Venture Capital-Backed Firms, Unavoidable Value-Destroying Trade Sales, and Fair Value Protections

22 Eur Bus Org Law Rev 39 (2021)

LawFin Working Paper No. 1

49 Pages Posted: 6 Oct 2020 Last revised: 14 Sep 2022

See all articles by Casimiro Antonio Nigro

Casimiro Antonio Nigro

Goethe Universität, DFG Center for Advanced Studies - Foundations of Law & Finance (LawFin)

Jörg Stahl

Católica Lisbon School of Business & Economics

Date Written: June 1, 2020

Abstract

This paper investigates the implications of the fair value protections contemplated by the standard corporate contract (i.e., the standard contract form for which corporate law provides) for the entrepreneur–venture capitalist relationship, focusing, in particular, on unavoidable value-destroying trade sales. First, it demonstrates that the typical entrepreneur–venture capitalist contract does institutionalize the venture capitalist’s liquidity needs, allowing, under some circumstances, for counterintuitive instances of contractually-compliant value destruction. Unavoidable value-destroying trade sales are the most tangible example. Next, it argues that fair value protections can prevent the entrepreneur and venture capitalist from allocating the value that these transactions generate as they would want. Then, it shows that the reality of venture capital-backed firms calls for a process of adaptation of the standard corporate contract that has one major step in the deactivation or re-shaping of fair value protections. Finally, it argues that a standard corporate contract aiming to promote social welfare through venture capital should feature flexible fair value protections.

Keywords: Private equity; Venture capital; Start-ups; Entrepreneurship; Innovation; Corporate governance; Private ordering; Drag-along rights; Trade sales; Corporate law; Fair value; Appraisal rights; Law and economics; Law and finance

JEL Classification: K22, M13

Suggested Citation

Nigro, Casimiro Antonio and Stahl, Jörg, Venture Capital-Backed Firms, Unavoidable Value-Destroying Trade Sales, and Fair Value Protections (June 1, 2020). 22 Eur Bus Org Law Rev 39 (2021), LawFin Working Paper No. 1, Available at SSRN: https://ssrn.com/abstract=3662441

Casimiro Antonio Nigro (Contact Author)

Goethe Universität, DFG Center for Advanced Studies - Foundations of Law & Finance (LawFin) ( email )

Theodor-W.-Adorno-Platz 3
House of Finance
Frankfurt am Main, Hessen 60323
Germany
+49(0)1741769794 (Phone)

Jörg Stahl

Católica Lisbon School of Business & Economics ( email )

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