Chapter 11 – the Latest in Vice Media’s Story

Since its inception in 1994, the Vice Media Group (“the Vice Group” or “the Group”) has carved out a distinctive niche in the global media landscape. The Brooklyn based digital publishing conglomerate became renowned for its unconventional and daring journalism with an edgy and youthful approach which appealed to a largely millennial demographic. The Group’s coverage of wide ranging and often underreported issues captivates audiences with its immersive and boundary-pushing storytelling. Embodiments of this include the embedding of Vice journalists with the so-called Islamic State in Syria, coverage of Denis Rodman and the Harlem Globetrotters basketball team in their visit to North Korea and the co-production of the acclaimed documentary about the infamous Fyre Festival.

Once regarded as “a digital media darling,” the Group was valued at nearly $6 billion in 2017. Despite its journalistic prowess, the Group’s profitability in recent years has dwindled. As social media platforms and tech titans continue to enjoy the lion’s share of digital advertising revenue at the expense of digital publishers, the Group’s financial position has become progressively more distressed. This misfortune came to a head on Monday, 15 May 2023, when amidst widespread anticipation, Vice Media LLC (the Group’s parent company) filed for bankruptcy protection under the Chapter 11 of US Bankruptcy Code, in the U.S. Bankruptcy Court for the Southern District of New York.

Chapter 11 and The Stalking Horse

The Chapter 11 filing does not mean that the various arms of the Vice Group have suddenly ceased to exist. Under the US Bankruptcy Code, the filing has triggered an automatic stay which suspends pending litigation and stops virtually all creditor collection activities against the Group. This is similar to the statutory moratorium under the Insolvency Act 1986 which is afforded to companies in UK insolvency processes such as administration.

The Group is said to have secured a further loan of circa $20 million which will allow it to remain operational in the immediate future. However, reports indicate that the Group intends to use this temporary breathing spell to facilitate a sale of the majority of its assets in a sale under section 363 of the US Bankruptcy Code (commonly known as a “363 sale”) which will be progressed under court supervision and subject to court authorisation. Notable assets of the Group include its flagship website, advertising agency, Virtue and the Group’s film division, Pulse Films.

A consortium of the Group’s creditors, including Fortress Investment Group and billionaire George Soros’ Soros Fund Management (“the Creditor Consortium”), is currently poised to acquire the bulk of Vice Group’s assets and assume significant liabilities, with a credit bid of $225 million reflected in the terms of an asset purchase agreement which the Group is said to have agreed to prior to the Chapter 11 filing. The $225 million purchase price will be covered by outstanding secured debts which the Group owes to the Creditor Consortium.

As is common with 363 sales of this nature, the sale will follow an auction procedure in order to achieve the best price for the assets in question. To set a minimum price, the debtor in distress will usually enter into a formal agreement with an initial proposed purchaser, known as “the stalking horse bidder,” (in this case, the Creditor Consortium). This “stalking horse agreement,” will set the minimum purchase price for the assets which may be subject to higher and better offers. A motion will then be filed at Court which subject to authorisation, will govern the bidding procedure and set a deadline for bidding. Simply put, if no qualifying bidders submit a higher offer by the court-imposed deadline, the sale to the Creditor Consortium will proceed. Reports indicate that the sale is expected to complete within the next two to three months.

The UK Perspective: Pre-Pack Sales in Administration

As mentioned above, England and Wales’ insolvency regime provides for similar protections to the automatic stay under Chapter 11, most notably through Administration proceedings. Where, through either an application to Court or (where applicable) an out-of-court process, a company enters administration, insolvency practitioners (“the Administrator(s)”) assume control over the distressed company’s assets and affairs in order rescue the company as a going concern, or should that not prove possible, to ensure that the value in the company’s business and assets are preserved as best  possible for the benefit of creditors.  

A common course of action in English or Welsh administrations is for the Administrator(s) to undertake the sale of the company’s business as a going concern or alternatively, the sale of some/all of its assets either immediately or shortly after their appointment in what is known as a “pre-pack sale.” Like 363 sales in US bankruptcies, pre-pack sales are often done on a competitive-bid basis, in order to ensure the best price is obtained for the benefit of the insolvent company’s creditors. Pre-pack sales often provide for a smooth and swift negotiation process (in distressed circumstances) and have the potential to preserve both confidence of suppliers, customers and employees in the business as well as the value of the assets. They can be controversial though, particularly where the business is sold to parties with a connection to the insolvent company, and a lack of court oversight sets them apart from the s.363 sale process in the US.

The English court is sometimes asked to consider whether a pre-pack sale is (or was) in the best interests of the Company’s creditors. In such instances, case law (Re Kayley Vending Limited [2009] EWHC 904 (Ch)) suggests that the Court will consider factors such as:

(i) whether the deal achieves the best price for the assets in the circumstances;

(ii) whether the cost associated with trading the insolvent company whilst negotiations take place will exceed the benefit of the sale price achieved; and

(iii) whether the inability of the Company’s creditors as a class to influence the transaction is outweighed by the benefit to them of completing the sale. In addition to evidence justifying the sale, the Court will also want to consider any material relevant to arguments in opposition to the sale.

Regulation

In the Vice Group scenario, if the stalking horse bid is successful, the Creditor Consortium intends to pay the $225 million purchase price via credit swaps in respect of the outstanding loans which are owed to them by the company.

Included in insolvency legislation in England and Wales, are the Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021 (“the Regulations”) which apply to pre-pack sales in administrations which:

(i) commenced on or after 30 April 2021; and

(ii) involve the administrator seeking to dispose of a substantial part of the company’s business or assets to a connected person within eight weeks of the start of the administration.

In an analogous situation to the Vice Group situation in this jurisdiction the broad definition of “connected persons,” under the Regulations means that the Regulations may apply to the purchasing creditors. Under the Regulations, secured creditors who have taken security over more than one third of a debtor company’s shares and have control of the corresponding voting rights will be connected persons. In order for the transaction to proceed, the administrator(s) will need to either:

(i) obtain creditor approval from the company’s creditors as a whole; or

(ii) obtain an independent evaluator’s report (to be commissioned by the purchaser) on whether the grounds and considerations for the sale are reasonable.

Watch this Space!

While it seems likely that the acquisition of the Vice Group as it is known by the Creditor Consortium will go ahead, we await to see what will ultimately become of the digital publisher once considered to be a vanguard of the modern industry.

The Vice Group’s Chapter 11 filing shows that previous financial success does not make a company invincible to financial difficulties. Equivalent companies in the UK  digital media sector should take note of the challenges posed to the Vice Group by the continued rise of social media platforms and tech titans.

More generally, companies facing financial difficulties in this jurisdiction would do well to take action as soon as possible to try to, if possible, avoid insolvency. However, if insolvency is unavoidable, pre-pack administrations are sometimes the quickest and fairest method of transferring the business to a new owner for the benefit of creditors and other stakeholders, whilst preserving continuity in the business’ underlying operations.

For further information about pre-packs in administrations please contact Georgina Bernard or Quentin de la Bastide.