The Weinstein Co. board pulled the plug on the sale on Sunday night and announced the company would pursue an orderly bankruptcy. The move caught Burkle and Contreras-Sweet off guard, and left the Weinstein Co. employees in fear of mass layoffs.
In a memo to the staff, Bob Weinstein — who has taken over internal communication since COO David Glasser was fired 10 days ago — said he had received “several emails regarding what are the next steps with regards to your futures.” Confessing that “this is new territory for me,” he promised to get in touch with the company’s labor lawyer and get further information.
The situation was no clearer outside the company, as observers wondered whether the potential bankruptcy filing was merely a negotiating ploy. In a letter to Contreras-Sweet and Burkle, the board complained of a series of new conditions on the deal, and openly questioned whether the buyers were acting in good faith.
The board felt they were getting “jerked around,” said one person involved.
Contreras-Sweet put out a statement Monday that appeared to indicate she was walking away. But she and Burkle still want to buy the company, according to sources close to them, and there is a possibility that the deal could be patched back together.
The board appears to be working on parallel tracks, preparing to declare bankruptcy without completely ruling out the deal with Burkle and Contreras-Sweet. Though the company said it would “prepare” a bankruptcy filing “over the coming days,” it may take at least two weeks to actually file it. The fact that the filing was not prepared already provides an opening to resuscitate negotiations.
The Weinstein Co. is running low on cash, but according to one source it has enough capital — about $5 to $6 million — to stay in business for at least several weeks.
One of the key sticking points in the negotiations was the investor group’s unwillingness to provide $7 million in bridge financing before the transaction officially closed. The Weinstein Co. board feared that the buyers would drag out the sale process for several months, bleeding the company dry. The bidders feared they would spend millions to keep the company afloat without knowing for certain that they would end up owning it.
Another factor may have been Bob Weinstein’s personal stake in the sale. Sources have repeatedly said that all equity holders — including Harvey and Bob Weinstein — would be wiped out completely. But according to sources familiar with the transaction, under the original plan Bob Weinstein would have received $10 million in loans that the company owes to him.
But after New York Attorney General Eric Schneiderman intervened two weeks ago, much of that money was set to be diverted to an escrow account, which might be used to compensate Harvey Weinstein’s victims. Some within the company believe that Bob Weinstein preferred to take his chances on recouping the loans as a creditor in bankruptcy.
A bankruptcy filing would make for a more orderly and transparent sale process. It would also give other bidders — such as Killer Content, Lionsgate, and MGM — a chance to try to pick up pieces of the company’s 277-film library.
But it would also likely cost many millions of dollars in fees for attorneys and bankers, who would be paid first out of the bankruptcy estate, reducing the amount available for other creditors and for Weinstein’s victims.
“There is absolutely zero benefit to them filing for bankruptcy,” says Larry Hutcher, of the firm Davidoff Hutcher & Citron LLP. “This is an act of desperation.”
A bankruptcy filing would pause all of the sexual harassment litigation against the company. That would give the company some breathing space, but the company would not be able to simply discharge any legal liability. Instead, the plaintiffs would become potential creditors to the estate, and would be paid along with other creditors out of the proceeds of the asset sale.
“It kind of puts a freeze on the assets, which is not necessarily bad for us,” says Jeff Herman, an attorney who represents two women who say they were sexually assaulted by Harvey Weinstein. “We can’t control it, so we’re going to wait and see.”
Should the company file for bankruptcy, it will need to secure debtor-in-possession financing. A bank may look for cuts to the payroll — now at around 130 people — as a condition of extending a loan.
At this stage, it is still unclear whether the business would continue to operate, or if it would be dismantled and sold off at auction. The latter scenario would mean the employees would be let go en masse.
“It’s really hard to tell at this point whether (creditors) will fare better or worse,” said Roger Friedman, a bankruptcy attorney at Rutan & Tucker. “Until we know what the assets are going to sell for, what the costs of the administration are, and the amount of claims that come in, it’s all speculation.”