Bargaining Inequality: Employee Golden Handcuffs and Asymmetric Information

When: 07 Jun 2021, 14:15-15:30
Where: Zoom
Speaker: Anat Alon-Beck

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Meeting ID: 949 1392 1791
Password: 535666
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The problem of inaccurate unicorn firm valuation is very severe and well documented in the finance literature. Unicorn employees cannot value their stock because they do not have access to financial reports, and in many cases, are denied access to such reports, even if they ask for them. Startup founders, investors and their lawyers have systematically abused equity award information asymmetry to their benefit. This Article sheds light on the latest practice that compels employees to waive their inspection rights as stockholders under Delaware General Corporation Law (“DGCL”) Section 220 as a condition to receiving stock options from the company.

DGCL Section 220 provides protection to stockholders by allowing them to exercise their ownership rights and inspect the books and records of a Delaware corporation. In Delaware, this ownership right cannot be eliminated or limited by a provision in a corporation’s certificate of incorporation or bylaws. But – there is ambiguity in the case law with regards to private ordering. Can employees (who are not yet stockholders) waive this right by entering into a contract with the corporation such as a stock option agreement?

The Delaware court has yet to answer the question of whether a stockholder can waive her rights to inspect books and records under Section 220. This Article puts forward the competing arguments and policy considerations for and against such a waiver. It fills the gap in the case law and evaluates whether a contract between the company and its employees, which operates independently and outside the charter or bylaws, can modify or eliminate the mandatory inspection rights expressly set forth in the DGCL. Despite the fact that Delaware courts have yet to answer this question, it is clear that the resolution on this issue will have tremendous influence on corporate law, litigation and practice.