Ventracor has been liquidated

Ventracor has been liquidated

The Ventracor Shareholders Group has worked tirelessly over the last 4 months to save Ventracor from collapse. Despite a number of last ditch efforts we were unable to raise sufficient funds to implement our deed of company arrangement (or DoCA) so we reluctantly withdrew it before the meeting on Friday 3rd July 2009. There were no other offers on the table and the creditors voted to liquidate the company. All shares are now worthless.


Why did we withdraw our proposal?

Our original plan was to pay creditors 100c in the dollar and operate the company as leanly as possible until it could be relisted and a share purchase plan (SPP) undertaken. Pledges from over 1,400 shareholders made us confident that SPP would raise at least $10M but the hard part was always going to be keeping the company going until we could raise that capital. After the General DoCA from Siqro was accepted by creditors on 29 May 2009 the group continue to monitor the position in case the deal fell over, which it did on Monday 22 June 2009. Then on Thursday 26 June the deed administrators called a further creditors meeting for Friday 3 July 2009 for the creditors to vote on winding up the company. The group then sought to revive their DOCA for submission to creditors, this time paying less than 100% to creditors. To have a reasonable chance of success we needed at least $7M but by Friday evening we only had $6.1M. Of this, $2.5M was conditional on bringing an institutional investor into the syndicate and, despite our last ditch efforts, we were unable to do that so the total funds available dropped to $3.6M. We expected the amount required to induce creditors to vote favourably for the Shareholders’ Group Varied DOCA Proposal to be in the region of $4M which would leave no money to operate the company. Prior to liquidation, the company burned through $400K per week and, even if we were able to drastically reduce costs, it would not have been possible to find enough money to keep the company going until the second round of funding (the SPP) could be completed.

Some people have asked why we initially planned to pay creditors 100%. Although trade creditors would likely accept anything other than liquidation most of the creditors are ex-employees who currently have no income. We expected they would only vote for our DoCA if it guaranteed them a job, paid out 100% of their entitlements or gave them more money than the Federal Government's General Employee Entitlements and Redundancy Scheme (GEERS). This pays employee entitlements if a company is liquidated but not if it enters into a DoCA. Even if we had $10M we could not offer everyone a job and with only $3.6M even fewer people could be re-employed. This meant there was a large voting block who would only support a DoCA that promised near enough to 100% to creditors. Without these votes we had little chance of success.

In the last week we explored two other options, i.e. “hibernation” and an “asset purchase”. In a hibernation we would use the $3.6M to pay out creditors, secure ownership of the company and then employ a skeleton crew to perform core functions such as maintaining the clean rooms, ensuring the accreditations are not lost, supporting existing patients and keeping the FDA approval process ticking over. The company would not be trading, i.e. it would not manufacture or sell new devices and no implants would be performed so there would be no income; only expenses. The strategy relies on a new investor completing their due diligence during hibernation and investing enough funds to revitalise the company. This is a high risk strategy for a number of reasons such as;

 We might not be able to find an investor.
 The investor might not wish to invest after due diligence.
 Key staff members would need to find other employment and would not be available when required.
 The regulators may decide to terminate accreditations.
 The reputational damage might be irreparable.
 The advantage over Heartware / Thoratec is eroded more and more every day.

Put simply, it is unlikely that the company would wake up from hibernation.

In an asset purchase we would let the company go into liquidation which would extinguish the creditor claims. The employee creditors would not be adversely impacted by this because the Federal Government would pay out their entitlements via the GEERS scheme however the trade creditors would not be very happy with the outcome and might need to be compensated when the company was recapitalised. Once the company was liquidated we would offer something like $2M for the assets and move on to the hibernation model. Although we would have more money to fund the hibernation in this scenario there are a number of added complications;

 The reputational damage of a liquidation would be enormous and it is unlikely that any surgeon would ever implant a VentrAssist again because their malpractice insurer would forbid it.
 The liquidation would waste the $200M of tax credits which Ventracor had built up so any new company will have to pay tax much more quickly than the old company would have.
 It would also trigger the liquidation of the subsidiaries wasting all the inter company loans made over the last few years.
 Most importantly, the existing shareholder investment would be worthless and the chance of raising sufficient cash through a SPP is greatly reduced.

We discussed the options with our cornerstone investors but there was not much interest in either hibernation or an asset purchase. The only option that had strong support was the one described in the DoCA and there was not enough money to implement this plan. The day before the meeting we sought advice from our insolvency specialist and lawyer. They told us that we did not have enough money to induce the employee creditors to vote for the proposal (as they would do better under the GEERS Scheme) and operate the company so this DoCA is not viable. Also, to present the DoCA without sufficient funds may have exposed us to claims of “false & misleading conduct”. We felt we had no option but to withdraw the Variation DoCA Proposal.

The final nail in Ventracor’s coffin came from a most unlikely source... Dr John Woodard, the company’s founder. For our DoCA to be approved we needed the support of both trade and employee creditors. A small group of volunteers contacted every trade creditor, explained the situation and asked for their proxy. This was very successful and we achieved 10% of all creditor votes by both number and amount. Getting support from the employees was not so easy. We contacted everyone for whom we had an email address asking them to vote for our DoCA but we only received a few proxies. We asked key employees for their help in lobbying their colleagues but they were reluctant to help. John Woodard has previously discussed plans to recapitalise the company in a way that excluded the existing shareholders and destroy their investment and were concerned he may have been working on an alternative plan. Dr Woodard spoke to some of our cornerstone investors seeking their funds. We repeatedly asked John to pool any funds he might have been able to raise with those of our cornerstones but he refused to do so. John was asked if he had a hidden agenda and he denied it although he told a different story to a journalist and the administrator said at Friday’s meeting that he had received a proposal from Dr Woodard. We may never know whether there was any substance to John’s alternate plan but his reluctance to help our cause certainly made our task much more difficult. We are greatly disappointed that John did not support the Shareholders’ Group

At Friday’s meeting the administrator, Steve Sherman, suggested the Ventracor Shareholders Group had dragged things out to the detriment of the company, employees and creditors. We refute this claim whole heartedly. What we did was to keep the door open for people who might be able to recapitalise the company. At the end of the day we were not able to secure enough funds. However, at least we tried to look beyond Siqro which Steve Sherman appears not to have done. Had Ferrier Hodgson co-operated with us then we believe the result might have been very different.

Which begs the question “why did Ferrier Hodgson not cooperate with us?”. One possible explanation goes like this... Siqro were interested in Ventracor long before it went into administration but the deal required shareholder approval and the board knew this would not happen at the low price being offered. By putting the company into liquidation shareholders were not required to approve the deal with Siqro. In fact, the Ventracor board are on record as saying the timing of Ferrier Hodgson’s appointment would “provide the administrators with time to finalise a transaction with Siqro or look at other options to realise value for creditors or shareholders”.

Ferrier Hodgson’s actions seem to indicate a preference for Siqro at the expense of other options that might realise value for creditors or shareholders. After the creditor’s meeting on Friday 3rd July 2009, Steve Sherman told a number of people that he did not allow other organisations free access because he had signed an exclusive contract with Siqro. This might explain why potential investors, including a medical device company, a private equity firm, wealthy individuals and the Ventracor Shareholders Group were frustrated by tactics such as non co-operation, inappropriate non disclosure agreements, threats of sacking for employees who made contact, and refusal to provide information such as board minutes and cash flow statements. Although not certain, we can only surmise the exclusivity arrangement only applied from the time the administrators entered into the sale agreement with Siqro.

For some of the players, Ventracor’s collapse was just another business transaction but for the shareholders, employees and patients it represents a betrayal from which some may never recover.


Why did we adopt this strategy?

When we started this campaign all we really wanted to do was to give the 17,500 shareholders a chance to subscribe to a share purchase plan now that (a) the market turmoil has subsided and (b) the previous board and executive have been removed. It quickly became apparent that the obstacle was getting the company out of administration so we could run the SPP. We were advised that to seek investment funds from retail investors for this purpose would have been prevented by ASIC and would have been too cumbersome to co-ordinate even if it was legal. Also, we were always operating under the assumption that the deadline was just days or weeks away so there was no time to approach the full 17,500. Consequently the cornerstone / SPP strategy was formulated. If we had known back in April that we had until early July to come up with $10M we might have adopted a different strategy. Hindsight is a wonderful thing.

We have been tantalisingly close to reaching our goal a number of times. Back in April we negotiated with a single investor wanted to contribute $10M but this shrank to $2.5M and later $0. We spent considerable time & money helping organisations do their due diligence and this was progressing well but the administrator & their lawyers seemed to frustrate this process so that it could not be completed in time and these investors withdrew their support. We also devoted resources to Satyan from Horizon Health who acted as an agent for a number of organisations but none of these negotiations produced any worthwhile result.

Throughout this entire saga the only people who showed us significant support were shareholders.