Friends, Families, and Fools – Delaware Chancery Court Rules on Constituency Directors

I fondly recall from an entrepreneurship class with Dan Himelstein at University of California, Berkeley, Haas School of Business that your first round of financing as an entrepreneur is composed of the 3 Fs: Friends, Family… and Fools.

In a recent case Eric Douglas Guilbeau, et al. v. Footprint International Holdco, Inc., et al., handed down in the Chancery Court of Delaware on April 30, 2026, a group of Class A preferred shareholder plaintiffs sued Footprint International Holdco Inc., which develops biodegradable food packaging, because they believed they were played for fools. However, the court refused to impose conflicted duties to a director to serve both their shareholder interests and the interests of the shareholders as a whole.

80 friends and family invested $25K each into a $90MM round for Class A Preferred Stock with a non-participating 1.4 liquidation preference. By the F round, there was a cram-down financing, giving the Class F shareholders 1.7X the common stock of Class A shares at conversion, leaving the Class A shares virtually worthless.

Plaintiffs sued in part under the theory that the Class A director (a former Intel CEO) violated his duties to Class A shareholders when approving the Class F financing. They pointed to this provision in the amended certificate of incorporation that stated the following:

The Company shall not…without the written consent or affirmative vote of a majority of the Board of Directors (including an affirmative vote of the Class A
Designated Director):

 5.1 Change the rights, powers or preferences of the Class A Stock…;

5.2 Authorize, create, or issue any new class or series of equity securities
(including any security convertible or exchangeable for any such new
class or series of equity securities) having rights, powers or preferences
that are senior to or on parity with those granted to Class A Stock;

However, the court remarked a point that many are not aware of:  “Delaware law does not generally recognize constituency directors as Delaware law rests on the bedrock principle that directors of a Delaware corporation owe fiduciary duties to act carefully, loyally, and in good faith to promote the value of the corporation for the benefit of its stockholders… in the aggregate” without regard to any particular class.

“Those principles do not change when a particular class or series of stock…has the ability to…designate a director…Directors breach the duty of loyalty by acting to benefit the investor that appointed them rather than pursuing the best interests of the corporation and its stockholders as a whole.”

Here, company risk of insolvency was the board’s motive, while the plaintiffs allege new investors intended to take over the company and wipe out Class A interests. Likely, new investors were willing to take the risk for a certain price…paid in part by the 3 Fs.
Jerome Fogel is co-founder of Fogel & Potamianos LLP, a firm recognized by Chambers & Partners’ California Spotlight Guide for excellence in corporate law. A partner in the Corporate Practice Group and Chair of the Sports & Entertainment Group, he is known as an innovator and dealmaker in the legal community. He serves as a general counsel to privately held companies, including representation in mergers and acquisitions. 

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