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Not just royalty obligations, you could apply this principle to any corporate acquisition and say that you're merely acquiring the assets and have no interest i

Not just royalty obligations, you could apply this principle to any corporate acquisition and say that you're merely acquiring the assets and have no interest in acquiring the liabilities. This is by no means a novel idea; the concept of fraudulent conveyance is frequently litigated: https://en.wikipedia.org/wiki/Fraudulent_conveyance https://en.wikipedia.org/wiki/Fraudulent_conveyance

musicale 6y ago
In a similar vein, private equity firms seem to be able to execute leveraged buyouts of companies (such as Toys R Us) saddling the company with huge debt payable to the private equity firm, which sucks money out of the company until it files for bankruptcy. It sounds like a scam but apparently it is legal somehow.
- lmm 6y ago
  That's not a scam; it's no different from buying a house on a mortgage. Paying down the debt sucks away your income, and maybe if you're not as successful as you'd hoped then you default and walk away. Generally companies only put themselves in that position if they're near-bankrupt already (certainly that's the case with Toys R Us - if it hadn't been for the private equity deal they'd have been bankrupt 5 years earlier).
  - musicale 6y ago
    And they're not the only retailer to collapse after a private equity buyout: https://slate.com/business/2020/01/private-equity-retail-fairway-why.html https://slate.com/business/2020/01/private-equity-retail-fai... The first theory is interesting: "sometimes, private equity firms really are just looters." The high bankruptcy rate is not encouraging. https://www.washingtonpost.com/business/2019/07/24/private-equitys-role-retail-has-decimated-million-jobs-study-says/ https://www.washingtonpost.com/business/2019/07/24/private-e... etc. And some of Toys R Us' creditors aren't happy either: https://www.bloomberg.com/news/articles/2020-03-13/toys-r-us-creditors-sue-directors-and-private-equity-owners https://www.bloomberg.com/news/articles/2020-03-13/toys-r-us...
    - lmm 6y ago
      Is it really a surprise that retail is in trouble? Private equity is a scapegoat for outdated business models. Covering up a non-viable business with the appreciation of your buildings is an accounting trick (and was a big factor in the 2010 crisis: a lot of companies went bankrupt not because their businesses suddenly became unviable, but because their businesses had been unviable for years but they made a profit on the value of their buildings); selling off the building while it's still worth something and letting the actual business stand or fall on its merits is a better approach.
      - beagle3 6y ago
        This is all true. The question, however, is: given that all these companies are already on the brink of bankruptcy, how is it legal (and acceptable) that a 3rd party comes in, extracts hundreds of millions from the already bankrupt company, and when the bankruptcy does arrive, it is bigger and worse than what would have happened without the PE involvement? Basically everyone except the PE gets screwed. I have not been following this closely, but if the 5-10 PE deals I’ve looked at over the years, it was clear from day 1 whether it was structured to have a chance at recovery, (some of which succeed, and some fail) or just to enrich the PE buyer. I wonder why this isn’t clear to the creditors - my guess would be that an early legitimate creditor only uses “other peoples money”, which legitimizes it for others.
        lmm 6y ago
        Often a PE buyout is a bankruptcy, or a last-ditch alternative to one. Breaking the company down for parts is often what the creditors want, explicitly or otherwise, and the PE firm is just being paid to execute it. (There are definitely cases where one creditor arranges things to screw over another - but again I think blaming the PE firm for that is misplaced.) They have their share of failures like any other industry, but IME Hanlon's Razor - or just legitimate risk-taking that doesn't pan out - applies to most PE bankruptcies.
    - namdnay 6y ago
      > The first theory is interesting: "sometimes, private equity firms really are just looters." Looting implies that the objects didn't belong to you. If I buy a cheap crappy old car to sell of the spare parts, is that "looting" > The high bankruptcy rate is not encouraging. That doesn't have much to do with private equity, the entire sector is in deep shit. It's not like Toys'R'Us was a model of health... > And some of Toys R Us' creditors aren't happy either: That's a more serious question, and will need to be resolved. Keep in mind that if the creditors aren't happy, they won't lend money again to companies owned by those PE firms. So it's not like there are no consequences
  - lazyasciiart 6y ago
    It is possible to do legitimately but it is also frequently done as a profitable game for the investor, who pays for the company with a loan that they pay back out of the company once they own it, sells off assets to his friends or a shell company and then declares the company bankrupt before selling it too. It is a well known phenomenon - the book Glass House covers the destruction of Anchor Glass this way in surprising detail. More background: https://prospect.org/economy/last-legislation-stop-private-equity-abuses/ https://prospect.org/economy/last-legislation-stop-private-e...
    - namdnay 6y ago
      > who pays for the company with a loan that they pay back out of the company once they own it, sells off assets to his friends or a shell company and then declares the company bankrupt before selling it too. None of this makes sense. if the company is profitable enough to be able to pay back its entire market capitalisation, why would they sell the assets off? If the cow is making that much milk, they'll keep milking it, or float it back and make a fortune
      - beagle3 6y ago
        The company is not profitable, but accounting somehow makes it possible to pay dividends to new owner.
        namdnay 6y ago
        the money has to come from somewhere... either the money was in the company, in which case it was drastically undervalued, or it comes from creditors, in which case if they want to lose their money it's their problem
        beagle3 6y ago
        Or, a loan was taken - repayment of which is supposed to take precedence over dividend distribution and dealing with related entity. And some apparently legal accounting tricks allow the loan repayment to lose its precedence, and when time comes to repay, suddenly there is no money. It is indeed the creditors money that is lost. And AFAIK it is legal. I just wonder why it’s legal. Much like in the subprime crisis, the original creditor knows quite well the likelihood of recovering the loan is low, but they sell it to a dumber creditor (often pension funds) who does not. Unlike toysrus and hostess, the subprime thing included a huge mount of illegal things by many of the parties, but still hardly any enforcement - so I guess it doesn’t matter all that much if it’s legal or not.
  - dingaling 6y ago
    > it's no different from buying a house on a mortgage. It's very different. The mortgage equivalent would be an investor taking out a loan to buy out the mortgage, transferring the deeds of the house to themselves. And then transferring the loan into the mortgage-payer's name and making him responsible for paying it off. They've really done nothing except use their superior credit status as abritage to obtain a tangible asset.
  - goatinaboat 6y ago
    That's not a scam; it's no different from buying a house on a mortgage. It's very different. A PE firm borrows money, buys a company, transfers the debt to the company, strips the assets and then lets it go bankrupt, leaving them with all the assets and no debts. Rinse and repeat.
    - barry-cotter 6y ago
      You can’t “transfer debt”. Otherwise I’d borrow a ton of money and transfer the debt to Bill Gates. A PE firm borrows to buy a company, attempts to make it a better money making machine by making process improvements and having it borrow to fund expansion and then sells it. The people who lend to the company know what they’re doing. They’re making a bet that the PE firm was right and they’ve made a better money making machine. Sometimes they’re wrong and they lose this money. That’s capitalism. If you make a bad investment you can lose all your money.
      - beagle3 6y ago
        If you followed toys r us or hostess (or many other such cases), the playbook is that the “money making machine” takes on new debt pays dividends to the PE, and then fails to pay that debt. This is apparently legal, the question is mostly how this loophole still exists despite being (ab)used by PE so many times.
        barry-cotter 6y ago
        It’s not a loophole. It’s people lending money to people who can’t pay it back. That’s capitalism. You make a mistake and lose money. It’s the exact same kind of mistake as lending to a wannabe restaurateur whose restaurant fails. You lent money to someone who couldn’t abide by the terms of the loan. As the lender that is your problem.
        themaninthedark 6y ago
        Sorry if I am being obtuse but I don't think that Toys R Us lent the PE firm money to buy Toys R Us. But somehow Toys R Us was responsible for paying back the debt that the PE firm took on to buy Toys R Us. The PE firm should have more skin in the game, if they take out a loan to buy Toys R Us, they should be responsible if the company fails.
  - dragonwriter 6y ago
    > That's not a scam; it's no different from buying a house on a mortgage. When I buy a house on a mortgage, I (not the house) end up with the debt, and I don't get to transfer any of the assets associated with the house to myself in a way which makes them not subject to repossession if the mortgage isn't paid. So, yeah, the deals we're talking about are very different.
    - lmm 6y ago
      Personal mortgages are non-recourse in most states. You can get whatever value you can out of the house, then walk away, and the lender gets to keep the house but they can't come after you.
      - dragonwriter 6y ago
        > Personal mortgages are non-recourse in most states. 12 out of 50 is not "most". https://www.forbes.com/advisor/loans/recourse-loans-vs-non-recourse-loans/ https://www.forbes.com/advisor/loans/recourse-loans-vs-non-r... ["In all but 12 states, home mortgages are also considered recourse loans. If a borrower is underwater on their mortgage—meaning the outstanding debt is greater than the value of the home—the bank may not be able to recoup all of its money from a foreclosure sale. In this case, the bank can get a deficiency judgment for the difference between the debt and the foreclosure sale price and then garnish the borrower’s wages or file a lien against other assets."]
  - microtherion 6y ago
    > it's no different from buying a house on a mortgage If you find a bank that lets me pay myself a "tenant fee" for living in a house I bought on a mortgage, please let me know, I'm all ears...
- cortesoft 6y ago
  What I don't understand is why a bank would loan money to a leveraged buyout when it so often ends in bankruptcy.
  - RobLach 6y ago
    PE can lend to its owned assets. Accumulation of capital is powerful in that way.
  - namdnay 6y ago
    I think we have to be careful of sampling bias - nobody ever hears of the leveraged buyouts that work smoothly
NegativeLatency 6y ago
If corporations are entitled to some of the rights of persons, then I'd like some of the rights of corporations. I'll take the asset of my house, without the liability of the outstanding mortgage balance.
- dnautics 6y ago
  You probably also want to be able to deduct all of your expenses from your taxes.
  - kevin_thibedeau 6y ago
    Just going to set up a double Irish with a Caiman sandwich to avoid paying any taxes.
    - LanceH 6y ago
      No imagination. I'm going to be a film company, get paid millions to work in different places, then have exactly zero profit when all is said and done.
    - wbl 6y ago
      Anne McCaffery lives in Ireland because royalties are taxed at a preferential rate.
      - reillyse 6y ago
        Artistic output is exempt from income tax (https://www.citizensinformation.ie/en/money_and_tax/tax/income_tax/artists_exemption_from_income_tax.html#:~:text=Income%20earned%20by%20writers%2C%20composers,in%20Ireland%20in%20certain%20circumstances.&text=Earnings%20from%20these%20works%20are,which%20the%20claim%20is%20made https://www.citizensinformation.ie/en/money_and_tax/tax/inco....)
        disgruntledphd2 6y ago
        Only up to a small amount yearly now. It used to be everything but they changed it a decade ago.
Juliate 6y ago
Acquiring the assets without the liabilities makes no sense. Does it legally?

musicale 6y ago

In a similar vein, private equity firms seem to be able to execute leveraged buyouts of companies (such as Toys R Us) saddling the company with huge debt payable to the private equity firm, which sucks money out of the company until it files for bankruptcy. It sounds like a scam but apparently it is legal somehow.

lmm 6y ago
That's not a scam; it's no different from buying a house on a mortgage. Paying down the debt sucks away your income, and maybe if you're not as successful as you'd hoped then you default and walk away. Generally companies only put themselves in that position if they're near-bankrupt already (certainly that's the case with Toys R Us - if it hadn't been for the private equity deal they'd have been bankrupt 5 years earlier).
- musicale 6y ago
  And they're not the only retailer to collapse after a private equity buyout: https://slate.com/business/2020/01/private-equity-retail-fairway-why.html https://slate.com/business/2020/01/private-equity-retail-fai... The first theory is interesting: "sometimes, private equity firms really are just looters." The high bankruptcy rate is not encouraging. https://www.washingtonpost.com/business/2019/07/24/private-equitys-role-retail-has-decimated-million-jobs-study-says/ https://www.washingtonpost.com/business/2019/07/24/private-e... etc. And some of Toys R Us' creditors aren't happy either: https://www.bloomberg.com/news/articles/2020-03-13/toys-r-us-creditors-sue-directors-and-private-equity-owners https://www.bloomberg.com/news/articles/2020-03-13/toys-r-us...
  - lmm 6y ago
    Is it really a surprise that retail is in trouble? Private equity is a scapegoat for outdated business models. Covering up a non-viable business with the appreciation of your buildings is an accounting trick (and was a big factor in the 2010 crisis: a lot of companies went bankrupt not because their businesses suddenly became unviable, but because their businesses had been unviable for years but they made a profit on the value of their buildings); selling off the building while it's still worth something and letting the actual business stand or fall on its merits is a better approach.
    - beagle3 6y ago
      This is all true. The question, however, is: given that all these companies are already on the brink of bankruptcy, how is it legal (and acceptable) that a 3rd party comes in, extracts hundreds of millions from the already bankrupt company, and when the bankruptcy does arrive, it is bigger and worse than what would have happened without the PE involvement? Basically everyone except the PE gets screwed. I have not been following this closely, but if the 5-10 PE deals I’ve looked at over the years, it was clear from day 1 whether it was structured to have a chance at recovery, (some of which succeed, and some fail) or just to enrich the PE buyer. I wonder why this isn’t clear to the creditors - my guess would be that an early legitimate creditor only uses “other peoples money”, which legitimizes it for others.
      - lmm 6y ago
        Often a PE buyout is a bankruptcy, or a last-ditch alternative to one. Breaking the company down for parts is often what the creditors want, explicitly or otherwise, and the PE firm is just being paid to execute it. (There are definitely cases where one creditor arranges things to screw over another - but again I think blaming the PE firm for that is misplaced.) They have their share of failures like any other industry, but IME Hanlon's Razor - or just legitimate risk-taking that doesn't pan out - applies to most PE bankruptcies.
  - namdnay 6y ago
    > The first theory is interesting: "sometimes, private equity firms really are just looters." Looting implies that the objects didn't belong to you. If I buy a cheap crappy old car to sell of the spare parts, is that "looting" > The high bankruptcy rate is not encouraging. That doesn't have much to do with private equity, the entire sector is in deep shit. It's not like Toys'R'Us was a model of health... > And some of Toys R Us' creditors aren't happy either: That's a more serious question, and will need to be resolved. Keep in mind that if the creditors aren't happy, they won't lend money again to companies owned by those PE firms. So it's not like there are no consequences
- lazyasciiart 6y ago
  It is possible to do legitimately but it is also frequently done as a profitable game for the investor, who pays for the company with a loan that they pay back out of the company once they own it, sells off assets to his friends or a shell company and then declares the company bankrupt before selling it too. It is a well known phenomenon - the book Glass House covers the destruction of Anchor Glass this way in surprising detail. More background: https://prospect.org/economy/last-legislation-stop-private-equity-abuses/ https://prospect.org/economy/last-legislation-stop-private-e...
  - namdnay 6y ago
    > who pays for the company with a loan that they pay back out of the company once they own it, sells off assets to his friends or a shell company and then declares the company bankrupt before selling it too. None of this makes sense. if the company is profitable enough to be able to pay back its entire market capitalisation, why would they sell the assets off? If the cow is making that much milk, they'll keep milking it, or float it back and make a fortune
    - beagle3 6y ago
      The company is not profitable, but accounting somehow makes it possible to pay dividends to new owner.
      - namdnay 6y ago
        the money has to come from somewhere... either the money was in the company, in which case it was drastically undervalued, or it comes from creditors, in which case if they want to lose their money it's their problem
        beagle3 6y ago
        Or, a loan was taken - repayment of which is supposed to take precedence over dividend distribution and dealing with related entity. And some apparently legal accounting tricks allow the loan repayment to lose its precedence, and when time comes to repay, suddenly there is no money. It is indeed the creditors money that is lost. And AFAIK it is legal. I just wonder why it’s legal. Much like in the subprime crisis, the original creditor knows quite well the likelihood of recovering the loan is low, but they sell it to a dumber creditor (often pension funds) who does not. Unlike toysrus and hostess, the subprime thing included a huge mount of illegal things by many of the parties, but still hardly any enforcement - so I guess it doesn’t matter all that much if it’s legal or not.
- dingaling 6y ago
  > it's no different from buying a house on a mortgage. It's very different. The mortgage equivalent would be an investor taking out a loan to buy out the mortgage, transferring the deeds of the house to themselves. And then transferring the loan into the mortgage-payer's name and making him responsible for paying it off. They've really done nothing except use their superior credit status as abritage to obtain a tangible asset.
- goatinaboat 6y ago
  That's not a scam; it's no different from buying a house on a mortgage. It's very different. A PE firm borrows money, buys a company, transfers the debt to the company, strips the assets and then lets it go bankrupt, leaving them with all the assets and no debts. Rinse and repeat.
  - barry-cotter 6y ago
    You can’t “transfer debt”. Otherwise I’d borrow a ton of money and transfer the debt to Bill Gates. A PE firm borrows to buy a company, attempts to make it a better money making machine by making process improvements and having it borrow to fund expansion and then sells it. The people who lend to the company know what they’re doing. They’re making a bet that the PE firm was right and they’ve made a better money making machine. Sometimes they’re wrong and they lose this money. That’s capitalism. If you make a bad investment you can lose all your money.
    - beagle3 6y ago
      If you followed toys r us or hostess (or many other such cases), the playbook is that the “money making machine” takes on new debt pays dividends to the PE, and then fails to pay that debt. This is apparently legal, the question is mostly how this loophole still exists despite being (ab)used by PE so many times.
      - barry-cotter 6y ago
        It’s not a loophole. It’s people lending money to people who can’t pay it back. That’s capitalism. You make a mistake and lose money. It’s the exact same kind of mistake as lending to a wannabe restaurateur whose restaurant fails. You lent money to someone who couldn’t abide by the terms of the loan. As the lender that is your problem.
        themaninthedark 6y ago
        Sorry if I am being obtuse but I don't think that Toys R Us lent the PE firm money to buy Toys R Us. But somehow Toys R Us was responsible for paying back the debt that the PE firm took on to buy Toys R Us. The PE firm should have more skin in the game, if they take out a loan to buy Toys R Us, they should be responsible if the company fails.
- dragonwriter 6y ago
  > That's not a scam; it's no different from buying a house on a mortgage. When I buy a house on a mortgage, I (not the house) end up with the debt, and I don't get to transfer any of the assets associated with the house to myself in a way which makes them not subject to repossession if the mortgage isn't paid. So, yeah, the deals we're talking about are very different.
  - lmm 6y ago
    Personal mortgages are non-recourse in most states. You can get whatever value you can out of the house, then walk away, and the lender gets to keep the house but they can't come after you.
    - dragonwriter 6y ago
      > Personal mortgages are non-recourse in most states. 12 out of 50 is not "most". https://www.forbes.com/advisor/loans/recourse-loans-vs-non-recourse-loans/ https://www.forbes.com/advisor/loans/recourse-loans-vs-non-r... ["In all but 12 states, home mortgages are also considered recourse loans. If a borrower is underwater on their mortgage—meaning the outstanding debt is greater than the value of the home—the bank may not be able to recoup all of its money from a foreclosure sale. In this case, the bank can get a deficiency judgment for the difference between the debt and the foreclosure sale price and then garnish the borrower’s wages or file a lien against other assets."]
- microtherion 6y ago
  > it's no different from buying a house on a mortgage If you find a bank that lets me pay myself a "tenant fee" for living in a house I bought on a mortgage, please let me know, I'm all ears...
cortesoft 6y ago
What I don't understand is why a bank would loan money to a leveraged buyout when it so often ends in bankruptcy.
- RobLach 6y ago
  PE can lend to its owned assets. Accumulation of capital is powerful in that way.
- namdnay 6y ago
  I think we have to be careful of sampling bias - nobody ever hears of the leveraged buyouts that work smoothly

NegativeLatency 6y ago

If corporations are entitled to some of the rights of persons, then I'd like some of the rights of corporations. I'll take the asset of my house, without the liability of the outstanding mortgage balance.

dnautics 6y ago
You probably also want to be able to deduct all of your expenses from your taxes.
- kevin_thibedeau 6y ago
  Just going to set up a double Irish with a Caiman sandwich to avoid paying any taxes.
  - LanceH 6y ago
    No imagination. I'm going to be a film company, get paid millions to work in different places, then have exactly zero profit when all is said and done.
  - wbl 6y ago
    Anne McCaffery lives in Ireland because royalties are taxed at a preferential rate.
    - reillyse 6y ago
      Artistic output is exempt from income tax (https://www.citizensinformation.ie/en/money_and_tax/tax/income_tax/artists_exemption_from_income_tax.html#:~:text=Income%20earned%20by%20writers%2C%20composers,in%20Ireland%20in%20certain%20circumstances.&text=Earnings%20from%20these%20works%20are,which%20the%20claim%20is%20made https://www.citizensinformation.ie/en/money_and_tax/tax/inco....)
      - disgruntledphd2 6y ago
        Only up to a small amount yearly now. It used to be everything but they changed it a decade ago.

Juliate 6y ago

Acquiring the assets without the liabilities makes no sense. Does it legally?