Japanese FTC Tackles Airbnb for Suspected Antitrust Practices

The Japanese Fair Trade Commission (JFTC) launched an investigation on Airbnb last month for violating antitrust laws. Regulators have obtained documents from Airbnb in Tokyo on suspicion that it asked users not to list properties on rival sites.


Upon reading an Airbnb contract, one property manager shared that he reluctantly signed an “exclusivity clause” that prohibited agents and owners from posting their listings on other websites. In exchange, Airbnb provided him with access to availability and other vital data.


Airbnb, however, denies the claims, saying it does not make property postings conditional on exclusivity. “All hosts and partners in Japan who list properties on Airbnb are able to list them on other platforms,” a Singapore-based Airbnb spokesman said.


Airbnb is Japan’s top home-sharing website, with over 50,000 rooms. It competes with hotels and other traditional forms of lodging by letting people rent out their homes or apartments to visitors. The hotel industry views Airbnb and other services as providing unfair competition, since the home-sharing companies provide similar services as the hotel industry without as stringent of licensing requirements and market regulation.


News about Airbnb’s suspected antitrust violations come amid a time of heightened competition in Japan’s vacation rentals market.


Until recently, peer-to-peer lodging (or minpaku) was illegal in Japan. However, this past June, the government passed a new law that allows private citizens to take in fee-paying lodgers for up to 180 days a year without a hotel operator license. A roster of new players have announced their entry to the market following the new minpaku rules, creating a time of intensified competition in the home-sharing market.


Furthermore, Japan is currently facing a tourism boom. As of October, the total number of foreign visitors entering the country reached 23.8 million, making it almost certain to surpass last year’s record of 24 million by the end of the year. This surge in travelers has increased the demand for short-term home rentals.


With increased supply and demand for short-term travel stay in the nation, the JFTC may face suspected antitrust violations with heightened scrutiny. If the investigation finds that Airbnb violated antitrust practices by partaking in actions to diminish business opportunities of rival companies or discourage new businesses to enter the market, the company could be subjected to disciplinary action.


Japanese FTC Tackles Airbnb for Suspected Antitrust Practices (PDF)

Regal Entertainment in Talks with Cineworld on a Potential Purchase

With companies like Amazon acquiring Whole Foods, and Broadcomm Limited making an offer to acquire Qualcomm, Inc., M&A deals have been active this quarter despite the slowing trend of M&A deals compared to those in 2016. Added to the list of notable companies in talks of potential mergers are Cineworld Group Plc. (“Cineworld”) and Regal Entertainment Group (“Regal”). Cineworld, a U.K. company and British operator of movie theaters, has offered $3.6 billion to acquire Regal in hopes of creating one of the largest movie theater chains worldwide.


Regal is not an unlikely choice for Cineworld as Regal has been looking for a buyer for the last couple of years. In 2014, Regal chose to drop its plans on selling itself. It then went on to purchase seven Warren Theaters in Kansas and Oklahoma. In 2016, it acquired Carmike Cinemas. Hoping to enhance its user experience and rival companies such as AMC Theaters and Apple and Netflix’s video streaming services, Regal has positioned itself well to dominate the industry with multiple partnerships to diversify its entertainment offerings and strengthen its hold in cinema. A partnership with Cineworld would fortify Regal’s place in the US cinema industry and expand Cineworld’s reach outside of the UK.


When news of the acquisition broke Regal’s shares increased “…as much as 16%…” Cineworld had initally offered Regal an all-cash offer of $23 per share, which analysts found to be a healthy premium over the current trading price of Regal shares. In response to the growing curiosity about the deal, Regal issued the following statement: “No agreement has been reached, and there is no assurance that any transaction will result. Regal Entertainment Group does not intend to make any further comment, or respond to any inquiries, until an agreement, if any, is reached, or discussions have been terminated.”


In a separate statement released by Cineworld later, Cineworld stated that it is in “…advanced discussions to acquire Regal and [is] finalizing due diligence on its offer.” Proposing an all-cash offer, Cineworld is said to “…finance its bid through a mixture of incremental debt and a material equity raise by way of a rights issue, including a commitment to full subscription from its largest shareholder, Global City Holdings.” Global City Holdings, a Polish holding company that owns entertainment and real estate businesses in Europe and Israel, owns 28% of Cineworld.


With Regal remaining rather quiet on this transaction, analysts find this merger to be a strong one. With attendance decreasing at movie theaters and the films failing to meet high box-office expectations, the cinema industry is scrambling to attract moviegoers who appear to be more captivated by Netflix or Amazon’s home productions than traditional Hollywood films. As Regal is the second largest move theater chain in the U.S. and Cineworld is also the second largest movie theater chain in Europe, both companies are poised to become global leaders in the cinema industry.

Regal Entertainment in Talks with Cineworld on a Potential Purchase (PDF)

Alternate Route for Keystone XL Pipeline Approved by Nebraska Public Service Commission

The Nebraska Public Service Commission provided approval for TransCanada Corporation’s Keystone XL pipeline that would travel over 1,700 miles, transporting crude oil from Hardisty, Alberta, Canada to Steele City, Nebraska. However, the commission did not approve TransCanada’s preferred and proposed route. Rather, the commission approved a modified route that is farther east, adds five miles of pipeline, and is more expensive. This regulatory approval for the $8 billion project, initially proposed in 2008, came through as a 3-2 vote by the commission.


Due to the commission’s approval of an alternate route and not TransCanada’s proposed route, TransCanada has not yet committed to constructing the pipeline. TransCanada Chief Executive Officer Russ Girling said that TransCanada will examine how the new route would “impact the cost and schedule of the project.” This new route introduces a problem for TransCanada, as the company would need to approach landowners affected by the new route and procure new easements. TransCanada had already accomplished this task with many of the landowners that were to be affected by the preferred route.


Another question looms over whether the construction of the project will move forward: whether there is sufficient demand for the pipeline and interested customers that will contract with TransCanada to ship oil over the pipeline. TransCanada did not specifically identify any customers who committed during the open season that was launched in October, but a company statement reflected that TransCanada expects commercial interest to match up with interest initially expressed when the company applied for the pipeline permit.


The construction of the Keystone XL pipeline has long been the center of controversy and protest. Environmental advocates, farmers, ranchers, and other opponents argue that the project will damage the natural resources, endanger available drinking water, and contribute to climate change. Proponents of the pipeline predict that it will provide substantial economic benefits, tax revenue for local governments, reduced fuel prices, and will stimulate job creation.


This commission’s decision comes shortly after an already existing TransCanada pipeline spilled 210,000 gallons of oil in South Dakota.


To challenge the commission’s decision for the newly approved route, opponents can still attempt to stop the construction of the pipeline by attempting to secure an injunction granted by the state court.


Alternate Route for Keystone XL Pipeline Approved by Nebraska Public Service Commission (PDF)

Reddit Visions to Go Public in 2020

During a conversation at the recent Internet Association’s Virtuous Circle Summit, Reddit’s CEO and co-founder, Steve Huffman, said that Reddit may go public in 2020. Although the plan seems to be pretty far from now, Huffman described the going-public strategy as “inevitable” and “the only responsible choice” to reward both employees and investors of the company.


Huffman and Alexis Ohanian founded Reddit in 2005 and sold the online discussion platform company to Advance Publications, the parent of several newspapers, and Condé Nast, for $10 million to $20 million. Advance then spun off Reddit, but remains a majority owner. In regards to the going-public plan, Steven Newhouse, head of Advance.net at Advance Publications, told Media Ink that it is possible for Reddit to have an IPO in a couple of years if it keeps on the same trajectory.


In addition to the spin-off, Reddit has experienced a number of other rough patches, including the allegations of hacked celebrity photos and child pornography. These controversies were worsened by the unfavorable response from the former CEO, Yishan Wong, who defended Reddit’s hands-off approach by claiming that every man was responsible for his own actions and that the users had the right to choose between right or wrong. Fortunately, Reddit has changed its policy and therefore now bans hateful “subreddits,” or hateful user-created communities.


Nonetheless, Reddit has climbed its way to become the eighth most popular site on the internet. Its advertising revenues have also increased five-fold over the past few years. In all, the company is now valued at $1.8 billion.

Reddit Visions to Go Public in 2020 (PDF)

Recap: “Current Trends in Corporate and Cross-Border Transactions in and with China”

On November 14th, 2017, the Boalt Global Corporate Law Society welcomed Bruce Quan, former Associate Professor at Peking University Law School and former Vice Chair of the Public Policy Development Committee of the American Chamber of Commerce in Beijing (AmCham Beijing), for a discussion about his experience in transnational transactions, trends in foreign investment, and implications of President Xi Jinping’s One Road, One Belt initiative.


A graduate of UC Berkeley (’71) and Berkeley Law (’78), Mr. Quan started his career in China in the early 80’s helping foreign companies invest in China. After Chinese leader Deng Xiaoping declared, “To get rich is glorious,” during his famous Southern Tour advocating economic reform, Mr. Quan served as an external observer on the development of the rule of law system in support of those reforms.


When asked about the impact of the recent Communist Party Congress, Quan said that the collective leadership balance set up by Deng is no longer valid, because Xi is now the “sole power,” elevated to the same level as Mao Zedong, as he has unchallenged control over the military and a substantial part of the economy. Quan believes that Xi’s ultimate goal is to challenge the West’s dominance of the global economy. As part of these efforts, China set up its own infrastructure bank as an alternative to the World Bank and the IMF, develops its own homegrown industries, and seeks to limit the influence of foreign companies in China.


Quan characterized Xi’s One Belt initiative as a “mirror image” of the global financial organizations established by the U.S. and its allies after World War II. From China’s perspective, the One Belt is a response to perceived unfair treatment by the IMF and World Bank. Through this initiative, China has built ports around the world, a rail system stretching from East to West that mirrors the historical Silk Road, and provides economic aid to developing countries.


With regards to foreign companies doing business with China, Quan noted that only a handful of Chinese companies can compete world-wide, so China would like to “level the playing field.” As a result, there is not a strong focus on anti-trust, because China is focused on making their state-owned enterprises competitive globally. Furthermore, China is interested in business that will support national interests in the long-term, rather than sectors like entertainment, sports, and real estate, which is why they have tightened foreign investment policies in an effort to crack down on offshore acquisitions by companies like Wanda Group and Fosun International Ltd.


Quan’s advice for corporate lawyers interested in working in China? “It’s pretty darn frustrating. It’s not easy,” noting that one prerequisite for working in China today is fluency in Mandarin. For more information about a specific industry, Quan recommended consulting the AmCham China White Paper, which offers insight about what foreign companies feel are the current issues of doing business in China.

Recap Current Trends in Corporate and Cross-Border Transactions in and with China (PDF)

Amid Bitcoin surge, Dudley says offering digital currency on Fed’s radar

At an event in New Jersey on November 18, William C. Dudley, President of the Federal Reserve Bank of New York, held a policy roundtable to discuss local economic trends, current monetary policy and the health of the U.S. economy.


A PhD graduate of the University of California, Berkeley, Mr. Dudley was formerly the chief economist of Goldman Sachs for ten years before being appointed president of the Federal Reserve Bank and vice-chairman of the Federal Open Market Committee.


At the event, Dudley stated that the Federal Reserve was considering what it would mean to offer digital currencies at some point in the future, and “whether it may be necessary as an alternative to cash.”  He also claimed that investors should be cautious because the value of virtual currency was not legal tender and it could still be highly unstable.


On November 27, the night before CoinDesk’s crypto conference, Bitcoin hit the record of 10k.  The digital currency has been increasing in value throughout the year and has more than doubled in value since the beginning of October.  Additionally, the global crypto-currency market  rose above $300 billion for the first time on Sunday evening.


Nonetheless, Bitcoins rapid ascent has also raised concerns that the digital currency might reach “bubble territory” and collapse. As Dudley stated during the event, “In terms of Bitcoin, I would be pretty cautionary about it. I think it’s not a stable store of value and it doesn’t really have the characteristics that you’d like to have in a currency.”


Recently, at a separate forum, when asked if Bitcoin and other crypto-currencies were a tulip, Dudley quickly acknowledged that it was still uncertain and that “there was a possibility down the road that central banks could get more involved in offering digital currencies as a substitute for cash.”  Additionally, he said that the Federal Reserve Bank was considering whether digital currencies would be a more effective medium than cash.


Furthermore, Dudley said he wasn’t that concerned about high leverage in financial markets and asset bubbles because the new regulations adopted since the 2007-2009 crisis “meant that the U.S. financial system could bear that stress much, much better than before.”

Amid Bitcoin surge, Dudley says offering digital currency on Fed’s radar (PDF)

Why Did Richmond, VA, Become a Dream Destination for Bankrupt Companies

In recent years, big companies have been turning to a new place when filing for bankruptcy: Richmond, Virginia. The U.S Bankruptcy Court in Richmond has become a destination wedding spot for failed companies, as debt-ridden large out-of-town corporations plant their bankruptcies in this town, using the court and judges here known to handle complicated bankruptcy cases in a way that’s perceived by many as favorable to debtors.


One of these companies was the San Francisco-based, children’s clothing store chain, Gymboree, who filed for Chapter 11 in Richmond federal court with more than $1 billion in debt. Even though they were based in California, according to Virginia bankruptcy law since Gymboree controlled an LLC that was incorporated in Virginia, it was allowed to file in the commonwealth, benefiting from the loophole in bankruptcy law, which allows for companies to file for bankruptcy in any court district where they have an affiliate.


Likewise, Toys “R” Us also chose Richmond as the place to file for bankruptcy, as a consequence of the company’s recent troubles with heavy debt load that has weighed on the company for years, after the private equity firms Kohlberg Kravis Roberts and Bain Capital purchased the company in a leveraged buyout for about $6 billion in 2005. The famous toy store also faced hardships in competing against warehouse and online sellers, which resulted in the accumulation of a long-term debt totaling more than $5 billion.


But why are these well-known companies choosing Richmond for their bankruptcy filing? First, bankruptcy procedures tend to be extremely arduous and can drag on for years. The Richmond court offers a so-called “rocket docket” that moves cases along much quicker, as exemplified by the Gymboree bankruptcy, which was completed in less than four months. Second, the legal history in that court district contains precedents favorable to companies, such as facilitating the process for companies to walk away from union contracts.


Moreover, and perhaps one of the biggest appeals of Richmond to bankruptcy filing, is the stratospheric rates bankruptcy lawyers are able to charge there. In some cases, the attorneys were making 25 percent more than the highest average rate in 10 of the largest bankruptcies this year. Such was the case for Kirkland & Ellis, the firm that represented Toys “R” Us.


Last, but not less important, in the list of Richmond’s draws for bankruptcy filings, is the fact that the two Judges in that circuit are well known for their expertise in large corporate bankruptcies, and according to local bankruptcy lawyers, can handle cases expeditiously, which makes the strenuous process of bankruptcy slightly easier to execute.


Why Did Richmond, VA, Become a Dream Destination for Bankrupt Companies (PDF)

Allianz launches Blockchain prototype for captive insurance

With Blockchain applications in the financial services industry on the rise, it’s no surprise that global insurance giants are taking notice. German insurer Allianz recently announced the development of a new prototype product incorporating Blockchain technology for their captive insurance business. Allianz’s captive insurance business collects premiums from each of Allianz’s operating companies and pays out international clients’ claims.


The adoption of Blockchain technology aims for a more streamlined process for international insurance transactions between insurers and clients. Blockchain technology also targets offering better data quality and communication compared to traditional transactional processes and user interfaces. Allianz explains that this prototype product differs from traditional insurance transactional processes because the prototype makes possible a distributed solution across multiple jurisdictions with a shorter cycle time, simpler process, minimized need for intermediaries, and greater transparency between the insurer and client. Their prototype–focused on two of their commercial products—professional indemnity and property policies, targets three moments in the captive insurance cycle: annual policy renewals, premium payments, and claim submissions and settlement.


This is not Allianz’s first bite of the Blockchain apple. In 2015, Allianz acquired Everledger, a Blockchain startup, and first started testing applications of Blockchain as part of their disruptive technology initiatives.


The incorporation of this technology into an international insurance operations program may elicit unique legal questions about not only international cash transfer but also what its impact may be in the U.S.’s highly-regulated insurance environment. Though Allianz’s venture indicates the potential for a significant improvement in efficiency of insurance transactions on an international scale, the lack of clarity around regulation of Blockchain-based transactions leaves its future in the American commercial and personal lines insurance industry uncertain. For a risk-adverse industry, the regulatory uncertainty and malleability of Blockchain technology may persuade insurers to proceed in adoption with caution.


On the other hand, it may just be the innovative product and platform that radically transforms the platforms on which insurance transactions rest, thereby significantly improving the customer experience, streamlining insurance transactions on multiple levels, and enabling productivity savings.

Allianz launches Blockchain prototype for captive insurance (PDF)

A Former SEC Regulator’s Opinions on Initial Coin Offerings

Initial coin offerings (ICOs) are a relatively new method of raising money by means of crowdfunding through the sale of cryptocurrencies. ICOs are highly unregulated and therefore, they are controversial in the financial world. Despite the warnings of regulators and the uncertainty of the rules concerning the fundraising method, this practice has taken off and is being widely used to raise money. Over $3 billion has been raised by startups through ICOs from investors.

Joseph Grundfest, a former commissioner at the Securities and Exchange Commission (SEC) in the 1980s and now a law and business professor at Stanford, stated that he had been asking SEC officials and staff to prohibit the primary distribution of coins as it violates all existing norms of federal securities regulation. “ICOs represent the most pervasive, open and notorious violation of federal securities laws since the Code of Hammurabi,” Grundfest said in an interview. “It’s more than the extent of the violation, it’s the almost comedic quality of the violation,” he added.


These ICOs are undertaken without the involvement of financial intermediaries such as institutional investors and financial regulators like the SEC. Due to this, the trading of these coins happens outside the traditional financial system. ICOs have recently been banned by regulators in China and South Korea due to the fact that they violate existing securities laws. Most of the startups that have raised money through such offerings have nothing to show for it. In fact, it is assumed that over 90% of these projects will fail. Yet, there is genuine interest in this business model and this way of raising money has attracted attention worldwide.


Jay Clayton, chairman of the SEC, has stated that the SEC is willing to scrutinize each ICO individually and determine which of the coin offerings are to be labeled as securities, which would require registration with the authorities. Further, he added that any ICO that violates federal securities laws would be met with strict punishment. “Where we see fraud, and where we see people engaging in offerings that are not registered, we are going to pursue them because these types of things have a destabilizing effect on the market,” Clayton explained in a meeting at the Federal Reserve Bank of New York.


Grundfest said that this a welcome step but it should not have taken so long to regulate these offerings and punish those that have acted in a fraudulent manner. The majority of the ICOs claim that they are not securities. However, the opinions on this issue are rather divided. Some companies effectively promise a return on investment and give voting rights to the coin holders. At the same time, most coins are bought in the hopes of financial gain. This has hindered the growth of this industry throughout the past few months. Whether or not the SEC will regulate ICOs and punish those who have indulged in fraudulent tactics remains to be seen.

A Former SEC Regulator’s Opinions on Initial Coin Offerings (PDF)

Qualcomm Comes Closer to Acquiring NXP

On November 18, a report surfaced that Qualcomm may soon gain antitrust clearance from the Japanese Fair Trade Commission on its bid for NXP. Originally announced in October 2016, Qualcomm’s $47 billion bid represented an all-cash deal that valued NXP shares at a 10% premium compared to the stock price on the day prior to the initial announcement. When completed, this merger is expected to be the largest semiconductor merger and is valued above the $37 billion Avago paid for Broadcom and the $32 billion Softbank paid for ARM. Executives from both Qualcomm and NXP showed great optimism in the deal being completed by 2017 and announced that integration efforts were already underway.


Acquiring NXP could be essential for Qualcomm’s long-term growth. Although Qualcomm is the world’s largest supplier of System-on-Chips (SOCs) for mobile devices and telecommunications equipment, its mobile chipsets are losing market share to rivals such as MediaTek and Huawei. This is occurring while its licensing business, which generates about one-third of its revenue, is under threat from regulators and others for high fees. A combined Qualcomm-NXP is expected to become the world’s third largest supplier of semiconductors, after Intel and Samsung, giving Qualcomm an opening into the automotive space, where NXP is the number one supplier.


However, challenges have arisen to delay the deal’s closing. Although approved by U.S. antitrust regulators in April, E.U. regulators continue to delay the deal. Qualcomm is expected to give concessions such as not including NXP’s standard essential patents and not taking legal action against third parties regarding near field communications (NFC), for which NXP was a co-founder. E.U. approval is expected after Japanese approval. In addition, hedge fund Elliot Management, which has a 6% stake in NXP, has stated that Qualcomm’s bid is undervaluing NXP, which is trading above the $110-per-share offer price. As of October 20, Qualcomm has only tendered 3.6% of shares where 80% is needed to close the deal.


Meanwhile, Broadcom made an unsolicited $103 billion offer for Qualcomm on November 6. Based on similar valuations, Broadcom’s offer undervalued Qualcomm and sources have noted that Broadcom may increase its offer for Qualcomm from $70 to $77 per share after rejection by Qualcomm’s board. Reports also note that Broadcom is expected to continue soliciting Qualcomm shareholders in a bid to stop Qualcomm’s acquisition of NXP, as Broadcom seeks to remain relevant by incorporating Qualcomm’s technologies in the cellular industry.

Qualcomm Comes Closer to Acquiring NXP  (PDF)