• The London Financial

Oracle and Walmart to acquire TikTok Global Business over Data Protection issues


By Luis Felipe Catao & Leonardo Antonelli - Co-Founders at KCLMA and LLB Students at King's College London


All about the TikTok deal: a financial solution to data privacy breaches or just another Trump stunt?


Deal Background


In June, India banned 59 Chinese owned apps over accusations from the country’s Ministry of Electronics and Information because of fears of child endangerment and spread of pornography. As concerns spread to the US in July, Wells Fargo and Amazon allegedly required their employees to delete the app from their corporate phones. Later that month, Donald Trump went public to threat banning the app over national concern.  


TikTok has been available for over three years. Why the sudden fuzz? 

As with any other app, TikTok collects user data. However, the app runs on software with security vulnerabilities that are more aggressive than on other social media; these range from snooping sensitive data from your clipboard to supplying insensitive information to children. It is worthy to remember these allegations are not unprecedented or even unexpected: last year, the app was fined by US’s Federal Trade Commission a record sum of $5.7m for collecting data of children under 13 – including names and email addresses – without parental consent as mandated by law. Furthermore, the app is now being investigated by French authorities for illegally collecting sensitive information such as addresses and postcodes. Ultimately, all of these breaches can be traced back to how the app is built – in other words, they stem from an invasive source code designed to keep track of such information. 


In seeing these breaches as an issue of national concern, Trump threatened to pass an executive order banning TikTok from all “app stores”. Even though the ban was ordered for last week, it would not preclude existing users to continue browsing the app. Therefore, a less invasive and more effective method was proposed; that an American company ought to acquire TikTok. This way, the application would be placed under the reach of US Data Privacy law and its developers would be kept under pressure from institutions such as the FTC that operate under complex legislation, capable of precluding such sensitive invasions of data privacy. Thus, the financial tool of acquisition is used for its broader legal impact. 


In this context, Trump gave his “blessing” for Oracle and Walmart – “the Buyers” – to take over from ByteDance – “the Seller” – a minority stake in a new company to be called TikTok Global – “the Target”.


The Deal


The proposed deal is not simple, nor is it in any way final: The Seller and Buyers have seemingly different views on how shares are to be distributed [2], and Beijing has strongly opposed this deal.


Under the proposed agreement, the Seller will perform a spin-off to create the Target (TikTok Global Business). Oracle and Walmart will then carry out a joint venture [4] to acquire 20% of the Target, currently valuated at $60bn. Central to this deal is the idea of a pre-IPO [5], including a warranty [6] that the spin-off will be publicly listed within the year. Once the deal is completed, Oracle and Walmart will inherit the title of “minority stakeholders” in the company TikTok Global Business (see  figure 1 - transaction chart). Oracle will take care of storing and managing the app’s user data securely, whereas Walmart will be responsible for the operative side of the business. 


The deal has three key implications. Firstly, the spin-off [3] requires the subsidiary company to be restructured from an enterprise governance perspective, meaning that it will require a new board, new officers, as well as new voting and decision-making procedures. Naturally, as Oracle and Walmart will be acquiring one-fifth of this restructured company, their say will influence that process. An example of that would be having the American common law as a north rather than the Beijing data privacy law. Ultimately, this means that the company might distance itself from overfeeding children with inappropriate content and advertising as a profit strategy. Nonetheless, it is worthy of note that under the terms of the agreement, the algorithm will still be controlled by the Seller, albeit with oversight of American investors and, more importantly, US law.


Secondly, the pre-IPO means that the TikTok business will fall under the jurisdiction of the SEC [7] and have to file their financial statements every year. This regulatory function prevents ByteDance from taking advantage of this spin-off and loading the company with trash like unwanted costs, debts or liabilities. Furthermore, the company will be under the constant scrutiny of potential investors, who will analyse its every move. This could prove dangerous in times like these, with a new tendency of short-sellers to hunt tech companies with big mouths like Wirecard and Nikola [8] .  


Lastly, there will be a myriad of tax considerations flowing from the deal, with the fiscal headquarters to be located in the US. Whilst we do not want to bore you with legal jargon in this article, ByteDance estimates that TikTok Global Business will pay up to $5bn in taxes to the US Treasury. However, this might be just a façade to mask Trump’s suspicious demand that TikTok donates $5bn to a “public education fund”.  


Political Intervention


What was initially supposed to be a meaningful and total acquisition of TikTok turned into a “trusted technical partnership”. The deal at the table – with Oracle and Walmart being merely minority shareholders – does not prevent any of the security breaches originating from the source code. 


Much of this can be attributed to the government’s hurried attempt to solve a complex issue. Trump’s bias against China produced premature executive orders and myriad empty threats without a plan for definitive action. This is evidenced by Judge Carl Nichols’ granting of a temporary injunction preventing Trump’s ban on grounds of undue process. Ultimately, had this been left for the relevant authorities to take care of – an example is the FTC’s sanctions towards the company in 2019 – the security issues could have been truly solved. 


Altogether, this haste is also proven by the fact that there may be other, more beneficial separation transactions than a spin-off. An example would be an equity carve-out, which, as opposed to the proposed deal, requires an almost immediate public listing of stocks. In a case where the deal seems to have been pushed to avoid regulatory breaches, a carve-out would have imposed stricter standards upon the board sooner. Ultimately, the transparency of and oversight of a public company could have avoided further security breaches and potential fiscal issues, such as the education fund misunderstanding mentioned earlier. 


Trump gave the deal his blessing as a signal that this would solve TikTok’s security issues. All in all, this is likely just a plot to incite a US-China tech war as a means of winning an upcoming election. 



Footnotes


[1] The basic algorithm powering the app. 


[2] In a public note, Oracle claimed the company would be 100% owned by American investors. This would bepossible because ByteDance already sold a significant portion of its shares to American investment firms Sequoia Capital and General Atlantic. ByteDance on the other hand has released a similar statement, albeit claiming that it would retain 80% of TikTok Global Business and operate the business as a subsidiary.


[3] A spin-off is the creation of an independent company through the sale or distribution of new shares of an existing business division of a parent company.


[4] A joint venture occurs when two institutions combine their different skillsets to achieve a common business goal – in this case, the acquisition of TikTok.


[5] A pre-IPO is a private sale of large blocks of shares before stock is listed on a public exchange.


[6] A term or promise in a contract, breach of which will entitle the innocent party to damages but not to treat the contract as terminated (discharged by breach).


[7] The Stock Exchange Commission – a regulatory body attached to the US government responsible formaintaining transparency in the Stock Market.


[8] See https://www.ft.com/content/a45a6638-167b-4e27-a9fd-576e7229f959



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