September 10, 2018

Basho Technologies: Examining the Contours of ‘Control’ and the Attendant Fiduciary Duties Owed by VC’s

Basho Technologies: Examining the Contours of ‘Control’ and the Attendant Fiduciary Duties Owed by VC’s

September 10, 2018

The PEVC Committee is sponsoring a Breaking News Program on the Delaware Court of Chancery’s recent opinion in Basho Technologies Holdco B, LLC v. Georgetown Basho Investors, LLC, C.A. No. 11802-VCL (Del. Ch. July 6, 2018). The panel will be moderated by Jon Gworek of Morse, Barnes-Brown & Pendleton, P.C., and will feature panelists John Mark Zeberkiewicz and Stephanie Norman of Richards, Layton & Finger, P.A., in Wilmington, Delaware. In this post-trial decision, the Basho Court found that a venture capital investor with a significant (but not majority) stake in Basho Technologies, Inc. exercised effective control over the corporation through, among other things, its charter-based blocking rights over financings. The Court held that the venture capital investor and its director-designees exerted their control in connection with a financing round and other post-financing actions in breach of their fiduciary duties. The Court held the venture capital firm and its director-designees jointly and severally liable for damages, including rescissory damages representing the difference between the value of the stockholder-plaintiffs’ shares before the financing transaction and the value of those shares at the time of the litigation. The Basho opinion addresses several important issues that routinely arise for venture capital investors and directors and officers of venture-backed companies as well as their counsel, including the circumstances in which investors owe fiduciary duties, the availability (or unavailability) of defenses to claims for breach of fiduciary duty, and the remedies that the Court of Chancery may impose for any such breach.

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