Venture Capital and Preferred Stock

69 Pages Posted: 12 Feb 2014

See all articles by Charles Korsmo

Charles Korsmo

Case Western Reserve University School of Law

Date Written: March 1, 2013

Abstract

Preferred stock has always posed something of a puzzle. Straddling the line between debt and equity, preferred stock has long existed in a shadowland between the realms of contract law on the one hand, and corporate law on the other. Depending on the situation, preferred stockholders have sometimes been entitled to the protection of corporate law fiduciary duties, and sometimes been left to lie in the contractual bed they have made. Historically, what little scholarship exists on preferred stock has consisted largely of calls for greater fiduciary protections for preferred stockholders. Preferred stock has taken on increased importance in recent years, as the favored mode of investment for venture capitalists. Moreover, in a recent trio of cases, the Delaware Chancery Court has restated – some have claimed re-made – the doctrinal treatment of preferred stock in venture capital deals, generating substantial confusion in the process. This Article takes a fresh look at the role of fiduciary duties in venture capital deals, examining the traditional rationales for fiduciary duties in corporate law and analyzing the extent to which they apply in the context of venture capital-financed startups. I conclude that the traditional rationales do not apply, and that venture capitalists, as preferred stockholders, should never be afforded fiduciary protections. Where preferred stockholders control the board, however, they should owe fiduciary duties to the common stockholders. Taken together, these conclusions provide what has long been lacking in this area of the law: a firm theoretical foundation and clear criteria for resolving disputes involving preferred stock.

Keywords: Preferred Stock, Fiduciary Duties, Contract, Venture Capital

JEL Classification: K22

Suggested Citation

Korsmo, Charles, Venture Capital and Preferred Stock (March 1, 2013). Brooklyn Law Review, Vol. 78, No. 4, 2013, Available at SSRN: https://ssrn.com/abstract=2394258

Charles Korsmo (Contact Author)

Case Western Reserve University School of Law ( email )

11075 East Boulevard
Cleveland, OH 44106-7148
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
341
Abstract Views
1,681
Rank
161,852
PlumX Metrics