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Why exactly did the $2 billion merger between China’s LeEco and American TV manufacturing giant Vizio not materialize earlier this year? The answer could be political, and in a court filing on Tuesday, LeEco’s attorneys are beseeching a California federal judge for the opportunity to present it.
Vizio has filed a fraud lawsuit against LeEco, alleging in a complaint filed this past July that the company dubbed the “Netflix of China” had misrepresented its financial state and had entered into a contemplated merger to obtain financial stability and credibility. Vizio further claims that LeEco concocted a “secret plan” to access confidential customer information, and upon the marriage being called off, had attempted to reduce a $100 million break-up fee to just $40 million in liability.
LeEco, which appears to have switched law firms since the filing of the lawsuit, is now fending off the imposition of a default judgment. In the Chinese company’s latest court papers in a bid to set aside a default, LeEco offers its fullest explanation to date of what happened. The defendant says it does have a meritorious defense to fraud claims and even teases counterclaims.
According to LeEco, when the two companies decided to merge, both realized two primary risks. The first was that LeEco wouldn’t come up with the financing. The second was that either the Chinese government or the American one would not grant approval.
Explaining the latter risk, LeEco’s lawyer Daniel Tyukody at Greenberg Traurig writes, “This proposed merger occurred at a time when China was taking a much stricter approach to currency controls, and was denying approval of mergers determined not to be ‘strategic’ to China’s long term interests. For example, around this time the Chinese government declined to give approval to Dalian Wanda Group Co. Ltd.’s proposed acquisition of Dick Clark Productions.”
Vizio believes the failure is attributable to a financial lapse, and this theory is perhaps supported by LeEco’s trouble over unpaid debts. If the failure of the merger is due to lack of financing, then Vizio is entitled to $100 million.
But LeEco asserts that regulators are to blame. If true, then its liability is nothing.
“Ultimately, the American government granted its approval to the proposed merger, but the Chinese government did not,” states LeEco’s motion. “The Chinese government did not articulate its reasons for the denial. Vizio contended that the PRC’s lack of approval was the result of LeEco allegedly not having adequate financing in place, whereas LeEco maintained it did have adequate financing in place and was ready, willing and able to consummate the merger but for the lack of Chinese government approval, which it believed was the result of China’s tightening currency controls. Faced with a situation where LeEco claimed its responsibility under the Merger Agreement was zero, and where Vizio contended it was entitled to the full $100 million Buyer Termination Fee, the parties reached the compromise that is the Framework, Termination and Mutual General Release Agreement.”
That would be the $40 million separation agreement.
“Vizio apparently believed that getting $40 million today from a party whose financial viability it now says it always questioned, was worth putting aside a potential $100 million claim under the Merger Agreement, the outcome of which might not be seen until many years later,” writes Tyukody. “Proving ‘but for’ causation is often difficult, and in this case that might require the testimony of PRC officials who not make themselves available, and who, if they did, might not agree with Vizio’s version of events. In short, the parties reached a classic compromise in the Framework Agreement, whose settlement and release language could not be clearer. LeEco did not admit any liability under the Merger Agreement because it believed that but for exogenous factions having to do with China’s currency control initiatives, the proposed merger could have and would have taken place.”
The collapse of the merger happened around the time that President Donald Trump took office, promising a harder stance on Chinese trade and a crackdown on currency manipulation. That may have caused Chinese authorities to react. If the litigation moves along, this could garner exploration.
Vizio, of course, has a different theory, and says the $40 million also came with promises to establish a joint venture in the alternative to a full-scale merger.
LeEco is now presenting some material factual disputes of what happened including money that was to go into an escrow account and execution of the joint venture agreement.
“While LeEco negotiated with Vizio in good faith regarding the formation of the China JV, it should be recognized that the Framework Agreement does not require that the parties actually enter into that joint venture in order for the releases granted by the Framework Agreement to be effective,” continues LeEco’s memorandum that discusses the language of this contract. “This was not the result of clumsy draftsmanship, but an honest recognition of the risks involved in creating a joint venture in China. The Hsieh Declaration makes clear that after the Chinese government denied approval, and even before Vizio delivered its March 30, 2017 Termination Letter, the parties were discussing ways to obtain some of the synergies contemplated by the merger, along with a desire to avoid protracted litigation over the ‘real’ reasons for the PRC’s denial.”
Charles Hsieh is the director of corporate finance and development of Le Technology, Inc. and a principal negotiator for LeEco in the Vizio talks.
He states in his declaration that LeEco and Vizio had something to gain from working with each other. Vizio wanted something called “Le App,” facilitating the delivery of entertainment content, while LeEco wanted a Vizio technology called “Inscape Data,” which he says tracks viewers’ use of their televisions.
Notably, Vizio has been under fire in America for the way its Smart TVs allegedly spy on consumers. Vizio has come to a $2.2 million settlement with the FTC and is still facing a substantial privacy lawsuit from consumers.
“While Vizio has gotten into some legal trouble in the United States for alleged nondisclosure of Inscape Data’s information gathering feature — what some have characterized as a kind of ‘spyware’ — it was contemplated that with proper disclosure to consumers, and if in compliance with local laws, this was a potentially very valuable tool that might be able to be monetized by the China JV,” states Hsieh. “It is my understanding that LeEco’s engineers did meet with their counterparts at Vizio and reached agreements that helped facilitate that exchange.”
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