We have assisted various clients in due diligence in acquiring assets, both inside and outside Chapter 11 and in creating the control structures for new business ventures.
Investment in due diligence to justify your new entity or joint venture transaction is essential. Have you minimized downside risk if the new entity fails or parties file bankruptcy? Who will control the orderly sale or liquidation? What assets may be impaired? To what third party liabilities is your current business exposed? Expensive litigation can ensue if front-end answers are unclear. What is the contract is rejected or breached? A representation or ongoing performance on which you relied may be nothing but a worthless unsecured claim. Is there a less risky practical alternative?
With the increasing importance of intellectual property in valuing businesses, the possibility that an intellectual property license may only be an unsecured claim, rather than a property right, can come as an unpleasant surprise. Most interests in intellectual property are licensed rather than sold and can often be rejected or partially destroyed in bankruptcy. License provisions permitting termination upon filing of bankruptcy are unenforceable. On the flip side, some intellectual property licenses may be lost by Chapter 11 debtors, potentially leaving sublicensees exposed – even if your investment has been wildly successful. Would the intermediate or original licensor’s bankruptcy leave you vulnerable to a trustee’s demands to renegotiate? Without access to imbedded intellectual property, many types of modern equipment cannot be lawfully operated unless a new license is reached.
To understand and mitigate these risks, consider consulting with a bankruptcy attorney with substantial transaction experience before the deal is finalized rather than waiting until the wolf appears at the door. Skilled in analyzing and solving potential practical enforcement problems and minimizing risks in future fights for control in Chapter 11, M+M can help you navigate these tricky waters.