Liquidating a Technology Company in Bankruptcy

Since the peak of the NASDAQ in March of 2000, many technology companies have found either that they cannot raise enough capital to implement their business plans or that they have an untenable business plan. Some have simply shut their doors and gone out of business, while others have filed for bankruptcy. Either way, these companies have left many unsatisfied creditors. For example, Webvan.com was a start-up company in the late 1990’s that raised over $1.2 billion in equity, $375 million of which came from an IPO in November 1999. It had very ambitious business plans to build a series of warehouses and deliver groceries to fulfill customer orders placed over the Internet. Webvan.com, however, faced a number of challenges, including a downturn in the economy, and quickly ran through its capital. Webvan.com filed for Chapter 11 bankruptcy protection in July 1999 and reported that it owed $106 million to creditors. By January 2002, it reported that the value of its liquidated assets totaled only $25 million, leaving its creditors to receive pennies on the dollar and its investors to receive little or nothing for their $1.2 billion investment in the company.
Like Webvan.com, the majority of technology companies have few tangible assets of the type that the Federal Bankruptcy Code (“Code”) was originally designed to handle, as technology companies often have little equipment, inventory, or real property. Many technology companies pride themselves on being virtual companies, not tied down with the brick-and-mortar assets of traditional companies. They do have assets, however. Their assets are predominantly intellectual property and other general intangible assets, including human capital. A technology company’s balance sheet does not show many of these assets, and special care must be taken not only to identify all the assets of a technology company but also to preserve their value in bankruptcy. As one author put it, “The challenge lies not in the quantity of the assets but rather in the difficulty one faces in liquidating these non-traditional assets.” Some of this property is deemed property of the bankruptcy estate as defined by the Code, while some is not. Using fire-sale or straight liquidation procedures under the direction of a bankruptcy trustee, the bankrupt technology company’s assets and their associated value rapidly disappear because their worth is very much dependent on the people within the business and the continued operation of the bankrupt business. Value to creditors can be maximized, however, to the extent that a business can be held together and then sold in discrete units or segments, while also retaining the support and loyalty of the people associated with each unit.