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Business at Berkeley Law

Tax Bill Threatens the Dell-EMC Merger

Last October, Dell offered to buy EMC for $67 billion, making it the largest tech merger ever. This merger will create a new technology giant that will sell both consumer and IT products, ranging from personal computers to data storage gear for corporate data centers.

To finance this acquisition, Dell will use a combination of borrowed cash up to $49.5 billion and tracking stocks in an EMC subsidiary called VMware. The offer valued EMCat $33.15 a share, for which Dell will pay $24.05 in cash per share and give EMC shareholders a special stock that tracks the share price in VMware. Intended to offset the amount of debt Dell will take on, those tracking stocks seriously threaten the feasibility of the deal because of a possible $9 billion tax bill.

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Emergency Hearing Set for FanDuel and DraftKings

On Wednesday, November 25th, while many households prepare for the Thanksgiving holiday, New York-based users of fantasy sports companies, FanDuel and DraftKings, will also be awaiting the outcome of an emergency hearing before the New York Supreme Court. The hearing could decide whether the companies receive a preliminary injunction to operate while the illegal gambling cases against them are pending, a process that could take over a year.

The hearing will be the latest match up in the ongoing public legal battle between New York Attorney General Eric Schneiderman and the two largest daily sports fantasy companies. On November 10th, Schneiderman sent “cease-and-desist” orders to FanDuel and DraftKings, instructing the companies to stop accepting illegal bets from New York residents. In response, FanDuel and DraftKings requested relief through a temporary restraining order to stop Schneiderman until the companies could present their cases. The court denied the companies’ requests but set the date for the emergency hearing.

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Federal Circuit Rules that ITC Lacks Regulatory Power Over Digital Imports

On November 10, 2015, the Federal Circuit ruled in ClearCorrect Operating, LLC v. ITC (“ClearCorrect”) that the U.S. International Trade Commission (“ITC”) does not have jurisdiction to regulate digital data imports. The court held that the ITC’s regulatory power is limited to “material things,” and electronically transmitted digital data is not a “tangible good.”

The decision overturned the ITC’s April 2014 finding that ClearCorrect was barred from importing data sets converted from scanned models of patients’ teeth. The ITC had found that ClearCorrect infringed seven of Align Technology’s patents by using the data sets to create dental aligners, a method to reposition teeth, via 3D printing.

The appeals court explained that Section 337 of the Tariff Act of 1930 was enacted to stop the importation of articles involved in unfair trade practices. “Articles” was defined by the court as tangible, “material things,” which do not include non-physical articles such as electronic transmissions of data sets.

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New Stock Exchange Could Use “Speed Bump” to Combat High-Frequency Trading

Recently, an investment company known as Investor Exchange, or IEX, proposed a new solution to the problems created by increasingly complex and high-speed stock markets. The firm plans to create a new American stock exchange that use a 350 microsecond “speed bump” as a limit for traders to place and cancel orders. IEX has proposed to create such a tool within the next five years to fight against high-frequency trading.

This proposal has already drawn some criticisms. Notably, other large stock exchange companies and high-speed trading firms have argued that this “speed bump” will make the stock market more complicated. The extra complexity might therefore benefit one side of the market over the other. Moreover, ordinary investors might enjoy trading immediately at the market price.

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Mutual Fund’s Devaluation of Snapchat Raises Concerns for Tech Startups

The number of unicorns, companies valued at over $1 billion, has greatly increased, growing from 43 companies at the beginning of 2014 to around 128 companies in November.  However, these companies are often difficult to value because the shares are privately held and there is no readily available market price.  This is a serious problem for mutual funds since they are legally obligated to value each of their portfolio holdings everyday. The values can fluctuate between mutual funds as firms use different methods to value startup companies.

On November 10, 2015, Fidelity devalued its stake in Snapchat by 25%.  Fidelity also devalued several more startup companies: Blue Bottle Coffee, Dataminr, Zenefits, and others. These markdowns may suggest that the market is slowing down or that these companies’ values were inflated.  The high valuations might have also been a result of competition between investors to acquire the next big startup, driving up valuations.  Fidelity is not the only fund devaluing its stake in startups, as the asset manager Blackrock devalued Dropbox.

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Treasury Releases New Guidance on Inversions

On Thursday, November 19, 2015, the Treasury Department issued a second notice designed to limit the tax benefits of overseas tax-inversion deals. This notice is a continuation of the US government’s recent anti-inversion actions, including the notice that the Treasury Department issued on September 22, 2014.

“Last year, Treasury took targeted action to address inversions,” said Treasury Secretary Jacob J. Lew. “This notice made a real difference by reducing some of the economic benefits of inversions, resulting in a decline in the pace of these transactions. This next action makes it even harder to invert, and further reduces the tax benefits for U.S. companies. While we intend to take additional action in the coming months, there is only so much the Treasury Department can do to prevent these tax-avoidance transactions. Only legislation can decisively stop inversions. The Administration has been working with Congress in an effort to reform our business tax system and address the issue of corporate inversions‎.”

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Global Financial Policy Makers Push Closer to the End of “Too Big to Fail” Banking Era

An international group of financial policy makers, the Financial Stability Board (FSB), designed a framework seeking to keep 30 of the world’s biggest banks from becoming “too big to fail” and having to resort to taxpayers-backed bailouts in the event of a future financial crisis. The “too big to fail” conundrum refers to the government having to bail out big banks because letting them fail would inflict collateral damage too severe for the economy to recover.

The proposed rules would require these banks to maintain “capital buffers” capable of absorbing potential losses when a bank is failing, thus preventing the spreading of further pressure in the global banking system. Most of this buffer would come in the form of shareholders’ equity as well as long-term debt issued to investors. By making banks sell bonds explicitly exposed to losses, the risk would shift from the government to be borne by the banks’ investors, and taxpayer-funded bailouts would, in theory, no longer be necessary.

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U.S. Proposes to Cut Back on Solar Installation Tax Credits by 2017

By the end of next year, the U.S. will cut back on tax credits for wind and solar.  Solar power’s most prominent tax credit will expire at the end of 2016, with the most significant tax credit for wind power having already expired.

Currently, federal subsidies provide residential solar installers with a thirty percent tax credit through the solar investment tax credit (ITC).  The ITC has been extended in the past, and has helped solar installation grow by over 1600% since its inception in 2006.  At the end of 2016, this subsidy will be reduced down to ten percent.

These cutbacks on credits for solar energy could have steep consequences on the solar industry in the United States.  Elon Musk has blamed the closing of Zep Solar UK, a subsidiary of his US-based parent company, Solar City, on cuts to solar subsidies in the UK.  Other markets however, have managed quite well, despite a lack of tax credits.  Solar energy in Chile, for example, has fared much better without governmental support: total installed solar capacity increased from less than 4 Megawatts to more than 220 Megawatts in a year, without the support of subsidies.

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Can Artificial Intelligence Protect Us From Cybercrime?

According to Symantec’s Norton Report, the global cost of cybercrime was $113 billion in 2013. That is an astounding number. Human beings tend to be the biggest barriers to computer security in the sense that passwords are predictable, random USB drives do not cause pause, and we routinely visit less than secure websites.

The U.S. Department of Defense experiences 41 million scans, probes, and attacks a month. The U.S. military, once a vulnerable IT behemoth, is now reformed as an adept defender of its well-secured networks. According to the Pentagon, while technical upgrades and advanced technology are important, minimizing human error is even more critical. Despite the unified architecture and state-of-the-art technology, in almost every successful attack on the .mil network, people have been the weak link. Hackers capitalize on mistakes by network administrators and users, which create loopholes for successful penetration. Experts contend that simply consistent monitoring of systems—fixing known vulnerabilities and double-checking security configurations—can prevent the majority of attacks. It seems that technology can create a false sense of security. People matter as much as, if not more than, technology in building an ethos and culture that minimize risk.

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Marriott to Acquire Rival Starwood Hotels in $12.2 Billion Deal

On November 16, 2015, Marriott International announced that it is acquiring its rival Starwood Hotels & Resorts Worldwide in a $12.2 billion deal, becoming the largest hotelier in the world.

The deal brings Starwood’s 11 brands, including W Hotels, St. Regis, and Westin, together with Marriott’s 19 brands, which include Ritz-Carlton, Residence Inn, and Courtyard. The combined company will be able to offer more than 5,500 owned or franchised hotels with 1.1 million rooms across more than 100 countries.

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