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that higher bids are sufficiently higher to cover the amount of the breakup fee that would become payable to the initial bidder.
Some courts have approved such breakup fees in bankruptcy cases based on the debtor's business judgment that they are necessary to stimulate the initial bidder and because they are customary in the nonbankruptcy context of corporate takeovers.143 Other courts have identified various factors that must be considered before approving a breakup fee.144 Courts have denied approval of breakup fees where there was insufficient evidence it was necessary to induce further bidding, or where there was a concern the fee would chill other bids.145
The Third Circuit recently addressed the propriety of breakup fees and upheld the bankruptcy court's denial of a breakup fee.146 The Third Circuit held that the bankruptcy court was justified in concluding that the fee was not necessary to stimulate bidding, since the unsuccessful bidder bid without the assurance of such a fee, and the very active bidding up to a price more than $52 million more than the original bid suggested no breakup fee was needed to stimulate bidding.
In negotiating a breakup fee, parties should be careful to specify whether it is a fixed fee or is intended only to cover actual expenses up to a maximum amount.147
143 Official Committee of Subordinated Bondholders v. Integrated Resources, Inc., 147 B.R. 650 (S.D.N.Y. 1992); In re 995 Fifth Avenue Associates, L.P., 96 B.R. 24 (Bankr. S.D.N.Y. 1989).
144 In re Hupp Industries, Inc., 140 B.R. 191 (Bankr. N.D. Ohio 1992)(seven factors).
145 In re Tiara Motorcoach Corporation, 212 B.R. 133 (Bankr. N.D. Ind. 1997); In re America West Airlines, Inc., 166 B.R. 908 (Bankr. D. Az. 1994)(rejecting reliance on the debtor's business judgment and customary practice in nonbankruptcy corporate takeovers). See Markell, "The Case Against Breakup Fees in Bankruptcy, 66 AM. BANKR.
L.J. 349 (1992).
146 Calpine Corp. v. O'Brien Environmental Energy, Inc. (In re O'Brien Environmental Energy, Inc.), 181 F.3d 587
(3rd Cir. 1999).
147 See In re American Shipyard Corporation, 229 B.R. 551 (Bankr. D. R.I. 1998).
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