An Efficiency Model of Section 363(B) Sales

Note — Volume 92, Issue 7

92 Va. L. Rev. 1639
Download PDF

Section 363(b) of the Bankruptcy Code allows a corporation to sell assets outside of the ordinary course of business without undergoing the rigorous process of confirming a Chapter 11 reorganization plan. Such a side door may encourage efficiency—enabling a quicker sale of assets that would diminish in value during the lengthy plan confirmation process—but may also encourage waste—enabling managers or creditors to advocate a hurried sale of assets at a sub-optimal price without the protection of confirmation procedures. These sales have become ubiquitous in large corporate reorganizations, but are largely under-theorized.

This Note offers a theoretical approach, deriving a framework analyzing the features of efficient sales. The framework demonstrates that the level and quality of court analysis of such sales drives whether a Section 363(b) sale is efficient or inefficient. Too much intervention increases the costs of a sale such that its value is less than that recoverable under a reorganization plan. Too little or poorly tuned intervention enables under-valuation and agency shirking which likewise reduces the value below the reorganization plan baseline. The framework provides a theoretical calculus from which to determine the optimal level of court intervention and which factors should matter to the decision-making process both by the court and the seller. Among others, the driving factors are the agency costs and the anticipated fluctuation in the value of the asset. This Note finally questions whether there may be a more efficient mechanism to perform the functions of valuation and minimization of agency costs.

Click on a link below to access the full text of this article. These are third-party content providers and may require a separate subscription for access.

  Volume 92 / Issue 7  

On Belling the Cat: Rawls and Corrective Justice

By Kevin Kordana & David Tabachnick
92 Va. L. Rev. 1279

Eliminating Corrective Justice

By Steven Walt
92 Va. L. Rev. 1311

Making and Keeping Contracts

By Daniel Markovits
92 Va. L. Rev. 1325

Is As Ought: The Case of Contracts

By Barbara Fried
92 Va. L. Rev. 1375