TikTok is up for grabs. But while the popular short-form video app likely won’t lack for suitors, President Donald Trump says the US government needs to get a “substantial amount of money” as part of any deal.
It’s a demand that experts say is far outside the norm at best, and if it were to be met could set a dangerous precedent.
“It’s really not for the President to say that a deal can go through or a deal can’t go through, or that a company must pay a ransom to the United States government or get a deal done by a particular deadline,” said Avery Gardiner, general counsel and senior fellow for competition, data and power at the Center for Democracy and Technology. “That’s very unusual, it’s more than very unusual. It’s wrong, it doesn’t happen.”
The US government’s authority to compel foreign firms to sell their business to an American company comes primarily from the Committee on Foreign Investment in the United States (CFIUS). CFIUS has stepped up its scrutiny of Chinese-owned firms in recent years as tensions between the United States and China on technology escalate — the committee recently forced the Chinese owners of Grindr to sell the gay dating app to a US-based company over national security concerns.
ByteDance, the Chinese tech firm that owns TikTok, is already under investigation by CFIUS over its 2016 acquisition of US app Musical.ly. And there is a scenario in which the committee could insert a fee to cover the government’s expenses from the review process, according to Jeffrey Bialos, a partner at law firm Eversheds Sutherland who served as the Deputy Undersecretary of Defense for Industrial Affairs in the Clinton administration.
“The only argument I can see the government making is that they should be compensated for the time and effort they spent on this,” Bialos said. However, “to require that part of the consideration ByteDance is getting from selling its business go to the US government, I think that’s an overreach.”
Trump said he would seek a “very large percentage” of any deal, which could be a substantial amount given TikTok’s estimated valuation of $50 billion by some investors.
The TikTok saga could also scuttle potential future deals in a tech industry already under scrutiny.
“The recent events around TikTok will change the way we look at companies that are based in China or have interest in expanding to China, which is often one of the most interesting markets to expand into from the US,” said Mike Jones, co-founder and managing partner at Science Inc, a Los Angeles-based incubator and tech studio that’s backed companies such as Dollar Shave Club and Bird.
“The recent developments give us pause and change the way we think about company growth and development when the government could block them from crossing into markets,” Jones added.
Gardiner points to the growing pressure on tech companies that have any links to China, citing the Trump administration’s years-long campaign against Huawei as an example.
“That’s going to make American companies think twice about purchasing or being purchased by Chinese entities in the tech space,” she said. “I think that does have a chilling effect on the merger landscape.”
Ultimately, though, Bialos says if all the parties involved in the deal agree to cut the government in, there’s not much anyone can do about it. Microsoft, seen as the frontrunner so far to purchase TikTok, said it would be open to “providing proper economic benefits to the United States, including the United States Treasury.”
“If they agree to that as one of the conditions, it’s hard for anyone to challenge it,” Bialos said. “I’m not sure anybody could oppose it readily if the party involved here agrees to it.” (Chinese state-run media this week slammed the US moves and said China will “by no means accept” the “theft” of TikTok.)
It’s a slippery slope with the potential to fundamentally change how business is done in the United States.
“I suppose it’s possible that any company could voluntarily write a check to the US Treasury, but making that a de facto requirement for mergers in the United States would be incredibly dangerous,” said Gardiner. “To condition deals on requiring a payment to the government would be a drastic change and, in my mind, it would be a terrible mistake.”