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The glory days of unlimited financing for dot-com companies appear to be fading. And since Internet start-ups are no longer the “belle of the ball” among venture capitalists and other funding sources, some Texas firms anticipate a flurry of bankruptcy fees from failed Web ventures. “As soon as the capital markets dry up, many e-businesses are in trouble,” says Kevin Thomason, a partner in Dallas-based Thompson, Coe, Cousins & Irons. “It won’t be because they lack a fundamental soundness, but it will be because they’ve run out of cash, which is the prime opportunity for reorganization of business.” Due to the Nasdaq’s recent volatility and a significant decrease in capital sources, five bankruptcy lawyers agree that Internet start-ups have entered the “dot-gone” phase of technology financing. “The tech industry is one we targeted in some respects because we expected to see a fall-out,” says Greg Gordon, a Dallas bankruptcy partner in Cleveland-based Jones, Day, Reavis & Pogue. Thomason’s fellow Thompson Coe partner, Gerrit Pronske, a bankruptcy attorney, says that the time is now, not somewhere in the distant future. “Investors are fickle,” he says. “The fact that many of these companies haven’t made a profit yet is starting to concern investors. The old joke about the Internet companies not being worth anything unless they’re losing money isn’t as valid anymore.” In preparation for this expected fallout, Thomason and Pronske have teamed up to create an “e-ruptcy” site where the Internet community can check out who has filed a bankruptcy or who’s on the verge of filing. Currently, it’s difficult to find such information in one location, Thomason says. “The site is envisioned as a resource for people who have troubled dot-com companies to look at all the avenues available to them,” Pronske says. “The first place Internet companies will look is on the Internet. This is going to be a portal to be used as a research site.” Thompson Coe has acquired the domain names of e-ruptcy.com, e-ruptcy.net and e-ruptcy.org. It has also filed a trademark application on the term, Thomason says. The site is expected to be up and running by the beginning of August, according to Thomason. “What law firms will likely benefit from this?” he asks. “At first blush, one might think the law firms who have ridden the e-business wave will also capitalize on the e-ruptcy wave. The problem that exists for those firms who have taken equity stakes in their clients is that, under the normal rules of bankruptcy, those firms are conflicted out of representing clients in which they have a substantial equity stake.” Thomason speculates as to whether or not negative opinions about the future profitability of dot-com bankruptcies are biased because so many firms have chosen to invest in their start-up clients. “Original owners aren’t going to readily give up all rights to those important assets,” he says. “Moreover, the flurry of shareholder lawsuits against lawyers, accountants and venture capitalists who have straddled various lines during the formation of the companies will need to be managed in a centralized forum.” San Francisco-based Brobeck, Phleger & Harrison has been investing in its clients for some time, says the firm’s Dallas managing partner Tom Nelson. “We know we have ethical duties to the company and a small equity participation does not affect that,” he says. “The dollar amounts we invest are fairly nominal — less than 5 percent.” However, suits are always a risk, he says. “Venture capital transactions are risky investments. But the investors are sophisticated. I’m not convinced that such investors will have cause for a flurry of lawsuits. “Public companies are obviously a different matter, to the extent that the company’s risks have been disclosed,” he notes. “If, as attorneys, we haven’t done our job and made sure that the risks were explained to the investing public, then we could be opening ourselves up to liability. But, at the end of the day, inadequate disclosure is separate from having an investment in a client.” That said, it doesn’t mean attorneys won’t be named in suits, he explains. “Plaintiffs tend to cast as wide a net as possible in order to pull in whomever they can,” he says. BONANZA OR BUST? “We will see more dot-com company failures and all connected industries should be aware of that,” says Bill Wallander, a partner in the solvency and reorganization section in the Dallas office of Vinson & Elkins. “I don’t think people have a full handle on what the undertow could be if there is a big downturn in the dot-com market.” But in the final analysis, Wallander doesn’t believe that a huge bonanza of legal fees will come out of failed Internet start-ups. “I don’t see this wave as being like it was when the oil industry or real estate market crashed because the dot-com companies don’t involve that many employees or that much property,” he says. “The bankruptcy process is primarily effective at fixing an over-leveraged balance sheet,” Wallander says. “I think the key problem for the dot-com companies is that if they’re failing now, they’re not profitable. Reorganization is difficult in bankruptcy for nonprofitable companies.” Gordon agrees. “I don’t know how much work cases like that would generate,” he says. “What assets would they have?” Assets among these types of companies typically include a domain name, intellectual property and its work force. However, since many of the companies have collectively leased a significant amount of commercial space, area real estate could suffer a ripple effect as these companies begin to fail, Pronske says. Attorneys like Jerry Mills, a partner in the Dallas office of Baker Botts, says he buys and sells domain names all day long and that there’s really not much value in them. But David Staber, counsel for Dallas-based Akin, Gump, Strauss, Hauer & Feld, disagrees. “I think this area will be profitable for law firms,” he says “These companies’ market share and name recognition will be important to retain. … A lot of their value is in the people who were able to assemble the software, the technology and marketing strategy. Keeping those people in place is the other key concern in trying to restructure those companies.” Nelson remains skeptical that dot-com companies will turn to bankruptcy for restructuring. Says Nelson, “What we’ll probably see is a lot of shotgun mergers — basically, a distress sale to salvage what’s left.”

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