Startup Law 101 Series – The (Hidden) Elements of Business Law

Entrepreneurs often make the mistake of believing that business law can be understood as a series of declarative statements or rules. This is the Strunk & White school of legal interpretation. Everything can be simplified to easily understandable rules.

Unfortunately, business law does not work like Strunk & White.

Let us take an example to illustrate our point.

“Under corporate law, a board of directors sets the price of the company’s stock in the exercise of its reasonable business judgment.”

Now that is a fine declarative statement. It is also true.

Insofar as it goes.

Can you as an entrepreneur take that statement and conclude that your board of directors can do anything it wants in setting the stock price of its company so long as they believe it to be reasonable?

No, you cannot.

Here is why.

The law of one state may not be the same as another (Delaware or California).

Federal law may override or supplement state law (409A).

Law can change such that what was once accurate no longer is (409A).

Law may be subject to exceptions (self-interested transactions).

Equitable rules may override other forms of law (estoppel).