USA Law and Practice Contributed by: D. Scott Bennett, Nicholas A. Dorsey, Virginia M. Anderson and Ellen H. Park, Cravath, Swaine & Moore LLP
3.6 Corporate Governance Investors negotiate for a variety of minority pro - tections that come in the form of stockholder and director approval rights over specified fun - damental actions proposed to be taken by the company. Directors (including those designated by a specific investor or group of investors) are subject to fiduciary duties and, as such, must act in a manner they believe is in the best interest of the company and all of its stockholders (and not just in the best interest of the investors that nominated them). As a result, both the company and investors may carefully consider which mat - ters are voted on by investors in their capacity as stockholders as opposed to in their capacity as directors. Stockholder Approval Rights Special stockholder approval rights typically require the approval of the holders of either a majority of all convertible preferred stock vot - ing together as a single class or a majority of a specific series of convertible preferred stock. Actions customarily subject to special stock - holder approval include: • extraordinary transactions, such as mergers and asset sales; • liquidating, dissolving or winding up the com - pany; • the issuance of senior and/or pari passu securities; • amendments to the company’s charter in a manner adverse to the outstanding convert - ible preferred stock; and • payment of dividends. Board Designees and Approval Rights Investors are usually granted the right to desig - nate at least one director (a “preferred director” ) to the board of directors. This right is typically
preferred stockholders have a right to receive the higher of: • an amount equal to the purchase price of their stock; and • their pro rata share of the proceeds resulting from the liquidity event. In a distressed situation, and more frequently in recent years as a result of a more challenging fundraising environment, investors are some - times able to secure a liquidation multiple and/ or participation on their liquidation preference. “2x participating preferred” , for example, would allow an investor to recoup twice its initial invest - ment and then participate in any distributions made to the common stock pro rata. Participa - tion with the common stock could also be sub - ject to a cap on the overall return the holder may receive in the liquidity event or be “fully partici - pating” . Dividends Preferred stockholders typically have rights to receive dividends on an “as converted to com- mon stock” basis when, as and if paid on the common stock. Variations of these dividend rights are less common, but include a fixed dividend payment required before the company can pay dividends on the common stock and cumulative dividends that accrue at a fixed rate over time. Upon a sale or winding-up of the company, the holders of convertible preferred stock would be entitled to their liquidation preference plus any declared and/or accrued but unpaid dividends before the common stock is entitled to receive anything. These investor-friendly variations have become slightly more common under recent market conditions.
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