D. Gordon Smith, 𝘐𝘯𝘥𝘦𝘱𝘦𝘯𝘥𝘦𝘯𝘵 𝘓𝘦𝘨𝘢𝘭 𝘚𝘪𝘨𝘯𝘪𝘧𝘪𝘤𝘢𝘯𝘤𝘦, 𝘎𝘰𝘰𝘥 𝘍𝘢𝘪𝘵𝘩, 𝘢𝘯𝘥 𝘵𝘩𝘦 𝘐𝘯𝘵𝘦𝘳𝘱𝘳𝘦𝘵𝘢𝘵𝘪𝘰𝘯 𝘰𝘧 𝘝𝘦𝘯𝘵𝘶𝘳𝘦 𝘊𝘢𝘱𝘪𝘵𝘢𝘭 𝘊𝘰𝘯𝘵𝘳𝘢𝘤𝘵𝘴, 40 Wɪʟʟᴀᴍᴇᴛᴛᴇ L. Rᴇᴠ. 825 (2004).
Independent legal significance, good faith, venture capital, Delaware corporate law
Venture capital contracts are inherently incomplete. When interpreting such contracts, courts could deal with the expectations of parties formally by inquiring only about the plain meaning of the contract or qualitatively by enforcing the presumed expectations of the parties, regardless of whether those expectations are expressed in the contract. The Delaware courts have opted for a formal approach. In doing so, they appear to be engaged in an effort to force contracting parties toward completeness. While the duty of good faith appears to respond to the inevitable incompleteness of contracts, the courts largely ignore this duty in preferred stock cases. This omission, coupled with the doctrine of independent legal significance - which treats charter amendments via merger separately from charter amendments via board and stockholder approval - virtually ensures that preferred stockholders will be subject to opportunistic behavior by common stockholders. Whether courts should respond to claims of injustice in this context depends on comparative institutional analysis. Just because market contracting produces incomplete contracts does not mean that courts should be obligated to fill such contracts. On the other hand, this Article suggests that the application of the duty of good faith in this context might provide valuable incentives to renegotiate when unexpected circumstances arise.
For “A Venture Capital after the Bubble”, sponsored by Willamette University College of Law, Portland, Oregon on March 5, 2004.
Willamette Law Review