Publications & Presentations
June 20, 2019
Funding rounds led by existing investors in venture capital-backed firms occur for a variety of different reasons and under a wide array of circumstances. While such investors often possess only a minority equity position, they nonetheless may be deemed to exercise control over the enterprise, either broadly or in connection with the round they lead. The determination of control can be exceedingly nuanced, and for that reason is not always foremost on the minds of investors and advisors as the round is brought to fruition.
Recent Delaware cases, including the Court of Chancery’s post-trial decision in Basho Tech. Holdco B, LLC v. Georgetown Basho Inv., LLC, 2018 WL 3326693, at *26, *51 (Del. Ch. July 6, 2018) (awarding a judgment of over $20 million against an existing VC investor that lead a G round), underscore the importance of the control question, driving home the point that it should be addressed early in the deal process rather than as an afterthought. As is clear from Basho and other cases, whether the investor leading the round is a controller has potentially profound implications for litigation risk, and measures that may be taken pre-closing to mitigate that risk. 
The below article (authored by R. Montgomery Donaldson, Co-Chair of Polsinelli’s M&A Litigation practice group and lead trial counsel in the Basho case) examines the effective control determination under Delaware law and corresponding procedural enhancements that have been deployed in the context of funding rounds and other material transactions involving a controlling stockholder.
Inside Funding Rounds In Venture-backed Companies: The Perils of “Effective Control”