Liquidating Trusts

Interim Management • Financial Consulting • Fiscal Stewardship

Liquidating Trusts
Overview
Liquidating Trust – Life Sciences
Pros/Cons -- What a Liquidating Trust Can and Can’t Do
What ARGYCE Brings
First Step

Overview  
To many the words “liquidating trust” connote bankruptcy, but that need not always be the case.  In fact, a liquidating trust can be a cost effective, simplified structure to wind down a solvent company and realize some value for stockholders.  In the context of a managed liquidation it can be particularly effective as the final stage of a well planned wind down process.  Alternatively, the liquidating trust can be a backstop for a complete and relatively quick transfer of liquidation responsibilities to a third party trustee when a management team finds itself unable or unwilling to complete the liquidation effectively.  

For companies with certain types of illiquid but valuable intellectual property, the liquidating trust’s simplicity and lower cost can make it superior to other alternatives.   For example, for a small biotech with drug development programs
out licensed to third parties, the liquidating trust can be a cost effective way to collect milestones and royalties for a period of time while open issues are resolved and a transaction can be closed to monetize the licensor interest.

In the role of liquidating trustee, (beginning before the trust is formed) we administer and manage the liquidating trust to sell remaining assets, settle open contracts, pay creditors and distribute any available funds to the company’s former stockholders.  We are not bankruptcy trustees or receivers. On the contrary, we prefer to be retained early enough in the wind down process to avoid insolvency and transition smoothly from the public entity to the liquidating trust structure.   

A liquidating trust is a new legal entity that becomes a successor in interest to the liquidating company at the point the company dissolves and all its assets and liabilities move to the trust.  Stockholders in the company become unit holders a/k/a beneficiaries of the trust.  The trust units are not tradable but shares of stock in a company that has dissolved are typically are no longer tradable either.  The terms of the trust and governing principles are established in the trust agreement executed between the company and the trustee prior to dissolution of the company and include trustee duties, compensation and indemnification as well as beneficiary rights, governance, mechanics for notices and distributions and other administrative matters.

Liquidating Trustee Services – Life Sciences/Biotech Focus  

A liquidating trust may be appropriate for a biotech or drug development company if:
• Continuing research and development activities is not financeable or otherwise not in the stockholders’ best interests;
• The company is solvent on both balance sheet and liquidity bases: with sufficient liquidity to settle contracts, real estate leases and severance; and
• The Board and management begin the wind down process early enough to assure an orderly process and maximize the opportunity to realize value for stockholders.

What a Liquidating Trust Can Do: 

• Lower burn rate versus costs of maintaining company infrastructure.
• Support a longer run off period to collect milestones or royalties from out-licensed assets – up to three years under Delaware law with ability to extend for longer lived assets.
• Provide a vehicle to wrap up loose ends when lower value or less liquid assets remain.
• “Liquidation” into trust can end officers’ deferral period for severance payments under IRC 409A, depending on specific company circumstances.
  •  Liquidation into a liquidating trust in accordance with Rev. Rul. 72-137, 1972-1 C.B. 101, can qualify as sale or exchange of shares for Federal Income Tax purposes allowing stockholders to recognize loss to the extent the cost basis of their shares exceeds the per share value of assets transferred to the liquidating trust.
• As the winding up process progresses, the trust is readily administered on an as needed basis, versus retaining a corporate officer trying to move on with his/her life.

What it can’t do:
• Continue active research participation in collaborations or other research activities  for long periods;
• Continue employee benefit programs for long indefinite periods;
• Provide a tradable security for unit-holders.  

What ARGYCE brings – emphasized in the Managed Liquidation section:  
Objectivity and constructive passion.  It’s our job --- and it’s not a job any executive or employee of a client company sought or signed up for.  

We “get” start ups, technology and biotech.  In an industry where a “successful” company may not sell any products and a majority of programs fail, familiarity helps.  We understand how value can be perceived in high risk programs but we are familiar with “biobucks.”

Practical financial, legal, transactional and operational experience.  Our services do not replace lawyers, investment bankers or accountants, but our involvement can make their work more cost effective.  The mechanics of transitioning to a liquidating trust are straightforward, but are not standard fare for these high priced professionals.

First Step 

When making the decision to proceed with a managed liquidation of your company, as with most difficult business decisions required of Board and Management teams, taking the first step can be the hardest.  ARGYCE makes that first step manageable.  Simply contact our team to discuss your company’s situation.  We will develop a plan and timeline to efficiently and effectively manage, or help you manage the liquidation of your company and, when necessary, transition your current company activities into a liquidating trust.
Interim Management • Transition and Crisis Consulting • Managed Liquidation

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