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We can all enjoy a bit of CEO bashing: 'Jack's an idiot hippy', 'Elon's a snake oil schmuck', 'Aron's a scammer'. Good, clean fun. But are they really?
Smart people do stupid things all the time (Brent Donnelly). That doesn't make them stupid people. Stupid people also do smart things, but we don't really hear about that, because it's much funner to laugh at the 'elites' failing.
If you throw free money into the mix, you get smart people doing stupid things for longer, because there's no cost of failure. Investors are also remarkably tolerant of failure when there are limited (or negative) returns available in government bonds...
Druckenmiller: "When you have free money, people do stupid things. When you have free money for 11 years, people do really stupid things"
However, there are limits to the levels of stupidity that will be tolerated.
Let's start with Jack Dorsey. The Block (Square) CEO orchestrated a deal to buy the majority stake in Jay Z's music-streaming service TIDAL for $306 million in 2021.
This is how TIDAL was characterised by Reuters back then 👇
Tidal calls itself an artist-owned service backed by Kanye West, Beyoncé, Madonna, Rihanna and Nicki Minaj among others, and is available in more than 56 countries. It has sought to distinguish itself from Spotify and other rivals by committing to providing higher sound quality to listeners and a greater share of revenue to artists.
It hasn't gone well... 👇
(TIDAL's tucked away in the 'others' category)
The zeitgeist at the time was all about blockchains and NFT's, breaking the industry stranglehold and supporting artists directly. Dorsey was all over it.
After the deal was agreed, there were a few errrm, minor issues that the City of Coral Springs Police Officers' Pension Plan highlighted as Block shareholders, in a complaint to the Delaware courts. They challenged the TIDAL acquisition as a breach of fiduciary duty.
Yesterday, the court dismissed the case, but it's a hollow victory for Jack and the gang. It's a really bad (funny) read...
Here's the summarised version from the court documents (emphasis added) 👇
The idea for the acquisition came to Jack Dorsey—Block’s founder, CEO, and Chairman—when he was summering with Carter in the Hamptons. From his Hamptons retreat, Dorsey joined a videoconference meeting of Block’s board and proposed that Block acquire TIDAL. The board formed a transaction committee to consider the proposal.
Nothing wrong so far. This isn't the first (or last) deal to start in the Hampton's. However...
Over the ensuing months, the committee learned that TIDAL was failing financially, losing its major contracts, and facing an ongoing criminal investigation.
The committee also learned that Carter personally loaned TIDAL $50 million to help the troubled company through its difficulties and that Dorsey was the sole Block management member in support of the acquisition.
Just a few red flags there, I'm sure they... Oh wait!
Despite the obvious problems with the deal, the committee approved the transaction for $306 million.
All of these potential pitfalls were known in advance... 👇
The presentation stated that “existing artists will have no legal obligation to [Block]; we are counting on their economic incentives as owners to drive future contributions to the growth and success of [TIDAL].”
...agreements “may be difficult to enforce legally, we will largely be relying on Jay-Z’s influence with them” to secure performance.
“we do not have a concrete view on the value of the artist shareholders.”
But f**k it, let's do it anyway. Block's market cap for much of 2021 was north of $100 billion.
$306 million was a drop in the ocean. Why not buy TIDAL on the back of pure hopes & vibes?
The judge's final comments are hilariously brutal 👇
It seemed, by all accounts, a terrible business decision.
Under Delaware law, however, a board comprised of a majority of disinterested and independent directors is free to make a terrible business decision without any meaningful threat of liability, so long as the directors approve the action in good faith.
Basically, it's not illegal to be sh*t at business, as long as you don't do it on purpose. More negligence nuggets in here 👇
And Hindenburg's accusations here too 👇
Let's talk about Aron
Adam Aron, CEO of AMC, has been accused of all sorts, but he's operating on a whole different level to Dorsey's gang.
It's hard to deny that AMC wouldn't have survived the pandemic without the memestock phenomenon.
Away from the emotional rollercoaster and absolute casino this market became though, there's an entire story of doing the right thing by AMC's original shareholders. That whole fiduciary duty thing again...
Hearing the story in Aron's own words gives a very different perspective to the mainstream media soundbites. 👇
Does this mean that he's whiter than white? A perfectly innocent, angelical CEO who will do no wrong? Absolutely not...
I mean, that Hycroft gold mine purchase... Are you kidding me?
The connection between AMC and the precious metals business may not be quite as mysterious as it first appeared, though. Hycroft was taken public through its merger with blank-check company Mudrick Capital Acquisition Corporation in May of 2020.
That business is tied to investor Jason Mudrick, whose investment firm Mudrick Capital Management injected $100 million into AMC in December of 2020 to help the theater chain avert bankruptcy.
So, the bankruptcy problem that was solved by issuing massive amounts of stock into the memestock frenzy, became a problem itself. Once you've sold all of the authorised shares in the charter (as AMC did), you need to get the shareholders to agree that you can issue more shares.
The problem AMC faced is that their shareholders didn't care enough to vote. For a charter amendment like this, a majority vote is required. Not voting is treated the same as voting no. So they couldn't get anything done. APE's were the solution.
Matt Levine has discussed the mechanisms in wonderful detail here and here, but the crux of it is that the APE's could get around the voting problem. Or so AMC thought.
Some of the shareholders took AMC to court & that case is still unresolved.
However, the lengths of corporate wizardry that AMC had to go to in order to circumvent this issue highlighted an issue that many companies actually face.
Most shareholders, especially retail, don't want to vote. For anything that requires a majority vote, that's a big problem.
So, a proposal to change the legislation is expected...
In recent years, due to a wider dispersion of shares among retail holders and policies in which brokerage firms decline to exercise their discretionary authority to vote shares held in “street name,” many public corporations have encountered significant difficulty in securing various stockholder votes and, in particular, a vote necessary to effect a reverse stock split to help a corporation maintain the minimum share price amount necessary to be listed on a national securities exchange.
The lack of interest and participation among stockholders and beneficial owners in these critical votes is often attributable not to the merits of the proposal—few stockholders, it would seem, would support a de-listing that would assuredly diminish the liquidity of the stock—but to “rational apathy” among retail and other dispersed investors, each of whom individually owns too few shares to have a vested interest in the corporation but all of whom collectively represent a significant portion of the voting base.
Why do I love this?
Butterfly effects. The AMC insanity has led to a law change that benefits companies and 'rationally apathetic' shareholders a few years later.
Within this beautifully infinite chaos, progress often goes quietly un-noticed.
As for the AMC
bagholders shareholders that are up in arms about the dilution... What exactly did they think would happen?
I was going to talk about Elon Musk too, but this note's already too long.
TL;DR investing is fun. Anything can happen and it probably will.
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