A recent Delaware Court of Chancery decision is noteworthy for its deep dive into the doctrinal underpinnings of the various aspects of fiduciary duties, as well as the difference between the standard of conduct and the standard of review. But my favorite part of the opinion is its discussion of the nuances of duty of candor. Slip op. at 65-70. This core duty receives less attention in most corporate decisions than the other aspects of fiduciary duty. In Leo Investments Hong Kong Limited v. Tomales Bay Capital Anduril III, L.P., C.A. No 2022-0175-JTL (Del. Ch. June 30, 2025), the Court determined that even though there was a breach of the fiduciary duty of candor, because no damages were proven, the court awarded nominal damages of $1.
Key Point
The real damage done to the defendant was reputational harm based on the Court’s finding, and I paraphrase, that the defendant fund manager was not forthright with his investment partner. The court even went so far as to suggest, and I paraphrase, that because of his “callous” conduct in this case future investors should “think twice” about future investments with the defendant fund manager. Slip op. at 59. Ouch.
Even though the decision has only been out for about a week or so, already two leading corporate law professors have written insightful and scholarly analyses of the opinion, with reference to their prior writings, as well as links to the scholarship of Professors Lyman Johnson and Ed Rock, and in particular the extent they discuss the role of Delaware courts in publishing detailed morality tales or parables, as a teaching tool and to provide guidance to fiduciaries and their lawyers. This opinion is an example of such a parable.
Moreover, as in this case, when there is public shaming of the person who breached fiduciary duties, and even if, as here, meaningful damages were not awarded, the public criticism may have more of an impact on the defendant involved in this case who might suffer more long term negative consequences from the opprobrium in this opinion as compared to the court merely awarding damages of a monetary nature, which some of the wealthier among us may consider a cost of doing business.
Key Background Facts
The key facts of this case involve a fund manager who solicited investments to buy stock in SpaceX. The fund manager knew that SpaceX was unlikely to accept investments from investors based in mainland China, for reasons including its sensitive government contracts involving national security. The fund manager accepted the investment from a publicly traded company based in mainland China knowing that that investor would have to make disclosures about the investment having a connection with SpaceX. But the fund manager was not candid with the investor about SpaceX being unlikely to accept a Chinese investor because the fund manager wanted to get the money for his fund.
Once SpaceX found out about the Chinese investor, they prohibited the fund from buying SpaceX stock. The fund manager essentially refunded the $50 million investment which caused negative publicity for the Chinese investor in light of the prior announcement by the Chinese investor that they would invest in SpaceX—and a resultant drop in stock price for the publicly traded investor based in mainland China.
Highlights
A lengthy law review article could be written on the analysis of why the fiduciary duty of loyalty, good faith, and care were not breached in this case and why.
But the most memorable aspect of the case for purposes of this short blog post is the analysis of the duty of candor once communication with a beneficiary was initiated. Slip op at 65-70.
As indicated above, another noteworthy aspect of this decision is the award of nominal damages for breach of the duty of candor, even though no measurable monetary damages were proven, based in part on the contractual right of the fund manager to redeem or return the investment, which was refunded within a very short time after the investment was received.
As discussed by Professor Ann Lipton and Professor Stephen Bainbridge, the public shaming aspect of this opinion, which undoubtedly will make the fund manager involved suffer reputational harm, is a theme that both professors comment on extensively in connection with their description of the role of Delaware courts as moral arbiters of sorts who provide guidance to those whose conduct as managers of Delaware entities is subject to the enforcement of fiduciary duties by Delaware courts. The good professors describe some Delaware court decisions as cautionary tales and a “teaching moment” with examples of “what not to do” as a fiduciary governed by Delaware law.
There is much to digest in this opinion and much more to comment on, but this short overview should whet the appetite of those who need to know the latest iteration of Delaware corporate law on this topic.