Cetero Research‘s unsecured creditors are challenging the bidding process for the clinical research organization claiming that the bankruptcy sale process is rigged in favor of the banks who are already lending to the company.
Outsourcing Pharma first reported on the court filing, in which the unsecured creditors say the bid procedures are “seriously flawed, and in numerous respects will serve to chill rather than enhance a competitive bidding process.” A hearing on objections to the bidding procedures was scheduled for this afternoon.
Cary, North Carolina-based Cetero filed for chapter 11 bankruptcy protection on March 26, a move that the company said in court filings was prompted by capital constraints on the company after a U.S. Food and Drug Administration inquiry into the CRO became public last July. The FDA alleged that some work at Cetero’s Houston, Texas site was compromised due to falsified clinical research records.
The Cetero bankruptcy filing said the company and its assets would be sold in a “stalking horse” auction. That process calls for a bidder, the stalking horse, to set a minimum bid for others to top. Typically, the stalking horse has the right to match bids from other parties. In this bankruptcy auction, Cetero’s lenders comprise the company’s stalking horse.
The filing says that the minimum bid amount for Cetero is $81 million and bidders must post an $8.1 million deposit. Cetero wants to move quickly with the sale, seeking bids filed by May 1 and a sale hearing no later than May 10. That’s not enough time for a serious bidder to conduct due diligence and line up financing, the group of unsecured creditors said in the filing.
It is evident from the speed with which the Debtors are proposing to prosecute the sale
that they have determined to forge ahead with a sale that hands over the keys of their company to
their purportedly secured lenders, notwithstanding the window dressing of a process for
permitting other offers to come forward over a period of likely less than a little over 30 days
from when these cases were filed (and merely 15 days from the date of the bid procedures
hearing to the date bids are due) and effectively forecloses any real opportunity for any interested
party to propose a different path, including a plan of reorganization or a competing bid.
The unsecured creditors claim that the stalking horse has other advantages over third-party bidders. The bid process does not require the stalking horse to post a deposit. They also object that the secured creditors are allowed to use the amount of money owed to them as part of their bid. This credit bid, on top of the $81 million minimum bid, could bring the secured creditors’ bid to $147 million, an amount that is “impossibly high and will chill bids,” the group wrote in the filing. Nonetheless, U.S. bankruptcy law has recognized credit bidding as one of the rights of secured creditors.
The unsecured creditors, who are among the last in line to get paid after the secured creditors, want the bankruptcy court to at least extend the bid deadline. But Cetero executives stand to gain from a quick sale. Pharmalot reported that executives and project managers are seeking incentive bonuses totaling at least $1.3 million. Cetero attorneys argued that these incentives are not unusual and the sale and restructuring of the company depends on these key employees.
[Photo from stock.xchng user chessabell]