Changes To Corporate Capital In Equity Financing Transactions, Part II

How Are Fiduciary Duties Applicable to Decisions Authorizing Changes to Corporate Capital?

The first post in this series analyzed whether shareholders may seek remedies in the context of charter amendments to facilitate changes to corporate capital in equity financings. The conclusion was that if an amendment to a corporate charter is properly adopted (and doesn’t violate an independent contractual obligation), shareholders can obtain a remedy only if the corporate action can substantiate a claim for breach of fiduciary duty against enough directors or control persons.

In situations where corporations are needy for additional capital, existing and potential stockholders often seek to maximize their potential benefits upon providing investments. They may control the company or control board seats. Some of the actions they take can adversely affect other shareholders’ interests. For instance, they may create a senior class of stock with superior right and preferences. Consequently, it is worthwhile to consider when shareholders can claim a breach of fiduciary duty in connection with equity financings or recapitalizations. This part of the series addresses how fiduciary duties of corporate directors and control persons apply in these circumstances in Texas and Delaware.

Directorial Fiduciary Duties in General

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Changes To Corporate Capital In Equity Financing Transactions, Part I

If the rule isn’t that anything goes with enough votes, what is it?

Experienced entrepreneurs and investors alike understand that equity dilution is a fundamental aspect of investing in corporations. This is especially true when companies anticipate needing additional capital prior to their prospective profitability. But investors do not always trust management to act fairly and wisely when they sell additional stock or restructure shareholder rights.

This is the first part in a series of blogs focusing on modifications to corporate capital in equity financings. In this first part, I evaluate the law applicable to charter amendments in both Texas and Delaware. As many readers know, Delaware is the leading U.S. jurisdiction for domiciling corporations and has a highly developed body of corporate decisional law. Texas does not benefit from the same depth or breadth of case law. Accordingly, Texas courts—like those of other states—frequently look to Delaware precedent when making determinations in connection with Texas corporate law. Nevertheless, both statutory and judge-made law in Texas and Delaware are different in important aspects.

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