Monday, May 4, 2009

action in this deal is going to be focused on whether Chrysler and the government can force this through over any objections of the secured lenders


The Ins and Outs of the Chrysler Sale

Update | 11:15 a.m. Sunday evening, Chrysler filed the documents related to the proposed sale of its business.

Chrysler, backed by the federal government and the United Auto Workers, is petitioning to sell its business to a “newco” in an expedited procedure under Section 363 of the bankruptcy code. The goal is to push the sale through over any objections from senior secured lenders and allow the Chrysler business to be purchased by Fiat, the UAW’s retirement trust and the United States and Canadian governments. Once the newco purchases the Chrysler business, it will change its name to Chrysler, and the old Chrysler will similarly change its name to something without Chrysler.

New Chrysler will then continue on its hopefully successful way. Behold the magic of bankruptcy at work.

The filing is more than 300 pages. It sets forth the mechanics and details of the Chrysler deal in legal terms. And a review of the papers, and the intricacy of the deal it describes, show without a doubt that a large number of people have been working on this potential bankruptcy filing for a fair bit of time. This is a well-thought out and nicely documented deal.

The filing also contains lots of public-relations nuggets that people can grab onto, depending upon their disposition. On page 211 of the documents (downloadable below) is the letter from the UAW to its retirees outlining the minor changes to the health care retiree trust, known as a VEBA, that are currently planned. The plan’s biggest cuts are to dental and vision coverage, but the UAW states that more changes will be made starting in 2010.

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the legal aspects of mergers, private equity and corporate governance. A former corporate attorney at Shearman & Sterling, he is a professor at the University of Connecticut School of Law. His columns are available at The Deal Professor blog.

This is a political punt to put off the harder decisions to the VEBA trustees, who will be majority independent, rather than the union. Also — and this is strange — one of the few cuts to retiree benefits occurring now is that retirees are losing their entitlement to erectile dysfunction medicine. Go ahead and laugh, but it seems odd to negotiate such a small detail with all that is going on. They must have really been looking for sacrificial lambs.

But for those who are deal junkies, the real interest in the papers is in the asset sale agreement. This is the operational document that will transfer the Chrysler business to the newco, if the bankruptcy court approves the transfer.

The most interesting part is on pages 67 to 73, which set forth the terms of the transfer of the assets and liabilities of Chrysler to the newco. This sale is not a stock sale, but rather a sale of assets. Asset sales are much more complicated, since the buyer actually picks and chooses the assets and liabilities that it purchases. The parties must therefore negotiate in painstaking detail which assets and liabilities are transferred.

The agreement takes a broad approach. It transfers all of the assets of Chrysler to the newco except for specified excluded ones. The assets not transferred include a number of plants and assets scheduled on the disclosure schedules to the agreement. These are unfortunately not all disclosed, though the excluded plants are listed on page 25.

The second part of any asset sale is the assumption of liabilities by the buyer. This is the most important, and where one of the main benefits of an asset sale typically lie. The reason is that the buyer can simply refuse to assume those liabilities it does not want to pay for. It can therefore make a clean break with the parts of the seller that are undesirable to keep.

Here, the Chrysler agreement is again overbroad in transferring liabilities in excessive amounts than normal to the buyer, among other things transferring accounts payable, environmental liabilities and obligations for warranties. The last is important, as it allows Chrysler to stand by its cars and preserve reputation.

But there are still exclusions from the transferred liabilities that will remain with the bankrupt Chrysler entity. This appears to include all claims for product liability that are pending. Selected litigation liabilities are also excluded, including workers’ compensation claims, and liabilities related to litigations brought by Getrag Transmission Manufacturing and Faurecia Interior Systems. Claimants here are likely to also be out of luck as they will now become unsecured creditors in bankruptcy.

Sorry, old Chrysler customers — it appears that if your warranty is expired or inapplicable, and your claim is one for negligence for product liability, you are one of these out-of-luck people.

The key to this deal is that the parties have put it on a short leash. The agreement states that if the Chrysler sale is not completed by June 15, 2009 — extendable by 30 days if antitrust clearance is still needed — then Fiat can terminate the agreement at any time. This allows Chrysler to argue to the bankruptcy court that the sale must be completed as soon as possible or otherwise will be lost. The deal will not close right away even if the court allows it: there is a target closing date in the first week of June. And the United States, Canada, the European Union (or any relevant member states of the European Union) and Mexico are required to obtain antitrust clearance for the approval.

Ultimately, the agreement is interesting more for what it transfers than anything else.

The real action in this deal is going to be focused on whether Chrysler and the government can force this through over any objections of the secured lenders. Here, I suspect that the case has been made, and we will find out in Monday’s 10 a.m. bankruptcy court hearing when these papers are considered. Update: Monday’s hearing on the sale motion has been adjourned to Tuesday at 2:30 p.m.

The value of Chrysler’s assets are uncertain at best, and the purchase price to be paid here is $2 billion cash, funded by the federal and Canadian governments. Moreover, Chrysler appears to be retaining a fair bit of assets, including the ability to sell the Viper assets. Compare this to the likely liquidation value of Chrysler, a large part of which consists of the scrap metal price for its factories.

The government has now passed the crisis stage of the bailout and is now in the less heroic business of day-to-day administration of its liabilities accrued during this time period. This is not only a political game, but one that is likely to push off costs and create more obligations far, far into the future. Remember, this is Chrysler’s second, and likely not last, drink at the federal well.

Download the Chrysler Sale Motion (PDF) »

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