The goal of a sale process under section 363 of the United States Bankruptcy Code is for a debtor to maximize the value of estate property for the benefit of all parties-in-interest. But what happens when the only party that is interested in purchasing the estate property is a former insider who is unwilling to submit a binding offer without certain bid protections, such as a breakup fee and expense reimbursement? This is the predicament that the Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) recently faced, ultimately denying such protections without prejudice. The decision serves as a helpful reminder of how debtors should conduct a bidding process, evaluate bids, and what terms interested parties should expect a bankruptcy court to find improper. 

Background

Between September 19, 2023, and October 20, 2023, UpHealth Holdings, Inc. and six of its affiliates (collectively, “UpHealth”) filed chapter 11 bankruptcy petitions in the Bankruptcy Court. On July 17, 2024, UpHealth filed a bidding procedures motion to market, auction, and sell its equity interests in a non-debtor subsidiary, TTC Healthcare, Inc. (“TTC”), which provides behavioral inpatient and outpatient treatment programs and was previously referred to as UpHealth’s “crown jewel.” However, UpHealth had no stalking horse bidder for TTC, so it enlisted the help of its investment banker to market TTC’s equity. The Bankruptcy Court approved the bidding procedures motion on August 6, 2024.

NewCo’s Commitment Letter

Unfortunately, despite contacting over 150 prospective buyers and executing 50 non-disclosure agreements, UpHealth only reported one meaningful indication of interest (the “Commitment Letter”) before the September 12, 2024, bid deadline. The Commitment Letter was from a newly organized special purpose acquisition entity (“NewCo”) formed by UpHealth’s former CEO and TTC’s former chairman, Martin S.A. Beck, and Freedom 3 Capital. NewCo proposed to purchase TTC’s equity for a cash purchase price of $11 million.

Unlike a traditional qualified bid to purchase a debtor’s marketed assets under section 363 of the Bankruptcy Code, NewCo’s Commitment Letter was not a binding commitment. Instead, the Commitment Letter stated that NewCo’s “goal is to execute a definitive share purchase agreement,” and contained the following terms:

• Exclusivity Period: For up to four weeks after execution of the Commitment Letter, UpHealth and TTC shall not solicit, discuss, negotiate, facilitate any submission of a proposal, or consummate any agreement related to TTC’s equity with any other party other than with NewCo. 
• Right of First Refusal “ROFR”: NewCo has the right of first refusal related to any competing bid UpHealth receives for TTC’s equity during the Exclusivity Period.
• Prior Approval: Before executing any definitive share purchase agreement, Freedom 3 Capital must first obtain final approval from its Investment Committee.
• Breakup Fee: $750,000.
• Expense Reimbursement: $500,000 cap.

On September 22, 2024, UpHealth filed a supplement to its bidding procedures motion requesting that the Bankruptcy Court authorize UpHealth to enter into, and perform under, the Commitment Letter and for the Commitment Letter to be binding on UpHealth (the “Private Sale Supplement”).

U.S. Trustee’s Objection to Private Sale Supplement

On October 7, 2024, the United States Trustee (the “U.S. Trustee”) objected to the Private Sale Supplement. In its objection, the U.S. Trustee argued that the breakup fee and expense reimbursement are (i) a “poison pill” meant to “chill the bidding process,” (ii) “value-destructive to the estates,” and (iii) “serve as a penalty against [UpHealth] for evaluating any other late materializing interest.” Moreover, the objection cited Third Circuit caselaw in support of the position that breakup fees are only allowable when such fees are “necessary to preserve the value of the estate” and an inducement for a party to negotiate an agreement, conduct due diligence, and submit a bid. In this case, the U.S. Trustee asserted that no such inducement was necessary because (i) the marketing process for TTC’s equity concluded with “no other actionable proposals identified” by UpHealth, and (ii) as TTC’s former chairman and UpHealth’s former CEO, Mr. Beck, “did not need to undertake any due diligence to make a bid, did not need an incentive to make a bid, and does not need expense reimbursement.”

Denial of Private Sale Supplement

At the October 9, 2024 hearing, the Bankruptcy Court denied UpHealth’s proposed Private Sale Supplement. Siding with the U.S. Trustee, the Bankruptcy Court found the breakup fee, expense reimbursement, Exclusivity Period, and ROFR “too rich” for an “uncommitted” indication of interest subject to further diligence. 

Specifically, the Bankruptcy Court stated that it had not seen a “no shop” provision, i.e., the Exclusivity Period and ROFR, since the 1980s and did not understand why such provision was necessary. Moreover, the Bankruptcy Court noted that Mr. Beck’s Commitment Letter was “problematic” from a “bankruptcy court systemic perspective,” given Mr. Beck’s status as a former insider. Accordingly, the Bankruptcy Court concluded that UpHealth had not demonstrated that the Commitment Letter’s bid protections were necessary to preserve the value of the estates, declined to approve such protections, and noted that the parties could come back to seek approval of the bid protections after NewCo signs a definitive agreement or there is an alternative transaction.

On November 29, 2024, NewCo notified UpHealth that it was discontinuing its efforts to purchase TTC and no sale of TTC or any portion thereof was consummated, resulting in TTC’s operations being shut down.

Takeaways

This decision demonstrates the limitations of nonbinding bids to purchase estate property. Receiving no offers for assets that were formerly referenced as an estate’s “crown jewel” is disappointing to say the least. Although it is unclear why NewCo’s bid was not binding, it is possible that after a dismal marketing process, Mr. Beck, as TTC’s former chairman, agreed to publicly disclose an indication of interest in the hope of encouraging at least some of the 50 parties that executed non-disclosure agreements to reconsider whether to submit a bid. Not only would a binding bid liquidate one of UpHealth’s remaining assets, but it would also likely produce a public benefit by keeping a treatment facility open for its patients who may not have access to alternative healthcare services. Indeed, the continuation of TCC as a going concern is likely far superior to the alternative—liquidation and reduced healthcare services to the impacted community. As a court of equity, this is likely one factor the Bankruptcy Court considered before denying UpHealth’s requested relief.

Regardless of the parties’ intent, and notwithstanding potential public health benefits, future debtors can take heed that a court will not likely approve the entry of an order allowing a debtor to enter into a nonbinding commitment letter that (i) is contingent on further diligence and third-party approval, (ii) is from a former insider that does not need to conduct diligence, (iii) stems from a bidding process where no party submitted a bid for the assets, and (iv) when the case is over one year old, there is no conceivable need to rush the process, and the parties-in-interest can afford to grant a prospective bidder more time.

Moreover, even if the Commitment Letter had been binding, the Bankruptcy Court took issue with NewCo’s requested bid protections, the Exclusivity Period, and ROFR. First, when requesting bid protections, especially if the bidder is a former insider, the bidder should ensure that the breakup fee and expense reimbursements are arguably “necessary to preserve the value of the estate” and a percentage of the purchase price that aligns with recent comparable sales. Potential bidders and debtors should question whether the protections are necessary on account of the interested party’s diligence and negotiation expenses, or if the party will incur minimal expenses. Furthermore, bidders should be thoughtful before incorporating an Exclusivity Period or ROFR, as such provisions may be scrutinized by a court, especially in the context of a non‑binding bid.