What Is a Stalking Horse Agreement?

Although not particularly common in smaller, personal bankruptcy filings, stalking horse agreements are used to maximize the overall value of assets during a sale. Taken from a hunting term in which fowl would not run away from hunters hidden behind their horses, stalking horse agreements occur when a third-party buyer tests the market for a debtor. These companies or individuals place an initial offer in the hopes of driving up the value of a debtor’s assets in bankruptcy auctions.

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How a Stalking Horse Agreement Works

The primary goal of any stalking horse agreement is to help the debtor by presenting their property in a positive light to potential buyers. As stalking horses lead the auction process by throwing in a substantial starting bid for the company or individual’s property, other bidders are meant to see this as a sign that the assets are worth bidding on. In order to protect stalking horses from actually having to bid on, and therefore buy-out, a debtor’s assets, the following protections are in place:

  • Repayment for any legal processes involved in the act of bidding
  • Break-up fees
  • Establishing bidding procedures

As these agreements are meant to maximize the worth of a debtor’s assets, many jurisdictions permit the use of stalking horse agreements. However, these dealings may be contentious and may or may not be permitted in certain cases.

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