

Important fiduciary duty case for major non-controlling holders in Delaware corp - grellas
http://www.gibsondunn.com/Publications/Pages/TrialCourtGuidanceShareholderFiduciaryDutiesUnderDelawareLaw.aspx

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grellas
This might be pretty technical legal stuff for HN but I posted it to alert
private equity investors to an important California decision that limits their
fiduciary-duty exposure for corporate actions in Delaware corporations.

Bottom line: if you are not a "controlling" shareholder, you can exercise
special rights as a shareholder (such as a right to veto a deal) given to you
by the terms of your investment without having that action second-guessed as
being allegedly inimical to the best interests of the corporation and its
shareholders on some theory that you breached fiduciary duties owed to the
company (the ruling held that no fiduciary duty is owed in such a case). In
other words, when it comes to exercising special rights given to them by a
startup in connection with their investment, investors can freely act in their
own self-interests without regard to its impact on the company.

This is primarily of interest to angel and VC investors (who might have a
direct financial stake in such matters) but also to founders who need to
understand that, when special rights are given to investors, they may be
freely exercised against what the founders perceive to be theirs and the
company's interests (therefore don't give these rights unless you intend to
live with the consequences).

~~~
hvs
I think there are some important distinctions, though. One seemingly major
factor in this case was that at no point was it "unfair" to the other
investors. At each round, all the other investors had the opportunity to
participate on a pro rata basis:

    
    
      The determinative factor in the entire fairness analysis was that Baker had structured the financing so that every 
      shareholder of Wine.com could, if it wanted to, purchase its pro rata share of the offering.  In other words, the 
      transaction was not for the "exclusive benefit" of defendants, which under Delaware law is strong evidence of 
      fairness.

~~~
muerdeme
Giving the other investors the opportunity to participate on a pro rata basis
isn't per se "fair." The technique can be used to freeze out other
shareholders that don't have the liquid capital to participate in the
transaction.

~~~
btilly
Legal fairness may bear little relation to what lay people consider fair. For
instance as long as you and a large corporation both have lawyers, a court
fight between the you is considered "fair" even though the large corporation
has substantially more resources and likely has better lawyers.

In this case the standard of fairness to apply is Delaware law. And under
Delaware law, that was fair.

