Instagram Testimony Doesn't Add Up
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Can someone explain why this department is doing that? It wasn't a publicly traded company or anything. I'm assuming that Instagram had a board which included seats to represent the VC's, which would have been involved in the various deals.
Are the VC's behind this, alleging that Kevin Systrom kept board members in the dark about a possible Twitter acquisition? Or are people who invest in the VC's behind this, alleging that the VC's betrayed a kind of fiduciary obligation or something? Is the state of CA an investor in the VC's?
The article seems so short on details.
Why would you think the state that creates and formalizes the laws under which a company organizes wouldn't have an interest in how that company sells securities in itself?
There's also this:
http://www.corp.ca.gov/Codes/Laws.asp
1. Corporate Securities Law of 1968 (Corporations Code § 25000 et seq.) requires persons offering or selling securities such as stocks or bonds to qualify (e.g., submit to the Department for review and approval) the proposed securities, and requires licensing and regulation of securities broker-dealers and certain investment advisers, except as specified; prohibits misrepresentations, fraudulent and deceptive acts in the offer and sale of securities; and provides administrative, civil (injunction, ancillary relief and appoint of receiver) and criminal remedies for violations of the law.
2. California Commodity Law of 1990 (Corporations Code § 29500 et seq.) prohibits misrepresentation, fraudulent and deceptive acts in the offer and sale of certain off-exchange commodities, except as specified; and provides administrative, civil (injunctions, ancillary relief and appointment of receiver) and criminal remedies for violations of the law.
...
This regulation, which applies to all corporations everywhere, is there to protect investors from being swindled by executives. Without it, we'd have a very different corporate landscape. I don't know if it'd be better or worse, but it'd be very different.
If you have to break a tie, then you aren't a controlling shareholder. The idea behind controlling shareholding is that as long as you follow your duties to the minority you can install whoever you want (perhaps yourself) on the board, the board can then install whoever they want as CEO (perhaps yourself)
These things get really murky in private companies where the board, controlling interest, and CEO are shared by one individual.
It appears that Systrom and Mike Krieger (the other cofounder) together held a majority stake. Assuming the two of them decided to accept the Facebook deal, then they are indeed acting in the best interests of the majority of shareholders, no?
Why do things get murky when the CEO/board/controlling interest is the same? They started and built the company, and structured their funding deals such that they were able to keep majority control wrt voting rights. If they want to screw over the minority shareholders, I think that's pretty lame, but that should be their prerogative.
The law doesn't really give you blanket approval to do that, though. There are a lot of legal ways to screw over minority shareholders, but lots that aren't. When you sell part of your company, you agree to be bound by certain responsibilities to those minority owners. If you don't like those aspects of contract law, and want to do whatever you want without obligations to other co-owners, you need to keep 100% ownership.
In such a scenario you end up with a boilerplate contract that any right-thinking investor will insist on, just to protect themselves in such a scenario.
Basically, company law has simply declared that those clauses are there by default.
For instance, Zuckerberg controls Facebook. He can not decide to use all Facebook's cash as his own personal bonus. That is because it's a clear violation of his fiduciary responsibilities to minority shareholders.
Minority shareholders have a right not to be screwed, though it is VERY difficult to establish misconduct in private companies.
Unless there are some serious smoking guns here this case is going nowhere fast, Twitter doesn't really have standing in a fiduciary duty case as they are not a shareholder. Since the vast majority of shareholders have not complained it's a pretty easy argument that the vast majority of shareholders are happy with the performance of Instagram.
To nail Instagram they'll have to prove an anti-trust violation, and/or fraud/perjury. Given the underwriters for Facebook this is highly unlikely.
It's a serious problem in corporate governance in the US, but it's not in the interests of any individual involved, including the victim, to uncover any particular instance of it, because the deal is done and a prosecution would only damage the company they presumably still own.
I don't know if that was added to the article later, but it seems to explain. It wouldn't normally be a matter for the state, being a private transaction; but closing the deal is a matter for Instagram's investors (who have to agree to sell their shares for the agreed price), and it sounds like Facebook thought getting the investors' approval would be easier if a state department ruled that it was in their best interests.
Besides the more general reasons that others have given, the last sentence of the first paragraph is, "Facebook requested the hearing as a way to speed up the approval of its acquisition."
If you are running a company, these are the kinds of things you need to care about. One's personal sensibilities don't matter a lick when the regulators come knocking.
Instead, I would look at this (and whatever fallout occurs) as a warning of the kinds of things you have to think about and use it to sharpen skills so as to not be on the receiving end.
And, once again, if you don't skirt gray areas of ethics, you are less likely to face problems. Did Twitter give an offer? "Well, that's open to 'interpretation', and I'm going to interpret it as 'no'."
From what I understand, Zuckerberg showed disregard to FB's board when going through this process, and it looks like Instagram's founders acted in the same manner. Sounds like they just sat around and hammered out a deal on a personal level.
That can't be the case. You have to have your board as well as lawyers involved because you could be breaking securities laws as well as breaching your fiduciary duty as a corporate director.
Generally speaking, 5% of the company's (and below) is not considered 'material' in common usage. But, self-dealing issue is another matter. Nearly any amount of compensation is likely to be material relative to the salary of the Instagram CEO (for example), and in any event self-dealing is a more of a bright-line test (unjust enrichement).
You have no right to be able to engage in profit-seeking business and have your personal assets protected from any liability that might result from that activity. People take that basic, fundamental, fact completely for granted.
The corporate form and limited liability is a pure creature of state law designed to incentivize investment and building businesses. The state, the source of this privilege, thus has an automatic interest in any corporate activity, especially activity by corporate officers that might undermine the legitimate function of the corporation.
"Facebook has tangled with regulators before. What it does with its customers’ data attracted the attention of the F.T.C., which accused it last year of 'unfair and deceptive' practices. The agency’s settlement with the company required Facebook to submit to privacy audits for 20 years."
It reminded me a lot if that scene in Ghostbusters where the regulators showed up to inspect the facility and clearly had no idea what was going on, even though they had suspicions of something nefarious. With such a complex, proprietary system like Facebook I just can't see the efficacy of external security audits. Kind of scary territory.
This is most certainly not nonsense if true, though it is a bit ridiculous given the windfall for investors.
If you have ever been a major shareholder in a company, you would understand - not considering legitimate offers for acquisition is a major no-no and violates the most important responsibilities of a the corporate stewards.
By the way, a term sheet is usually first sent over email, as it will be redlined several times before anyone signs it. As the CEO of a startup, a printed term sheet without the corresponding email trail would be very suspect.
Nobody has said there is proof of anything, but the government has grounds for suspicion. That is all. Presumably an investigation is warranted.
Lets create a hypothetical example, you are an 'angel' investor and you invest in a company "WunderKund Inc". In exchange for your investment you get 10 or 15% of the company interest, now lets say WunderKund grows rapidly, they really hit a niche, maybe they have a series A, and people start to express an interest in acquisition. The angel investor is perhaps diluted down to 1 - 2% of the preferred stock, and maybe its one of those deals where the founders still have control of the preferred. Now along comes a buddy of one of the founders and says "Hey, awesome how about we make you rich, and you can come to work with me!?" and its awesome and all but there is this other less awesome company saying "Hey we really want to acquire you we'll pay what ever it takes..."
Now as the Angel Investor your interest is getting as good a return as possible on your investment because you know that only 1 out of 100 of your investments will pay off. How do you prevent the founders from making a sweet heart deal ("under market") with their buddy that makes them rich enough, and leaves a bunch of money from the other guys on the table that would have added to your return? If you are making less than full value that is one thing, but what if you're getting completely frozen out because the "sweet heart" company is offering very little cash or stock but big earn out bonuses for the founders if they stay on at BigCorp?
There are lots of ways that you can structure a deal that benefits one party more than the others and this commission was created to mitigate the damage done by unscrupulous business people.
(Found the link: http://www.corp.ca.gov/ENF/FairnessHearings/Default.asp)
Its the California Department of Corporations
This is the result of the Instagram / Facebook hearing : http://www.corp.ca.gov/Press/news/2012/Facebook_08-29-12.pdf
That'd be a faux pas in this context.
Between two corporations, fine, but to bring in lawyers against Facebook/Instagram in this context would bring a lot of stigma.
Better to let the gov't be your barking dog.
I would be very interested to know what the procedural background here is. (Unfortunately, this hit piece of an article does not go into detail about this).
Quite the contrary. In the United States, states watch dealings like a hawk and legal opinion is that states hold the line on antitrust and other anticompetitive corporate governance issues. Federal invention is seen as supplementary here. California v. ARC America Corp. (1989), at 490 U. S. 102[1]:
> Congress intended the federal antitrust laws to supplement, not displace, state antitrust remedies.
(IANAL, etc.) I'm curious. Why do you consider this article a hit piece?
[1]: http://supreme.justia.com/cases/federal/us/490/93/case.html
This seems to be an investigation as to whether Instagram screwed their investors by taking a low ball offer. And I am curious why the state is investigating this to begin with.
The compliance requirements are effectively a tax on acquisitions. We're only better off with this tax if it prevents more damage than it costs to enforce. The enforcement cost is not just on everyone's time, but it also effectively restricts their available decisions in unanticipated ways (for example wanting to ensure that there's appearance of compliance with the law). It's clearly costing Instagram/Facebook to comply, can anyone point to a case where having this regulation helped/would have helped an investor and therefore was a good thing?
I don't know why, but it seems like there's a pro-bureaucracy mindset on HN. People seem to be supportive of rules as long as there's a coherent reason for them without questioning if the rule is a net negative. Can someone explain this to me?
Presumably Facebook at that point in time, is a business incorporated by the State of California. I don't know of any national corporation process.
It's not clear to me (and I am certainly not a lawyer) that the protection of investors and the protection of taxpayers at that stage of the company falls to the SEC and not at all to the state regulators of the state that incorporated the company.
As others have pointed out, please remember what an extraordinarily weird thing the modern corporation is. In older conceptions of how to run a business, investors had the right to hold the directors personally liable for losses. Now, we have a system which largely removes that; in exchange for removing that check, others must be instituted, and a higher level of scrutiny (since a person who is not responsible for losses arguably has less incentive to avoid losses) is entirely appropriate. Since this privilege of freedom from liability is a creation of the state government, it is appropriate that the state government is actively involved in the oversight.
Nick Bilton is among the most respected journalists, but he's written some really questionable articles lately.
Why should they? They have a fiduciary duty to get Instagram for as low a price as possible; nothing about 'begging', they weren't even told about the higher time-sensitive offer (which are just two parts of the price to be negotiated...). They were told Instagram didn't want to sell at all, which is more than a little bit different from 'we think FB will pay more, do you disagree?'.
> The people familiar with the negotiations said Twitter executives were shocked that they had not been given an opportunity to present a counteroffer. They said Twitter was prepared to make higher offers.
That said, it's hard to have sympathy for investors in a company that flipped for $750M in under two years.
I think the investors would have a lot of difficulty establishing that they got a raw deal here given the incredible rate of return.
When a company recieves offers, the founders don't get to just pick and choose which offers they want to present to the board for a vote.
However, what I also meant is that in the article they talk only about the money side, there is no mention what else was on the table. For example, may be the strategy that Instagram is interested in is closer to that of Facebook than to the one of Twitter. Or maybe something completely different. We don't have the full picture.
Anyone with legal insight comment on the idea behind these two maneuvers(meeting at restaurants and handing back termsheet)? If it has legal basis, why would twitter accept such terms?
Really? This is not the sale of a Picasso painting. I believe there is always risk of putting off potential buyers, and you might not get the highest bid by optimizing the process down to the last detail. You might as well close it while you can. I believe the founders did the right thing.
As I pointed before to this article [1], Andreessen and Sequioia Capital have/had closer relationship with Facebook than they do with Twitter. Won't be surpised if some "sentiment" in regards to who represents who, interfiered with the purchase.
And CCD has very good business sniffing into this kind of stuff. After all, lower price = lower taxes. Lower taxes = less for CCD and other Gov entities.