DealLawyers.com Blog

It’s probably an understatement to say that transactions in which directors, officers or controlling stockholders have conflicts have received quite a bit of attention from courts and legislatures in recent years, so this recent Cooley memo (co-authored by Courtney Tygesson and our own Liz Dunshee) that provides a “playbook” for navigating conflict transactions under Delaware & Nevada law is a timely and helpful resource.  Here’s an excerpt from the intro:

Completing your initial public offering (IPO) is an exciting time, with capital inflows taking you to the next level. But if you are getting ready to go public – or recently closed your IPO – it is important to recognize the litigation risks that come with selling stock to the public and operating as a public company.

Those risks are amplified in some ways if controlling stockholders, interested directors or officers are in the mix, which is not uncommon, especially for tech companies. Among other things, the US Securities and Exchange Commission’s rules require disclosing related-party transactions and other relationships. Minority stockholders tend to scrutinize decisions that appear to benefit some holders more than others and may challenge them as unfair.

Your best defense is not a heroic legal argument after the fact. It is boring excellence in process and disclosure, especially in the run-up to and during significant transactions and fundraising rounds. That begins with understanding how corporate law safe harbors and guardrails would apply to the company’s circumstances in various scenarios.

Tracking ownership thresholds and approvals, along with the following baseline good practices – such as keeping careful minutes and disclosing accurate information to the board and stockholders – can save you from trouble down the road.

The playbook lays out, in summary fashion, how to assess transactions that may be “conflicted” for Delaware corporations and Nevada corporations. It also contains a brief “cheat sheet” that provides a high-level summary of the applicable legal standards.

– John Jenkins