Delaware Chancery Court Finds 26.4% Stockholder Did Not Exercise Transaction-Specific Control Over Footprint Board

WILMINGTON (LN) — Vice Chancellor J. Travis Laster dismissed a breach of fiduciary duty claim against Footprint International Holdco, Inc. investor Cleveland Avenue, LLC, ruling that the plaintiffs failed to plead that the 26.4% stockholder exercised transaction-specific control over the biodegradable packaging company’s board.

The plaintiffs, who include early-stage friends-and-family investors, challenged a January 2023 cram-down financing. Approximately 80 friends-and-family investors purchased Class A preferred stock for $25,000 per share in a 2019 and 2020 round that raised approximately $90 million.

The financing, which valued the company at $1 billion, issued new Class F stock to institutional investors affiliated with Cleveland Avenue, Olympus Growth Fund, and Movendo Capital. The deal also converted existing Class A stock into Class A-1 stock and eliminated the plaintiffs’ governance protections, including the right to designate a director.

The plaintiffs alleged that Cleveland Avenue, whose founder Don Thompson served as board chair, orchestrated the transaction to seize control of the company and eliminate the Class A stockholders’ protections.

Count IX of the complaint asserted that Cleveland Avenue breached its fiduciary duties as a controlling stockholder. Laster granted the motion to dismiss that claim.

Under Delaware law, a stockholder that does not control a corporation is not a fiduciary. To plead that Cleveland Avenue owed fiduciary duties, the plaintiffs had to allege that it exercised control over the business affairs of the corporation.

The court applied prior law, as the Safe Harbor Amendments to Section 144 of the Delaware General Corporation Law, which define controlling stockholder status, do not apply retroactively to actions pending before February 17, 2025.

Under prior law, a defendant without majority control could be a fiduciary if it exercised control over the particular transaction at issue. The plaintiffs invoked transaction-specific control, arguing that Cleveland Avenue exercised actual control over the board during the Class F Financing.

Laster noted that a reasonable inference of control stage typically results when a confluence of multiple sources combines in a fact-specific manner. The court examined block size, board composition, and other sources of influence.

Cleveland Avenue held 26.4% of the company’s voting power. While the court acknowledged that blocks of 25% carry substantial influence and that a 26.4% block would be dominant in a widely held firm, two factors mitigated its significance here.

First, other large stockholder blocks existed that could offset Cleveland Avenue’s voting power. Olympus and Movendo each held significant stakes and had board designees. ZenCap Holdings FP, LLC, another investor, could nominate three directors and possessed director-level blocking rights.

Second, the Governance Agreement bound Cleveland Avenue to vote for a slate of ten directors, with Cleveland Avenue appointing only one. The agreement also contained blocking rights that other investors’ director designees could exercise.

“Standing alone, under prior law, and of a firm with otherwise widely dispersed ownership, the pled fact of Cleveland Avenue’s 26.4% block would provide a strong basis to infer actual control,” Laster wrote. “In the context of the Company’s capital structure and in light of the Governance Agreement, Cleveland Avenue’s 26.4% stake does not support that same pleading-stage inference.”

The court also found that board composition did not support an inference of control. Cleveland Avenue had the right to designate one director, Thompson, who served as chair. The plaintiffs did not allege that Cleveland Avenue had compromising influence over any other directors.

“One director among ten, even when that one director is the Chair, does not provide meaningful support for an inference of actual control,” Laster wrote.

The plaintiffs did not argue that Cleveland Avenue and other significant holders formed a control group.

The court granted the motion to dismiss in part and denied it in part. A separate order will address motions to dismiss under Rule 23.1.

The plaintiffs are represented by Timothy R. Dudderar, Aaron R. Sims, Ellis H. Huff, and Camilia R. Stoyanova of Potter Anderson & Corroon LLP.

The defendants are represented by Daniel A. Mason, Sabrina M. Hendershot, and Miranda N. Gilbert of Paul, Weiss, Rifkind, Wharton & Garrison LLP, and Kaan Ekiner and Nathan D. Barillo of Cozen O’Connor.