10.1.

18: Conflicts of Interest

The second function of the Valuation Committee is to resolve conflicts of interest, a significant issue. Some
partnerships lay down rigid laws prohibiting conflicts; thus, the managers are bound to bring to the PIV's
attention all investments that might be of interest to the investor partnership. Indeed, teeth can be added
to this section by insisting that the managers' personal investments be limited to their interest in the
investor partnership and to minority positions in publicly traded securities. (In corporate law, this area of
concern is generally described under the heading of "corporate opportunity.")
[1]
Partnerships with strict
limitations on corporate opportunity also clamp down hard on self-dealing and co-investment, requiring
that the partnership neither buy nor sell securities from any manager or affiliate thereof (an almost
universal provision) and that the managers refrain from investing in portfolio opportunities either prior to,
coincident with, or subsequent to the partnership's purchase of shares. Finally, the stricter versions of this
section require the managers to devote all their time to the activities of the partnership (no outside
business activities).
[2]

Other schematics are much looser, on the theory that the partnership may be deprived of significant
opportunities and the managers' motivation diminished. Should a titan of the business elect to manage
other people's money in addition to his own, it would be curious for the investors not to want the
opportunity to invest in companies in which the titan plans or already holds a position. Moreover, some of
the most successful investment managers are running two or more investment partnerships, all of which
may have investable funds.
[3]
Running them past the Valuation Committee for consideration usually
sanitizes conflicts and approval (or, in the odd case, disapproval) in cases in which there is some elasticity
in the arrangements. In a given case, the committee will prick up its ears if the managers are investing at
one price and the partnership is coming in, albeit in a later round, at a higher price.
[4]


[1]
Henn & Alexander, Law of Corporations 625-62 (1983).

[2]
If the management of the investor partnership is an affiliate of a commercial or investment bank, other
conflicts may arise; thus, one has to worry about inside information and "Chinese Walls" and/or the
partnership's investments being used to bail out bad loans made by the bank.
[3]
Michael Halloran shrewdly remarks that the severity of the conflicts section varies "inversely with the...
general partner's track record." I Halloran at 1-75.
[4]
It can be predicted that investors will become more sensitive to conflicts as a result of litigation arising
out of the publicized troubles of A. David Silver, the quondam general partner of two funds that are in
liquidation as of this writing. The allegations include the charge that the assets of fund No. 2 were used to
attempt to bail out fund No. I's investments. Ely, Dr Silver's Tarnished Prescription, Venture 54 (July
1987).
Page 1 of 2 10.1.18: Conflicts of Interest - Encyclopedia - Library - VC Experts
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Page 2 of 2 10.1.18: Conflicts of Interest - Encyclopedia - Library - VC Experts