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

Bo Bian, Yingxiang Li and Casimiro A. Nigro

No 35, LawFin Working Paper Series from Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin)

Abstract: 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.

Keywords: Acquisitions; Corporate Governance; Fiduciary Duties; Fire Sales; Liquidation Preferences; Trados; Venture Capital (search for similar items in EconPapers)
JEL-codes: G24 G33 G34 K20 K22 K40 M13 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-cfn, nep-ent, nep-law and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:lawfin:35

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