Trados 10 Years On

Abraham Cable

UC Hastings Law

Abstract

Through its opinions, the Delaware judiciary famously fires warning shots in the direction of corporate boards. How closely does Silicon Valley listen? This article considers the question by asking startup lawyers how a high-profile decision affects their advice to clients. In its Trados opinion, the Delaware Chancery Court tried to send a message to venture capital investors serving on startup company boards. The court criticized a board for approving a merger that, in accordance with customary Silicon Valley stock terms, resulted in a modest payout to investors holding preferred stock but no consideration to common shareholders. The case generated a flurry of law firm memos and law review articles predicting substantial changes to Silicon Valley deal making. Contrary to those predictions, Silicon Valley lawyers describe modest effects. The case does not appear to alter the customary terms of venture capital investments in startups, but it does appear to alter board process at the time a startup is sold. Boards now focus more squarely on how a transaction affects common stock and, in some instances, provide for payouts to holders of common stock beyond their baseline entitlements. Capturing this customary practice has important implications for Trados doctrine and Delaware fiduciary law more generally. It helps the Delaware judiciary assess the reach of its opinions, reveals ambiguities in current doctrine, and provides a baseline for defining appropriate board conduct.