Crypto-tunities: Transaction strategies in the challenging crypto markets
13 July 2022
Indeed, market players with large cash reserves have indicated interest in using their cash on hand to help troubled crypto firms make it through the current challenging market. On the flip-side, crypto platform Voyager Digital and its subsidiaries, among others, have sought bankruptcy protection in the hope of finding a buyer or alternatively, finding a way to restructure without one. Other troubled crypto firms have sought different solutions. The range of possible transactions in this context appears endless. For example, a buyer could desire to purchase all of the equity of a distressed target through a stock sale or merger. Alternatively, a buyer could look to acquire all or a limited pool of the assets of a troubled or distressed crypto firm. The types of potential transactions do not end there. The distressed seller may want to conduct a carve-out or spin-off of non-strategic assets and related liabilities or businesses. Or, a potential buyer may want to conduct an “acqui-hire” wherein the buyer engages in a purchase transaction principally to acquire the distressed seller’s skilled workforce. In fact, transactions may also be driven by the desire to acquire a distressed seller’s technology more than its existing business through a license or even an option. Finally, a potential buyer may look to engage in a “loan to own” transaction in which the buyer advances funds on a secured loan basis to give it the opportunity to get inside early and to take the “pole position” in connection with any future distressed sale as described below. It appears that some well-funded market participants have already started to engage in this loan to own strategy.
Each of these types of transactions presents its own set of benefits and risks. And, with any distressed seller for which valuations have tumbled dramatically, the specter of fraudulent transfer claims arises if a sale takes place outside of formal sale process like a bankruptcy or foreclosure and it becomes difficult to determine whether an opportunistic buyer has paid fair or reasonably equivalent value for a distressed target or its assets and creditors are paid less than what they are owed. Distressed sales can take place quickly in a different ways that maximize value and efficiency for sellers and provide protection for buyers:
In court bankruptcy sale
A distressed seller like Voyager could sell its assets free and clear of claims and interests in the assets under Section 363 of the United States Bankruptcy Code. A relatively straightforward auction and sale process on a relatively quick timeline gives the debtor-seller a chance to maximize value and provides the successful buyer with the protection of a court order authorizing the sale of the assets free and clear of any claims or liens and granting protection from future fraudulent transfer attack. Importantly, bankruptcy court sale orders can override most contractual limitations on transfers of such contracts and secured creditors can credit bid all or part of their secured claims.
Out of court UCC foreclosure sale
To the extent a distressed seller has loans outstanding secured by the assets of its business, it could look to facilitate a “friendly” foreclosure sale by its secured lender(s) either to its existing secured lender(s) who may credit bid all or part of such secured claim or to a third party bidder. Notice requirements in foreclosure sales tend to be shorter and the opportunity to conduct diligence is more limited. As a result, the process is faster and less expensive than a bankruptcy sale which benefits the existing secured lender(s) and any potential buyer that has familiarity with the seller and its business. Courts generally recognize the validity of properly conducted UCC sales, but such sales do not have the same level of protection in respect of future fraudulent transfer or successor liability claims as bankruptcy sales (i.e. a court order) as most UCC sales are done without judicial intervention or supervision. For this reason, it is important to ensure that any UCC sale complies with well-recognized procedures and practices to protect the sale from any future legal attack. Moreover, the lack of judicial intervention means that buyers may have to comply with consent requirements for the transfers of contracts that may not be necessary in a bankruptcy sale.
Other key considerations
As noted up top, potential buyers may seek to gain an inside track by strategically purchasing an existing secured loan note from the lenders to a troubled company in light of the legal right of a secured lender in both a bankruptcy sale and a UCC sale to credit bid the outstanding loan as all or part of the purchase price at either type of sale. It will be critical for any such party to confirm perfection of the liens in the assets before negotiating the final purchase of the secured loan which will constitute the consideration or purchase price in either form of sale.
If a buyer looks to negotiate and close a sale outside of the bankruptcy or foreclosure processes, that buyer may want to obtain a “fairness opinion” from a well-regarded valuation firm to reduce the risk of fraudulent transfer claims from a distressed seller’s creditors.
Finally, it is important to understand exactly what is being purchased especially on an expedited basis: Crypto-firms may be brokerages or custodians for clients or both. As we noted in our recent alert, “Oh no, where’s my crypto? What happens to crypto assets when a custodian fails?” parties must determine “who has what rights” to the assets managed by the distressed seller. Market players with capital can successfully seize these crypto-tunities and reduce their risks if they tread carefully, but expeditiously through the process. For sellers confronting what appears to be an endless market winter, opportunities to maximize value in distressed times abound if they avail themselves of the proven strategies for the disposition of distressed assets.
The interdisciplinary A&O team remains ready to assist you and to answer any questions you may have with respect to any potential transaction.
This publication was co-authored by Jonathan Cho, David Esseks, Todd Fishman, Jonathan Flynn, Daniel Guyder, Laura Hall, Eugene Ingoglia, Elizabeth Leckie, Anthony Mansfield, Gregory Mocek, Bill Satchell, Robin Spigel, Barbara Stettner and Alex Touma.