Delaware Court Allows 'Catch and Kill' Suit Against Strategic Investor
A recent Chancery Court decision warns that contractual veto rights do not shield a strategic investor or its board designee from liability for allegedly using those rights to destroy a company for competitive advantage.
In a recent opinion, the Delaware Court of Chancery allowed a startup's lawsuit to proceed against a strategic investor and its board designee for an alleged “catch and kill” scheme. The startup, Zync Inc., claimed the investor used its contractually-granted board seat and veto rights to block essential financing and a $50 million acquisition, ultimately forcing Zync to shut down. The court denied the investor's motion to dismiss claims of fiduciary breach, aiding and abetting, and tortious interference.
The decision in Zync v. Porsche Investments is a stark reminder that extensive contractual rights do not provide an absolute shield against liability for bad-faith conduct. Vice Chancellor Laster emphasized that a board designee’s fiduciary duties are owed to the company as a whole, not exclusively to the investor who appointed them. When an investor allegedly directs its designee to harm the company for the investor's own competitive advantage, both may face liability. This ruling reinforces that Delaware courts will scrutinize the exercise of contractual discretion, which must be wielded for rational purposes, not maliciously. Counsel for investors and their board designees should ensure that any exercise of veto rights is carefully documented and defensible as being in the company's best interests.