Delaware Court Tests Limits of Strategic Investor Veto Rights

A Delaware Court of Chancery decision is serving as a cautionary tale for strategic investors, allowing a startup to proceed with claims that an investor abused its governance rights in a “catch and kill” scheme. In Zync, Inc. v. Porsche Investments Management, S.A., the court denied a motion to dismiss, finding it plausible that an investor and its board designee used contractual veto rights to block crucial financing and an acquisition, not for legitimate business reasons, but to access the startup’s technology and then shutter it to harm competitors.

The ruling is a critical reminder for corporate counsel that contractual rights are not absolute. Vice Chancellor Laster’s opinion underscores that exercising such rights may breach the implied covenant of good faith and fair dealing if done maliciously for ulterior purposes. Furthermore, a director designated by an investor owes fiduciary duties to the company, not to the investor, and cannot exercise their powers in bad faith. The court rejected the argument that an investor's equity stake automatically aligns its interests with the company's, especially if other competitive motives could outweigh the value of the investment. This case will now proceed, forcing a closer look at how strategic investors wield their power in portfolio companies.