http://biztaxbuzz.com/reason-venture-capital-firms-prefer-delaware-corporations/ May 21, 2013 One Reason Why Venture Capital Firms Prefer Delaware Corporations | BizTaxBuzz by Trevor Crow 17thMayOne Reason Why Venture Capital Firms Prefer Delaware Corporations Posted by Trevor Crow There are various structures to use when selling a company. Most privately held companies are sold through a sale of its assets or a triangular merger, where the purchaser forms a subsidiary that then merges into the target company. State law and a company’s constituent documents (i.e., articles of incorporation and bylaws) control the requirements for a merger and for the sale of substantially all of a company’s assets. In this post, I outline a comparison of the voting requirements under Delaware law and Colorado law for a merger. Delaware Under Delaware corporate law, a merger requires approval of a majority of the outstanding stock entitled to vote, unless there are additional approvals required under the company’s Certificate of Incorporation (e.g. super-majority approval or approval from each series of stock). Further, the acquiring company may require other approval, like a super-majority approval, to limit the number of stockholders that may exercise dissenter’s rights. Colorado Under Colorado corporate law, a merger requires the approval of a majority of the outstanding shares of each class of the corporation, unless (i) the board of directors requires a greater vote (ii) additional approvals are required under the company’s Articles of Incorporation or Bylaws adopted by the shareholders (e.g. super-majority approval) or (iii) the acquiring company requires other approval, like a super-majority approval, to limit the number of stockholders that may exercise dissenter’s rights. In practice, this usually means that a majority of the preferred shareholders must approve of the merger and a majority of the common shareholders must approve the merger. One of the biggest differences between Colorado law and Delaware law is that a majority of each class of shares must approve a merger under Colorado law whereas a majority of the total outstanding shares must approve a merger under Delaware law. To illustrate, assume that a Colorado company has 50 common shares and 50 preferred shares for a total of 100 shares outstanding. If all 50 of the preferred shares and 20 of the common shares are voted in favor of the merger, the merger still fails because a majority of the common shares did not vote to approve

One Reason Why Venture Capital Firms Prefer Delaware Corporations

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This difference is typically why many funds investing large amounts of money in a company prefer it to be a Delaware corporation. These investment funds want to protect their ability to control whether a merger occurs and do not want common shareholders to have the ability to block a merger.

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Page 1: One Reason Why Venture Capital Firms Prefer Delaware Corporations

http://biz taxbuz z .com/reason-venture-capital- firms-prefer-delaware-corporations/ May 21, 2013

One Reason Why Venture Capital Firms Prefer DelawareCorporations | BizTaxBuzz by Trevor Crow

17thMayOne Reason Why Venture Capital FirmsPrefer Delaware CorporationsPosted by Trevor Crow

There are various structures to use when selling a company. Most privately held companies aresold through a sale of its assets or a t riangular merger, where the purchaser forms a subsidiarythat then merges into the target company. State law and a company’s const ituent documents(i.e., art icles of incorporat ion and bylaws) control the requirements for a merger and for the sale ofsubstant ially all of a company’s assets. In this post, I out line a comparison of the vot ingrequirements under Delaware law and Colorado law for a merger.

Delaware

Under Delaware corporate law, a merger requires approval of a majority of the outstanding stockent it led to vote, unless there are addit ional approvals required under the company’s Cert if icate ofIncorporat ion (e.g. super-majority approval or approval f rom each series of stock). Further, theacquiring company may require other approval, like a super-majority approval, to limit the numberof stockholders that may exercise dissenter’s rights.

Colorado

Under Colorado corporate law, a merger requires the approval of a majority of the outstandingshares of each class of the corporat ion, unless (i) the board of directors requires a greater vote(ii) addit ional approvals are required under the company’s Art icles of Incorporat ion or Bylawsadopted by the shareholders (e.g. super-majority approval) or (iii) the acquiring company requiresother approval, like a super-majority approval, to limit the number of stockholders that mayexercise dissenter’s rights. In pract ice, this usually means that a majority of the preferredshareholders must approve of the merger and a majority of the common shareholders mustapprove the merger.

One of the biggest dif ferences between Colorado law and Delaware law is that a majority of eachclass of shares must approve a merger under Colorado law whereas a majority of the totaloutstanding shares must approve a merger under Delaware law. To illustrate, assume that aColorado company has 50 common shares and 50 preferred shares for a total of 100 sharesoutstanding. If all 50 of the preferred shares and 20 of the common shares are voted in favor ofthe merger, the merger st ill fails because a majority of the common shares did not vote to approve

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Page 2: One Reason Why Venture Capital Firms Prefer Delaware Corporations

the merger. Under Delaware law, this same example reaches a dif ferent result . The merger wouldbe approved under Delaware law because a majority of the outstanding shares voted to approvethe merger (i.e. 70 out of 100).

Bottom Line. This dif ference is typically why many funds invest ing large amounts of money in acompany prefer it to be a Delaware corporat ion. These investment funds want to protect theirability to control whether a merger occurs and do not want common shareholders to have theability to block a merger.