YouTube Gave Equity To Record Labels On The Morning Of The Google Deal

from the oh-really? dept

Thu, Oct 19th 2006 12:25am — Mike Masnick

Remember how hours before the Google acquisition of YouTube was officially announced, the company first announced deals with a bunch of record labels. While everyone assumed these were basic content deals, the NY Times is now reporting that it actually involved giving those companies an equity stake in YouTube, on which they made a nice profit on a few hours later when Google made the announcement that they were buying the site. That, obviously, helps explain why YouTube wasn't included in the lawsuits Universal Music announced on Tuesday. However, something about this doesn't seem right. The article notes that the labels and YouTube rushed to get a deal signed just hours before the Google deal was signed "in part so that it could benefit in the jump in YouTube's value." Of course, that sounds like something of a scam. By that point, it was clear that YouTube and Google were signing a deal, and YouTube basically gave the labels a super favorable deal so they could make quick millions hours later when Google bought YouTube at the high valuation Google gave the company. Sounds like a case where YouTube basically gave the labels Google's cash before any official deal was completed.

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34 Comments

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Anonymous Coward, 19 Oct 2006 @ 12:34am

Is that legal?
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Noni, 19 Oct 2006 @ 1:07am

Who cares if it is legal so long as someone made off with a pile of cash... people rob banks for that very reason
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Anonymous Bored Coward, 19 Oct 2006 @ 1:21am

What's wrong with this?

Shareholders in YouTube gave up some of the Google equity that would have been theirs if they hadn't done the deal with the music cos.

It was Google equity that would have belonged to the YouTube shareholders - I don't see how this is Google's money.

How can it be illegal? Unless some minority shareholder was tricked into giving their equity to the music companies for less value than the Google shares - without knowing that the Google deal was imminent.

Sounds like a very sensible deal for everyone:

YouTube - Google may have made this a condition precedent
Google - no lawsuits
Music Cos - Google shares

Oh - and typically stupid reporting from Techdirt.
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nodream, 19 Oct 2006 @ 1:39am

Insider Trading
Isn't this what is usually called insider trading? Trading with forknowledge? Isn't that what landed Martha Stewart in Prison?
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Anonymous Coward, 19 Oct 2006 @ 2:26am

Insider trading is different, it's when you are in a position where you have more knowledge about something than the public, and you utilise that by buying/selling shares. For example if you were the head of AT&T, and you had a piece of paper on your desk saying the company was about to go up in value a shitload, and you buy more stock. That's insider trading.

This is just money fetching, which is a pretty good idea, and another easy way to get money.
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Nobody Special, 19 Oct 2006 @ 3:32am

assumptions
There appears to be an assumption that disclosure wasn't followed. One can disclose to the proper people without involving the media. And as for the Youtube shareholders - who are they? I don't recall them going public. Thus the only shareholders were probably present at the table.

I would suspect that Google knew that this was on the table and may even have made it a condition. Keep in mind that Google doesn't really want to be sued. And the deal may have been part of why Google paid such an astrnomical price. Part of the price was money to pay of the lawsuit happy rats. The deal sounds much better to me now. Google is happy as they didn't want the suit. The creators of YouTube are happy as they got a pocketfull of stock. And the record labels are happy as they got their unfair share.

The deal most likely had to be completed before Google would sign in. They couldn't afford the exposure.
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Krish, 19 Oct 2006 @ 5:16am

This is indeed crafty work by Google's lawyers / Management to ward off costly ( copyright infringement ) future litigations and the disrepute that may have ensued.

YouTube has not been a Public quoted company and is free to allot shares to any investor as it may deem fit, either for cash / consideration other than cash so long as its existing stock owners do not have objection. At best, only one who could've objected to this transaction is Google itself since there are "material changes in stock ownerships" which went unreported during the due diligence it (had) conducted on YouTube weeks before. ( As per the report the deal with record labels was closed only hours before Google announced its deal with YouTube ).

Since Google has not objected to this, there's every reason to believe that it was Google's idea to buy peace with Record Labels, as is evidenced by convenient omission of YouTube name from the lawsuits announced by Universal Music.

Did you say Surbanes Oxley...?
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The Original Just Me, 19 Oct 2006 @ 5:52am

To: Anon Coward on Oct 19th, 2006 @ 1:21am
If you're going to be an idiot at least post with a name so it's easier for us to ridicule you.
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Anonymous Coward, 19 Oct 2006 @ 6:07am

Something about this sounds shady..

Not sure if it's illegal, but from a taxing perspective doesn't this mean that Universal will be taxed for a capital gain rather than a settlement/profit (depending on how they would have received the cash otherwise)?

Also, from an accountability perspective, doesnt Google or You Tube need to notify its share holders before transferring equity over?
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MartinE, 19 Oct 2006 @ 6:50am

It's no different than settling a lawsuit before going to court. They simply headed off the spector of IP lawsuits by paying off the potential litigator.
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kwilson, 19 Oct 2006 @ 6:57am

Another NY SLime report of Anti Business
Funny how the NY SLime always reports or shall I say misreports facts.
This paper is the very one that gives away National secrets to our enemies.
This paper is aways Anti- American- anti capitlaist.
(Of course they love making millions themselves- just don't you do it.)
I would take anything the NY Slime reports as nothing more than toliet paper.
So remember the to consider the source... THey have a notable track record.
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Anonymous Coward, 19 Oct 2006 @ 7:13am

Re: Another NY SLime report of Anti Business
you mean the national secrets that we and the terrorists already knew about?
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Roger, 19 Oct 2006 @ 7:15am

Re:
It may be a capital gain but (a) it's a short-term gain so for an individual it would not receive a favorable tax rate and (b) these are corporations, not individuals, and corporations do not get favorable tax rates on capital gains.
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jb, 19 Oct 2006 @ 7:16am

Broadcom did this a few times. I'm in a rush, but I think the relevant documentation is in their FY2000 10K in the discussion of "performance-based warrants."
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Anonymous Coward, 19 Oct 2006 @ 7:33am

NY SLime....er...??
do you mean the NY Times?

i thought they were a pro-right wing paper?
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Anonymous Coward, 19 Oct 2006 @ 8:02am

Ooo.. YouTube is going to end up in a halfway house. SNAP.
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Mousky, 19 Oct 2006 @ 8:06am

Re: assumptions
Except that Google did not pay an astronomical price. They 'paid' this acquisition with Google shares. It's all paper money.

I'm fairly certain that Google knew and fully supported these equity stakes. Remember that Google intends to run, for the time being, YouTube as an independent company, probably as a shield from future litigation.
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KenEngland, 19 Oct 2006 @ 8:06am

Re: To: Anon Coward on Oct 19th, 2006 @ 1:21am
Raw,Raw,Raw. Yea! straighten out your act. You make it bad for the rest of us.
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Petréa Mitchell, 19 Oct 2006 @ 8:46am

Yes, it's probably illegal
A blog entry at ZDnet is pointing to an SEC regulation that this probably violated. Here's the SEC's site on that regulation.
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Egat, 19 Oct 2006 @ 8:57am

No it's not even close to illegal
Hooray for posting without reading!

from the SEC link:
selective disclosure of information by publicly traded companies

Let me just be really clear here. YouTube does not fall under SEC regulation because they ARE NOT A PUBLICLY TRADED COMPANY.
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OperaFan, 19 Oct 2006 @ 9:15am

Google/YouTube Deal isn't complete yet
The YouTube/Google deal is not scheduled to complete until 4Q 2006. A lot of corporate and legal maneuvering could happen in the next few weeks.
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Petréa Mitchell, 19 Oct 2006 @ 9:16am

Re: No it's not even close to illegal
And Google?
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Anonymous Coward, 19 Oct 2006 @ 10:05am

Google bought a private company, who cares? How many of you retards understand that insider trading refers to public companies?
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Anonymous Coward, 19 Oct 2006 @ 11:12am

If you're not a lawyer don't act like one.

Would someone who actually knows about this post something relevant?
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Shohat, 19 Oct 2006 @ 11:54am

Great Idea , win win win for everyone
Google get's lawsuit free Youtube , Youtube founders and the company get value and ability to grow , and the content owners get paid for their content , being used by other on Youtube .
Not only is it all Legal , it's good for everyone !
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Brad Eleven, 19 Oct 2006 @ 2:11pm

Re: Noni (who cares?)
> Who cares if it is legal so long as someone made off with a pile of cash?

Oh, yeah. Just like Iraq.
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Tom, 19 Oct 2006 @ 2:44pm

i'm not a lawyer, but this seems phenominally illegal.
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pwb, 19 Oct 2006 @ 3:26pm

Tom, that's why you're not a lawyer. There's nothing remotely illegal about this. Companies give out equity to partners and service providers *all* the time.
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Anonymous Coward, 19 Oct 2006 @ 5:51pm

the irony: isnt universal now liable?
so if universal is an equity owner of you tube can someone now sue them? Maybe one of their own artists (the beegees for instance whose older clips the label might now have any rights to) or even better some grouper employees...

As part owners of youtube is it not a bit silly that they are now
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IANAL, but..., 19 Oct 2006 @ 11:15pm

Worth investigating...
This is certainly very shady and even though YouTube was not a publicy traded company, the structure of the deal was clearly designed to benefit entities that most likely knew of the impending sale of the company to a publicly traded company. They must have recognized that the deals would have a positive impact on Google's share price once the announcement was made because it helped reduce concerns about lawsuits and gave the appearance that the record labels had decided to work with YouTube/Google. This definitely has the appearance of coordinated dealmaking designed to have an impact on the market for the benefit of certain parties.

IANAL but I do see some issues with this that may have violated SEC regulations. It's certainly worth an investigation and if I were one of the media companies that hasn't done a licensing deal, I would probably be looking into suing Google, YouTube and these record labels because each party profited enormously from what they knew to be infringing behavior taking place on the service. In essence, these record labels took a large bribe to do a deal even though they knew this was supporting a company with some major copyright issues. The Bertelsmann/Napster case and settlement provides some justification for this type of argument. In that case, the plaintiffs argued that Bertelsmann's investment in Napster kept the company alive and facilitated continued infrigement of the plaintiff's copyrights, especially because Napster may have not survived without Bertelsmann's financial support. In this case, if Google, YouTube and the record labels put this deal together specifically to cement Google's purchase, other copyright holders might argue that each party specifically acted in a manner that enables YouTube/Google to keep infringing.
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Gerri, 2 Apr 2007 @ 9:22am

Very interesting!
I had not read this before but it explains a lot.
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Re: Iam ready to work with you now
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