Money Stories: Capital Finance & Board Governance Best Practices

A venture capital client was about to provide a loan to a Company to bridge the company over to the $ 7,000,000 equity funding which the venture capital firm was planning on providing to the Company.  My client, the venture capital firm had looked at the financial statements of the target Company and found that they had too much debt on the books and required that prior to the Closing all that debt would have to be converted into equity. The problem was, according to the Company, that they had a number of creditors who had Notes that would be automatically convertible into the equity at the next financing as long as the Notes were not declared to be in default.  In fact, the Notes were in default but had not yet been declared to be in default.  The President of the Company pointed out that he had a Wild Card Director who was very opposed to the whole transaction and if he got wind of the proposed terms of the financing which required the debt to be converted to equity, that Director out of spite would contact the creditors and urge them to declare a default immediately which would prevent the debt from being converted into equity.  To solve this dilemma, although not representing the Company (remember we were representing the Venture Capital Firm investing in the Company), I pointed out to the President that the Company was a Delaware Corporation and that under Delaware law Section 141(k), a majority of the shareholders can take action by written consent and remove a Director without cause.  This meant that they could immediately take action by written consent signed by a majority of the shareholders, remove the recalcitrant Director and then hold a meeting of the newly reconstituted Board without the bad guy Director, approve the transaction and get the bridge financing that they needed.  Result:  Bridge loan funding tomorrow.

Leib Orlanski, Partner, K&L Gates

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