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Square Sale Could Impact Twitter

Stocks in this article: TWTR GOOG

NEW YORK (TheStreet) - Whether Google (GOOG) buys Square or not, it may be beside the point for Twitter (TWTR). No matter what, the Jack Dorsey chaired micro-blogging site could be impacted by Square's future.

Square, an upstart mobile payments processor was founded and is currently run by Jack Dorsey. Dorsey is also a co-founder of Twitter; however, he left the company's day-to-day operations in 2008 amid a shakeup that put fellow co-founder Evan Williams briefly in charge with the site's reins. Nevertheless, Dorsey holds a crucial role at Twitter as Chairman of the company's Board of Directors.

Were Square to be sold to a competitor, it could put Twitter in an awkward place. If Dorsey sought to continue running the operations of Square in the event of a sale to a larger technology conglomerate, it might raise conflicts of interest that make it harder for him to remain the chairman of Twitter.

On Monday, The Wall Street Journal reported that Square had discussed a possible takeover by Google earlier in 2014, amid continued losses and draining cash balances at the company. Square has also held discussions with Apple (AAPL) and eBay's (EBAY) PayPal division, the WSJ reported.

Some of those potential Square suitors could present a problem for Twitter. For instance, Google is listed as a direct competitor to Twitter in its annual 10-k filing.

"We compete against many companies to attract and engage users, some of which have greater financial resources and substantially larger user bases, such as Facebook (including Instagram), Google, LinkedIn, Yahoo! and Microsoft," Twitter said.

Other large Silicon Valley players like Apple and eBay are also competitors, albeit less directly.

"Competition for highly skilled personnel is intense, particularly in the San Francisco Bay Area, where our headquarters is located, and we compete for personnel against online and mobile businesses, other companies in the technology industry and traditional media businesses, such as television, radio and print," the company added.

The potential of a management role or directorship at a tech giant like Google, Apple and eBay in the event of a Square takeover might present conflicts of interest for Twitter to think over.

"Ordinarily a person cannot sit on boards of two companies in the same industry," David Yermack, a corporate governance expert at New York University's Stern School of Business said.

"Although there might be conflicts of interest, there are also opportunities for alliances. It's a grey area, because it is not completely clear whether Google and Twitter are competitors," he added.

Google doesn't appear to dole out board seats when making acquisitions, something competitors like Facebook (FB) have done in the past. Meanwhile, inside of Google or Apple, Dorsey might not have large conflicts even if he continued to run Square, which specializes in mobile payments.

John C. Coffee of Columbia Law School said Dorsey could not serve as an as an officer of two technology sector competitors without "extraordinary provisions to in effect blindfold him." He, however, noted no current conflicts of interest if Square is in fact on the selling block.

"[T]here is no conflict at this stage where Twitter has no apparent interest in buying Square. At this stage Dorsey has every incentive to obtain the highest price possible for Square," Coffee said.

PayPal also denied the WSJ report that it had acquisition talks with Square.

Twitter's Governance

Twitter, which went public in November in one of the largest internet IPO's on record, presents an interesting case study in corporate governance.

Because of a complicated history that included false starts, reinvention and the firing of some co-founders, the company went public with none of its initial founders in an executive role.

Like Dorsey, co-founder and former CEO Evan William also no longer is involved with Twitter's day-to-day operations. Current CEO Dick Costolo took over from Williams in 2010 after Williams took the company's reins from Dorsey in 2008.

Since then Williams also has moved to found a hot startup Medium, which as a blogging site, is a direct competitor to Twitter. Williams, like Dorsey, retained a seat of Twitter's board after leaving the company. He too, might face prospective conflicts of interest were Medium be suited by a deep-pocketed Silicon Valley competitor like Facebook (FB), LinkedIn (LNKD), or most obviously, Twitter.

Twitter didn't immediately respond to an email seeking comment.

Both Dorsey and Williams were "selected to serve on our board of directors because of the perspective and experience he brings as one of our founders and as one of our largest stockholders, as well as his extensive experience with technology companies," Twitter states on its web-site.

Share Lockup

Earlier in April, Dorsey, Williams, CEO Richard Costolo and early VC-investor Benchmark said they won't sell shares in the micro-blogging giant as a May 5 lockup looms.

That disclosure, made in a filing with the Securities and Exchange Commission, has helped to boost the company's shares given fears that large stockholders would be selling their shares at the beginning of next month.

Dorsey, Williams and Costolo will have the ability to sell their shares in the 90-days after Twitter's next lockup expiry, given a so-called cooling off period that has been put in place by the company. Other top Twitter executives have also pledged to either retain their shares, Twitter said.

-- Written by Antoine Gara in New York.

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