This is a special episode originally recorded for participants of the VC-Backed Board Academy (VCBA), a new executive education program for directors of venture-backed companies by the University of California College of Law San Francisco, in partnership with Cooley and Nasdaq. The program is taking place at Cooley’s SF offices on March 8th, 2024. If you’re a director of a venture-backed company, you should definitely check it out and visit the website at uclawsf.edu/vcba. This podcast features a discussion with Vice Chancellor J. Travis Laster of the Delaware Court of Chancery on fiduciary duties of venture-backed company directors and lessons from the Trados case, a landmark decision that addressed the question to whom fiduciary duties are owed when the interests of common and preferred stockholders’ conflict. My UC Law SF colleague Professor Abe Cable interviews Vice Chancellor Laster on the Trados case, plus other trends and matters relevant to directors of startup companies. Professor Cable published an article on this case at its five-year mark, and a retrospective on its 10th anniversary, calling it a watershed moment in defining the fiduciary duties of corporate directors affiliated with investment funds. Trados has now been cited in more than 120 judicial opinions, 170 law review articles, and an unknown number of law-firm slide decks explaining fiduciary law to corporate boards. This podcast is sponsored by the American College of Governance Counsel.
(0:00) Intro.
(2:27) About the podcast sponsor: The American College of Governance Counsel.
(3:13) Start of interview. [Interviewer: UC Law SF Professor Abe Cable. Reference to his article "Does Trados Matter?" (2019)].
(4:17) Summary of the Trados case by Vice-Chancellor Laster.
(9:44) Concept of "residual value maximization." Distinguishing between standard of conduct and standard of review.
(16:17) Explaining standards of review: 1) Business judgment rule, 2) Enhanced scrutiny and 3) Entire fairness standard. The impact of conflicted transactions.
(23:55) Distinguishing governance standards from public companies and Silicon Valley-style private startups.
(28:10) Social factors or dynamics that make Silicon Valley VC-backed startups a relatively lower risk environment for litigation.
(31:07) Why directors should always try to maximize the value of the corporation for the residual. Emotional commitment and engagement in many cases.
(33:31) "What made Trados a difficult case and a litigable case was that this really was a sideways situation where the value was in the vicinity of an area where the common could take."
(36:36) How to think about maximizing the residual value. *reference to Credit Lyonnais opinion by Chancellor Allen (1991).
(39:04) Other trends or cases that present some litigation risk for startup corporate directors. "I don't know if there's anything super new. What we tend to see is sort of old problems recurring because these are really problems of human nature. And so things are cyclical."
(45:54) The importance of outside or independent directors. "I really think that somebody has to be in the room asking the proverbial dumb question, which usually isn't a dumb question. Usually it's the question that needs to be asked."
The Honorable J. Travis Laster was sworn in as Vice Chancellor of the Court of Chancery on October 9, 2009.
Professor Abe Cable joined the UC Law SF faculty in 2011. He is the Faculty Director of the UC Center for Business Law San Francisco.