Lessons learned so far from the Microsoft-Yahoo takeover fight - Marc Andreessen
April 28, 2008
Famed Internet entrepreneur Marc Andreessen teamed up with two corporate lawyers to publish some lessons already learned from Microsoft’s attempt to take over Yahoo. For example:
• Staggered three-year board terms, with only one-third of the board members being elected each year, would have made it easier for Yahoo to resist a hostile takeover. With a staggered board, Microsoft probably would have had to win two or even three successive annual proxy fights to completely take over Yahoo.
(Of course, staggered boards are a bête-noir of some shareholder activists who have been pressuring public companies in recent years to switch to annual election of the entire board.)
• Multiple classes of stock, presumably with Yahoo’s co-founders controlling at least one other class of stock, would have required Microsoft to win over a majority of the shareholders of each class. According to Andreessen, Google has a dual-class structure that gives co-founders Larry Page and Sergey Brin, along with CEO Eric Schmidt, an effective veto over any takeover or other transaction requiring shareholder approval. Andreessen says, "You can bet that this is being noticed by the founders of every technology company that might go public from here on out."
Think out loud, but say so - Brad Feld
April 25, 2008
Denver-area venture capitalist Brad Feld tells of a board call yesterday for one of his companies. The CEO left the other board members thoroughly confused. (That’s never a good thing for any subordinate reporting to a superior, let alone for a CEO reporting to his board members.) The lesson learned was one that most executives can identify with, from both sides of the table:
I talked to the CEO today just to check in. We had a good call and we both reaffirmed that all was cool. He said he’d learned something important - that if he was just going to “think out loud” during a board meeting that he should preface this with a statement indicating this. I agreed that this was the right conclusion - that I’d much rather he “think out loud” vs. feel compelled to figure it out all.
My experience has been that outside board members are much happier when executives label their information as fact, projection, conjecture, speculation, etc. It helps the listeners assign the information they’re getting into the proper pigeonholes. It also gives the speaker an air of competence, which is certainly something a CEO wants when talking to his/her board.
Reduce out-of-state taxes: Give your affiliates arms-length terms
April 17, 2008
If your company has subsidiaries in other (U.S.) states, you need to think about whether those states can make you pay taxes on the income of other members of the corporate family. As a rule of thumb, the more separation there is between businesses, the lower the odds of being forced to pay out-of-state income taxes.
The U.S. Supreme Court hinted this week that doing inter-company business on arms-length terms may strengthen the case against out-of-state taxation. The parties to the case were Ohio-based MeadWestvaco Corporation ("Mead") and the state of Illinois. Mead realized $1 billion in capital gains when it sold off its Illinois subsidiary Lexis/Nexis. Illinois taxing authorities assessed a $4 million state capital-gains tax. Mead paid under protest and sued for a refund.
The Supreme Court held unanimously that Illinois isn’t allowed to levy the tax unless it can prove on remand that Mead and its subsidiaries operated as a "unitary" business. I’m not a tax lawyer, so I won’t try to go into the details of Justice Alito’s (very readable) opinion. The New York Times article thought it was noteworthy that Justice Alito specifically mentioned the arms’-length nature of Mead’s intercompany business dealings with its subsidiary Lexis/Nexis; the opinion says:
Lexis was subject to Mead’s oversight, but Mead did not manage its day-to-day affairs.
Mead was headquartered in Ohio, while a separate management team ran Lexis out of its headquarters in Illinois.
The two businesses maintained separate manufacturing, sales, and distribution facilities, as well as separate accounting, legal, human resources, credit and collections, purchasing, and marketing departments.
Mead’s involvement was generally limited to approving Lexis’ annual business plan and any significant corporate transactions (such as capital expenditures, financings, mergers and acquisitions, or joint ventures) that Lexis wished to undertake. In at least one case, Mead procured new equipment for Lexis by purchasing the equipment for its own account and then leasing it to Lexis.
Mead also managed Lexis’ free cash, which was swept nightly from Lexis’ bank accounts into an account maintained by Mead. The cash was reinvested in Lexis’ business, but Mead decided how to invest it.
Neither business was required to purchase goods or services from the other. Lexis, for example, was not required to purchase its paper supply from Mead, and indeed Lexis purchased most of its paper from other suppliers. Neither received any discount on goods or services purchased from the other, and neither was a significant customer of the other.
MeadWestvaco Corp. v. Illinois Dept. of Revenue, No. 06–1413, slip op. at 4 (U.S. Apr. 15, 2008) (extra paragraphing added)
Camel’s noses and tents
April 17, 2008
The Wall Street Journal opines about the recent resignation of former General Re CEO Joseph Brandon, thought to have been brought about by pressure from the Department of Justice:
… the Sage of Omaha may not have had much choice. Fiduciary duty to Berkshire shareholders requires him to avoid a criminal indictment of Gen Re at any cost. Such a reputational blow is a likely death sentence for any financial company…. We have come to a strange pass in this country when prosecutors who can’t prove their case can nonetheless tell Warren Buffett who can run his companies.
(Emphasis added.)
A better way of nipping business legal disputes in the bud
April 16, 2008
As I mentioned a few minutes ago, the CEO of Blue Jeans Cable, a former litigator, responded pretty forcefully to a cease and desist letter from Monster Cable, alleging various forms of infringement. One of the things I liked about the Blue Jeans response was its detailed requests for additional information — “If you expect to persuade me, you had better start making full, open and honest disclosures; I will find out the facts sooner or later in any event ….” (Emphasis added; hat tip Jeff Nolan at Venture Chronicles.)
The horrors of lawsuit discovery
The Blue Jeans Cable approach recognizes one of the grim realities of U.S. litigation, which is the American legal system’s premise that “the law is entitled to every man’s evidence.” Proceeding from that premise, the discovery rules allow adversaries’ lawyers to demand copies of each others’ relevant documents and to interview potential witnesses in depositions; one of the few limitations is that the requested information must be either relevant in itself or “reasonably calculated to lead to the discovery of admissible evidence.”
Disputes about discovery are one of the major reasons litigation is so expensive in this country:
- Party A’s lawyers demand that Party B produce copies of Documents X, Y, and Z;
- Party B’s lawyers object and refuse to comply;
- Party A’s lawyers file a motion to compel discovery; they spend lots of time writing a brief in support of the motion;
- Party B’s lawyers file an opposition to the motion, with its own brief;
- Party A’s lawyers file a reply brief;
- the judge orders an oral hearing — incidentally, there’s nothing judges hate worse than discovery disputes;
- the parties’ lawyers prepare for and attend the hearing;
- the lawyers’ meters are running the whole way.
Discovery disputes can also get in the way of coming to a sensible business resolution to the dispute: The parties and their lawyers get ticked off at each other, and over the money they’re spending on legal fees; as a result, they can sometimes have their judgment clouded about the true legal merits of their positions.
Cut the crap
In commercial litigation, it often makes sense for both sides to just cut the crap and exchange documents under a nondisclosure agreement, even before a lawsuit is filed. This lets the lawyers and management evaluate the case in a less stressful environment, and improves the chances of coming to an agreeable settlement (not just a nuisance settlement) before the parties’ backs have stiffened. When I was a software-company general counsel, I used this basic approach in quite a few disputes. It didn’t matter whether we were the potential defendant or the potential plaintiff: If preliminary due diligence suggested that the other side and its lawyers could be trusted to honor a nondisclosure agreement, I’d tell them something more or less like this:
- If our company is in the wrong, we want to know it early.
- We hope the same is true for you.
- If litigation were to come to pass, we’d each get the information we wanted during the discovery process anyway.
- So let’s put a nondisclosure agreement in place, and we’ll give your lawyer whatever s/he wants to look at that we can conveniently collect, as long as you agree to do the same for us.
- And then let’s talk, before we’ve both spent a ton of money on legal fees.
That approach generally worked out pretty well.
Monster Cables picked the wrong guy to threaten
April 16, 2008
Monster Cables, which makes extremely high-priced stereo cables, has apparently sent a cease-and-desist letter to Blue Jeans Cable, alleging various kinds of infringement. Bad move - the president of Blue Jeans Cable, Kurt Denke, is a former litigator who responded pretty forcefully:
… Once I have received the above materials and explanations from you, I will undertake to analyze this information and let you know whether we are willing to accede to any of the demands made in your letter. If my analysis shows that there is any reasonable likelihood that we have infringed in any way any of Monster Cable’s intellectual property rights, we will of course take any and all action necessary to resolve the situation. If I do not hear from you within the next fourteen days, or if I do hear from you but do not receive all of the information requested above, I will assume that you have abandoned these claims and closed your file.
As for your requests for information, or for action, directed to me: I would remind you that it is you, not I, who are making claims; and it is you, not I, who must substantiate those claims. You have not done so.
I have seen Monster Cable take untenable IP positions in various different scenarios in the past, and am generally familiar with what seems to be Monster Cable’s modus operandi in these matters. I therefore think that it is important that, before closing, I make you aware of a few points.
After graduating from the University of Pennsylvania Law School in 1985, I spent nineteen years in litigation practice, with a focus upon federal litigation involving large damages and complex issues. My first seven years were spent primarily on the defense side, where I developed an intense frustration with insurance carriers who would settle meritless claims for nuisance value when the better long-term view would have been to fight against vexatious litigation as a matter of principle. In plaintiffs’ practice, likewise, I was always a strong advocate of standing upon principle and taking cases all the way to judgment, even when substantial offers of settlement were on the table. I am “uncompromising” in the most literal sense of the word. If Monster Cable proceeds with litigation against me I will pursue the same merits-driven approach; I do not compromise with bullies and I would rather spend fifty thousand dollars on defense than give you a dollar of unmerited settlement funds. As for signing a licensing agreement for intellectual property which I have not infringed: that will not happen, under any circumstances, whether it makes economic sense or not.
I say this because my observation has been that Monster Cable typically operates in a hit-and-run fashion. Your client threatens litigation, expecting the victim to panic and plead for mercy; and what follows is a quickie negotiation session that ends with payment and a licensing agreement. Your client then uses this collection of licensing agreements to convince others under similar threat to accede to its demands. Let me be clear about this: there are only two ways for you to get anything out of me. You will either need to (1) convince me that I have infringed, or (2) obtain a final judgment to that effect from a court of competent jurisdiction. It may be that my inability to see the pragmatic value of settling frivolous claims is a deep character flaw, and I am sure a few of the insurance carriers for whom I have done work have seen it that way; but it is how I have done business for the last quarter-century and you are not going to change my mind. If you sue me, the case will go to judgment, and I will hold the court’s attention upon the merits of your claims–or, to speak more precisely, the absence of merit from your claims–from start to finish. Not only am I unintimidated by litigation; I sometimes rather miss it.
(Emphasis added; hat tip: Jeff Nolan at Venture Chronicles.)
I can relate to Denke’s final comment quoted above …. I wonder what the attendant publicity is doing for his sales.
Signed Google’s non-competition clause, then got laid off
April 12, 2008
According to a Valleywag report, Google asked employees of its recent acquisition DoubleClick to sign a new employment agreement. The employment agreement contained a non-competition clause and a non-solicitation clause. A week later, the lay-offs began.
Question: Will Google be able to prevent the laid-off DoubleClickers from going into competition? The comments to the Valleywag piece add up to a great general overview of some key legal issues, such as:
- in California, non-competition clauses for employees as such are pretty much unenforceable per se (but many of the DoubleClick employees were based in New York);
- in some states (such as Texas), non-compete clauses require separate consideration;
- even if a non-competition clause turns out to be unenforceable, a non-solicitation clause, prohibiting the former employee from trying to hire people away from the former employer, might be another story.
Co-creators shouldn’t wait too long to claim their share
April 4, 2008
A day late and a dollar short — well, more like 13,000 days, and possibly millions of dollars.
In 2005, the guy who played the organ in Procul Harem’s 1967 hit A Whiter Shade of Pale filed suit against the lead singer. Matthew Fisher claimed he was entitled to an estimated $2 million in back royalties as a co-author of the song (his contribution being the famous organ solo).
Fisher won in the (UK) trial court, but the appeals court just reversed, saying that he was "guilty of excessive and inexcusable delay in his claim to assert joint title to a joint interest in the work …. He silently stood by and acquiesced in the defendant’s commercial exploitation of the work for 38 years.”
So despite being confirmed to be a co-author of the song, Fisher will get neither back royalties nor future royalties (unless he successfully appeals to the House of Lords).
If Fisher had been able to convince the court that he didn’t know he’d been left off the credits, conceivably he might have had a shot at getting future royalties, and perhaps back royalties for the statute-of-limitations period (probably three years in the U.S., although I haven’t looked it up).
But the way a NY Times blog describes the song’s credits, if he had made such a claim, he likely would have been laughed out of court: "music by Gary Brooker, lyrics by Keith Reid, it says on the band’s own recording and on the 600-odd cover versions that other artists have made over the years."
Pactix feed has moved here
April 4, 2008
Instead of trying to post both on the Pactix site and here at 100 Feet Up, I’ll be doing all such posts here.
If you’re a reader of the Pactix feed, the switch should be completely transparent to you, because I switched the Feedburner feed to point to a special 100 Feet Up feed limited to posts that I tag with the Pactix category.
Test post for Pactix
April 4, 2008
I’m likely to move my Pactix Web site over here to 100 Feet Up. This is a test post to see whether the feed will work.