Managing the Preparation, Delivery and Review of the Disclosure Schedule in Section 363 Transaction Can Help Avoid a Shipwreck

With the complexity and unpredictability of bankruptcy proceedings – which can often cause the asset sale transaction to move at either a hurried or lethargic pace at the discretion of the bankruptcy court –preparing a real-time disclosure schedule for an operating health care facility becomes an especially formidable challenge. Too little time to prepare a disclosure schedule, and you have a fire drill. Too much downtime between initial preparation of the disclosure schedule and closing, and you are forced to recreate the disclosure schedule after significant lag time. In either case, the orderly preparation, delivery and review of key components of the disclosure schedule can play a pivotal role in achieving a smooth closing of the asset sale transaction.

Managing the uncertainty that comes with preparing a disclosure schedule in the context of a Section 363 sale in bankruptcy is important. In our practice, we have learned that paying attention to some key considerations can smooth out the process and keep the sale transaction on track:

1. Consider the impact of the sale order. Generally in asset sales, the buyer seeks a full disclosure as to the assets it’s buying and the seller seeks to limit the representations and warranties that could lead to post-closing claims or a reduction of the purchase price. A benefit of a sale under section 363 the Bankruptcy Code is that under the sale order issued by the bankruptcy court, the seller’s assets will be transferred to the purchaser free and clear of most liens and claims. As a result, certain representations and warranties, and their corresponding disclosures, may be of little import. Accordingly, it makes sense to consider the significance of the sale order when drafting representations and warranties that call for the production of lengthy and time-consuming disclosure schedules. Attention and resources should be focused where the sale order might have limited effect, such as successor liability for certain regulatory matters like governmental health care program liability.

2. Consider setting firm dates to deliver certain schedules, rather than having them all due at closing. While certain schedules might require revision up until the date of closing (e.g., a list of assigned or rejected contracts or a list of pending litigation), other schedules may be less vulnerable to change (e.g., an organizational chart or a list of leased real property). To ease the burden of delivering all schedules upon the occurrence of a potentially moving target, consider setting defined delivery dates (e.g., by September 1, 2016) prior to closing for certain schedules. While this might necessitate adding as a closing condition that the seller bring down any already-delivered schedules at closing if necessary, it at least encourages both counsel and sellers to conduct the diligence and prepare the schedules in advance.

3. Establish and maintain communication channels with the seller representatives who know the business. In the context of a bankruptcy asset sale, the already distressed seller may have insufficient resources to respond to every demand from the multiple stakeholders involved, including creditors, trustees, regulatory agencies, a shareholders committee and the bankruptcy court. That said, only the seller is familiar with its assets or has access to the documentation needed to populate the disclosure schedule. From the outset, identify who at the seller knows, or has access to, the information needed to prepare the disclosure schedule and establish lines of communication with these people. Creating an easy-to-use data room (and an expectation that these identified people upload documents as soon as they are received by the seller) and scheduling standing check-in calls are ways to create and maintain communication throughout the process.

With these simple considerations in mind, it may be possible to smooth out the disclosure schedule process to limit its ability to derail the asset sale transaction in a bankruptcy proceeding.

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