Conflicting fiduciary duties and fire sales of VC-backed start-ups

  • This paper studies the interactions between corporate law and VC exits by acquisitions, an increasingly common source of VC-related litigation. We find that transactions by VC funds under liquidity pressure are characterized by (i) a substantially lower sale price; (ii) a greater probability of industry outsiders as acquirers; (iii) a positive abnormal return for acquirers. These features indicate the existence of fire sales, which satisfy VCs' liquidation preferences but hurt common shareholders, leaving board members with conflicting fiduciary duties and litigation risks. Exploiting an important court ruling that establishes the board’s fiduciary duties to common shareholders as a priority, we find that after the ruling maturing VCs become less likely to exit by fire sales and they distribute cash to their investors less timely. However, VCs experience more difficult fundraising ex-ante, highlighting the potential cost of a common-favoring regime. Overall the evidence has important implications for optimal fiduciary duty design in VC-backed start-ups.

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Author:Bo Bian, Yingxiang Li, Casimiro A. NigroGND
URN:urn:nbn:de:hebis:30:3-651763
URL:https://ssrn.com/abstract=4139724
DOI:https://doi.org/10.2139/ssrn.4139724
Parent Title (English):LawFin working paper ; No. 35
Series (Serial Number):LawFin Working Paper (35)
Publisher:Center for Advanced Studies on the Foundations of Law and Finance, House of Finance, Goethe University
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2022
Year of first Publication:2022
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2022/07/12
Tag:Acquisitions; Corporate Governance; Fiduciary Duties; Fire Sales; Liquidation Preferences; Trados; Venture Capital
Issue:June 9, 2022
Page Number:83
Note:
The paper has benefited significantly from a fellow visit of Bo Bian at the Center for Advanced Studies on the Foundations of Law and Finance funded by the German Research Foundation (Deutsche Forschungsgemeinschaft, DFG) - project FOR 2774.
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Wissenschaftliche Zentren und koordinierte Programme / DFG-Forschergruppen / Foundation of Law and Finance
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
3 Sozialwissenschaften / 34 Recht / 340 Recht
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht