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Court Of Chancery Explains Fiduciary Duty Of Preferred Stockholders’ Directors

Posted In Fiduciary Duty

The Frederick Hsu Living Trust v. ODN Holding Corporation, C.A. 12108-VCL (April 14, 2017, corrected April 25, 2017)

This decision is a primer on most of the major issues in Delaware corporate law. However, what it is most likely to be remembered for is its explanation of the duties that directors have to the enterprise as a whole, even when they are elected by or beholden to preferred stockholders. Thus, it has big implications for venture capital investors. Briefly, the decision holds that it may be a breach of the directors’ fiduciary duty to cause the corporation to sell off parts of its business to satisfy a liquidation preference of its preferred stockholders.

On a more theoretical level, the decision also notes that the board has a duty to the long-term interests of the stockholders and need not bow to short-term pressures. Of course, what works in the best case is not always what appeals in our short-term world.

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