Bitcoin Edges Closer to Mainstream As It Attracts Serious Venture Capital

Bitcoin seems to moving away from its seedy reputation as a digital currency for the underworld.

Coinbase, a San Francisco based startup founded in June 2012.  It provides a Bitcoin “wallet and platform where merchants and consumers can transact with the new digital currency bitcoin.”  If you look at their ‘About‘ page, their kitchen looks spiffy.

Coinbase announced a $25 million funding round led by Andreessen Horowitz and including Union Square Ventures and Ribbit Capital, both existing investors.  This brings their funding to $31 million, including the $6 million they announce on their website.  Representatives of Andreessen Horowitz and Union Square will join Coinbase’s board.

According to Bloomberg, other high profile VC firms have invested in Bitcoin companies, such as Tim Draper and Founders Fund.  Otherwise, we have seen novelty acts in this space, such as the Winklevoss Bitcoin ETF.

Much of the trepidation around Bitcoin stems from the regulatory issues.  Basically, many people (me included) expect the U.S. federal government to view Bitcoin with hostility, despite recent noises that they are okay with it.  To that end, Coinbase says that they will be spending a lot of money for licenses with state regulators.

 

 

Swiss CEO Pay Limits Rejected By Voters

A show of reason from Swiss voters.

A Young Socialist-backed proposal to limit executive pay to twelve times the pay of junior employees was voted down by Swiss voters by a vote of 65 percent.  The executive pay limits far exceed the disclosure-based limitations of Dodd-Frank and SEC regulations.

According to the Bloomberg article, at least five of Europe’s highest paid execs are in Switzerland.

Swiss Flag
Swiss voters reject strong limits on executive pay.

The leader of the Young Socialist party vowed to continue the fight to:

  • Send Swiss companies fleeing to other jurisdictions
  • Severely water down the talent pool willing to work in Switzerland or for a Swiss business
  • Turn the pool of executives working for Swiss companies into easy prey for headhunters in competing companies in other countries
  • Make Switzerland toxic to anyone who wants to start a business and hire employees

There may be constraints on UBS leaving Switzerland, but you can bet its CEO (or those talented enough to be in line for executive positions) has plenty of means of escape from this sort of income restriction.  However, do you think Glencore (giant international commodities trading firm) can’t structure its business away from these restrictions?

These are the types of consequences that result from navel gazing over “income equality” and generally looking to more successful people with envy and anger rather than looking to more successful people and trying to learn about how to become successful.

Disagree?  Ask the French.

A Brief Reaction to a Small Part of “Assessing Silicon Valley Corporate Governance Measures” Article

The Recorder recently ran an article discussing Fenwick & West’s corporate governance study.  I believe F&W produces these annually, and they are excellent resources for anyone interested in the up-to-date information about corporate governance practices, particularly for Silicon Valley companies.

However, there was an interesting statement at the beginning of the article:

“When companies are seeking to establish appropriate corporate governance  policies, they often look to model themselves after those titans of industry in  the Standard & Poor’s 100.”

Well . . . sometimes.

More often, companies will look to the companies that:

  1. they deem somewhat comparable to the themselves; and
  2. they aspire to be.

Typically, that will include prominent companies in their industry, which may or may not include companies in the S&P 100, 500, Pick-A-Number.  They also account for size and complexity and other factors.

For many companies, the governance practices of the S&P 100 will be far too complex and have far too many processes and procedures to have any value.  There will often be fewer people in the decision-making process, fewer layers of bureaucracy and the fewer issue-specific policies for smaller companies.

That said, the F&W studies tend to be extremely valuable, and I plan to spend a good part of the weekend reading the new one.  I hope your weekend is better than that.

 

Delaware Supreme Court Discusses Meaning of “Business Combination” In Activision Vivendi Case

As it turns out, it isn’t ambiguous.

Link: Activision Blizzard Inc. v Hayes

In an appeal of an injunction, the Delaware Supreme Court took a look at whether a stock buyback would be a “business combination” requiring stockholder approval under Activision’s bylaws.

Background

Activision Blizzard Logo
Activision Blizzard fights for its rights to buyback its shares.

In 2008 Activision bought Vivendi’s video game subsidiary for Activision shares.  Vivendi also made a separate cash investment in Activision.  Activision’s bylaws were amended to require approval of unaffiliated stockholders with respect to any merger, business combination or similar transaction between Activision and Vivendi. In 2012, Vivendi wanted to sell its Activision stake but found no takers.  Activision agreed to a buyback, under which Vivendi would create a non-operating sub, “Amber,” to hold the assets for sale and Activision would purchase Amber. Activision did not seek stockholder approval, which was the part of the reason for the litigation, which resulted in a preliminary injunction.

Court’s Analysis

The court first looked to see if “business combination” was ambiguous.  Nope.

“A provision is ambiguous only if it is “reasonably susceptible to more than one meaning,” and the fact that the parties offer two different interpretations does not create an ambiguity. Moreover, a provision “may be ambiguous when applied to one set of facts but not another. Finally, the provision must be read in context.”

The court decided that while the meaning could be ambiguous in some contexts, it was not ambiguous here because under their agreement, Vivendi will sell 429 million shares of Activision stock back to Activision. Because those shares will become treasury stock, control of Activision will shift from Vivendi to Activision’s public stockholders. Vivendi’s holdings will decrease from 61% to 12%, and Vivendi’s representation on Activision’s board will decrease from six appointees to none.

Since there was no “combination or intermingling of Vivendi’s and Activision’s businesses,” it is not a business combination.  In fact it is the opposite of a business combination.  These companies will be separating themselves.  As a result, the stockholder approval requirement does not apply.

In addition, structuring the sale through Amber does not change the analysis.  Neither the form of the transaction nor its size changes its fundamental nature. Amber is a shell created to serve as the transaction vehicle.  The court stated that calling Amber a business “disregards its inert status” and “glorifies form over substance.”

The size of the deal does not change the analysis.  The plaintiffs argued that it was a “value-moving” transaction.  However, the bylaws do not require stockholder approval based on size of the deal.

In addition, the bylaws do not require stockholder approval for any deal between Activision and Vivendi, only specified transactions.  While the Chancery Court may have been looking out for the non-interested shareholders’ interests, other provisions of the bylaws already provided for independent director approval for related party transactions.

How Start-ups Can Increase Their Odds of Success

I had a discussion the other day about how start-ups can increase their odds of success.  Since I do a lot of work with start-ups, in legal and consulting roles, I offered three tidbits of advice:

1.  Business Idea.  Do not pick an idea simply because you think it is cool or you will get rich.  For example, the start-up graveyard is littered with music industry apps created by people who believed it was their entry into a “cool” industry.

Find a problem that you think you may share with many people and build a solution.  This is what good businesses do.  They induce customers to pay them to make the customers’ lives easier in some way.  Yes, this includes the Facebooks and Twitters of the world who are good at aggregating and identifying users to make advertisers’ jobs easier in targeting an audience.

2.  Pick the Right Team.  It is important that founders surround themselves with people they trust to be committed to the venture and, most importantly, to produce quality results.  The start-up world is populated with many “flakes,” but the founders need to be able to trust that their associates will do what they commit to do.  I have seen this over and over.  People show up with visions of options and IPOs and foosball tables, but when it comes to actually working and producing results, enthusiasm and attendance fade.

3.  Know When to Step Aside.  Very often, the skills necessary to start a business are different from the skills needed to grow a business.  For example, founders often underestimate the importance of a skilled and talented sales person.  This is a skill set just as computer programming is a skill set, and they does not necessarily overlap.  In addition, managing an ongoing enterprise is much different than managing the birth of an enterprise.  A skilled manager can often be the difference between a hobby with some potential and a successful, growing business.

New Twist On Old SEC Enforcement Tool: Deferred Prosecution Agreements for Individuals

The SEC announced that it entered into a deferred prosecution agreement with an individual, a first for the agency.

Enforcement officials often use DPAs to encourage targets to come forward with information about illegal activities and to cooperate with investigations.  The agency agrees not to prosecute, and the target agrees to behave.

In this case, the deferree, a hedge fund administrator, spilled the beans about his boss regarding misuse of about $1.5 million and lying to investors about the fund’s performance.  The DPA discusses overstatements of fund returns and discrepancies in the net asset value, or NAV, used for internal and external purposes.

The SEC froze the fund’s and the boss’ assets and is preparing to distribute about $6 million to injured investors.

FINRA Trading Halt In All OTC Stocks Earlier Today

In what seems to be contagious, FINRA halted all equity stock trading.

FINRA Logo
FINRA halts trading in equity securities.

Today, FINRA halted all trading in OTC equity securities:

On Thursday, November 7, 2013, the Financial Industry Regulatory Authority, Inc. (“FINRA”) halted trading in all OTC Equity Securities pursuant to FINRA Rule 6440(a)(3). FINRA determined to impose a temporary halt because of a lack of current quotation information. Therefore, FINRA has determined that halting quoting and trading in all OTC Equity Securities is appropriate to protect investors and ensure a fair and orderly marketplace. The trading and quotation halt began on Thursday, November 7, 2013, at 11:25:00 a.m. E.T. FINRA will notify the market when trading may resume.

The trading halt was lifted mid-afternoon.

This comes after:

No wonder people went nuts over the smooth execution of today’s Twitter IPO.

SEC Files Fraud Charges Against Wing Chau, One of the CDO Managers Profiled in Michael Lewis’ “The Big Short”

This won’t be good for the Wing chau defamation suit against Michael Lewis.

Some readers may be familiar with “The Big Short: Inside the Doomsday Machine,” Michael Lewis’ chronicle of the run up to the financial meltdown.  I strongly recommend it.  It is a great read.
The Big Short
Michael Lewis, The Big Short. Short review: A good read.

In the book, there was a discussion of Wing Chau, who helped create and, in theory, manage some disastrous CDOs.  He was not portrayed like the brilliant hedge fund managers who cashed in on the crash of real estate-backed securities.  He was portrayed like a fool.  For this, he sued Lewis for defamation.

I’m not sure if that case is ongoing or not, but the SEC has weighed in.  Verdict:  fraud charges against Chau for misleading investors in a CDO and for breach of fiduciary duties.

The SEC’s claims that Chau and his firm, Harding Advisory LLC, compromised their independent judgment as collateral manager to a CDO in favor of a hedge fund firm.  The hedge fund, the awesomely named Magnetar Capital LLC, had invested in the equity of the CDO.  Merrill Lynch structured and marketed the CDO.  Harding was collateral manager for the CDO.

Specifically, the SEC claims that Harding agreed to let the hedge fund help select the subprime mortgage-backed assets underlying the CDO.  This was not disclosed to investors.

The SEC claims that the influence of the hedge fund led Harding to select assets that its own credit analysts disfavored.  In the tradition of criminal geniuses everywhere, in accepting the bonds, Chau wrote in an e-mail to the head of CDO syndication at Merrill Lynch:

“I never forget my true friends.”

The SEC claims that Chau understood that Magnetar was interested in investing as the equity buyer in CDO transactions, and that Magnetar’s strategy included “hedging” its equity positions in CDOs by betting against the debt issued by the CDOs.  Because Magnetar stood to profit if the CDOs failed to perform, Magnetar’s interests were not necessarily aligned with investors in the CDO debt, which depended solely on the CDO performing well.

Internet Sales Tax Law Struck Down In Illinois

Statute providing for Internet sales tax on out of state sales and sales through affiliates struck down in Illinois.

Link: Performance Marketing Association, Inc. v. Hamer (Illinois Supreme Court)

Amazon.com Logo
Amazon.com is typically the primary target for state Internet sales tax laws.

Like many states, Illinois desperately wants to collect an Internet sales tax when its citizens buy stuff over the Internet.  Generally, a state cannot impose duties to collect taxes on out of state retailers and must rely on people to report their own purchases and pay the sales taxes directly to the state.  Good luck with that.

In order to get to the Internet sales, Illinois changed its sales tax law to change the definition of “maintaining a place of business in this state” to include:

“a retailer having a contract with a person located in this State under which the person, for a commission or other consideration based upon the sale of tangible personal property by the retailer, directly or indirectly refers potential customers to the retailer by a link of the person’s Internet website.”

In other words, Illinois can get to Amazon and its sales if someone in Illinois signs up for their affiliate program and includes an Amazon ad on their website.

The performance marketing industry has been fighting these laws across the United States and made it to the Illinois Supreme Court.

The court noted that the statute does not require tax collection by out-of-state retailers who enter into performance marketing contracts with offline and over-the-air broadcasters.  As a result, the amended statute is targeted solely at “online” performance marketing.

The plaintiffs argued that the federal Internet Tax Freedom Act (the “ITFA”) preempts the Illinois statute and that the Illinois statute violates the commerce clause of the U.S. Constitution.  The ITFA prohibits a state from imposing discriminating taxes on e-commerce.  This includes revenue raising measures and the imposition of obligations to collect sales taxes.

The court concluded that the statute uses performance marketing over the Internet as the basis for imposing a use tax collection obligation on an out-of-state retailer.  However, national, or international, performance marketing by an out-of-state retailer which appears in print or on over-the-air broadcasting in Illinois will not trigger an Illinois use tax collection obligation.  As a result, the statute imposes a discriminatory tax on electronic commerce within the meaning of the ITFA. Accordingly, it is expressly preempted by the ITFA and is therefore void and unenforceable.

Because the court made its decision based on preemption, it did not make a decision based on the alternative argument that the statute violates the commerce clause of the Constitution.

Contracts and the Law – Beer Contracts in Mergers & Acquisitions

Labatt distributor shows why contracts must work with the law and can’t just change it.

Link:  Esber Beverage Company v. Labatt USA Operating Company (Ohio Supreme Court)

Labatt Light Lime - Yum - Terminated Contract in InBev and Anheuser Busch MergerIs this still a thing? Terminated Contract in InBev and Anheuser Busch Merger

Every now and then I get a request to draw up an agreement that does not jive with the law.  I’ll get suggestions such as, “Just call it something else, like “Consulting Agreement.’”  I have to say, “It doesn’t work that way.  The contract has to work within the framework of the law.  Sorry.”

How is this relevant to anything?  Well, because when a manufacturer sell its rights relating to a particular brand of alcohol to a successor, the new owner can terminate any distributor’s franchise without cause.  At that point, the new owner’s obligations are notice and compensation.

We learn this because Esber Beverage Company was a long-time distributor of Labatt for InBev.  InBev went on to merge with Anheuser-Busch.  Because easy is cheap, the U.S. Department of Justice would not allow this merger to proceed without some sort of obstacle.  With no consideration at all of the good folks who distribute Labatt, the Justice Department forced the merged company to divest itself of all assets relating to Labatt.  A new company backed by private equity firm KPS Capital Partners, L.P. purchased the rights to Labatt and terminated Esber.

Esber sued claiming that the statute only applied when there was no written agreement.

The court didn’t buy it.

Pursuant to the statute, every manufacturer of alcoholic beverages must offer its distributors a written franchise agreement specifying the rights and duties of each party. If the parties do not enter a written franchise agreement, a franchise relationship will arise as a matter of law when a distributor distributes products for 90 days or more.  So far so good.

The statute also sets forth how to cancel or terminate a franchise.  There are three situations:

  • With prior consent and 60 days’ notice
  • With “just cause,” and the statutes explains what this means.

In addition, in either case, the manufacturer must repurchase all of the terminated distributor’s unsold inventory and sales aids.

However, the statute also provides for terminating a franchise when the manufacturer sells a particular brand or product of alcoholic beverage to a successor manufacturer. If a successor manufacturer acquires all or substantially all of the stock or assets of another manufacturer, the successor manufacturer may give written notice of termination, nonrenewal, or renewal of the franchise to a distributor of the acquired product or brand.  On termination of the franchise, the successor manufacturer must repurchase the distributor’s inventory and must compensate the distributor for the diminished value of the distributor’s business that is directly related to the sale of the terminated product, including the appraised market value of the distributor’s assets devoted to the sale of the terminated product and the goodwill associated with that product.

This was not enough for Esber, which asserts that the statute does not permit a successor manufacturer to terminate when the successor manufacturer has itself entered into or assumed a written contract with the distributor. The court disagreed and quoted another case for the proposition:

“When a statute’s language is clear and unambiguous, a court must apply it as written.”

It continued:

“The plain language of the statute allows the successor manufacturer to terminate a franchise.  The definition of “franchise” includes both written franchise agreements and franchise agreements that have arisen by operation of law.”

As a result, the new owner can terminate Esber and Esber is entitled to compensation.  However, the contract does not trump the statute.