Independent Legal Significance, Good Faith, and the Interpretation of Venture Capital Contracts

Williamette Law Review, Vol. 40, 2004

28 Pages Posted: 20 Apr 2005  

D. Gordon Smith

Brigham Young University - J. Reuben Clark Law School

Abstract

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.

Keywords: Independent legal significance, good faith, venture capital, Delaware corporate law

Suggested Citation

Smith, D. Gordon, Independent Legal Significance, Good Faith, and the Interpretation of Venture Capital Contracts. Williamette Law Review, Vol. 40, 2004. Available at SSRN: https://ssrn.com/abstract=698401

D. Gordon Smith (Contact Author)

Brigham Young University - J. Reuben Clark Law School ( email )

422 JRCB
Provo, UT 84602
United States
801.422.3233 (Phone)
801.422.0390 (Fax)

Paper statistics

Downloads
624
Rank
33,129
Abstract Views
4,965