Recent Delaware Decision Addresses Directors’ Fiduciary Duties in All-Too-Common Scenario

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Before the advent of the current recession, many start-up and early-stage companies were able to attract investments from venture capital companies, so-called angel investors and other professional investors. These investments often were in the form of preferred stock of the company, which, among other things, afforded the preferred stockholders a preference over the company's common stockholders in the event of a sale or liquidation of the company or similar events. As the economy soured, the business of many of these companies faltered, presenting their boards of directors with the dilemma of whether to try to carry on the business or to accomplish a sale of the company or other transaction in order to salvage the remaining business and assets. This decision often places at odds the interests of the company's preferred stockholders and common stockholders and poses difficult issues for directors in fulfilling their fiduciary duties.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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