Though the decks have been cleared for TikTok USA’s eventual takeover by Microsoft Corp, questions remain over the legality of the deal. Experts say that Donald Trump had virtually nominated Microsoft to buy TikTok, with Satya Nadella having engaged in phone conversations with the President over the deal. Now with a ban on the horizon, TikTok is preparing to take Trump to court over what it calls racial discrimination by the US government.
President Trump has followed through on his threats to ban TikTok, a top-ranked short video sharing social media platform owned by China’s ByteDance. Effective November 12, American companies will be barred from doing business with TikTok, unless a US-based buyer can be found. An executive order to this effect was reported to have been signed on August 6.
The initial deadline of 45 days – which would have taken effect on September 15 – was later extended by another 45 days to allow time for the Beijing-based company and Microsoft to finalize a deal for TikTok. WeChat, a Chinese-owned messaging app, and its promoter, Tencent Holdings, have also been shut out of the US market. The move comes as the latest escalation in a smoldering US-China confrontation that has seen the two countries shut down each other’s embassies and indulge in saber-rattling in the South China Sea.
Watch: Trump gives Microsoft 45 days for TikTok takeover
In July, Secretary of State Mike Pompeo warned that TikTok was a threat to US national security and that a ban was imminent. He didn’t mince words, calling TikTok an entity that was “feeding data directly to the Chinese Communist Party”. However, some experts say that Trump’s ban on TikTok is legally unsound and the Chinese company would be well within its rights to sue the administration for what, according to them, is a form of censorship.
Is Trump’s TikTok Ban Justifiable?
No government can be faulted for wanting to protect its citizens from becoming unwitting targets of surveillance by a foreign government. CheckPoint Research, a cyber-security firm, reported that TikTok had a fatal security flaw that could allow hackers to manipulate user data collected by the app. A Wall Street Journal investigative article published in August, squarely blamed TikTok for flouting privacy laws.
Over the past few months, there have been unsubstantiated claims that the Chinese government had sponsored cyber-attacks in the US to influence the outcome of the 2016 US Presidential election. If there is any truth to these allegations, it would be unprecedented in terms of the magnitude of foreign interference in US domestic affairs.
On the recommendation of some US senators, the government’s Committee on Foreign Investment in the United States (CFIUS) began investigating ByteDance for failing to get its approval when it bought social media company, Musical.ly, in 2017. This was followed by a blanket ban on the use of the app by members of the US military and government employees.
What the pro-business lobby has to say
There is broad consensus on the Hill and among ordinary Americans on the national security imperative. However, some sections of the US business community suggest that data belonging to private citizens could not possibly have any national security ramifications, beyond those individuals that were associated with government institutions.
Critics say that there is no legal basis for such a ban unless substantial proof of wrongdoing on the part of TikTok and WeChat was available. A report in the New York Times quoted CIA sources as saying that it had no conclusive proof that the Chinese government had access to TikTok’s data servers. For its part, ByteDance has announced that it will challenge the ban on the grounds of political interference and discrimination.
Many are questioning whether Trump even has the authority to force a buyout without the backing of the US Congress. There are also fears that America’s appeal for overseas companies as an investment destination could be severely impacted as a result of how Trump treated TikTok.
Impossible deadlines
Trump has grossly underestimated the time it could take for a deal between the two corporate giants to be signed. TikTok’s US business has been valued at between $11 billion and $29 billion. With tech companies doing brisk business throughout the year, appetites for mergers and acquisitions are high. However, the scope of due diligence required for a deal this size is massive. From auditing TikTok’s finances to verifying outstanding tax obligations and ongoing litigation, the task before the two companies is onerous. Federal government approval – which is often the last stage of any internal M&A deal – may be quick to come by, given that Trump has backed Microsoft to take over the reins of TikTok.
However, the process of tying up the loose ends could take months. For its part, Microsoft is racing ahead with negotiations to complete the buyout before Trump’s November 12 deadline. It also has business reasons for expediting the process. Microsoft has been an outlier on the US social media leader board. It sees TikTok’s broad user base across the US and Europe as its ticket into the exclusive FAANG – Facebook, Apple, Amazon, Netflix, Google – club. Be that as it may, White House officials have said that a deal for TikTok need only be agreed and not necessarily signed by the deadline.
Windfall for Microsoft, Setback for TikTok
For one, TikTok’s valuation will certainly take a beating after it has been labelled a national security threat by the Trump administration. It is currently not listed on US stock indexes. An IPO planned for later this year has been indefinitely postponed. If the deal does go through, Microsoft could have a bargain on its hands. The Chinese government has agreed to let ByteDance divest its stake in TikTok USA.
However, the company does not want to give up without a fight. The latest reports say that TikTok is preparing to challenge the ban on the grounds of political interference and discrimination. A debacle in the Supreme Court could embarrass Trump in the run-up to the elections in November.
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