The current difficult economic conditions are again creating a set of circumstances for a number of Silicon Valley start ups and venture backed companies where anticipated revenues do not materialize and needed financing becomes unavailable at any price. Current market conditions seem to be inhibiting merger and acquisition exits as valuation multiples in the public markets have declined precipitously. Many of these companies may be facing the difficult decision of shutting down operations.
Once a wind-down becomes a certainty, an Assignment for the Benefit of Creditors (“ABC”) may be an attractive course of action. Specifically, an ABC is a legally prescribed business liquidation mechanism under many state codes that is an alternative to a formal bankruptcy proceeding. In California and in many other states, this ABC process is handled outside of the judiciary system. Therefore an ABC results in significantly lower expenses and a more stream-lined process.
If GCG becomes the assignee in an ABC, the process generally works as follows:
- The company considering liquidation (assignor) enters into a contract whereby it transfers all rights, titles, interests, custody and control of all assets to GCG as assignee.
- GCG acts as a fiduciary for the creditors by liquidating all assets and then distributing the proceeds to the creditors.
- Secured creditors are paid from proceeds derived from their security, relieving them of the legal costs and burden of foreclosing and selling their collateral.
- A formal claims process is established for unsecured creditors, thus allowing GCG, as assignee, to limit and control ongoing liabilities.
- Once all liabilities are paid off, GCG can manage the process of distributing any remaining value to shareholders in order of their preferences.
- GCG as assignee is able to review, control, clean-up and work toward liquidation and a formal wind-up of the corporation including all accounting, tax and other matters needing resolution, and filing of formal liquidation documents with the appropriate state authorities.
The benefits of an ABC are numerous. The liquidating company's problems become the Assignee’s problems. The personal liability of directors and officers for running an insolvent company ceases to be an issue once the assignment of assets occurs. Other benefits include:
- Asset sales can occur quickly, allowing for a higher price under such circumstances;
- A third party can acquire clear title to the assets in a purchase transaction;
- Intellectual property can be sold or auctioned to maximize remaining value;
- Limited operations can be continued to address customer transition needs;
- Contractual obligations can be negotiated and resolved efficiently.
In addition to ABC and quiet liquidation assignments, GCG has also assisted clients with other exit services including “cleaning up the books”, preparing due diligence packages, and helping management assess potential exit values and strategies.
The advantages of selecting GCG for these services include our extensive experience with venture-backed startup companies and private equity firms, and our range of services. —Mark Greenough