The Bright Side of Nuclear Winter: Opportunities in the New, New Economy
During the Internet revolution of the late ’90s, a well-known investor at a “Keiretsu Forum” boldly proclaimed that the division of the Internet landscape was akin to the great land grab of the 19th century. “In two years it will all be over,” he predicted. He was right, but for precisely the wrong reason. Two years later the dot-com bubble had burst, leaving in its wake a shattered economy.
Each of the last three decades has ended in significant recession. The ’80s ended in a downturn caused largely by the collapse of the commercial real estate market. The aforementioned collapse of the New Economy at the end of the twentieth century was spurred by wild speculation in technology companies. Now we have a worldwide recession caused in large part by the credit crisis. Each downturn feels somehow deeper and more troublesome than the last. Yet if history is a teacher this downturn too shall end. The question is how to survive, and even thrive, in this New New Economy. As with many complex problems, there is no simple or single solution. However, a careful analysis of the current landscape and developing a strategy around your company’s assets and liabilities is an important starting point.
Successful Management of Legal Issues in a Downturn
Tough economic times raise difficult legal issues, such as the increased risk of shareholder litigation. As more companies face financial uncertainty, officers and directors must clearly understand their obligations and act accordingly. Officers and directors owe a company and its shareholders due care, good faith and loyalty. Failure to uphold such duties can expose directors to personal liability for damages. This risk is particularly acute for venture capital and other private equity professionals.
In the last major downturn, the courts expanded their definition of creditors. The rationale was that in situations where a company is insolvent or on the brink thereof, such company’s equity is worthless and it is the company’s creditors that bear the risk of poor management decisions. Since many companies that were entirely solvent just months ago now teeter on the brink of insolvency, the risks of serving as a director have increased dramatically.
Directors need to be vigilant in the current environment. First and foremost they need to be candid with themselves regarding whether it is prudent for them to continue to serve as a director. Next, get a complete understanding of the company’s financial situation. Don’t take management’s word for it at face value; it’s the directors’ assets that are on the line. Analyze the company’s indemnification provisions and directors’ and liability insurance. Are they adequate? Is there any credit behind them? Finally, pay close attention to the company’s tax situation. The IRS and state taxing authorities may be looking for revenue wherever they can find it and won’t hesitate to chase the officers and potentially the directors of any company that fails to pay payroll withholding or state income taxes.
Strategic Intellectual Property Portfolio Management
The current downturn presents an opportunity for a company to undertake a careful, strategic analysis of its IP assets with a view to not only conserving costs, but also garnering new sources of revenue. Since it can be very costly to maintain families of patents and trademarks, it is important to analyze how vital such IP is to the company’s current and future business plan. While the reduction of some filing and maintenance fees can result in significant cost savings, such pruning must be done with a keen eye to the future. It would be folly to cannibalize a company’s IP portfolio in the name of cost cutting only to find that the company is at a substantial competitive disadvantage when the economy recovers.
The next strategic issue to address is whether the company wants to use its IP offensively, defensively, or a combination of both. If the company is primarily interested in using its patents and trademarks to protect its current and projected (near term) operations, then it should consider adopting a largely conservative strategy that emphasizes cost control and strategic filings. Still, even those companies should analyze whether there is any additional revenue that can be generated from a sale, licensing or litigation program.
Companies that have invested significantly in their IP should strongly consider harvesting their investment. A well-thought-out licensing and litigation strategy can result in an enhanced bottom line, often without significant new investment. Certainly infringement litigation is not inexpensive, but many companies in the current environment might be inclined to settle infringement suits to avoid the heavy costs of IP litigation, sometimes even at the expense of significant license fees.
Licensing in the current environment has its own set of risks. It is critical that the “nuts and bolts” of licensing be observed even in the face of the over arching need to “make a deal” and start generating revenue. Clearly defined field of uses, royalty provisions, representations, warranties, and indemnification provisions are critical for a successful licensing program. It is equally important to assess the credit of potential acquirors and licensees of IP. If a company licenses valuable IP to another company that goes into bankruptcy, it may end up in the unenviable position of dealing with a bankruptcy trustee.
This kind of savvy strategic planning, and a willingness to make difficult decisions, will define who will be the winners and losers in the New New Economy.
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