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In , Vice Chancellor Laster considered fiduciary-duty challenges to a dilutive cramdown financing, including claims against an alleged non-majority controller and members of the board. Ruling on a motion to dismiss, the court dismissed the claims against the alleged controller, but allowed certain claims against directors to proceed.

Although the transaction is the kind of financing that now sits squarely within the territory of the 2025 amendments to Section 144 of the Delaware General Corporation Law (“Section 144”), those amendments did not apply because the case was already pending on February 17, 2025.

Even so, the decision offers several insights into how courts may think about the amended statute — especially in the context of controller status, special committee design, and coercive “pay-to-play” structures.

The Facts

In November 2020, three investment funds, Cleveland Avenue, LLC (“Cleveland”), Olympus Growth Fund VII, L.P. (“Olympus”) and Movendo Capital B.V. (“Movendo”) (collectively, the “Funds”) invested approximately $150 million in the Class A stock of Footprint International Holdco, Inc. (the “Company”).��In January 2023, facing a liquidity crisis following a failed merger, the Company obtained approximately $70 million in bridge loans from Cleveland, an affiliate of Cleveland’s founder and CEO, and Movendo, convertible into a new series of Class F stock.��

In February 2023, the Board formed a special committee (the “Committee”) to consider financing proposals from investors affiliated with Board members.��The Committee had only the power to make recommendations to the Board but could not veto financing proposals.

On March 17, 2023, the Committee recommended proceeding with the Funds’ proposal for an investment of up to $500 million in Class F stock.��The Committee and the Board declined to pursue competing financing proposals: an offer from Shuler Capital for 80% of the Company at a $670 million valuation, and an oral offer from Apollo Global Management at a $1 billion valuation.

The Board approved the Class F financing in April 2023. It involved the Funds’ receiving new Class F Stock, and the exchange of their existing Class A shares for a new Class A-1 shares that converted into 1.71x more common stock.��To neutralize blocking rights, the Company used financing proceeds to redeem some Class B shares held by one holder (ZenCap, for $10 million), and proposed redeeming some Class D shares from another holder (the Koch family, for $35 million).��When the Company’s lenders refused to consent to the Class D redemption, Cleveland stepped in to purchase those shares, and in return received a change in the conversion ratio for an IPO that was nearly 27 times more favorable.

The financing valued the Company at $500 million pre-money — half the valuation used in bridge loans just months before.��The Funds took $450 million of the round; the remaining $50 million was offered to other stockholders in a compressed three-week timeline, with limited diligence permitted only after commitment. The term sheet showed that, in a $1.2 billion exit, subscribing stockholders would be made whole but non-subscribing Class A stockholders would recover just 4% of their original investment.��

Some of the Company’s early investors sued, alleging breaches of fiduciary duties by Cleveland as a controlling stockholder, and by the individual directors. 

The Decision

Controlling Stockholder

The court first considered whether Cleveland, a 26.4% blockholder, was a controlling stockholder.��Because the amendments to Section 144 did not apply, the court engaged in a lengthy analysis of a number of factors that the plaintiffs alleged evidenced control, drawing from two of Vice Chancellor Laster’s recent articles (the “Historical Articles”).��The court held that block size was the strongest factor evidencing control, but the allegations did not support a showing of control.

The court identified two competing schools of thought: formalistic and functional.��The “formalistic” school focuses on direct control over the board by virtue of voting power or ownership, as opposed to influence over the business affairs of the corporation, discounting influence outside of stock ownership, and requiring a high level of voting power to support a showing of control. In contrast, the “functional” approach looks at control over the corporation’s business affairs, considers multiple sources of influence, and recognizes lower levels of voting power as supporting control. Without expressly endorsing either school, the Guilbeau court’s analysis tracked a functional approach.

As to block size, the court held that 26.4% would support at least a presumption of control under most statutory regimes — singling out the Section 144 amendments as an exception. The court noted that, with typical ~80% meeting attendance, a 26.4% block needs only 27% of unaffiliated shares to carry a vote.��It reviewed a century of case law and commentary treating 25% blocks as carrying “substantial influence,” with several early cases finding control below 30% or even 20%. Nonetheless, the court held that any presumption of control was outweighed by other factors: other large blockholders, a governance agreement fixing board composition and the absence of any allegation of coordinated group action.

Other factors likewise fell short: Cleveland had only one board designee out of ten and no alleged ties to other directors. The complaint’s allegations of commercial influence (key customer/supplier relations) also were too generalized to support control. 

Director Fiduciary Duties

The court assessed whether the complaint adequately alleged that a majority of the board was independent and disinterested — a prerequisite in this case for avoiding entire-fairness review.�� Of the 10 directors, the court found that four directors (Fund and ZenCap affiliates) were “dual fiduciaries” with inherent conflicts, and found that for four others (including the three Committee members), the complaint failed to adequately allege they were conflicted.

Of the other two directors, one (Chung) was the Company’s Chief Technology Officer.��The court held that, when there is a controlling stockholder, or the board has an interested majority, at the pleading stage an officer-director is generally treated as non-independent, given the risks to continued employment from voting against the controller or interested majority.��The court held that, given five of the ten directors were conflicted, entire fairness would apply for the motion to dismiss.

Entire Fairness

The court made light work of finding that entire fairness was adequately pleaded. The large valuation gap between the Class F financing and other contemporaneous transactions, including the bridge financings and the Apollo proposal, indicated financial unfairness. The lack of disclosure in the term sheet sent to stockholders about the depressed valuation, the arrangements with the Series B investor and the Series D investor, the third-party proposals, and various nonrateable benefits received by the Funds indicated procedural unfairness.

The court held that the fact that stockholders were offered the opportunity to participate in the $50 million unallocated portion of the financing did not defeat the entire-fairness claim. While an opportunity to participate can be evidence of fair dealing, in other situations, the court reasoned that “a pay-to-lay structure can be actionably coercive and inferably unfair.” A coercive structure that forces stockholders into a favored structure is not the same as simply offering stockholders a choice. “[C]oercion exists when a fiduciary has taken action that causes its beneficiaries to act — whether by voting or making an investment decision like tendering shares — for some reason other than the merits of the proposed transaction.” The court held that the Class F financing was coercive because non-participating stockholders could not maintain the status quo. Moreover, the Class F financing was not made equally available to all stockholders.��The Funds took 90%, and the remaining 10% was offered to other investors under time pressure before they had an opportunity to conduct diligence.

Lessons Regarding The Section 144 Safe Harbor

The decision, when considered together with the Historical Articles it draws from, provides useful guidance on how the Section 144 amendments might be interpreted, particularly by Vice-Chancellor Laster.

• The One-Third Floor. Section 144(e)(2)(c) includes in the definition of “controlling stockholder” a minimum ownership or control of one-third in voting power (the “One-Third Floor”).��There has been debate in the legal community as to whether this is merely a threshold for getting into the safe harbor, or alternatively it means a stockholder that falls under the One-Third Floor cannot be deemed a controlling stockholder for fiduciary duty and potentially other purposes.��There is language in Guilbeau, such as a reference to Section 144(e)(2)(c) “establish[ing] a hard one-third floor below which control is precluded by statute,” that suggests the latter interpretation is the correct one.

• The Control Test Above the One-Third Floor. Above one-third ownership, the test for whether a stockholder is a controlling stockholder has changed. It is a version of the narrow formalistic test, not the multi-faceted functional test.
• Special Committee Role in Non-Controller Transactions.��The amendments to Section 144 attracted attention for relaxing the entire-fairness test in transactions involving a controlling stockholder.��But the amendments also significantly affect transactions without a controlling stockholder where a majority of the board is conflicted.
  • Before the amendments, that scenario was dealt with under entire fairness — a multi-faceted test of fair price and fair process (as applied in Guilbeau). If both elements pointed away from fairness, the board needed a robust special committee that replicated arm’s-length bargaining and had the power “to say no” — i.e., the board had to delegate negotiating and veto authority to the transaction committee. An advisory committee (such as the one in Guilbeau) was treated as ineffectual.��But handing over this level of control to the board members who are often the least deal-savvy and, by definition, the least vested in the deal is often disfavored by practitioners.
  • The safe harbor under amended Section 144 is more straightforward.��The special committee need only satisfy the criteria under Section 144(a), and there is no requirement that the board delegate negotiating and veto authority to the committee (unlike under Section 144(b) involving controlling stockholders).��The committee can act in parallel to the board rather than replacing it. The advisory committee in Guilbeau, consisting of disinterested directors, would not be dismissed out of hand as ineffectual.��
  • All that is required, besides the directors being disinterested, is that they (i) are informed of all material facts, and (ii) act in good faith without gross negligence.
  • Boards should ensure they have at least two independent directors who can serve on such a committee. Per Guilbeau, they should assume an employee-director will not qualify.
  • The less fact-intensive analysis under the safe harbor seem likely to make claims easier to dismiss at the motion to dismiss stage.

• Opportunity to Participate. A common approach in venture is to try to sanitize a deal that favors some preferred holders, such as a cramdown financing, by making it available to all stockholders. In many cases, that approach will be ineffectual.