31 posts categorized "October 2012"

Disney buys Valor (a peek at the 8-K)

Thought this morning we should look at the 8-K the Walt Disney Company filed yesterday in conjunction with the announcement that it would purchase Lucasfilm Ltd.

Dave Itzkoff of the New York Times had tweeted that Disney's codename for the acquisition was "Project Valor," and a reference in the 8-K seems to corroborate that.

"The Sole Shareholder has entered into an agreement pursuant to which it has, among other things, irrevocably agreed to approve the Merger Agreement and, subject to certain limitations, to indemnify the Company with respect to certain representations and warranties about Valor and other matters."

Lego star wars characters

Speaking of the Sole Shareholder (Shareholder Solo?): a Wall Street Journal story states that "Lucasfilm is wholly owned by producer George Lucas," but that's not exactly what the 8-K says or means by the defined term.

"The sole shareholder (the 'Sole Shareholder') of Lucasfilm is an entity affiliated with Lucasfilm Chairman and Founder, George Lucas."

Granted, that "entity affiliated" with Lucas might well itself be wholly owned by Lucas.

Last point: the deal reportedly is payable approximately half in cash, half in stock. But the 8-K says this instead:

"Under the Merger Agreement, the Sole Shareholder will receive merger consideration of $4.05 billion in the form of cash and stock.The amount of stock issued pursuant to the Merger Agreement will depend on adjustments based on cash distributions to the Sole Shareholder occurring immediately prior to closing, and subject to those adjustments, will consist of at least 32,348,243 shares of the Company common stock but in no event more than 40,348,243 shares of Company common stock."

The deal terms provide that the stock will be registered following closing, so the Sole Shareholder will be able to sell Disney shares on the open market. (In prepared remarks appended to the press release filed with the 8-K, Disney's CFO seems to say the Sole Shareholder's stock will soon be repurchased: "We continue to believe our shares are attractively priced at current levels and therefore, we currently intend to repurchase all of the shares issued within the next two years — and that’s in addition to what we planned to repurchase in the absence of the transaction.')

Sounds also like the Sole Shareholder has agreed to a no-shop. Though either party may walk if the deal doesn't close in 6 months.

Photo: chaines106 / Flickr.

West to East

My thoughts this morning are with friends, old and new, on the East Coast.

The folks I know all seem to be safe. Most will be dealing with property damage and a lack of electricity, sounds like.

One friend meant to make his way east to west Monday night. But flights were canceled and there are none to take today.

Residents, travelers, all, take care.


Dark Flatiron Building this morning; photo by @lvlewitinn.

One approach to Citizens United

There's some interesting disclosure in Microsoft's 2012 proxy statement, about how the company spends money to influence election campaigns and public policy.

US Capitol

That's not quite right. More precisely, the proxy disclosure is about how the company will not take advantage of the Supreme Court's Citizens United decision to influence elections with dollars that can't be traced back to Microsoft.

"Microsoft recognizes the increasing interest of U.S. public company shareholders in establishing greater transparency about corporate political contributions. Microsoft discloses its political contributions to support candidates and ballot measures as well as how certain of our trade association membership dues are used for political activities. As part of our commitment to transparency, after the U.S. Supreme Court’s decision in the Citizens United case in 2010, Microsoft amended its Principles Guiding Microsoft Participation in the Political Process in the United States to clarify that Microsoft will not make independent political expenditures or electioneering communications as are now permitted after the court’s decision. The policy is available at www.microsoft.com/politicalengagement."

When you follow the link, you get additional information about Microsoft's campaign contributions and lobbying efforts, including a chart which shows that lobbying expenditures at the state level have risen to almost match those at the federal level.

Ancient Times

On the plane home from New York last week I started reading Stephen Greenblatt's "The Swerve."

It's a book about 15th Century humanists who scoured monastic libraries to find copies of copies of copies of texts originating in Roman antiquity.

Huraculaneum papyrus roll

Not finished with it yet, but wanted to share some of the thoughts the book is provoking:

  • While by definition we live in the present, among contemporaries, we (those of us in Western technological societies alive today) may be naïve to presume that we continue to live in a modern or postmodern era. Art and architecture critics may have this right more broadly than they mean when they fix the modern in the 20th Century.
  • It is not necessarily the case that a new class of overlords will soon secure the keys to social media and use information technology to snuff out the free flow of information. Not necessarily. But looked at in an historical context, it is a bit embarrassing that those developing technologies that might empower and liberate individual human minds are companies, like Facebook, utterly lacking in humanistic ambition. (I think the Gates Foundation missed a huge opportunity when it failed to buy Twitter a few years back.)
  • History's lesson for authors is that an author's work must be copied in order to survive. Over and over and over again. In cultural circumstances she cannot begin to conceive. Don't put all your hopes in digital formats. Papyrus would be better.

Image of ancent papyrus scroll, copyright, The University of Kentucky Center for Visualization & Virtual Environments.

Drones and roses

"Drone" is not a word I would associate with the remote controlled helicopter that the Seattle Police Department displayed Thursday night at the Garfield Community Center.

If the device launches vertically into the air, never leaves the visual site of its operator, and can't fly for more than 10 minutes (the limit of the battery charge), I doubt it can pack and deliver weapons grade explosives.

DroneAt the meeting, a citizen asked if it would be legal for him to fly his own drone over his own property, for the purpose of monitoring police behavior.

An officer responded, yes, you may, as long as it doesn't fly over 400 feet.

I was late to the meeting, but in the 30 to 40 minutes I was there, I heard no city council member or other policymaker stepping into the breach between citizen agitators (most of whom were rude) pressing to discuss policymaking, and the (polite) police officers, who wanted merely to explain how they meant to use the drone under FAA rules and other instructions they'd been given.

"What's in a name," Juliet famously asked. "A rose by any other name would smell as sweet."

Juliet hadn't considered the example of the word "drone." I'll bet that name impacts how policy is shaped over police use of remote controlled, low altitude cameras.

Rob Weiss on Thomas Klein's call for regulatory competition: this may not be the best way to fix equity crowdfunding

Note from Bill: The following is a guest post by Robert Weiss, a finance and securities lawyer based in New York City. We met at the Docracy "Equity Crowdfunding Dissected" event in Brooklyn, and in the week since have been exchanging thoughts (including comments on the "Individual Crowdfunding Account" idea). Follow Rob on Twitter or connect with him on Linkedin.

This post is a response to an exciting post by Thomas Klein published at VCExperts.

In that post, Mr. Klein argues that truly effective reform of US securities regulation would result from creating competition between state legislators and securities regulators, on the one hand, and the US Congress and the SEC, on the other hand.

Muni regulationsThe “competition” would be over issuers (or perhaps more precisely over filing fees, taxes or other kinds of revenue a jurisdiction, whether it be state or federal, would raise from securities issuances under its authority).

Drawing on empirical research regarding the salutary effects of regulatory competition in the corporate law context, Mr. Klein concludes that regulatory competition in the securities context would benefit both issuers and investors by (1) improving the quality of both regimes and (2) providing maximum flexibility for issuers of securities.*

Among other areas, Mr. Klein directs his argument to the JOBS Act, and specifically the new law's crowdfunding provisions, which he finds to be unworkable because too restrictive. We are more likely to find. he argues, a workable solution through regulatory competition between state and federal regulatory regimes.

Mr. Klein’s argument does indeed address problems inherent in the JOBS Act’s structure and provisions. It probably is folly to expect that, by piling on "more of the same" from the tried and true paradigm of additional disclosure, a meaningful crowdfunding exemption can result.

But I have a couple of counter-points I think we should consider.

(1)  Corporate law may not be the right analogue to equity crowdfunding.

Mr. Klein (and others) present strong evidence that regulatory competition in corporate law has benefited both companies and, at least with respect to public companies, their investors.

The research also points out that most public company equities are held by institutional investors that are likely to be more sophisticated than the SEC itself. (Many people advocating for less regulation make this point.) This distinction is critical to getting the benefits from regulatory competition in corporate law: smart investors prefer investing in companies subject to good corporate governance regimes, and states want to attract successful companies so as to increase franchise or corporate tax revenues; accordingly, states have an incentive to have good corporate governance regimes so as to attract those kinds of companies.

It’s not clear, though, that less sophisticated investors (e.g., small investors participating in equity crowdfunding) could or would impose the kind of market discipline necessary to make regulatory competition worthwhile in equity crowdfunding. Other industries, where there are greater asymmetries among participants, may be more analogous to equity crowdfunding, and regulatory competition in those areas has not always been beneficial. 

Consider the insurance industry. Each US state regulates insurance business conducted within its borders. There is no federal insurance regulator or regulatory regime (though the federal government has imposed regulation in certain areas, most recently with the Affordable Care Act and Dodd-Frank). Now, insurance seems far afield from securities regulation. After all, insurance companies must be licensed ex ante to do business in each state; except for those states whose blue-sky laws include merit board reviews (which are few and dwindling), complying with the securities laws is a disclosure matter, and problems are resolved ex post. But the first and foremost purpose of insurance regulation is to protect policyholders, who are almost always at a distinct disadvantage in understanding the terms of insurance policies.

Similarly, one of the hard problems in crowdfunding is whether and to what extent we are willing to expose potentially unsophisticated investors to extremely opaque, and highly risky, investments. At least as far as protecting investors who may not be informed or sophisticated, insurance regulation may be a better analogue than corporate law.

The benefits of regulatory competition in insurance regulation for policyholders are not clear. Opinions differ, of course, but there is evidence that having over 50 separate regulatory regimes (1) imposes substantial cost on insurers that want to do business in multiple state, and, more importantly for this analysis, (2) pressures legislatures and regulators to deregulate in order to attract business to the state, a regulatory “race to the bottom” that puts state revenues, rather than policyholders, first. (See, for example, Professor Daniel Schwarcz’s article “Regulating Insurance Sales or Selling Insurance Regulation?: Against Regulatory Competition in Insurance”, 94 Minn. L. Rev. 1707 (2010).)

To combat these effects, insurance regulatory regimes have converged on certain key points; associations of regulators like the National Association of Insurance Commissioners have created model rules and forms that diminish the costs of operating in multiple states while attempting to ensure minimum levels of policyholder protections. In other words, an important result of regulatory competition in insurance is the convergence of state standards toward a single set of common rules that arguably serves its primary purpose (protecting policyholders) less well than it otherwise might.

(2)  Who would pay for it? 

Nearly all the states are struggling to handle their current corporate, tax and other administrative burdens. Few states currently have both (a) securities laws and regulations robust enough to address all of the issues raised in modern securities issuances and (b) enforcement authorities large, expertised and resourced enough to handle an upsurge in issuances. Requiring the states (whether directly or indirectly) to take on securities regulation would impose tremendous new burdens on them.

Who would pay for this?

Some commentators argue that those states that don’t want to incur great expense here could simply instantiate federal law. But why would we recreate the wheel? If we ended up with 50 state regimes that more or less mimicked the current federal regime, what would we have achieved?

There are fundamental issues with the JOBS Act, as Bill and others have described at great length. It’s important for us to resolve those questions, and I think many are resolvable. (For example, as noted above, we need to decide under which conditions we’re willing to expose non-sophisticated investors to ultra-high risk investments.) In theory, having 50 different problem-solvers each taking its best shot at resolving them would be great. But given the other constraints on time and resources, and the questionable value of regulatory competition in the crowdfunding context, it seems better, at least in my opinion, to address them at the federal level.

*Legal scholars have made comprehensive arguments for and against regulatory competition in the securities context.  Mr. Klein cites an especially good article in support of regulatory competition by Professor Roberta Romano of Yale Law School that I recommend if you are interested in the topic.  The article is “Empowering Investors: A Market Approach to Securities Regulation”, 107 Yale L.J. 2359 (1997-1998).

Photo: Frank Farm / Flickr.

Will funding portals matter?

A central feature of the equity crowdfunding legislation in the JOBS Act is the concept of a "funding portal," a Kickstarter- or Rockethub-like platform, if you will, through which all equity crowdfunding must take place. (Unlike deals restricted to accredited investors, issuers would not be permitted to sell directly to the crowd.)

Lego contraptionFunding portals would be regulated, but the implication was that funding portal compliance would not be nearly as complicated as broker-dealer registration and compliance.

That was the idea.

As the nascent equity crowdfunding industry sorts through how to organize itself, more and more participants are signaling they have come to the recognition that being a funding portal won't get them where they want to be. So they are aligning with broker-dealers, or planning to go ahead and go the extra hundred yards and become broker-dealers themselves. Apparently, it is dawning on everyone that funding portal registration will not be simple, and that funding portal regulation will be highly restrictive as to what a funding portal can do.

Quick example I've heard about: a participant who has concluded that UX design, or really any feature to organize how deals are presented on a portal, is going to be regarded by regulators as "investment advice." Funding portals can't give "investment advice." Broker-dealers can.

Permitted compensation is a factory in this, too, I'm sure.

Anyway, long build up by way of suggesting that you read Jonny Sandlund's post of this week on thecrowdcafé.com, where he begins to inventory what players in the nascent market are planning to do. His post is titled, ""Crowdfunding Platforms and Broker Dealers: An Evolving Relationship."

And by the way, Jonny has announced he will be offering a free webinar, "Making Sense of the Equity Crowdfunding Industry," tomorrow. Go here for details.

Photo: DanR / Flickr.

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