Chancery Finds Potential Liability for Blocking Company Financings Despite Contractual Veto Rights

In Zync v. Porsche et al (May 29, 2026), the Delaware Court of Chancery, at the pleading stage of litigation, declined to dismiss claims against Porsche, a 5% stockholder in  Zync, Inc. (the “Company”), and Porsche’s designee on the Company’s board of directors (the “Porsche Director”), relating to their blocking the Company’s critically needed financings, although Porsche had a contractual veto right over the financings. Allegedly, Porsche’s Director, whose approval was required for the financings, refused to act without Porsche’s prior approval; Porsche delayed providing, or refused to provide, approval for the financings; and, as a result, the Company was unable to secure funding and had to shut down.

Key Points

• A director with dual fiduciary duties—to the company and the stockholder that designated him—may breach his fiduciary duties to the company if he simply follows instructions from the stockholder. The court found that the Porsche Director may have breached his duty of loyalty and acted in bad faith by consistently deferring to the stockholder and acting in its, rather than the Company’s, interests. Porsche’s and the Company’s interests may not have been aligned, the court found, due to Porsche’s having invested in the Company based on an alleged “catch-and-kill” strategy.
• A stockholder may have aiding and abetting liability for its director-designee’s fiduciary breach if it instructs the director to block company action, without a rational purpose that is in the company’s interest. The court stated: “Porsche told [the Porsche Director] what to do, and he did it despite inferably knowing that he was acting to the Company’s detriment. That is knowing participation [by Porsche in the director’s breach].” Notably, the court stated again, as it has in other recent decisions, that the higher standard for “knowing participation” recently articulated by the Delaware Supreme Court in MindBody and Columbia Pipeline may not apply to alleged aiders and abettors who are not third party acquirors—in this case, Porsche, who was not a third party acquiror but was an affiliate of the alleger breacher.
• A stockholder’s contractual veto right over company action cannot be exercised for the purpose of harming the company. The court indicated that, although Porsche could have exercised its contractual veto right for any of a number of valid reasons, including reasons in its own self-interest, it could not act with the purpose of harming the company. The court held that Porsche may have liability for tortious interference with economic advantage, and breach of the implied covenant of good faith, as its instructing the Porsche Director to block the financings was wrongful and its purpose may have been to harm the Company.
• A contractual provision that exculpates a stockholder from liability for acts of its director-designee must exclude intentional and bad faith acts. The court held that an exculpation provision in the parties’ Investment Agreement—which purported to protect Porsche against acts relating to the Porsche Director—was invalid because it did not exclude intentional and bad faith acts. The court noted that new DGCL Section 122(a), adopted in 2024, prohibits governance rights that would be void under Delaware law if included in the Company’s charter—and Delaware common law prohibits exculpation of intentional or bad faith acts.

Background. The Company, founded in 2020, was an automotive technology startup providing video streaming, on-demand content, and other experiences for in-vehicle entertainment. The Company sought a strategic partnership that would provide capital and a path to commercialization of tis technology. The Company chose Porsche over other interested luxury auto manufacturers.

Porsche’s governance rights. Through its venture capital investment arm entities, Porsche funded the Company through a $2.9 million convertible note (the “Porsche Note”). Porsche received shares of common stock representing 5% of the Company’s equity. A “Voting Agreement” provided for a three-member board, with Porsche having the right to designate one director. Porsche designated one of its employees. An “Investor Agreement” provided that the Company could not take certain actions (including issuing any debt security) without the approval of the Porsche Director. The Board was comprised of the Company’s founder-CEO (the “Founder”), the Porsche Director, and a third director. Due to Porsche’s veto right, a board majority comprised of the Founder and the third director could not take action on a covered issue unless the Porsche Director gave his approval.

Need for funding. The Porsche Note contemplated five advances to the Company, at specified times. Notwithstanding that the Company had continued success with its technology, after Porsche paid its first two advances, it delayed the other advances, which jeopardized the Company’s stability. In June 2021, after two delayed advances, the Founder arranged for a €350,000 bridge loan  from a lender (the “Bridge Loan”), which was personally guaranteed by the Founder and unanimously approved by the board. Other automakers were interested in entering into agreements with the Company to use its technology, which intensified the Company’s need for capital. When Porsche indicated it would not provide additional funding, the Company considered alternative financing sources.

VC Financing. The Company signed a term sheet with a venture capital fund to lead a Series A financing round—$10 million at a pre-money valuation of $40 million (the “VC Financing”). The Porsche Director stated that he could not approve the VC Financing without Porsche’s permission. He met with Porsche several times over two months, seeking instructions. Meanwhile, the Bridge Lender began pressing the Company for repayment. The Founder emphasized to the Porsche Director the urgency of the situation, but the Porsche Director would not act without Porsche’s permission. In April 2022, the Porsche Director finally agreed to the Board voting on the VC Financing and voted against it (thus killing it).

Porsche bridge loan. Porsche then indicated the possibility of its providing a bridge loan to the Company. The Porsche Director suggested to the Founder that, to “kickstart” the process, the Founder should share with Porsche the terms of a confidential draft agreement between the Company and a Porsche competitor for use of the Company’s technology (the “Competitor Agreement”). The Founder did so, emphasizing that the Agreement was highly confidential. Porsche then delayed, and ultimately reneged on providing a bridge loan.

PE Financing. In June 2022, shortly after the Company entered into and announced the Competitor Agreement, a private equity fund (the “Fund) offered to acquire the Company for $50 million (the “PE Financing”). The Founder sought the Porsche Director’s input. The Porsche Director stated that he would not provide any feedback until there was a signed term sheet so that he could seek Porsche’s approval. The Company and the Fund signed a term sheet. The Porsche Director then insisted that the Fund speak directly with Porsche. Porsche delayed in considering the transaction and speaking with the Fund. The Porsche Director refused to act without Porsche’s consent. Ultimately, Porsche told the Fund that it would not authorize the Porsche Director to approve the transaction unless the Fund indemnified Porsche and the Porsche Director from any damages. The Fund refused, and the PE Financing fell through.

The Company  shut down. In August 2022, the Bridge Loan came due. A default judgment was entered against the Company and the Founder. Porsche then directed the Porsche Director not to engage with his fellow directors and, later, to resign. The Company, unable to raise capital given Porsche’s outstanding contractual rights and previous lack of cooperation, “effectively shut down.”

Vice Chancellor J. Travis Laster held that the Porsche Director may have breached his fiduciary duties to the Company, aided and abetting by Porsche; and that Porsche may have breached the implied covenant of good faith inherent in its Investment Agreement with the Company.

Discussion

The Porsche Director may have breached his fiduciary duties to the Company by favoring Porsche’s interests over the Company’s. The court found it reasonably conceivable (the standard for survival of claims at the pleading stage) that the Porsche Director was a “conflicted dual fiduciary” and “inferably acted in bad faith.” He may have faced an inherent conflict of interest because he owed fiduciary duties both to the Company (as a Company director) and Porsche (as a Porsche employee), and their interests may not have been aligned. In addition, he inferably acted in bad faith as it was reasonably conceivable that, in deciding not to approve the VC Financing and the PE Financing, and in persuading the Founder to share the confidential Competitor Agreement with Porsche, he was acting to advance Porche’s interests and harmed the Company rather than pursuing the Company’s best interests.

Porsche’s interests may have not been aligned with the Company’s based on Porsche’s alleged  “catch-and-kill” investment strategy. Under such a strategy, an investor makes a seed investment in a startup in return for veto and other governance rights, and then uses the veto and governance rights to block other sources of capital. By making the startup dependent on the investor, the investor gains control of the startup’s new and potentially disruptive technology. The investor then has the ability to deploy the technology if it wishes to; and if it does not wish to, it can force the startup to shut down, while maintaining control over its intellectual property. The court stated that the plaintiff’s Complaint cited exchanges between the Founder and other companies’ founders or executives that supported “the theory” that Porsche had used this strategy against the Company; and stated that the Porsche Director’s court testimony “acknowledged the pattern.” This strategy “could benefit Porsche far more than any harm it would suffer from writing off its comparatively small investment in the Company,” the court wrote.

The court amplified the standard for bad faith at the pleading stage. The court stressed (as it has in other recent decisions) that “[t]he standard for bad faith is not whether the action taken is so beyond the bounds of reasonable judgment that it seems essentially inexplicable on any other ground.” Rather, at the pleading stage, “a plaintiff need only plead facts supporting an inference that the defendant did not reasonably believe that the transaction was in the best interests of the entity or its equity holders.” The court acknowledged that it cannot “read minds,” but stressed that it can infer a person’s intent by “look[ing] at what the person did and the circumstances in which they did it.” The court found it reasonable to infer that the Porsche Director was favoring Porsche’s interests over the Company’s, as he “deferred to Porsche time and again”; he would not act on the VC Financing or the PE Financing “without Porsche’s signoff and [then he] slow-rolled the process”; he was “inferably part of [Porsche’s] bait and switch” when it demanded terms that killed the VC Financing and reneged on providing bridge financing after extracting confidential information about its competitor; and he followed Porsche’s instructions not to engage with his fellow directors and then resign from the board.

The court seemed to suggest that a fiduciary’s blocking a company’s critically needed financing might inherently constitute a breach of fiduciary duty. The defendants argued that the Porsche Director could not have breached his fiduciary duties because neither the VC Financing nor the PE Financing were formally put to a vote. The court responded that “[d]irectors can breach their duties through informal action and conscious inaction.” The Porsche Director “breached his duty of loyalty by consciously preventing the Board from taking action.” The court acknowledged that the Porsche Director could have blocked the financings for a variety of valid reasons—such as its being too expensive, better alternatives being available, and so on. However, notably, the court wrote, quoting from Shocked Technologies (2012): “[E]ven assuming [a] director believed his own agenda was best for the startup, the most logical objective of [the director’s] actions—strangling the Company with a potentially catastrophic cash shortfall—cannot be reconciled with his unremitting duty of loyalty.”

Porsche may have aided and abetted the Porsche Director’s fiduciary breaches through its “instructions” to him. The court wrote: “The claim here is simply that Porsche caused [the Porsche Director] to breach his fiduciary duties. Porsche knowingly participated because [the Porsche Director] acted on Porsche’s instructions. Spinning out the theory, Porsche knew that the Company was desperate for cash. Porsche knew that without explicit direction, [the Porsche Director] would not approve the VC Financing or PE Financing. Porsche also knew that either transaction could alleviate the Company’s financial distress and enable the Company to launch its product with Porsche’s competitors. To gain an advantage over its competitors, Porsche instructed [the Porsche Director] not to approve the VC Financing or the PE Financing. [The Porsche Director] likewise inferably knew all of this, and his knowledge is also imputed to Porsche as Porsche’s employee…. [The Porsche Director] was the tool Porsche used to carry out its plans…. Porsche told [the Porsche Director] what to do, and he did it despite inferably knowing that he was acting to the Company’s detriment. That is knowing participation.”

We note that, in another recent decision—Guilbeau v. Footprint—the court also found that investors may have aided and abetted their director-designees’ fiduciary breaches. In Guilbeau (Apr. 30, 2026), the Court of Chancery held, at the pleading stage, that it was reasonable to infer that certain directors of a non-controlled company breached their fiduciary duties when they approved a company financing that was proposed, and largely funded, by three institutional investors (the “Funds”) who were among the company’s largest stockholders. The court held that the Funds may have aided and abetted the breaches of their respective designees, each of whom was an employee or other fiduciary of a Fund. The court wrote: “The Complaint’s allegations support the inference that [the Funds’ 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.” In Guilbeau, Vice Chancellor Laster emphasized that board members’ references to fiduciary duties to corporate “stakeholders” reflected a fundamental misunderstanding of Delaware law. The court stressed that a director’s primary fiduciary duties are to the corporation and to the entire body of its stockholders. The court noted that attempts to serve the interests of “stakeholders” or the specific investor group that appointed the director, rather than all stockholders generally, highlight a flawed orientation that can lead to breaches of the duty of loyalty.

Porsche also may have breached the implied contractual covenant of good faith and fair dealing. Although Porsche had an express contractual veto right over the VC Financing and the PE Financing, it may have breached the implied covenant of good faith by exercising a discretionary contractual right unreasonably—that is, in a manner that was inconsistent with the parties’ expectations at the time of contracting. The court wrote: “The idea that Porsche could shut down the Company for its own purposes by strategically delaying advances under the Porsche Note, wielding its director veto right to block third-party financing that the Company desperately needed, and inducing the Company to give up confidential information with false promises of a bridge loan is so far from any concept of shared contractual purpose that it raises an inference of malice.” The court acknowledged that “if Porsche thought that the VC Financing or PE Financing were too expensive, harmful to the Company, or even harmful to its own interests, then Porsche could have prevented the Company from proceeding without facing a claim under the implied covenant.” However, “[w]hat Porsche could not do was use its veto right for the sole purpose of harming the Company….” Taken together, the court wrote, “the complaint’s allegations support the inference that Porsche acted maliciously to harm the Company, without any rational purpose grounded in the contract.”

The Investment Agreement’s “Exculpation Provision” did not, at the pleading stage, protect Porsche against liability. The Exculpation Provision stated as follows: “No Liability for Election of Recommended Directors. No Stockholder, nor any Affiliate of any Stockholder, shall have any liability as a result of designating a person for election as a director for any act or omission by such designated person in his or her capacity as a director of the Company, nor shall any Stockholder have any liability as a result of voting for any such designee in accordance with the provisions of this Agreement.” First, the parties disagreed as to whether the Provision provided exculpation only for acts relating to placing the Porsche Director on the board (i.e., designating and voting for him), or also provided exculpation for acts or omissions by the Porsche Director as a director. The court found that both interpretations of the “poorly worded” provision were reasonable; therefore, it could not support pleading-stage dismissal of the Company’s claims. Second, the court stated that, even if the broader interpretation were correct, the Provision could not support a pleading-stage dismissal because “Delaware law does not permit parties to eliminate liability for intentional and bad faith acts,” and the Company’s claims charged Porsche with such acts.

In a previous decision in the case, the court had dismissed the claims against the Porsche executive in Germany who had instructed the Porsche Director. In that decision (issued May 26, 2026), the court rejected the plaintiff’s argument that the court could exercise personal jurisdiction over the executive for aiding and abetting under a conspiracy theory. The court held that simply appointing a director to a Delaware corporation’s board did not by itself constitute a “Delaware-directed act”; and that his alleged “omission” in declining to let the Porsche Director sign off on a financing, which did not take place in Delaware, was too loosely associated to subject him to Delaware jurisdiction.

Practice Points

• A stockholder seeking board seats should consider seeking contractual veto rights in addition. A stockholder will have more flexibility to act pursuant to a contractual right than through a board designee. Where a stockholder has both contractual rights and board designees, the stockholder should consider acting through the contractual right rather than the board designees.
• Where a stockholder exercises a veto right over company action, the stockholder should maintain a record as to its valid reasons for doing so. Where the stockholder exercises a contractual veto right, it should consider the effect on the company and identify and record its purposes for exercising the veto. A veto of company financing could be based, for example, on the terms of the financing being inappropriate, other alternatives being preferrable for the company, or ways in which the financing would harm the stockholder’s interests—but there must be a purpose other than harming the company.
• A stockholder should not instruct its director-designee how to act. A stockholder’s blocking or other contractual rights should be exercised as such and not through instructions to its director-designee as to how to act. A stockholder can share its views and desires with its director-designee, but should not instruct the director how to act or require its approval before the director acts. A director must consider and act based on the best interests of the company (not the stockholder that designated him or her). A director can “consult with” the stockholder, but should not simply defer to the stockholder, refuse to act without the stockholder’s consent, nor act based on the stockholder’s (rather than the company’s) interests. A non-U.S. stockholder may be less familiar with the Delaware law framework that requires director loyalty to the corporation and its stockholders as a whole rather than to particular “stakeholders.”
• A stockholder should carefully weigh the benefits and disadvantages of designating its employee as a company director. If a stockholder designates an independent director, the director will not necessarily be viewed as a “dual fiduciary” with an inherent conflict of interest if the company’s and the stockholder’s interests are unaligned.
• A contract or charter provision exculpating a stockholder from liability should exclude intentional or bad faith acts. Also, it should be clear as to whether exculpation relating to the stockholder’s director-designee covers only liability relating to the designation and election of the director or also to the director’s acts as adirector.
• Startup companies should consider seeking contractual protection against a catch-and-kill investment strategy. These might include, for example, a right of first refusal for the stockholder—rather than a veto right—on financings or acquisitions.
• Stockholders with board designees (and financial advisors to a special committee or board) should be prepared for the possibility of more aiding and abetting claims against them. These claims may be more likely given that, (i) where the 2025 DGCL amendments providing safe harbor protection for conflicted transactions are applicable, plaintiffs will face a reduced likelihood of recovery on claims of breach of fiduciary duties against directors, officers and controllers, but the Delaware Legislature’s synopsis to the amendments states that the amendments will not affect liability for aiding and abetting such breaches; and (ii) the lower pleading standard for “knowing participation” that the Court of Chancery has been applying where claims are brought against affiliates of and financial advisors to fiduciaries (as compared to the higher standard articulated by the Delaware Supreme Court in MindBody (2024) and Columbia Pipeline (2025), applied in those cases to third-party acquirors).