Hytera creates new entity to be prospective buyer of its bankrupt U.S. divisions
A new Hytera affiliate has agreed to purchase assets of Hytera’s two active U.S. divisions—but not liabilities like the $764.6 million legal award owed to Motorola Solutions—for $7.897 million as an initial step in a Chapter 11 bankruptcy auction process that could be concluded next month, according to Hytera legal filings.
China-based LMR manufacturer Hytera Communications created a new entity known as Hytera US that submitted what is known as a “stalking horse” bid that is designed to set the lowest acceptable offer in a bankruptcy auction. Under the terms of the bid, Hytera US would pay $7.897 million cash for assets of Hytera America and Hytera Communications America (West), which reported combined revenues of more than $41 million in each of the last two years.
Hytera provided the following statement to IWCE’s Urgent Communications about the Hytera US bid:
“Hytera America, Inc. and Hytera Communications America (West), Inc. (together, ‘Hytera East and West’) have signed the Asset Purchase Agreement (‘APA’) with Hytera US, Inc. (the ‘Buyer’), an affiliate of Hytera Communications Corporation Limited, who has agreed to purchase certain assets at an estimated price of $7,897,459.00 and continue the operations of such assets,” according to the Hytera statement. “The APA is subject to court approval.
“Hytera East and West intend to preserve their business operations in the U.S. by selling certain of its assets and business under the APA but also use the restructuring process to streamline their operations. Upon approval, the Buyer will continue to serve and support customers and partners in the U.S. and will continue to bring innovative communications products and solutions to empower users with higher productivity and safety.”
Hytera selected its Hytera US offer as the stalking-horse bid after largely failing to attract offers from entities viewed as potential buyers of the U.S. divisions, which filed May 26 for Chapter 11 bankruptcy protection in a California court, according to Hytera filings.
After a U.S. federal-court jury ruled in February that Hytera would have to pay Motorola Solutions $764.6 million in damages for improper use of trade secrets and copyrighted software in a significant amount of Hytera’s DMR product portfolio, Hytera retained investment banker Imperial Capital to recommend alternatives for the U.S. divisions.
On May 5, Imperial Capital began distributing “transaction teaser” information to 107 targets deemed to be potential buyers of the U.S. divisions, according to Hytera filings. These initial efforts generated 60 responses, with 21 parties executing the confidentiality agreement needed to conduct due-diligence activities.
Despite this, Hytera’s banker “did not receive any formal indications of interest from potential acquirers” when the Hytera U.S. divisions filed for Chapter 11 bankruptcy on May 26.
After the bankruptcy filing, two competing offers emerged: the bid from Hytera US—an entity within Hytera that did not exist previously—and “a written offer from a third party for substantially less consideration,” according to a Hytera court filing.
“On July 15, 2020, following months of arm’s length back-and-forth discussions, the Debtors [the two primary Hytera divisions in the U.S.] entered into the Stalking Horse APA with the Stalking Horse Bidder [Hytera US],” according to the Hytera filing with the bankruptcy court. “Under these circumstances, the Debtors determined that the stalking horse bid represented the highest and best offer with the most certainty currently available and established a substantial floor for further bidding.
“The Debtors, with the assistance of Imperial, will conduct a further marketing effort for the Debtors’ assets on a postpetition basis over the next month, with a deadline for competing bids on August 14, 2020 and an auction (if necessary) on August 18, 2020.”
If qualified bids are received, the auction process would be completed to determine ownership of the Hytera divisions in the U.S. If no qualified bids are received, assets of the Hytera divisions in the U.S. would be awarded to the new Hytera US entity, according to the Hytera proposal.
One notable aspect of a sale to Hytera US is Hytera’s claim that such a sale would represent a “good faith” transaction under bankruptcy laws.
“Although [Hytera US] is an indirect affiliate of the Debtors [Hytera’s U.S. divisions], the proposed sale was negotiated in good faith, at arm’s length and without collusion or fraud of any kind and approved by the Debtors’ independent board member,” according to Hytera’s filing. “Further, all of the material terms of the sale have been fully disclosed. Accordingly, this Court should find that Purchaser acted in good faith within the meaning of section 363(m) of the Bankruptcy Code.
“Notwithstanding the foregoing, the Debtors shall present evidence, as necessary, prior to or at the sale hearing relating to the Purchaser’s good faith.”
This is a very different interpretation from the one submitted by attorneys for Motorola Solutions, which asked the court to dismiss or suspend the bankruptcy case. Motorola Solutions claims the bankruptcy filing is part of a “bad-faith” effort by Hytera to avoid paying the $764.6 million award amount, noting that Hytera has refused to post an appellate bond.
“This bankruptcy is another tactic in the Debtors’ illegal campaign, this time to avoid responsibility and evade judgment, all the while continuing to make illegal sales of Hytera products throughout the United States (and around the world),” according to the Motorola Solutions motion to dismiss the bankruptcy case.
“This is not in dispute: the Debtors made clear in their first-day declaration that the sole basis for this bankruptcy was the judgment entered against them and that they will ‘vigorously appeal the Motorola Judgment,’ (which accounts for 97.5% of their liabilities), yet they have failed to post an appeal bond, and instead filed for bankruptcy.”
In addition, Motorola Solutions’ attorneys have argued that it is impossible for potential bidders to determine the value of the Hytera divisions in the U.S., because it is not clear whether a buyer would be able to continue to sell DMR products. A federal-court judge is considering a request from Motorola Solutions to grant a worldwide injunction that would prohibit the global sale of Hytera DMR products that infringe upon Motorola Solutions trade secrets or copyrighted software.
“No genuine strategic buyer or investor would rationally purchase the Debtors’ assets (absent a massive discount detrimental to all creditors) with the cloud of Motorola’s motion to permanently enjoin Hytera China around the world from making, selling, or importing DMR products hanging overhead in the Illinois Trade Secret Case,” according to a Motorola Solutions filing. “Indeed, until the scope of injunctive relief is determined, no reasonably-reliable financial forecast of the Debtors’ business could be generated.”