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www.ecommerce-guide.com/news/news/article.php/521051
By Don Sussis November 28, 2000 After April''s drop in Net stocks, and streams of venture capital drying up, many dot coms have been forced to close their virtual doors. To better understand what bankruptcy, liquidation, and reorganization mean - and their implications for dot coms - I spoke with Charles Weintraub, a well-respected and experienced attorney who has specialized in Bankruptcy and Reorganization matters since being admitted to the New York State Bar in 1967. His practice is predominantly in the field of Chapter 11 and restructuring, representing debtors, although he has represented creditor committees, individual creditors, banks and secured lenders. Why might a dot com seek protection under the bankruptcy laws? What is meant by protection? Is there still a stigma attached to a bankruptcy filing? Many entrepreneurs operate under a culture that sees "failure" as a learning experience. But that would not be the case with all companies. For example, Boo.com (based in England) spent around $140,000,000 on advertising without having a product that was ready to launch! Hype without substance is not a recipe for investor compassion. What are the options for filing, that is, what are the different "Bankruptcy Chapters?" Is bankruptcy the right term for reorganization? Congress has been working on legislation to change the bankruptcy laws. What implications would this have for dot coms? Can you provide some examples of successful and unsuccessful reorganizations? Some prime examples of successful reorganization from the "old economy" include Texaco, Johns-Manville, and Barney''s. Unsuccessful efforts would include Alexander''s, Caldor''s and Eastern Airlines. However, success in legal terms means "a plan of reorganization" that is confirmed by the Court. There are no statistics (to the best of my knowledge) kept on practical successes -- i.e. what happens to companies after they have legally emerged from Chapter 11. Can "intellectual property" (such as computer code or "business practices," such as Amazon.com''s "one click purchase" or Priceline.com''s "demand collection system for committed bid buying") be assigned a value as "assets" in a bankruptcy proceeding? There is a distinct and growing tendency to include these items/assets as valuable property. How, exactly, their value is derived is decidedly more art than science. Increasingly, financial projections of revenue produced by such assets are increasingly used as a measure. An interesting wrinkle in this scenario took place in August of this year when a federal bankruptcy judge set aside a Federal Trade Commission plan which limited the ability of on-line retailer Toysmart.com to sell its database as part of its liquidation. The issue revolved around confidentiality -- the data had been collected with the promise of confidentiality. Judge Carol Kenner said that the restriction revolved around "hypothetical rather than actual considerations." Toysmart.com had pledged not to sell its customer information to third parties, but its bankruptcy prompted concerns that this pledge would not be honored. That is, the data would simply be sold as an asset of the corporation. The position taken by the Federal Trade Commission (FTC) was that the database could only be purchased by a similar "family" related business and that the information could not be resold without the permission of the individuals who submitted it. Notwithstanding the judges setting aside of the FTC''s objection, no sale has taken place to date in view of the fact that an actual purchaser was not obtained. Obviously, this is an area of the law that is innovative and evolving. Is there anything special about dot coms (such as cross border operations, etc.) that should be considered or that would affect bankruptcy outcomes? How might a company''s bankruptcy filing affect stock options, future compensation, employment agreements, etc.? Could bankruptcy filing lead to a change in company ownership or management or both? How does bankruptcy affect cash flow, especially accounts receivables? Could those with warrants, options, etc. maintain any possibility of future income if assets such as code, patents, etc. ever prove to be a bonanza to a company obtaining these in lieu of debt payment? Is there precedent for such an arrangement, or is the distribution of assets simply assigned and distributed without recourse for future compensation? On the contrary, in Chapter 7 a strict order of priority is followed whereby senior debt will always be paid prior to junior debt. With private equity tight and the IPO market treacherous -- and almost closed to many types of virtual companies -- too many entrepreneurs are faced with the decision of either liquidating their business, or trying to reorganize through the bankruptcy courts. If you are in such a situation, or want to understand the process more fully, then you would be wise to consult an experienced and qualified attorney, such as Charles Weintraub, who specializes in this area. Don Sussis is a business advisor and investment consultant in New York. He has led many companies to a Portkey of success. He can be reached at dsussis@internet.com or dons@interested.com. |
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