Fiduciary Duties

The Delaware Court of Chancery dismissed a stockholder suit claiming that directors of B. Riley Financial breached their fiduciary duties by failing to catch problems with an investment that later went bad. The suit was framed as a Caremark claim, the label Delaware uses for lawsuits arguing that a board failed to conduct oversight. The Court reaffirmed why those claims are so hard to win: a board’s oversight duty is aimed at the company’s own internal compliance and risk systems, not at policing misconduct by outside parties the company does business with, even where the company has significant money on the line. A failed investment, on its own, is not evidence of bad faith, and stockholders cannot repackage hindsight criticism of a bad bet as a breach of duty. Delaware courts scrutinize process, meaning they evaluate whether the board informed itself and had systems in place, rather than whether that process led to a good outcome.

Delaware has long been the default jurisdiction of incorporation of high-growth emerging companies due to its advanced, and evolving, body of corporate law, a specialized Court of Chancery, and decades of corporate law cases and precedents. But that default assumption has now come into question.

In recent years, Delaware’s courts have issued a series of decisions that have left some founders of high-growth companies unsettled. See, for instance, the recent Tesla cases, following which Elon Musk publicly blasted Delaware and both Tesla and SpaceX reincorporated in Texas. Musk is not alone in this trend toward “DExit” – TripAdvisor, Dropbox, AMC Networks, and Roblox are among those reincorporating in Nevada, and Dillard’s joined Tesla and SpaceX by reincorporating in Texas. Even Meta publicly announced that it was exploring a move out of Delaware in 2025.

In response, Delaware’s legislature adopted major reforms in 2024 and early 2025 (SB 313 and SB 21) codifying safe harbors for conflicted transactions, narrowing books-and-records access, and strengthening management’s shield against litigation.

More and more founders and GCs of later-stage companies are now wondering if Delaware should still be the default.

So, should you care and, if so, where are companies moving?

“Y’all Street” as an Alternative?

In recent years, Texas lawmakers have aggressively reformed state law to attract corporations. The state’s pitch? A pro-business legal climate, big-market economy, and fewer stockholder hassles. In 2024, Texas launched a new statewide Business Court system modeled on Delaware’s Chancery Court, with specialized judges to handle complex corporate cases. This was quickly followed in May 2025 with sweeping legislated changes (SB 29) to the Texas Business Organizations Code, in a package branded as “Texas: Open for Business." Key provisions include:

Codification of the Business Judgment Rule:

Texas now explicitly codifies the business judgment rule and the high bar to rebut it, giving directors stronger protection when their decisions are challenged.

Limits on Derivative Lawsuits:

Allowing corporations to set a minimum ownership threshold (up to 3%) for stockholder-plaintiffs to bring a derivative suit. This threshold is higher than most states and drastically curbs the ability of small stockholders to sue on behalf of the corporation.

Records and Litigation Procedure:

Limiting what constitutes corporate “books and records” available for stockholder inspection. For instance, emails and electronic communications are excluded. It also allows companies to include provisions in their charters or bylaws waiving the right to jury trials in corporate disputes, meaning cases would be heard solely by judges (as they are in Delaware’s Chancery Court).

In addition to the changes effected by SB 29, Texas later enacted several additional measures to allow certain Texas-listed public companies to adopt higher thresholds for stockholder proposals and to authorize the board of directors to delegate more discretion to the corporation’s executives.

Pros and Cons of the Y’all Street

The Texas proposals seem very attractive, especially to issuers and their insiders, but, in practice, their effectiveness is hard to measure. The new courts lack Delaware’s decades of precedent, making Texas less predictable for companies. So, certainty with respect to a few specific matters is offset by uncertainty with respect to treatment of a myriad of others. Additionally, incorporating in Texas might expose a corporation to Texas venue for certain lawsuits.

Texas has certainly had some luck in attracting private and public companies as of late, and we are working with a number of companies exploring Texas as a potential alternative to Delaware.

The “Silver Sanctuary”?

Like Texas, Nevada’s appeal lies in providing certainty to companies and their insiders with respect to certain specific common transactions. It automatically offers directors and officers strong protections. Key features of Nevada’s corporate environment include:

Robust Liability Shields

Nevada law automatically exculpates directors and officers from personal liability for breaches of fiduciary duty (except in cases of intentional misconduct, fraud, or knowing law violations). In Delaware, by contrast, corporations must opt in to exculpation (and even then, it covers only duty of care, not loyalty, and only recently were officers allowed similar protection). Nevada’s default rule thus gives executives peace of mind that honest mistakes won’t easily lead to personal liability. Likewise, Nevada statutes make it easier to indemnify and protect managers, which can reduce D&O insurance costs.

Consideration of Other Interests

Nevada explicitly permits boards to consider long-term corporate interests and the impacts on employees, customers, the community, etc., when making decisions. Directors are not strictly bound to maximize immediate stockholder value at all costs. This allows directors to justify decisions that favor sustainable growth or other constituencies, without breaching their duty to stockholders. This contrasts with states like Texas or Delaware, where directors must generally act in the best interests of the corporation and its stockholders, with true stakeholder balancing available only if the corporation opts into a Public Benefit Corporation framework.

No Franchise Tax

From a financial perspective, Nevada imposes no corporate franchise tax and so may prove cheaper to operate in, especially for early-stage companies.

Pros and Cons of the Silver Sanctuary

Nevada offers what Nevada usually offers: more freedom to operate at the expense of less predictability. Nevada’s business courts were established in 2001, but those courts have not published nearly as many written opinions, or as routinely, as Delaware’s Court of Chancery. The law, while more insider-friendly, is also less modernized in other areas.

So, in the end, what should you do?

The answer is not clear-cut. For now, there is no mass flight out of Delaware, but certainly lots of discussions are taking place. No clear winner has emerged for the alternatives, but it does appear that more public companies are leaning towards Texas while more private companies are considering Nevada. But the vast majority of new incorporations are still taking place in Delaware.

It all comes down to perception, expectation, and, perhaps in the future, actual experience. To help your thinking, a chart summarizing some, but certainly not all, of the key features of the three regimes may be found here:

In more challenged private company financing environments, down rounds (i.e., an equity financing at a lower valuation than a prior equity financing) often go from a relatively uncommon occurrence to a more common aspect of many growth equity and venture capital financings. The interrelated impact of geopolitical and macroeconomic events such as valuation resets from post-pandemic highs, public and private market liquidity constraints, prolonged fundraising cycles, and shifts in bargaining power can have profound effects on growth equity and venture capital financing dynamics, making down rounds and valuation pressure more common. Down rounds have significant implications for all participants in the venture ecosystem: founders and management teams, investors, employees, and fund limited partners.

This article focuses on the basic mechanics of conversion price-based anti-dilution protections for convertible preferred stock. Anti-dilution protections need to be considered in the context of the impact on the pricing of the down round in question, and also on the potential impact of future adjustments.

Anti-Dilution Protections

In any equity financing, two types of dilution can occur when a company issues new shares: (1) percentage dilution occurs because the issuance increases the number of outstanding and fully-diluted shares, reducing an existing holder’s ownership percentage if that holder does not maintain their ownership percentage through additional investment, and (2) economic (or price) dilution occurs when a company issues shares at a price that is lower than the conversion price applicable to an investor’s shares, reducing the value of that investor’s position on an as-converted basis.

The conversion price-based anti-dilution protections discussed below are intended to mitigate economic (or price) dilution and the resulting percentage dilution on an as-converted basis. Investors may also help protect against percentage dilution through preemptive rights, which can permit pro rata participation in later financings, whether those are up rounds or down rounds.

Below is a simple illustration of how dilution can occur:

• Before a down round, if Investor A purchased 2,500,000 shares of convertible preferred stock at a price of US$5 per share, and after that financing there were 10,000,000 shares of the company outstanding, Investor A’s US$12,500,000 investment would represent a 25% ownership stake in the company.
• In the down round, the company sells 5,000,000 new shares to investors (other than Investor A) at a price of US$4 per share.
• Following the down round, Investor A continues to own 2,500,000 shares of convertible preferred stock, now out of 15,000,000 outstanding shares of the company, representing a decreased ownership stake in the company of 16.67%, valued at approximately US$10,000,000.

To help protect against the scenario above, Investor A would typically have negotiated for price-based anti-dilution protection when it originally purchased its convertible preferred shares. In a down round, these protections operate to adjust Investor A’s conversion price and therefore the rate at which those shares ultimately convert into common stock. There are two main types of conversion price-based anti-dilution protection: (i) full ratchet and (ii) weighted average.

Full Ratchet

While less common in practice, there has been an increased use of full-ratchet anti-dilution protections to bridge valuation gaps (sometimes, with a sunset date). When used, they can have a profound impact on down-round financing. With full ratchet anti-dilution protection, the conversion price applicable to Investor A’s convertible preferred shares is reset to the new lower price per share from the down round (which is US$4 in the example above), meaning each preferred share from then on would convert into 1.25 shares of common stock.

Now, as a result, if those preferred shares convert, Investor A would own 3,125,000 shares of common stock out of 15,625,000 outstanding shares, meaning Investor A would therefore have a 20% ownership stake (which is less than Investor A’s initial 25% stake, but greater than the 16.67% stake Investor A would have been left with without this full ratchet protection).

Full ratchet protection is not common, but when it does exist, the resulting impact in a down-round financing can be profound.

Weighted Average

Weighted-average anti-dilution protection is far more customary. With weighted-average anti-dilution protection, a formula is used to determine a new conversion price that will apply to existing preferred shares following a down round:

• New Conversion Price = Old Conversion Price * [(X + Y) / (X + Z)]
  • X = the number of shares outstanding on a fully-diluted basis before the down round.
    • Note that the nuances of the X variable are sometimes negotiated, with a company preferring a broader approach (often referred to as the “broad-based” weighted-average formula) that includes all shares on a fully diluted basis, and an investor preferring a narrower approach (often referred to as the “narrow-based” weighted-average formula) that excludes certain types of derivative shares such as options and warrants. The broad-based weighted-average formula is more commonly used.
  • Y = the number of shares that would have been issued to new investors in the down round had the full investment been made at the old price per share (which is US$5 in our example above).
  • Z = the number of shares issued to new investors in the down round at the new price per share (US$4 in our example).

In our example, the resulting math would be:

New Conversion Price = US$5.00 * [(10,000,000 + 4,000,000) / (10,000,000 + 5,000,000)]

• US$5.00 * [(14,000,000) / (15,000,000)]
• US$5.00 * [0.933]
• US$4.67

Under this approach, the adjusted conversion price applicable to Investor A’s convertible preferred shares is now US$4.67, meaning each of Investor A’s preferred shares is convertible into 1.07 shares of common stock.

Now, if those preferred shares convert, Investor A would own 2,675,000 common shares out of 15,175,000 outstanding shares, meaning Investor A would therefore have a 17.63% ownership stake (which is less than Investor A’s initial 25% stake, and less than the 20% stake Investor A would have had with full-ratchet protection, but more than the 16.67% stake that would have resulted without any protection).

Economic Dilution

As mentioned above, conversion price-based anti-dilution protections are designed to reduce the impact of percentage dilution, but they also mitigate economic dilution. Continuing with our example:

• Before the down round, the value of Investor A’s as-converted stake in the company was US$12,500,000.
  
  • Value = (Price Per Share * Number of As-Converted Shares)
    
    • (US$5.00 * 2,500,000)
    • US$12,500,000

• Without any anti-dilution protection, the value of Investor A’s as-converted stake in the company would drop to US$10,000,000.
  
  • Value = (Price Per Share * Number of As-Converted Shares)
    
    • (US$4.00 * 2,500,000)
    • US$10,000,000

• With full-ratchet anti-dilution protection, the value of Investor A’s as-converted stake in the company would remain US$12,500,000.
  
  • Value = (Price Per Share * Number of As-Converted Shares)
    
    • (US$4.00 * 3,125,000)
    • US$12,500,000

• With weighted-average anti-dilution protection, the value of Investor A’s as-converted stake in the company would drop to US$10,700,000 instead of US$10,000,000.
  
  • Value = (Price Per Share * Number of As-Converted Shares)
    
    • (US$4.00 * 2,675,000)
    • US$10,700,000

Down Round Pricing Must Be Modeled Holistically

These anti-dilution mechanics may be familiar to and understood by most management teams, investors, and advisors, but the practical implications are often not as straightforward. In practice, the negotiated enterprise value, or pre-money valuation, of a company is typically set at the outset of a negotiation, but the resulting per-share price often is not. The per-share price must generally be solved for after giving effect to anti-dilution adjustments, any option pool increase, and the resulting post-closing capitalization. When solving for this price per share, if anti-dilution adjustments would be triggered, the result is that the end-result number of as-converted shares outstanding will be higher than otherwise, which can prompt an iterative calculation. The end-result number of as-converted shares outstanding, and therefore the preferred price per share, must be solved for again.

Existing investors’ anti-dilution protections typically create a direct economic tension with the investors proposing to lead the down-round financing. This is because new investors typically bargain for a specified ownership percentage and expect their investment to buy it. Existing investors may seek to maximize the value of their anti-dilution adjustments. Common stockholders and other unprotected holders, including management and employee option holders, end up bearing much of the resulting dilution and often are most heavily “crammed down.” On the other hand, existing and new investors typically want to ensure that the management team is protected and appropriately motivated, so the option pool increases, the number of end-result fully diluted shares outstanding again changes, and the entire iterative calculation dance begins again. Add in the fact that many down rounds are led by some subset of existing investors, and the tension around the per-share price calculations increases further.

Because of these dynamics, down-round pricing should not be modeled by simply picking a per-share price. Instead, the agreed pre-money valuation, anti-dilution adjustments, option pool increase, and post-closing ownership targets should be modeled together and holistically to ensure that the intended transaction is delivered.

Discussions over a down-round transaction often expand well beyond pricing mechanics and can raise questions about participation, including the potential emergence of a pay-to-play dynamic, board fiduciary duties, voting power, minority equityholder protections, contingency planning for future financing, potential waivers of anti-dilution protections, control-investor risks, the consent process, and the consensus-building required to secure key approvals.

The Delaware Supreme Court recently affirmed that, with respect to limited liability companies (LLCs), courts will not fill gaps with implied duties that parties chose not to include in the LLC’s operating agreement. In Khan et al. v. Warburg Pincus, LLC, the Court found that minority LLC members could not use the implied covenant of good faith and fair dealing to challenge the outcome where the LLC agreement expressly waived fiduciary duties, authorized self-interested conduct by the majority investor, and provided a specific amendment mechanism for differential consideration. The Court refused to import corporate-style fairness and disclosure obligations where parties had negotiated a detailed contractual governance scheme, reinforcing Delaware’s highly contractarian approach to LLCs.

Ordinary Delaware law tells a board selling control to get the best price reasonably available; however, by statute, directors of a public benefit corporation must balance stockholders’ financial interests against the interests of other people affected by the business and the company’s stated public mission. In Drakes Landing Associates, L.P. v. Tilden Park Capital Management, L.P., the court held that the Revlon stockholder value maximization standard of conduct does not apply to these directors, though courts may still review their decision-making under an enhanced scrutiny standard. The case was dismissed on a separate ground: the directors were protected by a statutory safe harbor, given that their decision was found to be informed, disinterested, and not one that no sensible person would approve. Here, an independent special committee with its own lawyers and a banker ran a market check before approving emergency financing that heavily diluted existing holders.

Texas Governor Greg Abbott signed Senate Bill 29, a sweeping overhaul of the Texas Business Organizations Code aimed at making Texas the “corporate law capital of America.” Key changes include codifying the business judgment rule for publicly traded corporations, creating a statutory framework for controlling shareholder transactions with special committee pre-approval procedures, allowing entities to waive jury trials in governing documents, narrowing books and records demands to exclude emails and text messages, imposing up to 3% ownership thresholds for derivative suits, eliminating mootness fees for disclosure-only supplements, and permitting alternative entities to fully eliminate fiduciary duties in their governing agreements.

By the time a venture-backed company reaches its mid to late stages, its board is usually built out of overlapping interests. Directors are affiliated with the funds that led earlier rounds, a founder may hold a large voting block, and executives and investors alike see a steady stream of opportunities, some of which look a lot like the company’s own roadmap. Generally, Delaware corporate law treats these relationships not as misconduct but as a process question. Most recently, Delaware corporate law received meaningful codified updates to its conflicted transaction rules and the key in evaluating such transactions remains to ensure that process follows the most recent developments in the law.

Loyalty Sets the Baseline

Directors and officers of a Delaware corporation owe fiduciary duties of care and loyalty to the corporation. The duty of loyalty bars a fiduciary from using a position of trust to advance personal interests at the corporation’s expense, and it is the source of both bodies of law discussed here. A conflict of interest does not by itself make a transaction wrongful; what it changes is the standard of judicial review if the transaction is later challenged. A conflicted transaction that has not been properly cleansed risks review for entire fairness, the most demanding standard under Delaware law, while a transaction that satisfies the statutory safe harbors described below is insulated from fiduciary duty damages and equitable relief.

Conflicted Transactions Under Section 144

DGCL Section 144 gives boards a set of alternative cleansing paths. An act or transaction involving a conflicted director or officer qualifies for the safe harbor if any one of the following is true: the material facts of the interest and the transaction are disclosed or known to the board or a committee, and a majority of the disinterested directors approve it in good faith and without gross negligence; the transaction is approved or ratified by an informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholders; or the transaction is fair to the corporation and its stockholders. However, if a majority of the board is conflicted, the director-approval route must run through a committee of at least two disinterested directors.

Controlling stockholder transactions have their own rules, and the statute defines who is a controller: a person who owns or controls a majority of the voting power, has the right to cause the election of a majority of the board, or holds at least one third of the voting power together with the power to exercise managerial authority over the corporation’s business and affairs. On a maturing cap table, that can describe a founder with high-vote stock or, in some circumstances, a lead investor, and stockholders acting together under an agreement or understanding can constitute a control group. A controlling stockholder transaction (other than a going private transaction) qualifies for the safe harbor if it is approved or recommended by a committee of at least two disinterested directors with express authority to negotiate and to reject the transaction, or if it is conditioned on and receives an informed, uncoerced majority-of-the-minority vote. Only a going private transaction requires both protections, a deliberate departure from prior case law, under which both were generally required for a controller transaction to earn business judgment review.

The statute also defines disinterestedness. A disinterested director is one who is not a party to the transaction and has no material interest in it or material relationship with a person who does, with materiality keyed to whether the director’s objectivity would reasonably be expected to be impaired. Directors of exchange-listed companies also receive a heightened presumption of disinterestedness if the board has determined they are independent under exchange rules, a provision that becomes relevant after an IPO.

The Corporate Opportunity Doctrine

The corporate opportunity doctrine answers a different loyalty question: when a business opportunity belongs to the corporation rather than to the fiduciary who learned of it. A director or officer of a Delaware corporation may not take an opportunity for personal benefit if the corporation is financially able to undertake it, the opportunity falls within the corporation’s line of business and would be of practical advantage to it, the corporation has an interest or reasonable expectancy in it, and taking it would place the fiduciary’s self-interest in conflict with the fiduciary’s duties. The Delaware Supreme Court has emphasized that the factors are weighed together and that no single factor is dispositive.

In the venture ecosystem, fund-affiliated directors see deal flow across an entire portfolio, and founders and executives routinely encounter ideas adjacent to the corporation’s business. A fiduciary who takes an opportunity that a court later decides belonged to the corporation faces disgorgement of the opportunity or its proceeds. However, a fiduciary who presents the opportunity to the board and obtains a rejection from disinterested directors gains the benefit of a safe harbor, mitigating the risk of an after-the-fact judicial determination that the opportunity was usurped. Presentation is not legally required, but it creates a clean contemporaneous record, and the rejection should be clearly documented in the minutes.

Advance Waivers Under Section 122(17)

Delaware also permits much of this to be resolved in advance. Section 122(17) of the DGCL authorizes a corporation to renounce, in its certificate of incorporation or by action of its board, any interest or expectancy in specified business opportunities or specified classes or categories of business opportunities, whether presented to the corporation or to one or more of its officers, directors, or stockholders. Waivers of this kind are common in venture capital investments, where a firm and its designees may hold positions and board seats across a sector, and it is recommended to build them into the certificate of incorporation at the time of investment (which is consistent with the NVCA model certificate of incorporation). Note that such a waiver addresses only the corporate opportunity doctrine, not confidentiality. Accordingly, funds holding positions in competing companies should maintain information screens and avoid seating the same designee on the boards of competitors.

That said, advance waivers may not be an absolute shield to all issues arising out of potential corporate opportunities. Although details are scant as of the time of writing, and we expect to publish more detailed analysis once information becomes available, in August of 2026 the U.S. Department of Justice has been investigating certain venture capital firms with partners serving on boards of competing companies, potentially raising antitrust concerns, separate from the corporate law concepts of corporate opportunity.

DO’S & DON’TS:

Board Process for Conflicted Transactions

DO: Surface conflicts early and choose the cleansing path before approval. Disclose all material facts about the fiduciary’s interest and involvement, obtain approval from a majority of the disinterested directors acting in good faith and without gross negligence, and use a committee of at least two board-determined disinterested directors whenever a majority of the board is conflicted.

DON’T: Treat a conflicted deal as either automatically prohibited or automatically safe because the terms feel like market. Without disinterested director approval, a qualifying disinterested stockholder vote, or provable fairness, the transaction and the fiduciaries remain exposed.

Controlling Stockholders and Investor Directors

DO: Test whether a founder, investor, or group acting together is a controlling stockholder or control group under Section 144(e) before structuring any related party transaction. For controller transactions, use a fully empowered committee of at least two disinterested directors or a conditioned majority-of-the-minority vote, and use both for a going private transaction.

DON’T: Assume control requires majority ownership; one third of the voting power plus managerial authority can suffice. And do not rely on a stockholder vote to cleanse a controller transaction unless the deal was conditioned on disinterested stockholder approval by its terms when submitted for the vote.

Corporate Opportunities

DO: Adopt a simple protocol: fiduciaries promptly disclose opportunities arguably within the corporation’s line of business, the board or its disinterested members decide whether the corporation will pursue them, and any rejection is documented in the minutes before the fiduciary proceeds.

DON’T: Let a director or officer pursue such an opportunity quietly, or with the corporation’s resources, personnel, or information. Informal assurances from management are not a substitute for board-level disclosure and a documented rejection.

Waivers and Information Hygiene

DO: Consider a Section 122(17) waiver in the certificate of incorporation tailored to fund-affiliated directors and stockholders, revisit its scope at each financing, and pair it with confidentiality screens where investors hold competing positions.

DON’T: Seat the same designee on the boards of competing portfolio companies or treat a waiver as permission to share the corporation’s confidential information.