Selling Your Company? Be Clear on Your Fiduciary Duties

Palo Alto CA

20 March, 2021

3:02 AM

Description

By- Louis Lehot These days, most entrepreneurs bring their companies to market for sale for one of three main reasons: It was a goal from the start to launch a business and sell it eventually;The venture has not been making any significant progress since its inception or;It is time to leave the business industry and enjoy retirement with the profits acquired. More about the eight key stages of M&A transactions here, and more on structuring the sale of your startup here. Suppose you are contemplating selling your company as an investor or company founder who sits on the board. In that case, you have critical fiduciary duties to consider when making these types of big decisions. Presumably, the highest duty known to the law, the fiduciary duty, is an obligation of loyalty and good faith to a person or entity. It requires dedication and care that does not allow a violation without exposure to personal liability. Fiduciary duties do not permit undisclosed conflicts of interest, and they also require transparent sharing of all information where even a whiff of conflict could be spotted in the rear view mirror. Before a person becomes a director of a corporation, much like the trustee of a will, it is essential to have a thorough understanding of fiduciary duties to others. Today, a director can take the most critical steps to ensure compliance with fiduciary duties by attending every meeting, reading materials in advance, and considering the interests of all parties concerned, especially those not in the room. As a fiduciary, your actions will be viewed in hindsight with 20/20 vision. In recent years, the intersections of personal relationships with significant business decisions have received judicial scrutiny like never before, especially related to sales of securities. In a paradigm shifting Delaware Chancery opinion, the court found that the undisclosed co-ownership of a pleasure craft among two directors (in the absence of any other factor) could potentially constitute a conflict of interest when the company upon which board the two directors served made a business decision. When your company is for sale, your duties become heightened, and your fiduciary duties expand to include exerting best efforts to obtain the highest possible value for all stockholders. You should consider the interests of the common stockholders as “residual claimants,” therefore avoiding decision-making that benefits preferred stockholders to the detriment of the common stockholders. Often times, your hands are tied, such as when the value of the company does not exceed the aggregate liquidation preferences of the preferred stockholders. What to do? Some companies in this situation may consider a “carve-out” of some amount of proceeds for the common stock holders (even those not comprising the current executive team required to execute the sale). Read full article here: Louis Lehot - Selling Your Company? Be Clear on Your Fiduciary Duties