[bradleyjg]

This 2009 case from the Delaware Chancery Court seems on point: In re Trados Incorporation Shareholder Litigation (http://courts.delaware.gov/opinions/download.aspx?ID=193520)

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.)