By: Vitor Ferrari and Ivan Kubala

Originally, The term Stalking Horse refers to a hunting method in which the hunter hides behind a horse to surprise his prey.. The term became popular in the context of private merger and acquisition processes., in which one of the interested parties made the first bid in the auction in order to surprise the others, since he set the minimum price for the auctioned asset.

 The Stalking Horse is the first bidder, the one who makes a binding offer defining a minimum price for the transaction. He also defines the method of sale of the goods., influencing the second stage of the sale, the auction. This is a cutting-edge institute that is gaining popularity in bankruptcy law and insolvency proceedings. However, there are still few judgments and rulings that address the institute in detail, leaving gaps regarding specific topics of the institute.

The first bidder has advantages over the other interested parties, which is why its original role, provided for in the merger and acquisition procedure, changed when it was included in the insolvency proceedings, with differences arising regarding the role of the Stalking Horse between the procedures.

The advantages the use of Stalking Horse in insolvency proceedings are the binding offer, which brings certainty of the sale of the asset, providing legal security; the limitation of costs in the due diligence, since the minimum price was set and prior research into the value was carried out; attracting other interested parties in the asset, especially when Stalking Horse is well-known in the field.

However, its use can, depending on the case, be a disadvantage, especially for the bidder himself, since the price may be set incorrectly, not reflecting the reality of the object to be sold; the price may be very close to the real value of the asset, giving little room for negotiation for the bidder; or even the value of the asset may vary during the negotiations, driving away interested parties and causing Stalking Horse to have to acquire the asset for a higher price than it would normally pay.

As a result of these burdens and in order to encourage the use of the institute, some advantages are granted to the first proponent.. It should be noted that, as this is a new institute, there is no consolidated case law or legal provision that specifically establishes such advantages.

The most common are clauses that allow the asset to be valued before other interested parties, clauses that keep the Stalking Horse anonymous until the proposals are made, choosing the sales method, choosing together with the company to recover the previous financial conditions, right match (right to make a bid equal to that of a third party, as long as it is above the minimum price, obviously), reimbursement of amounts spent on the valuation of the property, and break up fee(a fine paid to Stalking Horse if it does not auction the property), which does not have a pre-established limit, and must be set by the responsible judge or agreed between the proponent and the owner, by means of a private instrument recognized in court.

Regarding the procedure for using a Stalking Horse, this may be provided for in the judicial recovery plan drafted by the debtor or may be requested from the Court later. The first case provides greater legal certainty to the process, since it establishes the benefits that the Stalking Horse will have, limiting the abuse of power on its part. On the other hand, this option ends up hindering the proceedings, which may discourage the proponent from becoming a Stalking Horse in cases where the benefits granted by the judge are minimal.

The use of Stalking Horse is still controversial: it is undeniable that it brings several advantages, both for the individual and for the company that will auction their assets; however, as it is a recent institution in bankruptcy proceedings, its application is not yet provided for by law, nor is it established in case law. Therefore, It is essential that its use is closely monitored by a team of lawyers specialized in bankruptcy matters, in order to maximize the institute's bonuses and protect yourself from possible burdens.

With the collaboration of Luis Felipe Simão.