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Breaking-Up the Code: A Method for Calculating Break-Up Fees in Value Decreasing Transactions

Norton Annual Survey of Bankruptcy Law
November, 2018, R. Stephen McNeill and D. Ryan Slaugh

In a recent decision from the Energy Future Holdings bankruptcy proceeding, Judge Sontchi, of the Bankruptcy Court for the District of Delaware, granted a motion for reconsideration, stripping a stalking horse purchaser of its previously approved $275 million termination fee. While the process utilized in reaching this decision was certainly unorthodox, an analysis of the historical underpinnings of break-up fees, under both Delaware and bankruptcy law, reveals that Judge Sontchi reached the proper decision on the merits. After discussing the historical rationale behind the allowance of break-up fees, this article will briefly discuss Judge Sontchi’s decision before proposing a methodology for analyzing break-up fees in bankruptcy transactions. With that methodology in place, the article concludes with a recommended practical approach to limit break-up fees where the successful bid generates less value to the estate than the original stalking horse bid.

For the full article or for more information on the Norton Annual Survey of Bankruptcy Law, Volume 2018, visit Thomson Reuters.