried sale of assets at a sub-optimal price without the protection of confirmation procedures. These sales have become ubiquitous in large corporate reorganizations, but are largely under-theorized.
This Note offers a theoretical approach, deriving a framework analyzing the features of efficient sales. The framework demonstrates that the level and quality of court analysis of such sales drives whether a Section 363(b) sale is efficient or inefficient. Too much intervention increases the costs of a sale such that its value is less than that recoverable under a reorganization plan. Too little or poorly tuned intervention enables under-valuation and agency shirking which likewise reduces the value below the reorganization plan baseline. The framework provides a theoretical calculus from which to determine the optimal level of court intervention and which factors should matter to the decision-making process both by the court and the seller. Among others, the driving factors are the agency costs and the anticipated fluctuation in the value of the asset. This Note finally questions whether there may be a more efficient mechanism to perform the functions of valuation and minimization of agency costs.
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