Bankrupt 23andMe’s DNA Data Gets Sale Nod as Concerns Linger (2)

Bankrupt genetic testing firm 23andMe Holding Co. won permission from a judge to try to sell information about customers’ medical and ancestry-related data, a trove that is considered the most valuable asset in the insolvency case — and has become a source of privacy and safety concerns amid the company’s collapse.

Shares in the company surged on the news, jumping as much as 158% as investors speculated that the bankruptcy could bring in enough cash to pay them something once all of 23andMe’s debts are paid. Under bankruptcy rules, any sale would need to bring in more than the company owes creditors — at least $214 million — before anything could be paid to shareholders.

Read More: 23andMe Shares Surge on Permission to Sell Some Customer Data

Under the sale procedures, the company set quick deadlines for potential bidders, including May 7 when definitive offers are due, and a final hearing the following month. But US Bankruptcy Judge Brian C. Walsh required the company to slow the overall pace by two weeks, in part to accommodate his schedule and in part to give creditors a chance to weigh in before the court makes a final decision on a buyer.

“My overall reaction to the timeline is that it’s pretty tight,” Walsh said at the company’s first bankruptcy hearing, held in St. Louis. At his request, the company agreed to push back the final court hearing for possible sale from June 2 to June 17.

Walsh’s ruling didn’t resolve concerns raised by the looming auction of the sensitive data or complaints from shareholders about the months 23andMe spent trying to find a buyer before filing for court protection earlier this week.

23andMe hasn’t been profitable since going public in 2021 despite collecting DNA from saliva samples from more than 15 million customers. Now, those samples — and the genetic data they yielded — have become the bankrupt company’s most marketable asset, and the prospect of the sensitive information being put up for auction has sparked anxieties among customers worried about how and where of their material may be used. Bankruptcy officials have also raised concerns.

Walsh at the hearing said speed in the sale process is partly justified because the company spent so much time trying to find a buyer before it filed bankruptcy. But the goal, he added, should be to “balance the desire to move quickly with the desire to avoid collateral damage.”

Sale Oversight

Carole J. Ryczek, a lawyer with the US Trustee’s office, which acts as a public watchdog in bankruptcy court, told Walsh that a privacy ombudsman is necessary to oversee the sale of customers’ private genetic information.

The bankruptcy case “needs a neutral third party” involved in the sale process to protect customers, Ryczek said. Company lawyers and company investment bankers declined to comment on the value of the customer data.

Walsh declined to say whether he would support a consumer privacy ombudsman, or how he would respond to a demand by two investors that he appoint an official committee to represent shareholders. Those shareholders complained about how the company tried to sell itself before filing for court protection.

23andMe lawyer Grace Hotz argued that an ombudsman was unnecessary because of the extensive privacy policies. Under the US Bankruptcy Code, companies cannot sell personally identifiable information about a consumer unless the sale conforms to the firm’s privacy policies or until after an ombudsman is appointed.

In this case, Ryczek indicated that the US Trustee planned to ask Walsh to authorize an the department to appoint an ombudsman.

The company has said the Chapter 11 reorganization doesn’t change how it stores or protects personal data and that any buyer will be required to comply with applicable laws with regard to treatment of such information. The company allows customers to delete the genetic details and other information in their account and to have their saliva, blood or other bodily tissues removed from the company’s “biobank,” according to court documents.

In the wake of 23andMe’s bankruptcy, a handful of state attorneys general issued consumer alerts instructing customers about how to delete their data, prompting a rush of customers to the company’s website. 23andMe said that its website “experienced some issues and delays due to increased traffic” on Monday as users sought to delete their data before it is sold.

Read more: 23andMe Says ‘Delays’ Resolved After Users Rushed to Delete Data

23andMe filed for bankruptcy protection on March 23 after it was unable to find a buyer to rescue it from insolvency proceedings and the board of directors rejected a buyout offer from co-founder Anne Wojcicki.

Its first bankruptcy hearing Wednesday took place far from the company’s home in Silicon Valley, and was also well away from the courtrooms in New York, Delaware and Houston that have dominated the business of restructuring major corporations for more than a decade. The company will return next month to seek final approval of a loan to help fund the bankruptcy case.

First ‘Mega’ Case

The case is also designed to resolve legal troubles related to a data breach in 2023, according to a statement. That hack compromised information about roughly seven million customers, including giving a hacker direct access to about 14,000 user accounts. The company faces about 35,000 claims related to the incident.

Walsh is overseeing his first “mega” bankruptcy case, which is generally defined as any Chapter 11 filing involving more than $100 million in debt, according to court officials. During his career as a commercial lawyer, Walsh was involved in several such cases, including one bankruptcy dispute he argued in front of the US Supreme Court, lawyers who know Walsh said.

Sporting a bright blue bow tie, Walsh oversaw the hearing in an efficient, even-toned fashion. About three dozen people attended, most of whom were lawyers, including some who were merely curious.

“I just came to watch Brian,” said bankruptcy attorney David Unseth, who practiced with Walsh for more than a decade before the judge was appointed to the bench in 2023.

Walsh was appointed to the bankruptcy court in St. Louis in 2023, after working as lawyer for 25 years, including several years overseeing the restructuring practice of Bryan Cave Leighton Paisner in St. Louis.

The case is 23andMe Holding Co., 25-40976, U.S. Bankruptcy Court Eastern District of Missouri (St. Louis).

(Updates with share price and debt figure in the second paragraph.)

--With assistance from Jonathan Randles.

To contact the reporter on this story:
Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

To contact the editors responsible for this story:
Irene García Pérez at igarciaperez@bloomberg.net

Beth Williams, Jaren Kerr

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