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US Sale of the Century


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Lehman Brothers Article-Five days in September

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US Sale of the Century

  1. 1. USA US Sale of the Century: Five Days in September n September 2008 Lehman 11 filing to the closing of the sale. approved by the Bankruptcy I Brothers Holdings Inc. and Lehman Brothers Inc. (collectively, “Lehman”) sold their While the sale order referenced “competitive bidding” and other “qualified bids,” Barclays was the Court. Lehman’s motion indicates that the original intent of the sale was a “wash” whereby Barclays historically coveted brokerage only realistic buyer. would pay fair value for the assets business to Barclays Capital Inc. This “sale of the century” has it was acquiring, when in fact the Many believe the sale was spawned litigation and deal was actually structured to give necessary to prevent a worldwide commentary around the globe. Barclays an immediate and economic meltdown given The most significant litigation that enormous windfall of Lehman’s tentacles throughout the emerged from the sale was approximately $11 billion. This global economy. In fact, Lehman’s Lehman’s own motion to have the was accomplished because the key Chapter 11 filing on 15 September terms of the sale modified, which Lehman negotiators were also key 2008 was valued at $639 billion, is currently pending before the employees who were transferring DAVID H. CONAWAY the largest Chapter 11 in U.S. United States Bankruptcy Court in to Barclays as a result of the sale. history. It involved 7,000 legal the Southern District of New A controversial component of Shumaker, Loop & Kendrick, entities and spawned 75 related York. The business and legal the transaction was the LLP (USA) insolvency proceedings throughout communities are closely watching “Clarification Letter” which was the world. Despite (or perhaps the outcome of this litigation on signed after the sale order was because of) the enormity of the the efficacy of the Section 363 entered. The “Clarification Lehman Chapter 11, the sale of sales process and the finality of Letter,” among other things, Lehman’s brokerage business was Section 363 sale orders. Is Lehman terminated a Repurchase accomplished in five days, an trying to renegotiate the deal after Agreement between Lehman and unprecedented accomplishment the fact, or does the Barclays where Barclays given the size, importance and unprecedented magnitude and transferred $45 billion cash to complexity of the assets being sold speed of this sale warrant a Lehman in exchange for $50 and the transaction itself. Lehman modification to the sale order to billion of securities, subject to proceeded under Section 363 of insure the original intent of the Lehman’s repurchase of the the U.S. Bankruptcy Code transaction? securities at a later date for $45 (regarding sales of assets) to effect According to Lehman’s billion. By terminating this this transaction. However, the sale motion to modify the Section 363 agreement, Barclays received an had none of the usual procedures sale order, there were material undisclosed $5 billion discount. and protections normally components of the transaction that Lehman asserted that under associated with a Section 363 sale. were not disclosed to the Section 559 of the Bankruptcy The sale followed an extremely Bankruptcy Court and the sale Code (dealing with Repurchase truncated process involving only transaction that closed differed Agreements), the excess of market five days from Lehman’s Chapter materially from the transaction prices over stated repurchase prices40 Winter 2010/11
  2. 2. USAare property of Lehman’s estate, Lehman’s broker-dealer business, Lehman-Barclays trial due to theand thus termination of theRepurchase Agreement violatedthe Bankruptcy Code. The terms where once an agreement was struck, both sides continued to negotiate terms as Lehman’s assets potential impact on the sanctity of Section 363 sale orders. The Bankruptcy Court has a delicate “ immediate gain The for Barclays wasof the “Clarification Letter” continued to deteriorate in the balance of preserving the finalityallegedly were not disclosed, and wake of its collapse. Barclays of sale orders and insuring the never disclosed to orconstituted a material alteration to asserted that it received far less process, including adequate approved by thethe transaction approved by the than the $50 billion in securities it disclosure, generates the maximumCourt. was supposed to get in exchange value for creditors. If the Bankruptcy Court In addition to the $5 billion for $45 billion in cash it advanced Bankruptcy Court modifies thediscount, and due to the fear thatthe value of Lehman’s assets wererapidly deteriorating, Lehman to Lehman. This short fall created “massive uncertainty and risk” for Barclays that was not resolved for sale order as Lehman requests, many will use the Court’s modification to challenge future ”asserted that there was a scramble months. Because the securities section 363 sale orders. While suchwithin Lehman to deliver to were actually worth only slightly a ruling would surely create someBarclays $5 billion of other assets more than $45 billion, the level of uncertainty for futurewithout consideration or disclosure embedded gain of almost $5 Section 363 sales, perhaps Lehmanto the court. The additional assets billion was a fiction. Barclays’ will be “limited to its facts,” andincluded approximately $800 court filings asserted that had the viewed as an extraordinary rulingmillion of the so-called “15c3-3 deal turned out differently such regarding an extraordinaryassets,” at least $1.9 billion of that Barclays incurred a loss transaction in an extraordinaryunencumbered assets in so-called because the assets were worth less time in our economic history. In“clearance boxes,” and than anticipated, Barclays would the Lehman case itself, aapproximately $2.3 billion of not have the right to come back to modification to the sale order isadditional assets. court a year later to change the estimated to create a nearly 16 Lehman further alleged that deal. cents per dollar recovery forBarclays was to assume $2 billion Lehman’s legal arguments Lehman’s 2008 bonus liabilities to included the following: (1) the sale A fundamental policy ofLehman employees who failed to maximise the value of the Chapter 11 is to preserve assettransferred to Barclays, and Lehman bankruptcy estate and the values for the benefit of theanother $1.5 billion for cure return to creditors, (2) under debtors’ estates and their creditors.payments for assumed executory Section 549 of the Bankruptcy Bankruptcy Courts in the Unitedcontracts. Lehman maintained Code, there were unauthorised States are accustomed to quickthat Barclays actually assumed no post-petition transfers of the Section 363 sales to accomplishmore than about $1.7 billion in debtor’s assets of at least $8.2 this purpose. What made theliabilities, compared to the $3.5 billion, based on “secret Lehman sale unique is that it wasbillion it had agreed to assume. agreements” which are the largest such sale in bankruptcyLehman also highlighted that unacceptable in bankruptcy as history, and it occurred in only fiveBarclays publicly announced in they deprive sellers of full market days, in an effort to stabilise theFebruary 2009 that it had enjoyed value, (3) Lehman executives United States’ economy and worlda gain of $4.2 billion “on colluded with Barclays to create a markets. It is impossible for a saleacquisition” of Lehman assets. sweetheart deal for Barclays, and of this enormity to have all detailsThis immediate gain was (4) through mistake, resolved prior to sale approval orattributable to “the excess of the misrepresentation and newly closing. Necessarily, thefair value of net assets acquired discovered evidence, it is clear that Bankruptcy Court approved aover consideration paid … on Barclays received an $11 billion transaction with many details leftacquisition.” Lehman maintained discount and failed to assume for further negotiations. Thethe “gain on acquisition” was liabilities for borrowers and Bankruptcy Court clearly gaveunderstated by at least $6 billion executory contract cure payments. Lehman and Barclays virtual cartebecause of various post-closing The trial on Lehman’s motion blanche to consummate a deal toasset and valuation adjustments. to modify the sale order, including save Lehman’s brokerage businessThe immediate gain for Barclays Barclay’s defences, concluded in and prevent a feared catastrophewas never disclosed to or approved October 2010. A ruling by the in the global economic the Bankruptcy Court. Bankruptcy Court is expected in While this strategy allowed a truly In response to Lehman’s the first quarter of 2011. Given the titanic Section 363 sale to bevarious assertions, Barclays has $11 billion at stake, there will negotiated, approved and closed inposited that Lehman is simply undoubtedly be appeals to the warp speed, the sale hastrying to rewrite the deal because it United States District Court, the predictably precipitated an $11was “too good for Barclays.” United States Second Circuit billion lawsuit challenging theMoreover, Barclays maintains that Court of Appeals and perhaps the terms of the transaction, and mayLehman’s assertions are “a gross U.S. Supreme Court. The business alter Section 363 sales in thedistortion” about the complex and legal communities are closely future.negotiations over the sale of watching the outcome of the Winter 2010/11 41