5 ms·

That is (obviously) the trick: the "acquirer" doesn't acquire the shell. And therefore is on the hook for nothing. Customers have contracts with a corporation

by x0x0 8y ago

That is (obviously) the trick: the "acquirer" doesn't acquire the shell. And therefore is on the hook for nothing. Customers have contracts with a corporation with no assets and no employees.

zaarn 8y ago
That's a pretty shitty thing to do. I would call such behavior immoral even consider it's all about not honoring contracts with customers.
raverbashing 8y ago
I wonder if this flies with a judge. Otherwise it would be a good way of making debts disappear.
- pmontra 8y ago
  Yeah, it could be borderline with fraud.
- dvfjsdhgfv 8y ago
  In some parts of the world it's actually a very common scenario. You not only get rid of debts in this way, but also employees.
jjeaff 8y ago
It doesn't work that way. You can't just transfer assets into a shell and leave the liabilities. Any lawsuits would be able to go after the assets, even if they were in a separate shell companies.
- PeterisP 8y ago
  You can't transfer assets into a shell, but you can buy certain assets you want (e.g. IP) for a reasonable price even if it is much less than the liabilities, and take over the employees (which aren't "owned" by the company and thus an asset), and leave the old company to bankruptcy. Also, it's quite plausible that Smyte had negative value before the acquisition - that it's going to be an "empty sack" not because valuable assets were transferred elsewhere (which can be reversed in courts) but because its debts already exceeded any value it had, that it was an empty sack in the first place and no debts can be paid in full in any case.
  - bencollier49 8y ago
    Two things: * If the assets were bought, they'd be the property of the original company, and the money would go to the company, which would therefore have money to be sued for. * If the directors took that money out of the company, full in the knowledge that they had legal liabilities as the result of terminating service, at least in the case the UK (and I can't speak for US law), they'd be guilty of a number of crimes, as they are responsible for acting in the best interests of the business.
    - PeterisP 8y ago
      What I mean by "its debts already exceeded any value it had" is that it's quite plausible that any money paid for the assets immediately goes to the company's current debtors (including some investors, if convertible debt was used instead of equity) to partially cover their existing debts (which would be a fully legal and correct action by the directors), and there's nothing left to be sued for future liabilities. There are startup acquisitions which result in lots of money being paid to investors, and there are acqui-hires which amount to a pre-bankruptcy firesale to get part of the money back, but resulting in unpaid debt and bankruptcy anyway. I don't know about Smyte's financials, but it may well be that their situation is like the latter case. I don't see any reason to suppose that there some big bag of money (even post-acquisition) that's somehow illegally taken out of the company. It may well also be that the money paid to the company itself for acquisition is insignificant, and the rest is in form of some "hiring bonus" to make the transfer of employees work, so not something that the debtors can claim.
      - bencollier49 8y ago
        Obviously this is massively speculative at this point in the conversation, largely a thought experiment, but -- Any side payment to the directors and staff outside of the acquisition - such as a "hiring bonus" as you suggest, which lead to the sale of assets at a lower price than would otherwise be the case - I'm pretty certain (again, in UK law, and I'm certainly not a lawyer), that this would be seen by the courts as a bribe, ie. money paid to perform their duty to the company improperly. See item 1.2 from the Bribery Act 2010: https://www.legislation.gov.uk/ukpga/2010/23/crossheading/general-bribery-offences https://www.legislation.gov.uk/ukpga/2010/23/crossheading/ge... Obviously not exactly relevant in this case, but I'm guessing there's a US analogue.
- exelius 8y ago
  The original company could have argued that the value received for its assets was less than its liabilities. It’s perfectly legal, but way overused in tech (where assets are overwhelmingly in the form of IP without an easily established market value). This type of uncertainty does lead to a situation where potential customers are wary of using a startup service — I can’t build a business off your service if I don’t have confidence your company will want me as a customer in 3 years. Ultimately I think we’re witnessing the final consolidation of the software industry. I expect the cloud/software industry of the next 30 years to start to look much like telecom over the last 30 years. Probably worse for consumers short term, but ultimately the plumbing isn’t all that interesting and it will hopefully enable the next round of innovation.

by x0x0 8y ago

That is (obviously) the trick: the "acquirer" doesn't acquire the shell. And therefore is on the hook for nothing. Customers have contracts with a corporation with no assets and no employees.

zaarn 8y ago

That's a pretty shitty thing to do. I would call such behavior immoral even consider it's all about not honoring contracts with customers.

raverbashing 8y ago

I wonder if this flies with a judge. Otherwise it would be a good way of making debts disappear.

pmontra 8y ago
Yeah, it could be borderline with fraud.
dvfjsdhgfv 8y ago
In some parts of the world it's actually a very common scenario. You not only get rid of debts in this way, but also employees.

jjeaff 8y ago

It doesn't work that way. You can't just transfer assets into a shell and leave the liabilities. Any lawsuits would be able to go after the assets, even if they were in a separate shell companies.

PeterisP 8y ago
You can't transfer assets into a shell, but you can buy certain assets you want (e.g. IP) for a reasonable price even if it is much less than the liabilities, and take over the employees (which aren't "owned" by the company and thus an asset), and leave the old company to bankruptcy. Also, it's quite plausible that Smyte had negative value before the acquisition - that it's going to be an "empty sack" not because valuable assets were transferred elsewhere (which can be reversed in courts) but because its debts already exceeded any value it had, that it was an empty sack in the first place and no debts can be paid in full in any case.
- bencollier49 8y ago
  Two things: * If the assets were bought, they'd be the property of the original company, and the money would go to the company, which would therefore have money to be sued for. * If the directors took that money out of the company, full in the knowledge that they had legal liabilities as the result of terminating service, at least in the case the UK (and I can't speak for US law), they'd be guilty of a number of crimes, as they are responsible for acting in the best interests of the business.
  - PeterisP 8y ago
    What I mean by "its debts already exceeded any value it had" is that it's quite plausible that any money paid for the assets immediately goes to the company's current debtors (including some investors, if convertible debt was used instead of equity) to partially cover their existing debts (which would be a fully legal and correct action by the directors), and there's nothing left to be sued for future liabilities. There are startup acquisitions which result in lots of money being paid to investors, and there are acqui-hires which amount to a pre-bankruptcy firesale to get part of the money back, but resulting in unpaid debt and bankruptcy anyway. I don't know about Smyte's financials, but it may well be that their situation is like the latter case. I don't see any reason to suppose that there some big bag of money (even post-acquisition) that's somehow illegally taken out of the company. It may well also be that the money paid to the company itself for acquisition is insignificant, and the rest is in form of some "hiring bonus" to make the transfer of employees work, so not something that the debtors can claim.
    - bencollier49 8y ago
      Obviously this is massively speculative at this point in the conversation, largely a thought experiment, but -- Any side payment to the directors and staff outside of the acquisition - such as a "hiring bonus" as you suggest, which lead to the sale of assets at a lower price than would otherwise be the case - I'm pretty certain (again, in UK law, and I'm certainly not a lawyer), that this would be seen by the courts as a bribe, ie. money paid to perform their duty to the company improperly. See item 1.2 from the Bribery Act 2010: https://www.legislation.gov.uk/ukpga/2010/23/crossheading/general-bribery-offences https://www.legislation.gov.uk/ukpga/2010/23/crossheading/ge... Obviously not exactly relevant in this case, but I'm guessing there's a US analogue.
exelius 8y ago
The original company could have argued that the value received for its assets was less than its liabilities. It’s perfectly legal, but way overused in tech (where assets are overwhelmingly in the form of IP without an easily established market value). This type of uncertainty does lead to a situation where potential customers are wary of using a startup service — I can’t build a business off your service if I don’t have confidence your company will want me as a customer in 3 years. Ultimately I think we’re witnessing the final consolidation of the software industry. I expect the cloud/software industry of the next 30 years to start to look much like telecom over the last 30 years. Probably worse for consumers short term, but ultimately the plumbing isn’t all that interesting and it will hopefully enable the next round of innovation.