Preferred outcome

25 May 2017 By Reynolds Holding

Cashing out venture capitalists on demand can leave other investors in a lurch. A case involving onetime dot-com darling Oversee.net and Oak Hill suggests judges have growing concerns. It’s an overdue warning about how such conflicts can hurt fledgling firms and their owners.

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The Delaware Court of Chancery on April 25 refused to dismiss a lawsuit accusing the board of ODN Holding, the owner of domain-name registrar Oversee.net, of breaching its fiduciary duty to common stockholders by selling most of the company’s assets so it could cash out the owner of the preferred stock, Oak Hill Capital Partners.

Vice Chancellor Travis Laster ruled that the board should have considered whether it was in the best interests of the common stock to breach the obligation to redeem the preferred and thereby enhance the company’s long-term prospects. The judge also decided that the board’s action should be evaluated under the entire fairness standard – the highest level of scrutiny – because Oak Hill was a controlling stockholder and the majority of the board was not independent.

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