WEBVTT - Comedians Want Pandora to Pay for Jokes 0:00:03.160 --> 0:00:12.000 This is Bloombird Law with June Brusso from Bloombird Radio. Indeed, 0:00:13.200 --> 0:00:16.120 nice to me in Washington, where the buck stops here, 0:00:16.120 --> 0:00:19.480 way to go, and then it's handed out to A I. G. 0:00:19.680 --> 0:00:23.360 And many other people. Now, Robin Williams is a comedy legend, 0:00:23.560 --> 0:00:27.040 as is George Carlin. There are words that you can say, 0:00:27.120 --> 0:00:30.920 no problem topography. No one has ever gone to jail 0:00:30.960 --> 0:00:34.080 for screaming topography, but there are some words that you 0:00:34.080 --> 0:00:36.720 can go to jail for. You can listen to their 0:00:36.760 --> 0:00:40.800 comedy albums on streaming services, but the estates of Williams 0:00:40.800 --> 0:00:44.400 and Carlin say that Pandora Media is streaming their comedy 0:00:44.440 --> 0:00:48.800 albums without getting a license from them. Their estates, along 0:00:48.840 --> 0:00:53.440 with comedians Andrew Dice, clay Ron White, Bill Angvilla, Nick Depolo, 0:00:53.760 --> 0:00:57.080 are suing Pandora for not paying them as the authors 0:00:57.120 --> 0:00:59.760 of the jokes in the way that songwriters are paid 0:01:00.000 --> 0:01:02.960 realties for writing lyrics. It will be the first time 0:01:03.000 --> 0:01:07.280 a court will hear a case over licensing spoken word comedy. 0:01:07.319 --> 0:01:10.600 To help us understand the novel questions here, my guest 0:01:10.680 --> 0:01:14.800 is intellectual property litigator Terence Ross, a partner caton Uten 0:01:14.920 --> 0:01:19.800 rosenmant Terry, the licensing structure gets very complicated. Can you 0:01:19.840 --> 0:01:24.399 give us an overview? So copyright law with respect to 0:01:24.600 --> 0:01:31.240 recorded sound is currently very complex because of a complicated history. 0:01:31.440 --> 0:01:35.560 There was literally no provision for copyright in recorded sound. 0:01:35.680 --> 0:01:41.000 Over the course twenty century in Congress finally got around 0:01:41.280 --> 0:01:46.119 to fixing the Copyright Act by providing copyrights or recorded 0:01:46.160 --> 0:01:50.760 sound going forward in time. But because recorded sound came 0:01:50.800 --> 0:01:53.960 to the copyright game so late in the day, it 0:01:54.200 --> 0:01:59.920 has now a complicated licensing mechanism. And this in part 0:02:00.080 --> 0:02:01.720 has to do with history, but also in part with 0:02:01.760 --> 0:02:04.120 the nature of music. You start from the beginning, somebody 0:02:04.160 --> 0:02:07.840 writes notes the melody to a song, someone perhaps the 0:02:07.880 --> 0:02:11.200 same person, perhaps somebody else writes lyrics to go with that. 0:02:11.200 --> 0:02:15.239 That combination of musical notes and lyrics is often published 0:02:15.240 --> 0:02:18.000 as sheet music. That sheet music then can be played 0:02:18.160 --> 0:02:22.000 live to audiences, for example in a ballroom by an orchestra, 0:02:22.400 --> 0:02:26.120 or it can be recorded onto an LP C, D 0:02:26.360 --> 0:02:30.240 any other digital medium and listen to add a person's convenience. 0:02:30.360 --> 0:02:34.839 So you have these multiplicity of ways that music can 0:02:34.880 --> 0:02:39.239 be you and that requires several different types of licenses 0:02:39.480 --> 0:02:43.440 because there's several different copyright components. The first one is 0:02:43.680 --> 0:02:47.440 known as a mechanical license. Mechanical license has to do 0:02:47.520 --> 0:02:51.160 with the copyright in the underlying composition, the musical notes, 0:02:51.360 --> 0:02:54.360 and the lyrics. So if I am a band and 0:02:54.520 --> 0:02:57.080 I want to call a song of say led Zeppelin, 0:02:57.280 --> 0:02:59.920 which is copyrighted, I would have to obtain a mechanic 0:03:00.000 --> 0:03:03.359 a license in order to use their composition. If, however, 0:03:03.639 --> 0:03:06.200 as part of perhaps a hip hop piece, I want 0:03:06.200 --> 0:03:09.880 to sample a few sections from a led Zeppelin song 0:03:10.040 --> 0:03:14.040 and then add to those samples my own composition, what 0:03:14.160 --> 0:03:17.280 I need is known as a master license, which is 0:03:17.360 --> 0:03:21.239 a right to use the actual recording of the music 0:03:21.440 --> 0:03:24.639 that led Zeppelin did. To make things even more complicated, 0:03:24.760 --> 0:03:27.400 if you're a radio station, you need to obtain a 0:03:27.480 --> 0:03:30.880 public performance license, which is a third type of license 0:03:30.919 --> 0:03:35.360 for musical recordings. And after the Music Modernization Act, we 0:03:35.440 --> 0:03:38.640 now have digital streaming services and they have to get 0:03:39.000 --> 0:03:42.800 completely separate license provided under the m m A, which 0:03:42.840 --> 0:03:45.840 is referred to as a blanket license. Where does the 0:03:45.880 --> 0:03:50.120 spoken words fit into this? The copyright regime I just 0:03:50.240 --> 0:03:54.360 described grew up in a musical context, not in the 0:03:54.360 --> 0:03:56.920 context of spoken words, And yet what is the comedy recording. 0:03:57.160 --> 0:03:59.680 It is spoken words, and we now have a culture 0:03:59.840 --> 0:04:04.120 in which, thanks to streaming services and podcasts, the marketplace 0:04:04.160 --> 0:04:07.600 for the spoken word is surging. And people who have 0:04:07.760 --> 0:04:12.280 copyrights in the spoken word, who previously never even gave 0:04:12.360 --> 0:04:14.920 much of a thought to enforcing the copyrights, now see 0:04:15.000 --> 0:04:17.080 that we have this new marketplace in which spoke ward 0:04:17.160 --> 0:04:19.719 is very valuable and see an opportunity to make money 0:04:19.760 --> 0:04:22.840 off of that by now for the first time enforcing 0:04:22.880 --> 0:04:24.960 their copyrights. And at the cutting edge of this are 0:04:25.000 --> 0:04:27.800 the comedians and these lawsuits that have been filed by 0:04:27.839 --> 0:04:30.560 them in California. Let me ask if this, just on 0:04:30.640 --> 0:04:35.200 a pure copyright kind of analysis, is a joke a 0:04:35.240 --> 0:04:39.080 comedian tells the same as a song that someone writes, 0:04:39.160 --> 0:04:42.240 because you often hear people say, oh, he's stole my joke. 0:04:42.560 --> 0:04:44.599 You know, you tell the same joke in a different way. 0:04:45.080 --> 0:04:48.919 Is it like lyrics or is it unlike lyrics? So 0:04:49.360 --> 0:04:53.080 in theory it is like lyric. There's the story of 0:04:53.160 --> 0:04:55.640 Bob Hope, one of the most prolific joke riders of 0:04:55.640 --> 0:04:58.440 all types, who kept all his jokes on three by 0:04:58.440 --> 0:05:01.839 five index cards and had this massive catalog and collection 0:05:02.000 --> 0:05:04.840 of jokes, and why did he do that? Because copyright 0:05:04.960 --> 0:05:09.080 only attaches when and rigid work is fixed in a 0:05:09.160 --> 0:05:13.120 tangible medium. The words from the copyright act fixed in 0:05:13.160 --> 0:05:16.240 a tangible medium. If I simply get up at a 0:05:16.279 --> 0:05:20.000 comedy club and do an improvised routine, I am not 0:05:20.680 --> 0:05:24.080 fixing those jokes in a tangible medium by, for example, 0:05:24.160 --> 0:05:27.000 the classic way of doing that writing them down. Now, 0:05:27.040 --> 0:05:32.560 the interesting thing about these recordings of comedians performing is 0:05:32.600 --> 0:05:37.279 that that act of recording their performance fixes the jokes 0:05:37.480 --> 0:05:40.040 in a tangible medium. Are they're gonna be heard for 0:05:40.080 --> 0:05:43.640 all time, and therefore there is at least a copyright 0:05:43.880 --> 0:05:47.640 in those recordings. Whether or not there's a separate copyright 0:05:47.880 --> 0:05:50.800 in the jokes the way there would be a separate 0:05:50.839 --> 0:05:54.240 copyright for the sheet music is a question that is 0:05:54.279 --> 0:05:57.760 purely factual and depends on how did the comedian take 0:05:57.800 --> 0:06:00.719 care of their joke creation where they, like Bob Hope, 0:06:00.760 --> 0:06:03.200 were they writing down their jokes and saving them and 0:06:03.240 --> 0:06:06.200 cataloging them over time, or were they more like you know, 0:06:06.320 --> 0:06:08.520 the comedy improv clubs, where people get up and just 0:06:08.600 --> 0:06:12.400 do bits and nobody's recording it, nobody's writing down even afterwards. 0:06:12.960 --> 0:06:17.800 So then Theoretically speaking, the streaming services would have to 0:06:17.880 --> 0:06:21.560 get two licenses. See in theory, what they should have 0:06:21.680 --> 0:06:26.919 to do is a pain both a master license from 0:06:27.120 --> 0:06:30.880 whoever owns the master recording, and they should also in 0:06:31.000 --> 0:06:34.440 theory of paying a mechanical license from whoever owns the 0:06:34.480 --> 0:06:37.000 copyright on the joke. Which is why your last question 0:06:37.080 --> 0:06:38.800 about do they have copyrights and the jokes there is 0:06:38.839 --> 0:06:41.360 a good question. Pen Dora says in filings that it 0:06:41.440 --> 0:06:45.640 streams comedy without a license for the underlying work because 0:06:45.680 --> 0:06:49.520 that's an industry wide custom. What would Pandora's defense be, 0:06:49.960 --> 0:06:52.800 This defense that it's an industry wide custom, that doesn't 0:06:52.800 --> 0:06:55.760 sound very strong to me. Bandora have to the extent 0:06:55.880 --> 0:06:58.880 of said anything about this and SEC filings is that 0:06:59.000 --> 0:07:03.200 there's no requirement to take a license in streaming the 0:07:03.520 --> 0:07:07.920 comedic recordings because that's the industry wide custom. That, however, 0:07:08.040 --> 0:07:12.440 is not a cognizable defense to copyright infringement. If there 0:07:12.560 --> 0:07:15.360 is a copyright and that work that is copyrighted is 0:07:15.440 --> 0:07:19.040 used without authorization of the copyright owner, that is at 0:07:19.120 --> 0:07:21.480 least a prime of fashion case of copyright infringement. The 0:07:21.520 --> 0:07:25.000 other defense you have heard mentioned on behalf of the 0:07:25.040 --> 0:07:27.960 streaming services is that it would be too hard to 0:07:28.120 --> 0:07:31.840 determine who owns the copyright and to track them down 0:07:31.920 --> 0:07:34.640 and to pay them a few cents every time they 0:07:34.680 --> 0:07:38.920 stream the copyrighted work. Again, that's not a cognizable defense 0:07:38.960 --> 0:07:43.240 to copyright infringement. So it's frankly very hard to know 0:07:43.840 --> 0:07:47.239 how the streaming services such as Pandora intend to defend 0:07:47.240 --> 0:07:50.480 against this, and left it's their intent to simply claim 0:07:50.640 --> 0:07:54.000 that there's no copyright in the underlying joke in the 0:07:54.000 --> 0:07:58.600 first place, As you said, with music, which is evolved, 0:07:58.640 --> 0:08:02.240 there are organization asians that you go to to get 0:08:02.280 --> 0:08:05.520 the license, right, so it's it's easy what Pandora saying 0:08:05.560 --> 0:08:08.600 is there's no organization we can go to that is 0:08:08.800 --> 0:08:11.560 absolutely right, And again it's a it's a problem that 0:08:11.680 --> 0:08:14.960 is a legacy of the law in this area being 0:08:14.960 --> 0:08:18.600 developed in the context of music. So UH an FM 0:08:18.680 --> 0:08:22.640 radio station that that wants to play recorded music UM 0:08:22.760 --> 0:08:26.280 can go to either b m I or ASCAP and 0:08:26.440 --> 0:08:30.000 obtain a public performance license with a set fee schedule, 0:08:30.560 --> 0:08:34.240 and they pay to those organizations. And it's in those 0:08:34.360 --> 0:08:37.360 organizations who have the burden of figuring out well who 0:08:37.360 --> 0:08:40.439 actually own the copyright that song, and and and figuring 0:08:40.480 --> 0:08:42.440 out how to get money to them. If if you 0:08:42.520 --> 0:08:48.040 want a mechanical license, you go to the publishing companies, 0:08:48.520 --> 0:08:50.880 and that that area is dominated by three companies, The 0:08:50.920 --> 0:08:55.920 Harry Fox Agency, Music Reports, Inc. And the Mechanical Licensing Collective. 0:08:55.960 --> 0:08:59.120 And again you simply pay the money to them, and 0:08:59.160 --> 0:09:01.840 it's up to them to figure out who owns the copyright, 0:09:01.920 --> 0:09:05.640 how much they get paid, when do they get paid um. Similarly, 0:09:05.640 --> 0:09:10.640 with digital streaming of music under the Music Monetization Act, 0:09:10.960 --> 0:09:15.400 this Mechanical Licensing Collective, which the m m A established 0:09:15.400 --> 0:09:20.400 by law, worries about collecting the fees from anybody wanting 0:09:20.400 --> 0:09:24.200 a license to stream music and distributing it. But the 0:09:24.360 --> 0:09:27.880 m m A did not provide for the handling of 0:09:28.520 --> 0:09:32.240 spoken word recordings. And so that's where we have this 0:09:32.679 --> 0:09:37.760 conundrum now, is that the various agencies that have been 0:09:37.800 --> 0:09:42.200 set up over the years to enforce copyrights to collect 0:09:42.320 --> 0:09:46.280 licensing fees, none of them were directed at taking care 0:09:46.440 --> 0:09:51.479 of the spoken word as recorded. And that's why Pandora, 0:09:51.559 --> 0:09:54.720 with a certain sense of justification, says, how do we 0:09:54.800 --> 0:09:57.679 do this? We want to comply with a copyright law, 0:09:57.880 --> 0:10:00.160 but how do we go about doing this, are we 0:10:00.240 --> 0:10:02.560 have to search out every comedian and figure out how 0:10:02.640 --> 0:10:05.200 much that joke was word firsts this joke, and then 0:10:05.440 --> 0:10:07.439 how to get it to them? And if they passed away, 0:10:07.440 --> 0:10:09.520 where is their state, who's the trustee of the state, 0:10:09.559 --> 0:10:11.320 how do we get the money to them. It is 0:10:11.360 --> 0:10:14.000 a very serious problem that at the end of the day, 0:10:14.080 --> 0:10:18.079 has to be addressed through legislation, just as the streaming 0:10:18.120 --> 0:10:22.040 of music was addressed through legislation the Music Modernization Act. 0:10:22.760 --> 0:10:27.680 Now last December, Spotify just pulled the content of hundreds 0:10:27.720 --> 0:10:31.360 of comedians when he couldn't reach a licensing deal with 0:10:31.520 --> 0:10:36.160 Spoken Giants, one of the first rights organizations for comedians. 0:10:36.160 --> 0:10:38.480 So it seems like they didn't think it was worthwhile. 0:10:39.240 --> 0:10:41.679 That is another argument here, hearing from the streaming services 0:10:41.800 --> 0:10:47.240 that there are a handful of comedians who get regular play, 0:10:47.320 --> 0:10:51.400 and then there are lots of comedian recordings that are 0:10:51.480 --> 0:10:54.400 in their catalog that are available to play but never 0:10:54.480 --> 0:10:58.480 get played. And as I understand it is that the 0:10:58.600 --> 0:11:02.000 problem was Spotify I refused to pay based on the 0:11:02.120 --> 0:11:06.559 volume of works in their collection available to be streamed, 0:11:06.800 --> 0:11:09.240 things that just wanted to pay for the ones that 0:11:09.280 --> 0:11:12.400 actually got streamed, which is a much smaller number, and 0:11:12.440 --> 0:11:15.920 that's where the negotiations broke down. And this same thing 0:11:16.040 --> 0:11:20.120 happened repeatedly over the years with respect to public performance 0:11:20.120 --> 0:11:24.040 licenses for music and mechanical licenses for music and master 0:11:24.240 --> 0:11:28.800 licenses for recordings, and the solution has always been compromised, 0:11:28.920 --> 0:11:33.480 often forced upon the various interests here by Congress or 0:11:33.559 --> 0:11:36.760 by the Department of Justice or the Federal Trade Commission. 0:11:36.840 --> 0:11:40.040 Looking in from antitrust perspective, just looking at the lawsuit 0:11:40.200 --> 0:11:43.120 by itself, does it seem that the comedians have a 0:11:43.240 --> 0:11:47.079 good case against Pandora. They certainly have a good prime 0:11:47.080 --> 0:11:50.480 of fashion copyright in Fringeman case they've alleged, and I 0:11:50.480 --> 0:11:53.480 as soon can prove up that they own copyrights in 0:11:53.840 --> 0:11:56.840 the works that have been streamed online. I assume that 0:11:56.880 --> 0:11:59.040 they can prove that the works were streamed online. That 0:11:59.080 --> 0:12:02.440 ought to be relatively easy to do. And then it's 0:12:02.559 --> 0:12:05.400 up to the defendant, Pandora, to come up with some 0:12:05.480 --> 0:12:07.199 defense on which I don't know what it would be. 0:12:07.280 --> 0:12:08.920 I may be missing something, but they don't see I 0:12:09.000 --> 0:12:11.880 need the normal viable defenses. I don't see diminimous use 0:12:11.960 --> 0:12:14.320 defense because they're playing the entire jokes. I don't see 0:12:14.559 --> 0:12:17.120 a fair use defense. And keep in mind, June, this 0:12:17.240 --> 0:12:19.480 is not like some of the music cases we've talked 0:12:19.480 --> 0:12:21.480 about in the past, where somebody says that you've got 0:12:21.520 --> 0:12:23.600 an idea from my song, you took bits and pieces 0:12:23.640 --> 0:12:25.640 of my song, you built upon that. This is what 0:12:25.840 --> 0:12:30.080 is known as literal copyright infringement. It's like taking a 0:12:30.200 --> 0:12:33.680 book and xeroxing the pages. It's not an attempt to 0:12:33.720 --> 0:12:37.679 create a transformative new work. You're simply giving away somebody 0:12:37.679 --> 0:12:42.320 else's actual work verbatim. And that's a much easier case 0:12:42.400 --> 0:12:44.720 to make than the music cases we've seen the past 0:12:44.800 --> 0:12:49.000 against that sure n fled Zeppelin, the Blurredlines case, where 0:12:49.160 --> 0:12:52.840 that we're based on substantial similarity as opposed to literal copying, 0:12:53.080 --> 0:12:55.240 which is what's going on here. So it's a much 0:12:55.240 --> 0:12:57.880 easier case for a plaintiff to make out copyright owner 0:12:57.920 --> 0:12:59.520 to make out. And I think you've done a good 0:12:59.559 --> 0:13:02.400 job here. And the really important thing to focus on 0:13:02.520 --> 0:13:06.720 is that they are claiming statutory damages. A Statutory damages 0:13:06.760 --> 0:13:09.400 are sort of a unique fixture of the Copyright Act 0:13:09.440 --> 0:13:13.160 of It says that if a copyright owner has trouble 0:13:13.240 --> 0:13:17.559 proving up their actual losses, they can always get a 0:13:17.720 --> 0:13:22.360 statutory royalty, and the statute sets that so that for 0:13:22.600 --> 0:13:26.160 the sort of willful infringement that's alleged here, you can 0:13:26.200 --> 0:13:29.600 get up to a hundred and fifty thousand dollars per 0:13:29.640 --> 0:13:32.920 work infringed. So that's not how many times it was 0:13:33.000 --> 0:13:36.080 stream it's for each work a hundred and fifty thou dollars, 0:13:36.080 --> 0:13:39.240 but their ten or twelve works, you're quickly into millions 0:13:39.280 --> 0:13:43.880 of dollars. And indeed, Robin Williams estate alone is suing 0:13:44.000 --> 0:13:47.680 for about four point one million dollars of statutory damages. 0:13:47.920 --> 0:13:50.920 And you can imagine if each of these various Comedians 0:13:51.080 --> 0:13:53.959 lawsuits is in that neighborhood, how quickly that number can 0:13:53.960 --> 0:13:56.720 get up there in the series money. So there's a 0:13:56.800 --> 0:14:00.760 lot at stake here and it should justify. Really cause 0:14:01.080 --> 0:14:05.160 Pandora some concern. Does this seem like it's a suit 0:14:05.240 --> 0:14:08.000 that will be settled or it's too big to be settled. 0:14:08.400 --> 0:14:13.280 So we've seen this type of lawsuit never before. This 0:14:13.360 --> 0:14:16.400 is the first of a kind, and that makes it 0:14:16.520 --> 0:14:20.440 difficult to predict the course of the litigation based on 0:14:20.680 --> 0:14:24.000 similar past lawsuits. The closest thing I can analogize to 0:14:24.400 --> 0:14:29.840 was the lawsuits brought by the Turtles sixty pop music 0:14:29.880 --> 0:14:35.480 group seeking to obtain licensed fees for the playing on 0:14:35.680 --> 0:14:40.080 radio stations and digital streaming of their songs that predated 0:14:40.440 --> 0:14:43.600 the seventy two amendments that the Copyright Act. So this 0:14:43.760 --> 0:14:47.000 is for songs that did not have copyright protection, but 0:14:47.080 --> 0:14:50.960 they alleged had various types of common law protections that 0:14:51.000 --> 0:14:56.280 were infringed. Again, those were novel, first of kind lawsuits, um, 0:14:56.320 --> 0:14:59.880 and they had to be litigated always all the way 0:15:00.120 --> 0:15:02.840 to appeal in order to get a sense of how 0:15:02.880 --> 0:15:06.880 the courts were coming out, And they went up in 0:15:07.040 --> 0:15:11.320 several state courts and several several federal courts, and it 0:15:11.360 --> 0:15:14.880 wasn't until all the parties involved had a sense of 0:15:15.280 --> 0:15:17.800 where the cold courts would all make come out that 0:15:17.880 --> 0:15:21.880 they had enough information to settle the case and come 0:15:21.960 --> 0:15:25.080 up with what the risk and rewards were and to 0:15:25.200 --> 0:15:28.040 agree that compromise. I think you'd likely to see something 0:15:28.120 --> 0:15:32.440 similar here. I think that the industry needs more guidance 0:15:32.960 --> 0:15:35.240 on what the risk is to them, and so I 0:15:35.280 --> 0:15:37.800 think they're liable not to try to quickly settle this, 0:15:37.880 --> 0:15:40.160 but don't try and push it and see where the 0:15:40.200 --> 0:15:43.680 liability is. The Pandora in particularly has been predicting something 0:15:43.720 --> 0:15:46.280 like this for years in their sec filings, saying that 0:15:46.360 --> 0:15:49.320 this is a risk that's out there, and so I 0:15:49.360 --> 0:15:52.800 think they're going to need some guidance from the courts, 0:15:52.800 --> 0:15:55.280 perhaps even going up to the appellate courts to see 0:15:55.280 --> 0:15:57.880 what the thinking there is on on the law in 0:15:57.880 --> 0:16:00.440 this area. And I think on the other side, a ledger, 0:16:00.880 --> 0:16:03.880 I think the comedians and their lawyers are going to 0:16:04.000 --> 0:16:07.680 want to get a lot more information as to the 0:16:07.920 --> 0:16:11.360 legal rights and liabilities before they can make an informed 0:16:11.360 --> 0:16:15.200 decision as to where to settle. And so my gut 0:16:15.320 --> 0:16:18.240 is that you're going to see this litigation move along 0:16:18.840 --> 0:16:21.280 for several years before you get that point where the 0:16:21.320 --> 0:16:24.040 parties feel comfortable that they are fully informed and can 0:16:24.080 --> 0:16:27.360 make an intelligent and reasonable settlement. Thanks for your insights, Terry, 0:16:27.400 --> 0:16:32.800 As always, that's Terence Ross of Captain muchen Rosenman. It 0:16:32.880 --> 0:16:37.040 was a whirlwind seventeen days for Twitter, starting with Elon 0:16:37.200 --> 0:16:40.680 Musk announcing he'd become Twitter as a larger shareholder, to 0:16:40.840 --> 0:16:43.880 his offers to buy the whole company, to the board 0:16:44.000 --> 0:16:49.240 launching a poison pill, to Musk's cryptic love me tender tweets, 0:16:49.280 --> 0:16:52.920 and finally, at least so far, to Musk making us 0:16:52.960 --> 0:16:56.040 show me the money move. But even with funding secured, 0:16:56.360 --> 0:16:59.680 taking over Twitter will not be so easy, as Musk 0:16:59.760 --> 0:17:03.720 Kim's self acknowledge during a Ted interview last week, do 0:17:03.760 --> 0:17:05.560 you think this will be somewhat painful and I'm not 0:17:05.600 --> 0:17:08.320 sure that I will actually be able to acquire it. 0:17:09.840 --> 0:17:14.679 I mean I could technically afford it. Um joining me 0:17:14.720 --> 0:17:17.200 to make some sense of these Musk moves is a 0:17:17.280 --> 0:17:20.960 long cabin, a partner at Ferrell Fritz. Even though Musk 0:17:21.160 --> 0:17:23.760 is the richest man in the world, the question was 0:17:23.800 --> 0:17:27.040 still whether he had enough to buy Twitter without selling 0:17:27.119 --> 0:17:29.840 part of his steak and one of his prized companies 0:17:29.880 --> 0:17:33.560 to get it. It appears that he does now with 0:17:33.640 --> 0:17:37.760 the commitments that he's received. He's received commitments from a 0:17:37.800 --> 0:17:42.600 bunch of banks, thirteen billion dollars from Morgan Stanley and 0:17:42.800 --> 0:17:46.600 a group of banks, an additional twelve point five billion 0:17:46.640 --> 0:17:50.439 dollars in margin loans that are secured by his Tesla stock, 0:17:50.880 --> 0:17:55.040 and he himself has provided an equity commitment letter for 0:17:55.720 --> 0:17:58.119 billion dollars. So if you add it all up, you 0:17:58.200 --> 0:18:01.520 get forty six point five billion dollars. It appears that 0:18:01.600 --> 0:18:06.640 he does have enough to fund the offer he has 0:18:06.720 --> 0:18:08.919 made for Twitter. Now that's not to say that the 0:18:08.960 --> 0:18:11.320 board will accept his offer. If the board does not 0:18:11.440 --> 0:18:14.720 accept his offer, he is at least threatening right now 0:18:14.840 --> 0:18:18.000 to go hostile, to go straight to the stockholders and 0:18:18.119 --> 0:18:21.520 offer to purchase their shares directly. The Twitter board made 0:18:21.520 --> 0:18:25.240 a defensive move by launching a poison pill. Explain what 0:18:25.320 --> 0:18:29.719 that does. Twitter adopted an anti takeover defense in the 0:18:29.760 --> 0:18:32.879 form of a sharehold rights plan, which is commonly referred 0:18:32.920 --> 0:18:35.840 to as a poison pill. What Twitter did was it 0:18:36.280 --> 0:18:40.000 distributed rights to all of its shareholders that allows them 0:18:40.040 --> 0:18:44.040 to buy shares, and if someone crosses a threshold trigger 0:18:44.080 --> 0:18:48.320 in this case, fifteen percent ownership without board approval, all 0:18:48.359 --> 0:18:52.560 the shareholders other than the person who crossed the fifteen 0:18:52.600 --> 0:18:56.200 percent threshold get to buy shares at a steep discount. 0:18:56.320 --> 0:19:00.119 It results in massive dilution to the acquiring person, and 0:19:00.359 --> 0:19:04.720 so in Twitter's poison pill, the rights allow shareholders to 0:19:04.880 --> 0:19:08.480 purchase shares at an exercise price of two ten dollars. 0:19:08.520 --> 0:19:12.000 On the payment of that exercise price, a shareholder would 0:19:12.040 --> 0:19:16.240 receive a number of shares equal to twice that exercise price, 0:19:16.359 --> 0:19:20.280 and that would result in massive dilution to the acquiring 0:19:20.320 --> 0:19:23.560 person because he doesn't get to buy shares at that discount. 0:19:23.800 --> 0:19:26.879 So the effect of all this is that it prevents 0:19:27.119 --> 0:19:32.159 Elon Musk from exceeding that fiftcent threshold or even announcing 0:19:32.160 --> 0:19:36.240 a tender offer to acquire shares that would result in 0:19:36.320 --> 0:19:39.760 him exceeding that threshold without board approval. And that's the 0:19:39.840 --> 0:19:43.119 key thing. So the practical impact of all this is 0:19:43.160 --> 0:19:46.600 that oil roads now lead through the Twitter board are 0:19:46.640 --> 0:19:50.280 poison pill is very effective in the history of poison pills, 0:19:50.320 --> 0:19:53.679 and this stretches back about forty years. I'm only aware 0:19:53.680 --> 0:19:57.960 of one documented case in which someone deliberately crossed the 0:19:58.000 --> 0:20:02.000 threshold without board approval, so it does serve as a deterrence. 0:20:02.160 --> 0:20:06.840 The poison pill has no impact on a friendly negotiated takeover, 0:20:07.040 --> 0:20:11.760 including by Musk, because the board retains the ability to 0:20:11.840 --> 0:20:15.840 amend the plan and exempt Musk or another require er. 0:20:16.320 --> 0:20:18.840 It just gives the board more leverage, gives it more 0:20:18.840 --> 0:20:21.919 time to consider an offer. What does it tell you 0:20:21.960 --> 0:20:25.640 that Musk is considering launching a tender offer, So it's 0:20:25.720 --> 0:20:30.520 unclear why he continues to threaten a tender offer. Presumably 0:20:30.720 --> 0:20:33.480 in order for him to proceed with that tender offer, 0:20:33.600 --> 0:20:36.520 he would have to convince the board to redeem the 0:20:36.560 --> 0:20:39.800 poison pill. If he can't convince them, he may try 0:20:39.840 --> 0:20:44.800 to unseat them. And he himself cannot nominate any directors 0:20:44.880 --> 0:20:48.760 for the upcoming election because he's missed the notice steadline. 0:20:48.960 --> 0:20:52.040 But what he could do is and engage in the campaign, 0:20:52.440 --> 0:20:58.000 really a proxy contest. He will compete for stockholders proxies 0:20:58.200 --> 0:21:02.080 in order to invent it's enough of them, not necessarily 0:21:02.160 --> 0:21:05.840 to vote for his select directors, because again he's missed 0:21:05.880 --> 0:21:09.840 the deadline for nominating, but he might convince enough shareholders 0:21:09.880 --> 0:21:14.320 to withhold their votes from the board's slate of directors. 0:21:14.320 --> 0:21:18.160 And what's interesting about Twitter is that Twitter has what's 0:21:18.200 --> 0:21:21.800 called majority voting. In other words, a director doesn't get 0:21:21.800 --> 0:21:25.000 elected unless he gets a majority of votes. The general 0:21:25.119 --> 0:21:29.680 rules that exists for most companies is a plurality voting rule, 0:21:29.760 --> 0:21:32.520 which means that all you need is more votes than 0:21:32.560 --> 0:21:35.720 any other. Guy. Tell me how a tender offer would 0:21:35.800 --> 0:21:38.879 work if he decides to do it. So tender offer 0:21:39.119 --> 0:21:42.919 is just an offer directly to the stockholders, and he 0:21:43.040 --> 0:21:47.840 would have to disclose material information about his offer to 0:21:47.920 --> 0:21:50.960 the shareholders. There are rules that he would have to 0:21:51.000 --> 0:21:54.000 follow in order for the tender offer not to be 0:21:54.080 --> 0:21:58.120 deemed courses, but the shareholders would be allowed to make 0:21:58.160 --> 0:22:02.120 their own decisions about whether to sell their shares that 0:22:02.200 --> 0:22:05.679 have been offered for tender. The downside of a tender offer, 0:22:05.680 --> 0:22:09.240 as opposed to a negotiate an acquisition with the company 0:22:09.520 --> 0:22:12.520 is that you're not guaranteed to get the entire company. 0:22:12.640 --> 0:22:14.879 So you may get a whole bunch of shareholders who 0:22:14.960 --> 0:22:17.680 tender their shares. You may end up with a majority 0:22:17.720 --> 0:22:20.600 of the company, but you are likely not to end 0:22:20.680 --> 0:22:23.840 up with the companies. But also takes longer than a 0:22:23.880 --> 0:22:28.480 negotiated acquisition with the company. And now with the poison pill, 0:22:28.760 --> 0:22:32.040 the announcement of a tender offer in and of itself 0:22:32.160 --> 0:22:35.120 would trigger the pill. So that's an avenue that has 0:22:35.440 --> 0:22:38.679 seemingly been cut off from Elon Musk does his latest 0:22:38.720 --> 0:22:43.439 filing with the SEC and securing financing shell Musk is 0:22:43.480 --> 0:22:47.720 really serious about acquiring Twitter's not just trolling. Well, I 0:22:47.760 --> 0:22:50.399 have to say that before this I was not quite 0:22:50.440 --> 0:22:53.800 convinced that he was serious about acquiring Twitter. I thought 0:22:53.880 --> 0:22:56.880 that he, you know, sort of can go either way. 0:22:57.160 --> 0:23:00.440 If it worked out, great, If not, he could exert 0:23:00.680 --> 0:23:03.520 pressure from the sidelines to do what we know he 0:23:03.600 --> 0:23:06.280 wants to do, which is to bring about certain changes 0:23:06.440 --> 0:23:09.760 in the product and the operations of Twitter. This filing 0:23:10.080 --> 0:23:12.760 shows that he's a little bit more serious than it 0:23:12.840 --> 0:23:16.159 appeared before, because now he's got the funding. And he 0:23:16.200 --> 0:23:20.440 also said in the SEC filing that another condition that 0:23:20.520 --> 0:23:24.800 he had expressed before is no longer a condition to 0:23:24.920 --> 0:23:28.560 his offer, which is business due diligence. So two major 0:23:28.640 --> 0:23:32.560 conditions have now gone away. One is the financing condition 0:23:32.600 --> 0:23:35.040 and the other one is the business due diligence condition. 0:23:35.240 --> 0:23:37.720 So the offer looks a lot more credible, and he's 0:23:37.760 --> 0:23:40.840 got some very serious banks smacking him up. That's not 0:23:40.880 --> 0:23:43.760 to say that the Twitter board will roll over and 0:23:43.800 --> 0:23:46.320 accept his offer. And what are the options for the 0:23:46.359 --> 0:23:49.560 Twitter board? Three things can happen now from the Twitter 0:23:49.720 --> 0:23:52.399 board side of things. One is that they could accept 0:23:52.480 --> 0:23:55.520 the offer. Number two is that they can make a 0:23:55.560 --> 0:24:00.480 decision to remain independent by asserting that stockholders in the 0:24:00.520 --> 0:24:05.159 company are better off by remaining independent and pursuing the 0:24:05.240 --> 0:24:10.200 corporate strategy. Or three they can find what's called a 0:24:10.280 --> 0:24:14.600 white knight, another company that they feel is more friendly 0:24:14.960 --> 0:24:18.119