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Finding Value in the Intellectual Property Assets of Distressed Companies

• by Jennifer McLemore
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Buying Intellectual Property as an Investment Opportunity by Jennifer McLain McLemore Last year’s wave of retail bankruptcies will have a long-lasting impact on the structure of modern shopping centers. However, the businesses that sought bankruptcy protection and the diverse outcomes can be instructive beyond the struggles of retailers. These bankruptcy cases provide examples of investment opportunities that arise when distressed companies seek liquidity by selling some or all of their assets, including their intellectual property. The intellectual property assets that may be sold range from brand names to e-commerce platforms to back-room software and infrastructure. In the next economic cycle non-retail entities may seek bankruptcy protection and will provide a similarly meaningful opportunity for investors seeking intellectual property assets. Intellectual property asset sales are important because this asset class can have overlooked value, which can be missed as distressed liquidations move quickly. For the aware and prepared, such expedited sale processes can be an opportunity and provide an advantage. This article will focus on (i) the investment opportunities that arise when distressed businesses seek to create liquidity through intellectual property asset sales, (ii) the means by which strategic business opportunities can be realized through distressed processes, (iii) the potential risks and rewards present when such assets are sold in a distressed environment, and (iv) the strategies for maximizing opportunities to capture such assets in a distressed sale context. Opportunities Await the Aware and Prepared—Examples of Liquidating Intellectual Property Assets in Bankruptcy Cases Covid-19 disrupted the plans of numerous retail businesses that already were in bankruptcy and forced numerous retail operations into bankruptcy. While some brands ended their operations quickly, liquidating all assets (from intellectual property to clothing hangers), some parent companies of brands chose to restructure debts and emerge from bankruptcy with a stronger balance sheet. Still other retail debtors engaged in strategic sale processes, closing brick and mortar stores for some brands, and selling other brands entirely. In the Stage Stores, Inc. bankruptcy cases, which filed as a result of the Covid-19 shutdowns, the debtors sought a buyer for their 700 department stores while simultaneously trying to wind down operations. The debtors sought to liquidate in-store assets as soon as government shutdowns were lifted, as a buyer for the physical stores did not immediately emerge. After several months of effort, the debtors found a buyer with a name related to one of the debtors’ operating entities. This buyer was willing to pay to take the debtors’ intellectual property. With this acquisition, the Stage Stores’ buyer was able to purchase full, national control of its own brand name. Case No. 20-32564-DRJ, Docket No. 861 (Bankr. S.D. Tex. October 9, 2020). Stein Mart, Inc. filed for bankruptcy protection after most of the Covid-related shutdowns were concluded. Quickly after filing, the debtors announced that all stores were liquidating their inventory and closing. Contemporaneously, the debtors announced the sale of the debtors’ brand name, domain names, private label brands, social media assets and customer data. A subsidiary of Retail Ecommerce Ventures was the stalking horse bidder and ultimately the winning bidder for the debtors’ remaining assets at auction. Case No. 20-2387-JAF, Docket No. 738 (Bankr. M.D. Fla. November 19, 2020). Retail Ecommerce Ventures was able to make similar acquisitions in bankruptcy cases across the country, including, for example, in the cases of Radio Shack, Linens ‘N Things, Modell’s Sporting Goods, and numerous others. In addition to preserving brand recognition, e-commerce presence, and the related intellectual property, in some instances, Retail Ecommerce Ventures even has been able to keep brick and mortar locations open. Opportunities Presented—When and How do Such Asset Sales Arise? While distressed businesses determine the best strategic means to create liquidity, there is immense pressure to make such decisions quickly in a bankruptcy setting. This pressure is created by lenders and compounded by the intense costs of bankruptcy. Further, debtors have just 210 days to decide which leases to keep and which to sell or reject. Yet, in order to satisfy the other requirements of the Bankruptcy Code, a proper sale process must include real marketing of the assets and must provide enough notice of such sale(s) for potentially interested parties to undertake proper due diligence. Further, the sale process must not be so quick as to frustrate potentially interested bidders from participating. Debtors and lenders will always prefer to pursue a sale with a stalking horse bidder, which party will set a floor-price for the assets. Thereafter, an auction is a preferred method to set the ultimate value of the assets, because it is hoped that an auction will involve a competitive process between at least two interested purchasers. Courts have come to accept auction results as the fairest way to realize value in a distressed context. Similarly, even if no other bidders assert an interest in a debtor’s assets, a stalking horse bidder buying the assets without an auction process is also perceived to be a fair outcome for the creditors and other parties with an interest in a debtor’s estate, so long as the pre-auction marketing process was robust. The Stage Stores and Stein Mart cases are just two of many possible examples that make clear that an interested purchaser needs to be attentive to case developments early on, or even in advance of a filing, in order to capture desirable intellectual property assets. Risk/Reward Analysis for Buyers to Consider Distressed retail cases show that an established brand name alone can be a meaningful asset. Similarly, a distressed company’s established e-commerce presence has value. An integrated and vetted infrastructure of functional business software can be a separate, strategic acquisition. When these assets come pre-assembled, as in the Stein Mart case, they present a real opportunity for a prepared purchaser. Such assets may have alternative value to the right purchaser. Beyond the example presented by the Stage Stores purchaser, that sought rights to use a brand name nationally, another type of buyer may be looking to eliminate a struggling competitor, or another buyer may seek to keep a