Managed Liquidations

Interim Management • Financial Consulting • Fiscal Stewardship

Managed Liquidations
Public Companies
Private Companies
Hibernation as an Option - VC Backed Tech and Life Sciences
Human Risks in Liquidation
What ARGYCE Brings
First Step

A “managed liquidation” may be appropriate if a company determines its business prospects do not justify continuing operations, but is solvent and not burdened by complex debt.  When commenced early enough, a managed liquidation avoids bankruptcy and other judicially imposed dispositions and improves prospects for stockholders to recover value.

By the time liquidation is a credible alternative, employees are typically stressed and their decisions, large and small, can be suboptimal at best and damaging at worst -- no employee joins a company planning to help liquidate it.  Of all the risks to realizing value in liquidation two categories are noteworthy, delay/denial of a need for action and devolution of corporate culture to a “new normal.”  [see Human Risks below]  

The goals and action steps are the same in public and private companies, though more complex at a number of levels for public companies.  In either case we calmly and systematically add order and stability by developing a company specific course of action following this general sequence:
• Prepare an overall assessment: prioritize issues by urgency and importance,   identify key assets, key transition employees and principal risks.
• Immediately prepare and implement a plan to protect assets, preserve employee   knowledge and manage the company’s financial situation – prepare a cash forecast with management and continuously update it thereafter.
• Implement a process to monetize assets and settle with creditors.
• Negotiate sales, settlements of contracts and final payments to creditors.
• Wrap up all remaining company affairs, e.g. regulatory notifications, building decommissioning, filings with the Secretary of State, SEC and NASDAQ filings, final tax returns etc.

Public Companies
Though simpler for private companies, the process for a public company addresses the same issues and includes very similar action steps.  In a public company, a formal sequence of actions must be followed starting with Board evaluation of options, a Board resolution to recommend liquidation to the stockholders and a special meeting of stockholders to approve a plan of liquidation.  SEC and filing requirements apply to all of these actions.  The proxy statement will include a proposed plan of liquidation and a number of situation specific disclosures.  The stockholder action will authorize the Board to dissolve the company, liquidate its assets, pay its creditors, settle its contracts and wind up its affairs – all in accordance with the plan of liquidation.  Once approved by stockholders at a special meeting, the Directors authorize filing of a Certificate of Dissolution.  

Following filing of a Certificate of Dissolution, the corporation continues to exist for up to three years (Delaware General Corporation Law) for the purpose of winding up its affairs.  At this stage, the company may continue in a skeleton form with a minimal number of board members and one or two officers to sell assets, settle contracts and wind up the company’s affairs with the assistance of contractors.  Alternatively, upon dissolution, all assets, liabilities and contracts may be transferred to a liquidating trust.  Under Delaware Law and many other states, the liquidating trust is a “successor in interest” to the effect all contracts and agreements of the corporation are automatically transferred without requirement of any party’s consent.  The liquidating trust option is discussed more fully on the “Liquidating Trust” page

Private Companies
By contrast, in a private company the winding down process starts whenever it suits a majority of investors.  Legal formalities are required but the timing is flexible and formal requirements can be addressed by simple consent documents – with relatively low legal expense.

Hibernation as an Option

Occasionally a venture capital firm wishes to salvage a development program or technology from an otherwise failed company for a restart later.  We can conduct a managed liquidation without dissolution of the corporate shell, organize accumulated information, electronic media, patent rights or other filings while dispensing with other assets and liabilities.  The goal is to minimize and reliably forecast ongoing costs to preserve the asset until it can be absorbed into an appropriate new or existing investee company.

Human Issues in Liquidation

It is nearly impossible to predict which employees will perform professionally through their last day of work and which employees, however reliable they have been in the past will respond badly as the time for liquidation approaches.  While an extraordinarily broad of range of things can go wrong when managers and employees are under duress, two categories of risks loom largest in our experience.

First, it can be hard for even the most capable Board to draw a line between what constitutes the persistence needed to advance a new technology or a drug program and what amounts to collective denial of grim realities.  Boards and management can be tempted to delay action hoping to find a transaction or collaboration to save the day.  Layoffs and cost cuts may be delayed to “not look weak.”  Saving face and seductive hope too often leads sophisticated boards and executives to keep the cash burn too high for too long – turning what could be an orderly closure into a public crash and burn.

Second, as executives and employees internalize the reality of company closure company culture can sometimes devolve to an ethically impaired “new normal”.  Consider a simple example from a facility shutdown some time ago.  As one of our team took charge, he was surprised by a departed executive’s request for building access for his “buyer” to pick up equipment acquired from the employee. The “buyer” had bought corporate equipment from the employee for 40 times the price the employee had paid to “buy” the asset from the company weeks earlier.  An executive selling valuable company assets to favored employees at a nominal price is small scale bad behavior.  But when executives and employees believe such behavior is routine and acceptable a pernicious “new normal” can emerge.  Not only are stockholders shortchanged, but reputations and public images of honorable board members and employees may be diminished.

What ARGYCE Brings:

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 have no face to save or past decisions to rectify.  

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.  For example, the mechanics of transitioning to a liquidating trust are straightforward, but are not standard fare for these high priced professionals.

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 is perceived in high risk programs but we “get” all the nuances of the term “biobucks” too.

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 the first step easier.  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.