It's absurd that the State of California has any say in this private matter in the first place. This inquiry was not even based on an antitrust issue (which California has no right to contest anyways on a state level). This is simply the state government sticking its nose where it doesn't belong.
The state fairness hearings are there to represent the interests of the investors in a privately funded company.
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.
There are many ways many people can get screwed in business deals but usually it is up to the injured party to show injury and file a claim of some sort. It is very unusual in the US justice system to have a state agency do an independent investigation of a business deal to protect the interests of particular investors. Government agencies are supposed to protect the interests of the public at large.
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).
> It is very unusual in the US justice system to have a state agency do an independent investigation of a business deal to protect the interests of particular investors.
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?
If this was an antitrust investigation it might make sense. But nothing here indicates this is an antitrust investigation. First, the Attorney General of California is supposed to handle antitrust, not the Dept of Corporations. Second, to the best of my understanding, California antitrust law does not provide for the government to block mergers and acquisitions. Third, whether or what other offers Instagram received is not really relevant for an antitrust investigation.
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.
Honestly the much more powerful effect to check that an entrepreneur is acting in an investor's interest is the entrepreneur's reputation. It counts for a lot here in Silicon Valley.
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?
Nothing that happens to a corporation is a "private matter." Any time you do business in corporate form, you are taking advantage of certain privileges (namely limited liability) extended by the state. The State of California has an interest in any activity that affects its corporations. As Facebook and Instagram, as California corporations, derive their very existence from California law, this interest is much more specific than the general interest the state has in economic activity within its borders.
Agree. This is nonsense. Furthermore, according to the article Systrom said they had not received any formal offers, which is confirmed by the Twitter sources. "Verbal offers" don't count. They cannot be binding, because an offer to buy a company must be quite detailed. A term sheet is a formal offer. However, if one is "given" without a signature and by a person without formal authority to make an offer, it also doesn't mean anything.
Verbal offers do count, regardless of whether the person handing the term sheet over had authority, Instagram was required to act in the reasonable interest of investors and find out if the offer had teeth. Avoiding "formal offers" by evading "formal authority" is rather obviously not in investor interest.
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.
I was and I do. My company (I was the CEO and single founder) was acquired by LinkedIn. However, "verbal offers" are very tenuous ground. You'd have to prove that the offer was believable, and that finding out was not a waste of time. Also, nobody said that he avoided a formal offer. Who knows who was the person who (allegedly) was handing a term sheet.
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.
And that's why there is an investigation, not a trial. There is probably some indication of wrongdoing but insufficient evidence for prosecution. A verbal offer may be difficult to prove, but far from impossible if there were witnesses or some sort of trail.
Nobody has said there is proof of anything, but the government has grounds for suspicion. That is all. Presumably an investigation is warranted.
In California verbal offers can be considered binding when made by an authorized representative. This has been litigated both with respect to the entertainment industry and the high tech industry.
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.
The investors should be savvy enough to protect themselves. And protecting the taxpayers? What? The state is going to poke its head into every company and review your operations to make sure you'll be profitable enough to pay lots of taxes?
The investors should be savvy enough to protect themselves.
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.
I am neither lawyer nor accountant so what do I know. I can believe that the various ways the sale of Instagram is structured and to whom can have huge tax differences. But I don't know.
