Fractionally Yours v7: The Government Forces a Sale of TikTok and How to Sell Your Company (Without Being Forced to)
In this edition of Fractionally Yours, I examine the constitutionality of the US government's attack on TikTok and offer advice on selling an obligation-heavy company.
Hi, and welcome back. First, some housekeeping. After some reader feedback, I'm thinking of changing the name of this newsletter to “Fractionally Legal.” Any objections? Please comment below if you think that's a good idea.
In this edition, I take a deep dive into the US government’s attempt to force a sale of TikTok. Should it? Can it? Yes and Yes. While this might seem like an issue that only is relevant to my clients who happen to be operating companies that are peddling foreign propaganda (which is to say, none), it actually says a lot about how the US and China regulate their media, and about how the US government could, if it wants to, simply ban a company. This issue seems very fundamental to running a company in 2024 that I think everybody building a business should understand.
Finally, I have some tips on the legal work that is needed to get your company sold, especially if your business is “obligation heavy.” For better or for worse, it is something I know all too well and work on all too much. If you, or someone you know, is thinking about selling a company but certain long-term obligations are dragging on your valuation, I’d be happy to talk them through some options.
TikTok: You Gotta Fight For Your Right to Twerk (Because It's Not Constitutionally Protected)
A few years back, the startup I worked for was heavily marketing itself via TikTok, which, at the time, was known as a new short-form video app, sort of the new Vine (remember that?). It replaced the prior marketing fad: Snapchat. We marketed wherever the audience was. I also remember knowing that TikTok was from China, and that showed that a non-US company could build a viral social networking platform for a foreign market, which was pretty cool. The geo-politics of it never entered my mind. I'm not prone to conspiracy theories.
When I tried the app, all I was served was videos of young people dancing. And lots of them. Yes, I disliked that. The next thing I was fed was left-wing conspiracy theories. And when I disliked that, I was given right-wing conspiracy theories. And then crypto scams. And then I left TikTok.
But most Americans did not follow my lead. In fact, 150 million Americans, about 40% of the US population, use TikTok at least monthly (and, most, a good deal more). Even though most are probably not looking for news and opinion, that seems to be what they are getting. Now, more Americans get their “news” from TikTok than watch cable news and certainly more than read any newspaper. It's undisputed that very few other forms of media command that large an audience. It's also undisputed that TikTok, whether by accident or design, intersperses twerking videos, videos promoting homeopathic remedies, Zyn influencers, and vacation guides, with news and opinion. Some people think that a foreign government, namely China, is manipulating those interspersed news and opinion videos in ways that are adverse to US national interests. It's certainly possible. If I ran China and had a platform like TikTok, that's exactly what I would do.
In response, the US government wants TikTok sold to a US company. That would be an elegant solution and common sense. But it's probably impossible because TikTok’s parent, ByteDance, won’t sell its interest to a US company. This is not a business decision; it's political. Chinese corporate law gives the Chinese Communist Party a “Golden Share” in ByteDance, which allows them to veto the sale. The Chinese government won’t sell the asset, no matter how much they stand to make.
Americans have trouble understanding that. In the US, we either have government-run corporations (FDIC, Amtrak, TVA, and in New York the MTA, etc.) or private companies (all the rest). And putting aside the potentially odd case of “Truth Social,” the US government would never take a controlling interest in a media company. It's not illegal for the US government to buy shares in US companies (even media companies) and demand the same types of rights the Chinese government has in Chinese media companies. It's just a cultural difference. The US government does not invest in private companies except to bail them out from time to time.
Because the Chinese government can (and will) block the sale, the legal question is whether the US government has the right to shut down TikTok because of the Chinese government's right to block the sale. Convoluted, I know. And the answer is yes, the US government can block the sale and by extension shut down TikTok in the US. Maybe those cultural differences are a bit overstated?
Why? First, the US is much more protectionist than we like to think. For example, there is a law that prohibits foreign ownership of radio stations. I won’t go through the brain damage of determining whether or not a law like that is applicable here. But it's the principle that matters. There is also the Committee on Foreign Investment in the United States (“CFIUS”), which reviews foreign investment in US companies. CFIUS, for example, forced the sale of the LGBTQ dating app Grindr by its Chinese owners on national security grounds a few years ago. Finally, there are provisions like the International Emergency Economic Powers Act which allows the President to declare an economic national emergency and take action against the threat. And, of course, there are always new laws like the one that the US House recently passed that would block the Apple and Google app stores from allowing downloads of TikTok until the sale. After all, the law is subject to interpretation and application.
The US government is moving towards making ByteDance’s ownership of TikTok illegal, and the right to not have your business shut down by the government is not actually constitutionally protected in the US. Stated another way, you don’t have a constitutional right to run a criminal enterprise, even if you’re incidentally making a statement that you don’t agree with the law banning the activity. And the government is the decider of what is criminal, and what is not. The Supreme Court has said as much. In sum, if the US government wants to shut you down, they will either with existing laws, or new ones.
Supporters of TikTok earnestly protest the application of all these laws on First Amendment grounds. But they are wrong on the law. The fact that there is some free speech happening on the platform does not make the government’s efforts to stop the illegality an attack on free speech. Rather, it's a government intervention in conduct (the criminal enterprise), not the speech. Those types of interventions happen about a hundred times a day. The class clown who makes a political statement does not have a constitutional right not to get detention for disrupting the class, for example. The law is that speech is political and non-disruptive, it is protected, but if it is disruptive and/or not really political, then the school has the authority to intervene. There is some scrutiny that needs to be applied when the government acts against conduct that has an impact on speech, but I think it's very apparent that in the case of TikTok, the national security concerns (aka the disruption) justify the intervention. Or at least that is how I think the courts, including the Supreme Court, will decide.
To me, the answer is for us to develop a better short form video domestic company, controlled by shareholders via the Board of Directors, where everyone can share their political opinions and twerking videos that are not owned by a foreign government. Wait, we have some (X, formerly known as Twitter, and Meta)! And yes, they suck. But that's not a reason to potentially allow a foreign adversary to influence the political opinions of 170 million Americans. If we all want to twerk in online short form videos, let's try harder.
Company For Sale! How to Get Your Obligation Heavy Company Sold
Most entrepreneurs believe that the value of their companies is based solely on its assets – the products it's built, its IP, its free cash flow. And there is some truth to that, sometimes. In the journey of any thriving startup, much of the effort is focused on building assets with little regard for the accumulating costs. It's common for obligations to be overlooked until the time for a sale approaches.
However, the value of a company during a sale is actually determined by both its assets and its obligations - the costs to run the business. While it's possible to use legitimate accounting principles to enhance the appearance of your assets and reduce the perceived cost of your obligations, often these adjustments balance out. Competing parties may find equally legitimate methods to devalue your assets and increase your obligations.
Thankfully, with sufficient planning and negotiation, it's possible to reduce these obligations without resorting to accounting tricks. This is where the expertise of a skilled lawyer becomes invaluable. Many obligations, such as SaaS contracts or leases, can be renegotiated or bought out. For instance, if a contract obligates the company to $1M over 10 years but can be terminated for $100K, and if you have the cash, it's a strategic move. A potential buyer will factor in these obligations, potentially reducing their offer accordingly. Yet, sellers have leverage in negotiations: the threat of business closure can be a powerful motivator for reducing termination fees.
Another strategy involves structuring the deal as an asset purchase, thereby segregating the obligations. This approach is complex and may lead to legal challenges, such as accusations of fraudulent transfer. It requires careful legal navigation and preparedness for potential litigation.
Lastly, filing for Chapter 11 reorganization is an option when other strategies are not viable. It forces creditors to accept reduced claims to avoid the company's liquidation, which would likely leave them with nothing. This route can be devastating for shareholders but allows the company to continue operations and preserve jobs.
Navigating the sale of an obligation-heavy company is challenging, with each situation requiring a tailored approach. If you're considering a sale and facing significant obligations, consulting with a legal expert can provide clarity and direction.
None of this is straightforward, and every case is unique, but navigating these complexities is part of the business lifecycle. If you find yourself in this situation, reach out, and let's discuss your options.
Keep building, keep thinking,
Jesse
I'm Jesse Strauss, Your Fractional General Counsel. I'm a lawyer with a private practice based in New York City, assisting clients both in the United States and globally with their U.S. legal needs. My expertise covers various areas, including raising funding rounds, addressing employment issues, negotiating master service agreements, managing intellectual property, ensuring compliance, overseeing legal process management, and facilitating dispute resolution. My focus is on founding and nurturing great companies from seed to exit. Discover more at www.yourfractionalgc.com and book a complimentary 30-minute consultation at https://www.yourfractionalgc.com/contact-yourfractionalgc.