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The following discussion thread excerpt is from a recently completed law.com online seminar “Bankruptcy in the Dot-Com Economy” moderated by Robert L. Eisenbach III, a partner at Cooley Godward in San Francisco. For more information on this program and other law.com seminar offerings, please visit www.law.com/seminars. MODERATOR ROBERT L. EISENBACH, III, PARTNER, COOLEY GODWARD, SAN FRANCISCO As we begin the discussion today, let’s assume that although the directors have concluded there is a viable business, the company has not been able to turn its business around yet. The company has let less essential employees go and has done its best to conserve cash, but more significant measures will be needed if this dot-com company will be able to make it. Bankruptcy plainly is one alternative that, under the right circumstances, can enhance a dot-com company’s ability to reorganize or realize value from its assets. For example, despite a falling rental market in some areas, a dot-com company may find itself holding a below-market lease. Another company may have net operating losses. Bankruptcy may be able to assist. I would like the panel to address some of the advantages — although there certainly can be drawbacks — to filing a bankruptcy, including the following questions: 1. Does bankruptcy enhance a company’s ability to implement a business and restructuring plan? 2. Can bankruptcy help in preserving net operating losses? 3. How does bankruptcy impact real property leases, both those that have above-market rent and those with below-market rent? 4. Can bankruptcy make credit more available than might have been available to a company pre-petition? 5. What advantages does bankruptcy present to a dot-com company looking to sell all or substantially all of its assets? PANELIST DAVID L. NEALE, PARTNER, LEVENE, NEALE, BENDER, RANKIN & BRILL, LOS ANGELES First, it is important to remember that, despite the procedures and relief afforded under the Bankruptcy Code, one thing the Bankruptcy Code does not do is create revenue for a company. In other words, the most important question that must be answered as a predicate to the analysis is whether the core business of the company is fundamentally viable. Assuming that our hypothetical dot-com company has an otherwise viable business, bankruptcy may enhance the company’s ability to implement its business and restructuring plan. One of the principle benefits available under the Bankruptcy Code is the automatic stay. As the name suggests, the automatic stay arises automatically upon the filing of the bankruptcy case and prevents pre-bankruptcy creditors from taking any action to enforce pre-petition claims against the debtor or its property. Given the statutory “breathing spell” created by the automatic stay, the environment in which business plans can be developed and implemented is radically different from the pre-bankruptcy crisis atmosphere that often prevails. Having said that, however, jumping ahead to question 4, a company in bankruptcy may find that it has alternative and plentiful sources of potential credit, yet the pricing and other terms of such credit are usually vastly different from the pre-bankruptcy venture capital type credit found by many of the dot-com companies. It is not uncommon for interest rates to be five or more points over the bank prime rate, with up front points charged by the new lenders. In addition, personal guaranties of the principals of the company may be required. Thus, the cost of doing business in the post-bankruptcy environment may be considerably higher than was the case prior to the bankruptcy. As to question 2, bankruptcy does allow for the preservation of favorable tax attributes of a debtor. However, the tax rules and regulations regarding the preservation of net operating losses (NOLs) are extremely complex. Usually, it is difficult to preserve a substantial NOL where there has been a change in control of the company (i.e., a change in the ownership of 51 percent of the common stock in the debtor). In Chapter 11, it is not uncommon for creditors to receive stock in full or partial satisfaction of their claims. In addition, in a hostile Chapter 11 case, the Bankruptcy Code allows for the “cram down” of a plan of reorganization (i.e., the confirmation of a plan of reorganization over the objection of a class of creditors or interest holders), provided, however, that, in the event general unsecured creditors vote to reject a plan of reorganization where they are paid less than 100 percent of their claims, any class that is junior in priority (i.e., stockholders) may not receive or retain anything under the plan on account of their interests. In other words, stockholders’ interests must be extinguished under a cram down plan rejected by unsecured creditors (subject to the ability to “reacquire” an interest in the debtor by way of a contribution of new value). Under those circumstances, it would likely be impossible to preserve significant NOLs. With respect to leases, the Bankruptcy Code gives the debtor the opportunity to assume or reject all of its nonresidential real property leases and executory contracts. The effect of a rejection of a lease is to treat the lease as having been breached by the debtor immediately prior to the commencement of the bankruptcy case. Where the debtor has an above-market lease, the prompt rejection of the lease has the effect of relieving the debtor of the obligation to continue to pay rent on a post-petition basis, and gives rise to a general unsecured claim in favor of the landlord. The landlord’s unsecured claim is capped under the Bankruptcy Code at the greater of one year’s rent or 15 percent of the remaining rent reserved under the lease, not to exceed three years’ rent. Until such time as the debtor rejects a lease, the debtor must make current payment of post-petition rent, so prompt action can result in substantial savings. Where a lease is below-market, the Bankruptcy Code provides the debtor with the opportunity to assume the lease and assign it to a new party, notwithstanding any restrictions on the assignability of the lease otherwise imposed by the landlord (subject to certain shopping center use restrictions probably not applicable in our dot-com company example). In other words, as long as the debtor can cure pre-bankruptcy defaults under the lease and find a replacement tenant that can provide “adequate assurance of future performance” under the lease, the debtor may assign the lease over the objection of the landlord, and, where the lease is below-market, may keep any sums paid by the proposed assignee for the assignment. It has been my experience that the below-market lease is the principle remaining asset in a failed dot-com company, and can often generate proceeds sufficient to yield some return for unsecured creditors. Finally, with respect to the possible sale of assets or the company through a Chapter 11, the Bankruptcy Code is uniquely well-suited to provide protections and security to potential buyers. Specifically, the Bankruptcy Code allows assets to be sold “free and clear” of all liens, claims and encumbrances, with such liens, claims and encumbrances being transferred to the proceeds of the sale received by the debtor. The purchaser of assets therefore is assured that there are no undisclosed claims or problems that may “come out of the woodwork” post-closing, and due diligence requirements may be substantially reduced. The Bankruptcy Code also allows the sale to proceed even if secured creditors holding a lien on the assets to be sold do not consent as long as one of the following criteria is satisfied: (1) applicable nonbankruptcy law permits the sale of assets free and clear of such interests; (2) the secured party consents (obviously, not the case in our example); (3) the price for the assets to be sold is greater than the liens upon such assets; (4) the lien is subject to a bona fide dispute; or (5) the secured party could be compelled to accept a money satisfaction of its interest in the assets. The Bankruptcy Code also allows for the court to find that the buyer is a “good faith” purchaser such that the reversal or modification on appeal of a previously-approved sale transaction would not affect the validity of the sale. In other words, the “good faith” purchaser is not in danger of having its purchase reversed even if the court order authorizing the sale by the debtor is later overturned, and the remedy of a party complaining about the sale is to pursue the consideration paid by the purchaser to the bankruptcy estate. Neither this protection, nor the “free and clear” sale opportunity, are available outside of the bankruptcy context. PANELIST LAWRENCE P. GOTTESMAN, PARTNER, BROWN RAYSMAN MILLSTEIN FELDER & STEINER, NEW YORK Bankruptcy may prove helpful in obtaining financing that may not be forthcoming outside of bankruptcy, assuming that the underlying intellectual property assets have value. Even if the financially distressed company has valuable assets, possible lenders may be reluctant to lend against such assets if there is any uncertainty regarding the perfection of their liens against such assets. For example, it is unclear whether a security interest in an unregistered copyright can be perfected. An order approving debtor-in-possession financing can go a considerable distance in eliminating such uncertainties. Under section 364(c)(2) of the Bankruptcy Code, the bankruptcy court, provided certain conditions are met, may authorize the debtor in possession or trustee to incur post-petition credit secured by a senior lien against the property of the estate. Such orders typically provide that the post-petition lender is deemed perfected without the need to file financing statements or take other action to perfect its security interest. Section 364(e) of the Bankruptcy Code states that the validity and priority of such lien is not affected by the reversal on appeal of the bankruptcy court order authorizing such lien, even if the lender knew of such appeal, unless a stay is granted pending appeal. A lender who advances funds post-petition can thus have a high degree of assurance that it will have a first priority lien against the debtor’s assets, whereas a prepetition lender will face considerable uncertainty on these issues. Bankruptcy may also enable the debtor in possession to avoid prepetition liens against these core assets. To the extent that the prepetition lender did not properly perfect its security interest, section 544 of the Bankruptcy Code permits the trustee or debtor in possession to avoid such unperfected security interest. Even if properly perfected, there is a real issue as to whether such security interest in web pages and software will continue post-petition. Section 552(a) of the Bankruptcy Code provides that, except as provided in section 552(b)(1), a prepetition security interest does not extend to property acquired by the debtor post-petition. Section 552(b)(1) provides that such prepetition security interest extends to “proceeds, product, offspring, or profits” of such prepetition collateral if the security agreement so provides and applicable nonbankruptcy law permits. Web pages and, to a lesser extent, software, are revised frequently. The real value of such assets lies in their current versions. The question arises whether such modifications make these items new property that has been acquired by the debtor post-petition and, if so, whether the new property fits within any of the exceptions enumerated in section 552(b). The answer is probably not. The prepetition lien is unlikely to extend to post-petition Web pages and software modified by the debtor in possession. PANELIST LARREN M. NASHELSKY, PARTNER, MORRISON & FOERSTER, NEW YORK One of the primary benefits of the Bankruptcy Code is to allow a debtor to pick and choose executory contracts and unexpired leases and make a determination (this time with hindsight) as to which of those contracts and/or leases are critical for the company’s future business plan and which are not critical. In that way, a debtor can attempt to fix operational mistakes made in the past and reorganize its business around those assets (contracts and leases included) which support the company’s new business plan. An example of this point is a company’s ability to reject an above-market lease which is bleeding a company’s cash flow. The claim which arises as a result of the rejection is capped pursuant to section 502(b)(6) of the Bankruptcy Code and would be payable as a general unsecured claim of the company — both of which are extremely beneficial to a company attempting to reorganize. On the other hand, a below market lease is an asset of the company which, in almost all circumstances, could be assumed and assigned to a third-party. The funds generated from such a sale might be used as working capital to allow the company to exit from bankruptcy. PANELIST GREGORY M. GORDON, PARTNER, JONES, DAY, REAVIS & POGUE, DALLAS Under certain circumstances, bankruptcy can improve the prospects for a successful restructuring. As an example, bankruptcy may be necessary to de-leverage a company. This would be the case where there are dissident debt holders with a sufficient amount of debt to effectively defeat an out-of-court restructuring. Moreover, bankruptcy may be necessary where a company simply needs additional time, free of creditor harassment and the crisis atmosphere that typically exists in the case of a troubled company, to implement needed operational changes. In our experience, despite these and other potential benefits, bankruptcy should always be viewed as a last resort, to be considered only after all other efforts fail. The reasons for this, among others, are the uncertainty and substantial cost of a bankruptcy proceeding. In certain cases, credit can be more readily available in bankruptcy. Indeed, some lenders may only be prepared to extend additional credit if the company files for bankruptcy. This may be due to the additional protections afforded in a bankruptcy financing order, but it also may be due to the fact that the lenders want the company in Chapter 11. The lenders may desire this result because they perceive that the company’s problems can only be fixed in bankruptcy and they are unwilling to advance additional funds without assurances that the company’s problems are, in fact, being addressed. With respect to the question regarding leases, it should also be noted that all types of existing contracts can be assumed or rejected so that uneconomic agreements can be rejected at minimal cost and beneficial agreements can be locked in through assumption.

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