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It is basically absurd to say that a party settling a legal case must comply with the disclosure laws for making a private placement in offering a stock compone

by dhimes 16y ago

It is basically absurd to say that a party settling a legal case must comply with the disclosure laws for making a private placement in offering a stock component as part of a settlement package. Why is it absurd? In particular, is it legal to lie about the value of the stock in a negotiation? I'm genuinely curious.

phlux 16y ago
When Lockheed Martin was buying a company I was with a few years ago - the company was telling the employees that the private stock price was X. And that they were not going to sell the company. Then, when the deal came through - the sale price was effectively 20% of the price that was previously told all the employees, and that any employees that joined the company in the last 12 months would receive nothing for their shares. They additionally, gave executive stock bonuses to the C-level team to compensate for the difference between the original stated price and the ultimate selling price. Further, they didn't allow any ESPP and gave no lockheed stock to any employees (except the C-Level). Had the employees been allowed to exchange their stock options dividends for money to buy Lockheed stock for street value - the employees would have made out ok - lockheeds stock tripled in the next 12 months due to the war on terror. Instead - they sold into Lockheed and had no incentive package for any new employees, fucked over existing employees and any employees who were there for <12 months got nothing. Employees pretty much left after that - and HR had no answer as to how they were incentivising any new hires with anything more than a paycheck.
- dhimes 16y ago
  That's pretty shitty behavior. I guess they figure "that's just business" or "we did what we had to do." But I'm a little confused as to how it all plays out legally. Suppose, for example, an employee negotiates a package with a company, and part of that negotiation is for a stock package that the company estimates is worth X. Now, it seems to me that the estimate has to be a good-faith estimate in order for the negotiation to be valid. If the employee signs an NDA or a non-compete, it would seem like finding out that the company lied should invalidate the contracts signed as a result of that negotiation (the NDA or NC). It's one thing if something truly unforeseeable arises which destroys the value of the stock. It's something else if it's done in bad faith. But, I'm not a lawyer, and there's probably a reason that I am not one.
  - nl 16y ago
    Suppose, for example, an employee negotiates a package with a company, and part of that negotiation is for a stock package that the company estimates is worth X. Now, it seems to me that the estimate has to be a good-faith estimate in order for the negotiation to be valid. That's where you have gone wrong. No private company (unless they are insane) will ever state a future value for a stock package - they will merely offer units of stock (and maybe state it in terms of a percentage of the company). The employee might try and calculate that value, and the company might state things like "based on our last funding valuation these shares are valued at $X", but that is very different to claiming they will be worth anything at any date in the future. In startup companies, share options are usually granted using a vesting arrangement, which assigns a low value to the share options but doesn't allow the employee to buy them until some point in the future (where presumably the share will be worth more than the option). If that point arrives, and the shares are worth less than the options then bad luck! (This situation isn't uncommon, and is known as "being underwater". It occurs in public companies, too. For example, Google revalued the options of its employees in 2008 after the Google share price fell substantially and a majority of its employees were underwater) The situation is different for publicly listed companies of course, because there the stock actually is worth something. In that case the company really can give a value to the shares at that point in time.
    - dhimes 16y ago
      Actually, I was speaking of present value. I understand the risk that the value might change, I was just speaking of the company misrepresenting the value. Yes, there is a lot of handwaving and guessing. That's an expected part of the game. It's deliberate deception I was concerned with- not disclosing what they know.
alexqgb 16y ago
@dhimes - I think the point is that valuations are something others apply. In the case of a stock offer (where the company and the issuer are - presumably - working together for their mutual benefit) disclosure tends to be far deeper and more detailed than it is in a case where a hostile, and possibly devious party is attempting to inflict/extract maximum damages. So it's not about lying, per se. Rather, it's about providing the least information possible, and letting the negotiations center on the whatever value the plaintiffs can infer from that disclosure. It's also worth remembering that the value (which is always changing) is based on factors beyond FB's knowledge or control. Given the opacity of GS, no one outside of that firm really knows what related transactions they may be a part of that are also contributing to the value they place on FB. So even if the Winkelvi did have all the information that GS had, that still doesn't mean they'd be able to value the company in the same way. In other words, they're just saying "well, if GS sees more value than we do, and for reasons we don't begin to understand, we want a piece of THAT action - even though we'd already settled for a different price before they got involved." It's a bit like selling your house to a guy who fixes it up, then flips it for even more money, only to have you sue a year later to "correct" the price you received. In a word, absurd.
- dhimes 16y ago
  It's a bit like selling your house to a guy who fixes it up, then flips it for even more money, only to have you sue a year later to "correct" the price you received. In a word, absurd. I like that analogy. Probably a little rough- a better one would be if a guy built a house on your property and wouldn't leave, but gave you a sum negotiated based on what he said it was worth. But you weren't allowed to look inside. Then he flipped it.
  - alexqgb 16y ago
    That may be a bit closer to the mark. The point is, you accepted his offer KNOWING that (a) you didn't have complete information, (b) he had every incentive to offer the bare minimum, and (c) that your contract didn't include any provisions saying you'd be entitled to more if the stated value subsequently climbed. Sure, you COULD have that uptick provision included (maybe), but only if you'd taken the risk of holding out instead of settling for the $65 million. As soon as you accept the money, you accept all the conditions under which it was given. Provided that FB held up its end of the settlement deal (which it seems to have done), there was no reasonable basis for the Winkelvi to revisit the case.
grellas 16y ago
Securities laws were obviously not intended for a mediation context. Innocent investors buying stock from an issuer presumably trust that the issuer will be truthful about the value of the stock and about the material facts that affect that value. No such trust exists in an adversarial context where it is presumed that, in negotiating deals, it is every man for himself. Moreover, if securities laws applied in this context, then parties would need to do Regulation D/blue sky compliance to ensure that they were not sued after-the-fact. This is wholly impractical and would basically negate the ability of parties to settle by offering stock or other forms of equity to one another. In all the many years since the U.S. securities laws were enacted back in the early 1930s, these laws have never been applied in the manner suggested by the Winklevoss brothers. Since the issue is one of what Congress intended in enacting those laws, the failure of anyone even to raise the issue for so long a time is a good indicator that Congress never intended them to apply to this context.
- dhimes 16y ago
  No such trust exists in an adversarial context where it is presumed that, in negotiating deals, it is every man for himself. This is what I was looking for. In these situations, misrepresenting the value is not considered fraud. Thank you for the warning. I was unaware of this.

by dhimes 16y ago

phlux 16y ago

When Lockheed Martin was buying a company I was with a few years ago - the company was telling the employees that the private stock price was X. And that they were not going to sell the company. Then, when the deal came through - the sale price was effectively 20% of the price that was previously told all the employees, and that any employees that joined the company in the last 12 months would receive nothing for their shares. They additionally, gave executive stock bonuses to the C-level team to compensate for the difference between the original stated price and the ultimate selling price. Further, they didn't allow any ESPP and gave no lockheed stock to any employees (except the C-Level). Had the employees been allowed to exchange their stock options dividends for money to buy Lockheed stock for street value - the employees would have made out ok - lockheeds stock tripled in the next 12 months due to the war on terror. Instead - they sold into Lockheed and had no incentive package for any new employees, fucked over existing employees and any employees who were there for <12 months got nothing. Employees pretty much left after that - and HR had no answer as to how they were incentivising any new hires with anything more than a paycheck.

dhimes 16y ago
That's pretty shitty behavior. I guess they figure "that's just business" or "we did what we had to do." But I'm a little confused as to how it all plays out legally. Suppose, for example, an employee negotiates a package with a company, and part of that negotiation is for a stock package that the company estimates is worth X. Now, it seems to me that the estimate has to be a good-faith estimate in order for the negotiation to be valid. If the employee signs an NDA or a non-compete, it would seem like finding out that the company lied should invalidate the contracts signed as a result of that negotiation (the NDA or NC). It's one thing if something truly unforeseeable arises which destroys the value of the stock. It's something else if it's done in bad faith. But, I'm not a lawyer, and there's probably a reason that I am not one.
- nl 16y ago
  Suppose, for example, an employee negotiates a package with a company, and part of that negotiation is for a stock package that the company estimates is worth X. Now, it seems to me that the estimate has to be a good-faith estimate in order for the negotiation to be valid. That's where you have gone wrong. No private company (unless they are insane) will ever state a future value for a stock package - they will merely offer units of stock (and maybe state it in terms of a percentage of the company). The employee might try and calculate that value, and the company might state things like "based on our last funding valuation these shares are valued at $X", but that is very different to claiming they will be worth anything at any date in the future. In startup companies, share options are usually granted using a vesting arrangement, which assigns a low value to the share options but doesn't allow the employee to buy them until some point in the future (where presumably the share will be worth more than the option). If that point arrives, and the shares are worth less than the options then bad luck! (This situation isn't uncommon, and is known as "being underwater". It occurs in public companies, too. For example, Google revalued the options of its employees in 2008 after the Google share price fell substantially and a majority of its employees were underwater) The situation is different for publicly listed companies of course, because there the stock actually is worth something. In that case the company really can give a value to the shares at that point in time.
  - dhimes 16y ago
    Actually, I was speaking of present value. I understand the risk that the value might change, I was just speaking of the company misrepresenting the value. Yes, there is a lot of handwaving and guessing. That's an expected part of the game. It's deliberate deception I was concerned with- not disclosing what they know.

alexqgb 16y ago

@dhimes - I think the point is that valuations are something others apply. In the case of a stock offer (where the company and the issuer are - presumably - working together for their mutual benefit) disclosure tends to be far deeper and more detailed than it is in a case where a hostile, and possibly devious party is attempting to inflict/extract maximum damages. So it's not about lying, per se. Rather, it's about providing the least information possible, and letting the negotiations center on the whatever value the plaintiffs can infer from that disclosure. It's also worth remembering that the value (which is always changing) is based on factors beyond FB's knowledge or control. Given the opacity of GS, no one outside of that firm really knows what related transactions they may be a part of that are also contributing to the value they place on FB. So even if the Winkelvi did have all the information that GS had, that still doesn't mean they'd be able to value the company in the same way. In other words, they're just saying "well, if GS sees more value than we do, and for reasons we don't begin to understand, we want a piece of THAT action - even though we'd already settled for a different price before they got involved." It's a bit like selling your house to a guy who fixes it up, then flips it for even more money, only to have you sue a year later to "correct" the price you received. In a word, absurd.

dhimes 16y ago
It's a bit like selling your house to a guy who fixes it up, then flips it for even more money, only to have you sue a year later to "correct" the price you received. In a word, absurd. I like that analogy. Probably a little rough- a better one would be if a guy built a house on your property and wouldn't leave, but gave you a sum negotiated based on what he said it was worth. But you weren't allowed to look inside. Then he flipped it.
- alexqgb 16y ago
  That may be a bit closer to the mark. The point is, you accepted his offer KNOWING that (a) you didn't have complete information, (b) he had every incentive to offer the bare minimum, and (c) that your contract didn't include any provisions saying you'd be entitled to more if the stated value subsequently climbed. Sure, you COULD have that uptick provision included (maybe), but only if you'd taken the risk of holding out instead of settling for the $65 million. As soon as you accept the money, you accept all the conditions under which it was given. Provided that FB held up its end of the settlement deal (which it seems to have done), there was no reasonable basis for the Winkelvi to revisit the case.

grellas 16y ago

Securities laws were obviously not intended for a mediation context. Innocent investors buying stock from an issuer presumably trust that the issuer will be truthful about the value of the stock and about the material facts that affect that value. No such trust exists in an adversarial context where it is presumed that, in negotiating deals, it is every man for himself. Moreover, if securities laws applied in this context, then parties would need to do Regulation D/blue sky compliance to ensure that they were not sued after-the-fact. This is wholly impractical and would basically negate the ability of parties to settle by offering stock or other forms of equity to one another. In all the many years since the U.S. securities laws were enacted back in the early 1930s, these laws have never been applied in the manner suggested by the Winklevoss brothers. Since the issue is one of what Congress intended in enacting those laws, the failure of anyone even to raise the issue for so long a time is a good indicator that Congress never intended them to apply to this context.

dhimes 16y ago
No such trust exists in an adversarial context where it is presumed that, in negotiating deals, it is every man for himself. This is what I was looking for. In these situations, misrepresenting the value is not considered fraud. Thank you for the warning. I was unaware of this.