Bidders Hesitate to Buy Takata’s Assets

Takata, one of the world’s top automotive parts producers, faces potential liabilities of billions of dollars to cover the cost of the biggest automotive recall in history, arising from its defected air bags. The company is considering a U.S. bankruptcy filing and is seeking a financial backer. But all bidders interested in Takata’s car parts business want Takata to file bankruptcy in the U.S. first.

Under Section 363 of the Bankruptcy Code, if certain requirements are met, the debtor may, upon approval of the court, sell its assets free of existing encumbrances or other liabilities. Such sale may occur at a very early stage of the bankruptcy proceeding. One significant benefit of this provision is that it allows the debtor to realize the value of assets that may be losing value, maximizing the value of assets for the creditors.

However, GM’s bankruptcy increased the risk for the buyer in such situations.  In 2009, GM used Section 363 procedure to sell its most valuable assets to General Motors Co. (“New GM”), and leaving the bad debt and liabilities behind in “Old GM.” But the Second U.S. Circuit Court of Appeals in Manhattan held that New GM could be sued over faulty ignition switches made by Old GM. GM has reportedly planned to appeal this ruling. But the Second Circuit’s ruling may nevertheless undercut a buyer’s willingness to bid for the assets of a company under financial strain, for fear of inheriting the liabilities.

Some lawyers point out that the key issues in both cases differ, and thus the Second Circuit’s ruling in the GM case may not be applicable in Takata’s case.  In GM’s case, GM intentionally concealed the faulty ignition switch problem until its bankruptcy was filed and thus GM’s customers had no opportunity to object to GM’s bankruptcy sale.  To remedy this, the court gave GM’s customers the right to pursue a class action against New GM. But Takata’s defective air bags and recalls have been publicly known for years, and thus their customers should have had sufficient time to object to the sale if they desired. This interpretation makes sense, but it is likely bidders will remain hesitant about taking this chance.

bidders-hesitate-to-buy-takatas-assets (PDF)