The change in market attitudes towards new economy companies has caused, or at least accelerated, a number of high-profile casualties. The old attitude allowed many companies to get off the ground even though they did not satisfy the traditional tests of long-term viability. But the combination of this and the now cautious market are a recipe for further trouble.
A number of companies are sitting on cash reserves, but their burn rate can be immense. Many will require further investment before being able to trade at a profit, if this is ever possible. Venture capital and debt markets are closed to most new economy companies, and this does not distinguish between dotcoms, telcos and others. If requests for further funding are declined, insolvency will loom.
Many of the legal issues that arise when a telco or a dotcom becomes insolvent are newly-charted territory for insolvency lawyers.
There are unlikely to be substantial tangible assets. The most valuable asset may well be the brand and for telcos, their national licences. But groups are often structured so that the brand and associated intellectual property rights (IPRs) are held in a separate company and are merely licensed to the operating company, with goodwill accruing for the benefit of the licensor. Such arrangements may terminate on insolvency.
Broadly, the brand comprises the domain name, trademarks, copyright in the design, layout and navigation around the website, and any associated goodwill. The domain name will be assignable but domain registries have their own procedures that need to be followed. For a global brand, there will probably be a mishmash of trademark rights, consisting of registered trademarks, pending applications and possibly wholly unprotected rights.
Where many jurisdictions are involved, each will have rules about what must be undertaken to give rise to an enforceable trademark and/or the ability to claim copyright.
In addition to these “soft” IPRs, there may be “hard” IPRs in respect of computer software that provides the company's functionality. Again, issues may arise as to who owns these rights, particularly where external software houses have developed the program.
The customer list is likely to have significant value and a dotcom's worth is often referable to the number of hits its website receives. The key employees and the key contracts will also be important assets.
But there may be little else of value. Computer hardware may have little second-hand worth, that is if it has not been provided on equipment leases. There are unlikely to be significant book debts or substantial stock.
In light of these predominantly intangible assets, realisations will probably be maximised if a business is sold as a going concern. However, there are a number of obstacles.
Some key third party service providers will be well placed to demand ransom payments as the host maintaining the company's website could close down the website with, literally, the flick of a switch.
The credit card facility, a key requirement of an e-tailer, will need to be preserved. Because of the credit card issuers' liabilities under Section 75 of the Consumer Credit Act 1974, the bank providing the facility will be exposed
upon insolvency (unless it holds security) and will need some comfort.
Data protection is particularly important. Under the Data Protection Act 1998 (DPA), individuals have the right to be informed before their personal details are passed to third parties for direct marketing. This places restrictions upon the sale of customer lists. Breach of the DPA is a criminal offence and insolvency office holders may incur criminal liability in certain circumstances.
One way to get around this is if the customers have consented to personal data being used. Another may be to seek guidance from the data protection commissioner. However, if the customer list is to be sold to a foreign entity, this may not solve the problem as the DPA restricts the ability to transfer personal data outside the European Economic Area.
It will be essential to tie in the key employees by offering incentives. Further, any buyer will need to secure an assignment of key contracts – which may be unclear or missing if, as is often the case, legal certainty has been sacrificed to speed.
When selling the business of a New Economy company, speed will probably be essential to protect its value. A pre-pack sale (a sale negotiated in anticipation of an insolvency procedure) may be the best option. Here, issues will arise as to whether the insolvency practitioner can effect the sale without prior approval from creditors and without carrying out a traditional marketing exercise.
If a pre-pack sale is not possible, it may still be worth placing the company into administration or provisional liquidation to provide an opportunity to seek a buyer or survival through a corporate voluntary arrangement (CVA) or scheme of arrangement. The creditors may be prepared to fund ongoing trading for a short period given the likely enhanced returns to them if a sale as a going concern or survival can be achieved. Liquidation should be very much the last resort.
Susan Moore is an assistant solicitor in the insolvency workouts team at Denton Wilde Sapte