Monetizing intangible assets (IA) in insolvency requires an understanding of the IA the company has to sell, especially since IA does not often appear on a balance sheet. IA can include patents, trademarks, copyrights, source code, licenses, executory contracts, know-how, trade secrets, domain names, registered and unregistered designs and data. These items may be of great value to a third party but, if not properly identified and marketed, the value can quickly dissipate.

Professional advisors, such as patent counsel and employees, are valuable, often vital, resources during the IA sales process as they often created, developed and used the IA. For example, to demonstrate IA to prospective buyers and to assure buyers the IA would be properly transitioned to the buyer in a functional way, an experienced user needs to demonstrate the technology. Undocumented source code or patent applications without context are of little use if no one knows how to retrieve, understand or implement the technology or has a fallback guide. When a company is winding down/closing, how does it retain such a team? Failure to retain employee know-how may cause deterioration in IA value.

Martin Pichinson, Vice President, Sherwood Partners
Martin Pichinson, Vice President, Sherwood

Legal Tools

Wind down methods for insolvent companies generally include bankruptcy, assignments for the benefit of creditors (ABCs), receiverships, foreclosures or outright sale before the company enters into a formal insolvency procedure. Bankruptcy and ABCs each have pros and cons. Bankruptcy is governed by federal law, and ABCs by state law. Receiverships and foreclosures are lender initiated actions, but if done without the cooperation of the company, the lender may find itself in control of something it does not understand and cannot monetize. As previously noted, retaining a core team around the technology is key. Preserving the assets’ value (and the team itself) requires finesse, speed and the appropriate legal framework.

In an ABC, the company chooses an assignee, which is designated with certain legal rights. The assignee communicates with creditors, takes title to assets, monetizes those assets and distributes cash to the creditors. This is generally done without court oversight in California and at a cost well below a Chapter 11 filing.

In a bankruptcy sale, the judge generally will need to approve any sale procedures, cash disbursements and asset sales. Although the bankruptcy process protects the buyer by minimizing the risks of fraudulent transfer and successor liability claims, these can largely be mitigated outside of bankruptcy by retaining a reputable assignee. An assignee that engages in arms-length transactions and has a record of transparency should have little risk of backlash from disgruntled creditors.

Although bankruptcy has other advantages over an ABC, it does not offer the benefit of speed, which is extremely important in most IA monetization. Bankruptcy does provide an automatic stay against creditors’ acts and litigation, which an ABC does not. From a practical standpoint, however, creditor and litigant actions can be effectively thwarted by an assignee’s de jure lien on the assets.

More significantly, unlike a §363 bankruptcy sale, the assignee cannot sell assets “free and clear” of all liens nor compel a counterparty to an executory contract to accept an assumption of the contract by a third-party buyer. This was a deciding factor in a recent Sherwood matter. The primary assets to be sold were executory contracts for services to be provided. To transfer the IA (contracts) to the buyer, a bankruptcy order was required even though an ABC would have otherwise been a satisfactory solution. In other instances, these executory contracts might be license agreements or supplier contracts. Under either process, directors and officers may enjoy some protection from liability arising from a sale of assets, as they are not the final decision makers. A judge’s bankruptcy order is generally the final word on the terms of sale in bankruptcy. In an ABC, the assignee, not the company’s officers, signs the sale documents and must defend its actions if challenged.

Joshua Pichinson, Vice President, Agency IP
Joshua Pichinson, Vice President, Agency IP

Securing the Assets

To secure the IA, a company patent counsel should be consulted for a docket report which will include a complete list of patents, trademarks and related applications, along with filing deadlines and expected fees. These carrying costs can be substantial and must be considered as part of the monetization budget. Patent applications, for example, require counsel to respond to U.S. Patent and Trademark Office (USPTO) office actions within deadlines or the applications may be considered abandoned and all benefits lost. Issued patents require ongoing annuity or maintenance fees payable to the USPTO for the patent to remain in force. A USPTO search for patents, trademarks and copyrights by inventors known to have worked at the company is another resource for uncovering IA. Working with an intellectual property (IP) attorney, IP management firm, IP software or simply using can uncover previously overlooked assets.

Securing web domains and third-party storage locations requires fee payments. The domains must be transferred to a secure account or confirmed as secured by the current domain registrar. For software stack/source-code, a back-up of the code is ideal but may not be practical in the short term. Again, payments to third-party storage providers such as AWS, Azure or utility vendors should be factored into the budget. If IA is stored on the premises, determine how to retain any required specialized hardware (which may be leased). Making an image of the company’s servers provides a copy to hand-off to the buyer and leaves a back-up in case one cannot get things back up and running. Often Sherwood moves the servers to our own facility for safe keeping. Having former IT employees involved is helpful, but, at the very least, a list of usernames and passwords for all accounts and license numbers for software is a must.

Generally, a buyer will not purchase assets with a perfected lien recorded against them. Perfected liens are identified in public filings with the secretary of state in the jurisdiction of operation or of incorporation called UCC-1 filings. Liens on patents and trademarks can also be registered with the USPTO. Technically, the assets can be sold without removing the liens, but liens do not disappear — they follow the assets. Liens can be removed with the consent of the secured party, generally with a payoff of the debt or partial payment in conjunction with negotiation. Only a bankruptcy court can remove liens unilaterally. An educated buyer will try to acquire assets free and clear of liens, and an educated seller will have a plan to resolve liens before the sale process begins.

The goal of the sale process should be to maximize proceeds based on value. When there is no established market or benchmarks for unique assets like IA, the marketplace itself establishes the value. The seller is obligated to approach every party which might be a potential buyer: competitors, customers, vendors, financial firms with investments in the same industry and even company insiders.

Buyers may see value in product insertion and development, denying the technology to a competitor or generating revenue from licensing activities. Value also can be found in offensive and defensive litigation. When developing the outreach list, consider applicable uses for which the IA was not originally developed, as this further broadens the target list of buyers.

One process is to develop a marketing memo which describes the technology, the discreet assets being sold and the terms of the sale. Using a database of investors and buyers along with the parties noted previously, deliver the memo to every potential buyer you can find. Continued communication with all targets, as well as the client, is essential to driving the sales process. These target companies can be difficult to navigate and getting to the right person is imperative, which is why it is important to work with a firm that knows how to do it and has buyer relationships in the IA communities. Next, interested parties sign a non-disclosure agreement and gain access to an online data room to begin diligence. Presentations by former management and in-person meetings may follow. Bid deadlines are generally in weeks — not months — to keep the momentum going and carrying costs down and to preserve the value of wasting assets. Often, a speedy sale is the only sale.

David Johnson, Managing Director, Sherwood Partners
David Johnson, Managing Director,
Sherwood Partners


The value of IA can supersede anything else in a distressed company. It can be in specific patents or a mix of IA, such as a formula or manufacturing process reliant upon a patent. A recent example included a patented chip architecture with a software stack, which combined to enable a general-purpose microprocessor to process digital media. Previously, this could only be done with special-purpose hardware. Online education platforms are another example; the value lies in both the software platform and the copyrighted material of the classes.

The Kodak Chapter 11 filing is a prime example of diminishing IA value. Eleven months before Kodak filed for bankruptcy, a portion of its patent portfolio (1,700 patents and 655 applications) was valued as high as $4.5 billion by a third-party valuation firm. Once in bankruptcy, the portfolio value fell to between $2.2 billion and $2.6 billion. Those Kodak assets later sold for only $94 million — less than the licensing fees Kodak collected in its worst year in recent history. Further, the remaining 20,000 patents were licensed to a 12-member consortium for only $433 million, severely restricting their future earnings. In 2009, Samsung paid a similar amount to license a single Kodak patent.

IA can command a large value in insolvent entities. To maximize the value, consider the timeline, create the proper structure, obtain the required resources and define the market as broadly as possible.