The implicit question is—where the acquisition allocates $0 to common, in what sense are the board of directors fulfilling their fiduciary duty to common shareholders in approving the deal?
Well, their fiduciary duty is to all shareholders and common generally holds a minority ownership interest.
It depends heavily on circumstances, but in a less than amazing sale the acquiring company often wants an incentive for employees to stay. So the acquisition offer will ensure that common gets nothing but they'll be covered by an earn-out over the next year(s).
As you can imagine the negotiation gets very tricky because investors do not generally participate in the earn-out.
The whole thing is well worth reading for anyone involved with VC funded startups. It involved an acquisition with a management incentive plan and preferences that together left nothing for common.
Among other things the court held that where there is a conflict of interest the board must prefer the interests of common shareholders over those specific to preferred (the interests of preferred over common being contractual). It also found that the board had acted procedurally unfairly and in several places suggested outright dishonesty. For those reasons it applied the harshest standard under Delaware law (entire fairness).
In the end however, it found that the company's value as an ongoing concern though not nothing, was not enough to overcome the large liquidation preference and cumulative dividend. Thus, since prior to the deal common stock was worthless a deal valuing them as worthless was fair within the meaning of Delaware law. Note that the litigation lasted 8 years, and at the end of the linked decision it was an open question whether the defendants were going to have to pay plaintiff's legal fees despite having won. (I couldn't find any information on what was ultimately decided there.)
You're not understanding the situation. The board isn't choosing where to allocate the money from the acquisition. The money goes to different classes of shareholders based on previously signed contracts.
The board decides whether or not to take an offer and that offer includes a set of destinations of funds. In particular, the offer may be $Z = $X1 for retention bonuses and $Y1 for purchasing the equity. Or, the offer may be $Z = $X2 for retention and $Y2 for purchasing the equity. The management - who are likely on the board - may want more of the money to go to retention bonuses for senior execs, while the external board members may want more of the money to go to shareholders. And, in many cases, a board member may be involved in negotiating the deal with the acquirer and may push for a particular deal structure.
tl;dr - The board can have significant impact on how the funds get split up, regardless of the previously signed contracts.
It depends heavily on circumstances, but in a less than amazing sale the acquiring company often wants an incentive for employees to stay. So the acquisition offer will ensure that common gets nothing but they'll be covered by an earn-out over the next year(s).
As you can imagine the negotiation gets very tricky because investors do not generally participate in the earn-out.