Chancery Finds Funds Liable for Aiding Directors’ Fiduciary Breaches

In Guilbeau v. Footprint (May 11, 2026), the Court of Chancery held, at the pleading stage of litigation, that it was reasonable to infer that certain directors of Footprint International Holdco, Inc., a non-controlled Delaware corporation (the “Company”), breached their fiduciary duties when they approved a Company financing (the “Financing”) that was proposed, and largely funded, by three institutional investors (the “Funds”) that were among the Company’s largest stockholders. The court also held that the Funds may have aided and abetted the directors’ breaches, acting through their designees on the Company’s board.

The Financing raised $500 million ($450 million of it from the Funds) through the issuance of a new class of preferred stock (the “Class F Stock”), at a time the Company was verging on insolvency. The Financing was recommended by a three-member special committee of independent directors (the “Committee”) and approved by the full ten-person board of directors (the “Board”) (which included one designee from each of the three Funds—collectively, the “Fund Designees). As would be typical in connection with this type of financing, the Company provided special benefits to the Funds and to two large stockholders (“ZenCap” and “Koch”) who had blocking rights.

Seemingly problematic aspects of the Financing included that, allegedly: the Financing afforded the Company a pre-money valuation that was half that indicated by contemporaneous transactions; the Company largely ignored other financing proposals that were received; it was not disclosed to stockholders that special benefits were granted to the Funds and ZenCap, the Company valuation was depressed, and other proposals were received; the Company’s Governance Agreement was amended to provide the Funds with post-Financing control of the Board and to eliminate the Class A stockholders’ protections; and the Committee was only authorized to make a recommendation to the Board, not to make a final decision about any proposal (i.e., was not authorized to say “no”).

Key Points

• The Safe Harbor Amendments were not applicable, but the decision highlights what their impact will be when they are applicable. The 2025 DGCL amendments providing safe harbor protection for conflicted transactions (other than going-privates) (the “Amendments”) were inapplicable because the case was already pending on February 17, 2025. We note that if the Amendments had been applicable, the fiduciary claims against the directors almost certainly would have been dismissed given the Committee approval (if the Committee had been fully authorized). We note also that, although the court concluded, after analysis of all the facts and circumstances, that one of the Funds, with 26.4% of the Company’s voting power, was not a controller with respect to the Financing, if the Amendments had been applicable that conclusion would have been reached irrespective of the facts and circumstances, as the Amendments provide that a stockholder cannot be deemed a controller if it has less than one-third of the voting power.
• The decision highlights the potential for aiding and abetting liability for stockholders with designees on portfolio company boards. The court reiterated the view it has stated in other recent decisions that the pleading standard may be lower when aiding and abetting claims are brought against an affiliate of (or advisor to) an allegedly culpable fiduciary than when they are brought against a third-party acquirer of the company. As the Fund Designees were executives or principals at the Funds, in determining whether the Funds may have “knowingly participated” in the Fund Designees’ breaches, the court found it reasonable, at the pleading stage, to impute to each Fund the knowledge of its Designee, and to infer that the Designee acted to further the Fund’s interests. We note that, if the amendments had been applicable, even with dismissal of the fiduciary claims against the directors, the claims against the Funds for aiding and abetting still may not have been dismissed, as the Amendments preclude injunctive or monetary relief for fiduciary breaches but, according to the Delaware legislature’s synopsis of the Amendments, they do not affect liability for aiding and abetting fiduciary breaches.
• The court observed that even directors who engage in a financing for the legitimate purpose of raising needed funds may at the same time have disloyal motivations. The Funds and the Board argued that they were motivated by the legitimate need to raise funds so that the Company could avoid insolvency. The plaintiffs contended that the Funds’ and the Board’s “true motivations” were to enable the Funds to take control of the Company, to eliminate the Class A stockholders’ protections, and to generate benefits for the Funds. The court wrote: “Those should not be regarded as exclusive alternatives. It could have been both.”
• The court clarified that a financing may be “coercive” even if the opportunity to participate is offered to all stockholders on the same terms. The court found that the Financing—even assuming it had been offered to all stockholders on the same terms—was “inferably coercive” to the Class A stockholders because they “did not have the opportunity to maintain the status quo”—any non-participating Class A stockholder would lose its rights, given the governance changes. Further, the court observed that the Financing actually was not offered to the Class A stockholders on the same terms as the Funds. The Funds subscribed to 90% of the offering, leaving only 10% for the other stockholders; the Funds received material, non-ratable benefits; the Class A stockholders were given only three weeks to make their investment decision and were precluded from access to a data room for due diligence until after they had subscribed and funded their commitment; and the Funds  “had the ability to develop and propose the terms of the [Financing].”
• In a holding of first impression, the court concluded that one of the directors was not independent with respect to the Financing by reason of his being an officer of the Company. The court stated that no Delaware case has addressed the specific issue whether an officer is self-interested in a company financing by reason of being an officer. Applying pre-Amendments law (which, as noted, is what applied), the court concluded that the officer was self-interested. The court considered several factors, including that under stock exchange rules the officer would not qualify as an independent director; and that the Financing was vital to the Company’s continued existence, which was essential to the officer’s continued employment at the Company.

Background

Class A round. The Company develops biodegradable food packaging. In 2019, it raised $90 million via a private offering of Class A preferred stock. About 80 friends-and-family investors, including the plaintiffs, participated. The Governance Agreement granted the Class A stockholders a favorable liquidation preference equal to 1.4x of the purchase price; the top spot in the liquidation distribution waterfall; and the right to designate one director (the “Class A Director”). Also, it prohibited the Company from changing the Class A stock’s “rights, powers or preferences” except with approval by a majority of the Board including the Class A Director.

Sale of Class A stock to the Funds. In November 2020, the Company raised $150 million in a sale of Class A stock to the Funds (Cleveland Avenue, Olympus Growth, and Movendo Capital). The Governance Agreement was amended, with the consent of the existing Class A stockholders, to change the composition of the Board and expand the list of actions the Board could not take without a favorable vote by the Class A Director. The Governance Agreement required that the Funds vote for a slate of ten directors comprised of: (i) one designee from each of the Funds (the “Cleveland Designee,” the “Olympus Designee,” and the “Movendo Designee,” respectively—collectively, the “Fund Designees”); (ii) three designees from ZenCap (the “ZenCap Designees”); (iii) the Class A Director; (iv) two unaffiliated directors selected by the Board and approved by the common stockholders (the “Common-Approved Directors”); and (v) the Company’s CEO. (Over the next two years, the Company amended the Governance Agreement five more times—but without informing the Class A stockholders or obtaining their consent.)

Bridge loans. In 2021, the Company announced a merger, but the parties mutually terminated it, citing negative market conditions. The Company, needing financing, obtained $71 million in bridge loans from the Funds, with the notes issued to the Funds being convertible into a new series of Class F preferred stock.

Committee. In early 2023, the Board viewed the Company as teetering on insolvency and expected to receive financing proposals from investors affiliated with the directors. On February 3, 2023, the Board formed the Committee to evaluate any such proposals. The Committee was comprised of: the Class A Director; one of the Common-Approved Directors; and the Company’s Chief Technology Officer (who had started as a Common-Approved Director but had become one of the ZenCap Designees). The Committee had the power to recommend the rejection or acceptance of financing proposals, but the Board reserved the final decision to itself.

Funds propose the Financing. On March 20, 2023, the Funds proposed the Financing, in which they would invest up to $500 million in Class F stock. That same day, the Committee determined that the proposal was fair and recommended that the Company proceed with it. The Financing afforded the Company a pre-money valuation of $500 million.

Other proposals received. In January and March 2023, the Company had received three proposals from investment firms (the “Other Proposals Received”). (i) In January, it received an offer for an investment of $125 million based on a pre-money valuation of the Company of $390 million. The Company did not consider this proposal. (ii) In early March, the Company received an offer for an investment, at a $1 billion valuation. Neither the Committee nor the Board pursued this proposal. (iii) On March 27, the Company received a verbal offer for the acquisition of at least 80% of the Company’s equity (including most or all the Class A stock), at a valuation of $670 million; plus an investment of an additional $545 million and paying off $180 million of the Company’s liabilities. At a meeting on March 30, the Committee acknowledged that this proposal would address the Company’s “severe liquidity position,” but rejected the offer because it “would not provide any meaningful return to the Company’s stakeholders.” The following day, the Board noted that the investment firm “did not appear [to have] the requisite funds to consummate the transaction,” but, the court noted, the meeting minutes did not provide “the basis for that observation.” The Committee never spoke to or sought to negotiate with the firm.

Board approves, and obtains consents for, the Financing. On April 2, 2023, the Board approved the Financing, noting “the likelihood of insolvency based on the Company’s current financial condition.” The Company then solicited consents from ZenCap and Koch, who had blocking rights. To obtain ZenCap’s consent, the Company agreed to use $10 million of the proceeds from the Financing to redeem shares of Class B stock that ZenCap held; and the Company converted ZenCap’s remaining Class B stock into a new series of Class B-1 stock with significantly better liquidation rights than the original Class B stock. To obtain Koch’s consent, the Company agreed to use $35 million of the proceeds from the Financing to redeem all of Koch’s shares of Class D stock; and the Company agreed that Koch would receive additional cash payments in a liquidation event or IPO, or receive additional shares. When the Company could not obtain the required consent from its lenders for the Koch repurchase, Cleveland stepped in to acquire the Koch shares. In exchange, the Company agreed to enhance the value of those shares, by increasing their original issue price and decreasing their conversion price, such that they would convert in connection with an IPO into nearly 27 times more shares of common stock than before.

Disclosure. In August 2023, the Company provided stockholders with a notice, subscription agreement, and term sheet (the “Term Sheet”) for the Financing. The Term Sheet attributed a pre-money valuation of $500 million to the Company. At that valuation, the Class F stock would account for 50% of the Company’s equity. The Term Sheet included a cap table showing the distributions each class of stock would receive based on a liquidity event that afforded the Company a $1.2 billion valuation (i.e., a valuation 20% higher than the post-money valuation in the Financing). The table showed that on such a liquidity event all stockholders would be made whole except for the Class A stockholders—they would receive just 4% of their original investment.

The Financing. The Funds subscribed for 90% of the Financing, offering 10% to the other stockholders. In the Financing, the Funds received new Class F stock and exchanged their Class A stock for new shares of “Class A-1” stock that converted into about 1.71 times more common stock than Class A stock. The Governance Agreement was amended to eliminate all of the Class A stockholders’ protections and to reduce the Board to four seats, comprised of the three Fund Designees and one of the Common-Approved Directors.

Discussion

The court held that one of the Funds, with a 26.4% stake, was not a controller and therefore did not owe fiduciary duties to the Company and its stockholders. The court, applying pre-Amendments law, stated that the Fund’s 26.4% stake was the most persuasive factor the plaintiffs cited to support a reasonable inference that this Fund may have had control over the Financing. However, the court stated, the Fund’s influence suggested by this stake was mitigated by the facts that the Company had other holders with large stakes and that the Fund was obligated under the Governance Agreement to vote for a named full slate of directors. Notwithstanding this conclusion, the court then engaged in an exhaustive, 40-page long discussion of the many bases and rationales for finding, under a variety of circumstances, that a 26.4% stockholder could well have control. As the Amendments provide a new statutory definition of “control” that, no matter what the facts and circumstances, precludes deeming a stockholder to be a controller if it has less than a third of the voting power, the decision reads as a pointed argument against the wisdom of the new bright-line rule.

The court held that entire fairness review applied because a majority of the Board was not independent. The court found that the three Fund Designees, each of whom was an executive or principal of a Fund, and one of the ZenCap Designees, who was a ZenCap executive, were not independent with respect to the Financing given the material, non-ratable benefits that the Funds and ZenCap received. The court found that the two Common-Approved Directors, the Class A Director, and one of the ZenCap Designees (who was not an executive or principal) were independent. The court counted the CEO-director as independent because the plaintiffs did not challenge his independence. Whether a majority of the Board was independent therefore hung on whether the director who was also the Company’s Chief Technology Officer (who had started as a Common-Approved Director but became a ZenCap Designee) was independent. The court found that he was not independent because, as an officer of the Company, (i) he would not qualify as an independent director under stock exchange rules; (ii) he would have a duty to comply with decisions of a majority of the directors; and (iii) he was self-interested in continuing his employment at the Company, for which the Financing was essential. The court held that entire fairness review also applied because, as discussed above, the Financing was coercive to the Class A stockholders.

The court held that the Financing may not have been entirely fair. With respect to price, the alleged facts supported a reasonable inference at the pleading stage that the Financing reflected a depressed valuation of the Company, as contemporaneous transactions suggested a significantly higher valuation. Most relevantly, the bridge loans obtained from the Funds in January 2023 reflected a $1 billion pre-money valuation, while the Financing afforded a $500 pre-money valuation, as did the Other Proposals Received in March 2023. With respect to process, the court found that the disclosure to the stockholders was materially inadequate, as the Term Sheet failed to disclose the depressed valuation; certain of the material, non-ratable benefits provided to the Funds, ZenCap and Koch; and that the Company had received and disregarded or rejected the Other Proposals Received in March 2023.

The court reiterated its view that the heightened pleading standard the Delaware Supreme Court recently established for aiding and abetting claims may not apply when the claims are asserted against affiliates of (or advisors) to allegedly culpable fiduciaries. The court noted the Supreme Court’s recent Mindbody and Columbia Pipeline decisions, which “made the knowing participation element [of an aiding and abetting claim] tougher for both knowledge and participation.” Those decisions established that the knowledge must be “actual” (i.e., “direct and clear”) knowledge, with “reckless indifference” being insufficient; and that the participation must be “affirmative action” and “substantial,” with a “conscious failure to act in the face of a known duty to act” being insufficient. Thus, the court wrote, “at the pleading stage, a complaint must contain factual allegations supporting a reasonable inference that the aider and abettor actually knew that the primary violator’s conduct was a fiduciary breach, actually knew that its own conduct was legally improper (even if not inherently illegal), and actively participated in the primary violator’s misconduct.”

The court stressed, as it has in other recent decision, that Columbia Pipeline and Mindbody were decided in the context of claims that a third-party acquirer aided and abetted sell-side directors’ breaches of fiduciary duties—and the decisions did not address whether the heightened pleading standard with respect to knowing participation would apply to alleged aiders and abettors other than third-party acquirers. The court reiterated that the heightened standard makes sense for claims against third-party acquirers because they are expected to bargain in their own interest, so there should be “meaningful facts to support an inference that the acquirer attempted to create or exploit conflicts of interest on the board or otherwise conspired with the directors to engage in a fiduciary breach.” Guilbeau presented a different situation, however, the court emphasized—a claim that an affiliate of an allegedly culpable fiduciary aided and abetted the fiduciary’s breaches. “The claim here is simply that the Funds carried out their scheme both with and through their Board designees.”

The court found that the alleged facts supported a reasonable inference that the Funds “knowingly participated” in the Company directors’ fiduciary breaches. With respect to “knowledge,” the court imputed to each Fund knowledge of the fiduciary breach by its Board designee—“because each Board designee inferably acted on [the Fund’s] behalf.” The Cleveland Designee was the founder-CEO of Cleveland; the Olympus Designee was a managing partner of Olympus. For these directors, it was “easy to infer an agreement between [the] designee and his employer to carry out the employer’s scheme.” The Movendo Designee was a non-executive director of Movendo. For him, the court stated, at the pleading stage his knowledge could be inferably imputed to Movendo as he was a “dual fiduciary” owing duties to both Movendo and the Company. The court stated that, at a later stage of the case, Movendo and its designee “may show otherwise, but not at the outset of the case.”

With respect to “participation,” the court found it reasonable to infer that “the Funds actively participated in and supported their Board designee’s actions.” It was inferable that that the Funds formulated a plan to get the Financing approved; and the Funds “were present for the Board’s deliberations regarding the [Financing] through their designees.” The defendants argued that the plaintiffs “offer[ed] only conclusory allegations that the Funds were ‘in cahoots’ with their Board designees.” The court found that “not an accurate description,” given that the designees were employees and fiduciaries of the Funds. The court wrote: “The Complaint’s allegations support the inference that [the Fund Designees] approved the [Financing] to advance the interests of the Funds at the expense of the minority stockholders. That is inferably what each of the Funds wanted each of them to do, and they did it.”

Practice Points

• Safe Harbor Amendments. The Amendments, when applicable, significantly simplify the process for, and reduce the potential for liability with respect to, conflicted transactions (other than going-privates) by providing safe harbor protection if the transaction was approved by a special committee. However, directors should keep in mind that, to obtain safe harbor protection, they must ensure that the safe harbor requirements are satisfied. The directors selected to serve on the committee must meet the new statutory definition of independence (i.e., applicable stock exchange listing requirements for independence); the committee must act in good faith and without gross negligence; and the committee must be fully authorized (i.e., not just authorized to evaluate and make recommendations with respect to a transaction but to “say no” to a transaction).
• Portfolio company director-designees. When a stockholder has the right to appoint designees to the company’s board, the stockholder should weigh carefully the benefits and disadvantages of selecting employees, principals or other fiduciaries of the stockholder (as they may be deemed not to be independent of the stockholder). Where the stockholder designates its fiduciaries, the designees and the stockholder must be sensitive to the potential conflicts arising from the designee’s dual fiduciary duties (to the portfolio company and the stockholder). A director-designee should avoid referring to fiduciary duties to the company’s “stakeholders”—the court emphasized in Guilbeau that the Board’s references to its fiduciary duties to the company’s “stakeholders” reflected that they misunderstood that their primary fiduciary duty was to the Company and all of its stockholders.
• Disregard of competing proposals. If a competing proposal is received, it should be considered before being rejected. If it is disregarded or rejected, the reasons for doing so should be contemporaneously documented (for example, in meeting minutes). Where the reason is a conclusory one (such as that the bidder appears not to have the necessary funds), it may be beneficial to include in the minutes the reasons for the conclusion.
• The decision highlights, again, the critical importance of good disclosure. As noted, the court, in its entire fairness analysis, found that the Financing’s price was unfair due to the depressed valuation and the process was unfair due to the failure to disclose the depressed valuation, the special benefits for the Funds and ZenCap, and certain Other Proposals Received. Notably, if the price had been fair, the problematic aspects of the process may not have prevented a finding of entire fairness if they had been disclosed.
• Financial advisors should be prepared for the possibility of more aiding and abetting claims against them—given (i) the reduced likelihood of plaintiff success on fiduciary claims against directors, officers, and controllers under the Safe Harbor Amendments, and (ii) the lower pleading standard for knowing participation that the Court of Chancery is applying for claims brought against advisors to (and, as in Guilbeau, affiliates of) such fiduciaries.