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Record Labels Sue Napster's VC
zemkai writes "From the "wtf?!?" department... Universal Music Group and EMI are suing Hummer Winblad Ventures for contributing to copyright infringement due to that firm's investment in Napster... I'd like to put something witty here, but I'm just speechless."
... and the legal scholars I talked to found plenty for Hummer Winblad to worry about. Of course, this was before Bertelsmann became involved.
My article, from Upside.com:
Hummer Winblad could answer for Napster's sins
Legal experts say there is a good chance the flush venture capital firm Hummer Winblad stands to lose more than its $13 million investment in Napster Inc. if the music-swapping firm is fined for music piracy.
then the Economist did a story:
Hummer's Napster bummer: Napster's backers under attack
You bet. Right in my backyard, even.
Fortunately, there's a bit of a resistance starting. Some students have started a website dedicated to the case here, and there's supposed to be a rally Sunday afternoon.
You'd better believe I'm going to show up.
I've moved on.
As part of the due-diligence, the major investors have publicly stated that they went to their lawyers, and the lawyers advised them to steer clear, because Napster was knowingly letting/encouraging people swap copyrighted material(this knowing/encouraging bit is important.)
They went ahead anyway, because they were greedy- the same reason people threw traditional rules-of-business out the window for countless dot-coms that(surprise) turned into dot-bombs.
Surprise surprise, people come knocking when they hear you funded a company which YOU KNEW(AND HAD BEEN ADVISED BY A LAWYER TO THE SAME EFFECT), WAS ENGAGING IN ILLEGAL ACTIVITY. It's called aiding and abetting, and in this case, the investors knew full well what was going on; it's not like someone was cooking the books and the investors honestly didn't know. EVERYONE at Napster knew they were doing something illegal.
If you want to be all "RIAA/MPAA sucks!", fine- but don't mix up centuries-old legitimate law. If you fund a business you know is a front for a drug operation, are you gonna be "speechless" when the DEA comes and arrests you? Actually, being speechless in such a case might be an excellent idea, particularly given your understanding of legal matters ;-)
Please help metamoderate.
Just so we have this clear. Limited Liability only applies if you keep you hands off. The more you are involved in the day to day operations of a corporation/LLC/whatever, the more the court will find that the entity is merely the investor's alter ego. This is nebulous test where the court will look at such factors as the extent to which assets are co-mingled, the extent to which the investor made day to day operational decisions, whether or not the company was underfunded, and the extent to which the corporate formalities were followed. That latter part means that if they weren't holding regular board meetings and getting board and shareholder approval for certain actions, the more it looks like a scam to avoid liability.
If you look at a publicly traded companies, you will virtually never be able to pierce the corporate veil down to the shareholders. The reason for this is that they stock is so widely distributed that the courts could not reasonably find that such a publicly traded company was the alter ego of any single or small group of investors.
The same cannot be said of small enterprises. It is not uncommon, when a company is getting started, for the CEO/President/staff to use his personal funds to prop up the company and then to take company funds for personal use. This is a no no. It is also common for the investors to get together and decide how to do things and not keep minutes. This too is a no no.
There are many means available to resolve these problems, or at least lessen them, today. The most common is the use of a Limited Liability Company. This lets you dispense, or at least lessen some of the corporate formalities in terms of board meetings. You would still be well advised to keep the bank accounts seperate. The biggest limitation of an LLC is generally the number of investors, depending on the state.
In short, there are a lot of people out there who could use just a little legal advice on how to keep their liabilities limited, but they are penny wise and pound foolish by not making a regular visit to the lawyer just like they do the doctor. Yes, IAAL, but I am not your lawyer. Go get one...blah, blah, blah.
-cliff