Investor Concerns Rise Over Potential Legal Risks in TikTok US Ownership Deal
Major investors are becoming increasingly cautious about injecting capital into the proposed US acquisition of TikTok, championed by the Trump administration. Their hesitation stems from significant potential civil liabilities arising from an anticipated wave of lawsuits related to the deal.
Legal Firms Warn of Potential Investor Liabilities
Prominent law firms have advised several prospective investors about the possibility of requiring indemnification from the White House if they engage in the proposed Oracle acquisition of the video-sharing application, which is currently under Chinese ownership. The core issue is potential legal challenges arguing that the agreement does not fully meet the requirements of legislation and a subsequent Supreme Court ruling. These legal interpretations suggest a need for complete divestiture from Beijing and substantial penalties for any violations, according to sources familiar with the matter.
“Our legal counsel has expressed concerns,” stated a Wall Street executive involved in the deal.
TikTok’s Background and National Security Concerns
TikTok’s rapid rise, particularly among America’s youth, has been a source of unease for Silicon Valley, Wall Street, and Washington for more than five years. During his first term, Donald Trump sought to prohibit the app due to worries it collects user data and shares it with its Beijing-based owners. The concern was that this data could assist the Chinese Communist Party in intelligence gathering on US citizens. Additionally, there are worries that the platform’s algorithm promotes pro-China and anti-American viewpoints.
TikTok has consistently denied these allegations. Nevertheless, a bipartisan effort to remove it from US app stores culminated in the No TikTok on Government Devices Act, signed into law last year by President Biden. This legislation was upheld by the Supreme Court shortly before Trump left office, following a protracted legal dispute.
Trump’s Evolving Stance and Deal Deadline
Donald Trump later shifted his stance, expressing a desire to preserve TikTok. Despite earlier security concerns and accusations of propaganda, he suggested pro-Trump videos on the platform helped him gain votes among the 18 to 24 demographic, a significant portion of TikTok’s user base.
Upon assuming office, a 75-day grace period was established to finalize a deal, set to expire on April 5.
The White House has been actively seeking a resolution since this deadline was initiated. Current plans involve the technology corporation Oracle. Oracle already hosts the app in its cloud infrastructure and is expected to implement further safeguards within TikTok’s new structure. Even with the creation of a legally distinct “new co” with US investors, ByteDance, the Chinese technology firm, would still own the crucial algorithm that governs user content and could potentially be exploited for espionage.
Legislative Concerns and Investor Liability
Republicans, including Senator Tom Cotton of Arkansas, have expressed skepticism regarding whether these measures adequately address the legislative mandate for a complete separation from Chinese control.
Another significant complication under discussion is the potential legal exposure for equity investors if the deal fails to meet legislative requirements.
Both Senator Cotton and Congressional aides have raised the liability issue with potential investors. The “civil penalties” section of the legislation highlights the severity of the situation: “An entity that violates subsection (a) shall be subject to pay a civil penalty in an amount not to exceed the amount that results from multiplying $5,000 by the number of users within the land or maritime borders of the United States determined to have accessed, maintained, or updated a foreign adversary controlled application as a result of such violation.”
Financial Implications and Oracle’s Position
Calculations reveal substantial financial implications. With an estimated 170 million US users, even a financially robust company like Oracle may be unwilling to assume such extensive liability. This could explain Oracle’s lack of publicly stated interest in acquiring TikTok outright or becoming an equity stakeholder, instead focusing on providing cloud hosting for the company and its algorithm.
An Oracle spokesperson declined to comment.
Uncertain Legal Landscape and Potential Lawsuits
The legal framework remains unsettled. The legislation grants the president authority to determine whether Chinese control over the algorithm has been sufficiently mitigated. Trump could assert that Oracle, led by his associate Larry Ellison, effectively addresses this concern.
However, this might not deter state Attorneys General, particularly those with political opposition to Trump, from initiating legal action against all parties involved. It is plausible that such legal challenges could find judicial support.
The potential financial burden from such lawsuits could be significant, even for well-funded technology firms or private equity investors.