The Challenges of “Intermediate” M&A Transactions for Venture-Backed Companies

On June 3, 2025, in Wei v. Levinson, et al.,¹ the Delaware Court of Chancery provided important guidance for boards and officers of corporations contemplating a change of control transaction. The guidance is particularly valuable for venture-backed companies where complex capital structures can create divergent economic incentives and founder-managers may prioritize strategic vision over maximizing stockholder value. 

Facts

The case arose from Amazon.com, Inc.’s $1.3 billion all-cash acquisition of Zoox, Inc., a self-driving vehicle technology company. As a result of its capital structure, Zoox’s convertible promissory noteholders and preferred stockholders received substantially all of the merger consideration while common stockholders received little.

Jesse Levinson and Tim Kentley-Klay founded Zoox in 2014 to develop autonomous robotaxi technology for ride-hailing services. By 2020, the privately-held company had raised significant capital through several rounds of preferred stock and convertible promissory note financings, resulting in a complex capital structure with substantial liquidation preference. Under that structure, the first $1.0717 billion of proceeds from an acquisition of the company would be distributed to noteholders ($300 million) and preferred stockholders ($771.7 million); the preferred stockholders would receive no additional consideration unless the deal price exceeded $2 billion. This capital structure created what the Court termed a “dead zone”—the space between $1.0717 billion and $2 billion in which the preferred stockholders would not be incentivized to push for a higher acquisition price. This created asymmetric incentives among the Zoox equityholders.² At the high end of the dead zone (i.e., deal values approaching $2 billion), common stockholders could more than quadruple their per-share consideration while preferred stockholders and holders of convertible promissory notes would not receive any of that incremental deal value. A transaction value of $1.5 billion, $1.75 billion or $2 billion was in each case the economic equivalent of a $1.0717 billion transaction for holders of preferred stock and convertible promissory notes.

In December 2019, Zoox engaged Qatalyst Partners as its financial advisor to explore strategic alternatives, initially focusing on raising more capital to fund its operations. However, operational challenges and the impact of COVID-19 in the spring of 2020 resulted in muted investor interest in an investment transaction and therefore motivated the company to expand its evaluation to include a potential sale of the company in light of the company’s rapidly depleting cash reserves. As a result, in early April 2020, Zoox received four proposals. The first two proposals contemplated an equity financing of the company, one of which would result in fifty percent dilution of the existing stockholders while the other was conditioned on a complex cross-licensing arrangement that would grant the bidder royalty-free rights to Zoox’s technology. The third and fourth proposals contemplated acquisitions of Zoox, one of which was Amazon’s offer. 

The Zoox board of directors was comprised of eight directors: two management directors (Aicha Evans, the CEO, and Mr. Levinson, the CTO and a founder), three directors affiliated with preferred stockholders and three ostensibly independent directors (Carl Bass, Daniel Cooperman and Laurie Yoler). Recognizing potential conflicts of interest, on April 7, 2020, the board formed an “independent director committee” comprised of Mr. Bass, Mr. Cooperman and Ms. Yoler, the only directors who were neither executives nor representatives of appointing preferred stockholders. 

Given the preferred holders’ and noteholders’ claims on the first $1.0717 billion in sale proceeds and the possibility that common stockholders would receive little, if any, consideration in a transaction, the board and management evaluated various structures for a retention plan for Zoox employees to share in the proceeds of a sale transaction. The board approved this Employee Retention Bonus Plan (the “Bonus Plan”) on April 21, 2020, under which up to 15% of the first $1 billion in proceeds in a sale transaction would be distributed to employees (excluding the management directors, Ms. Evans and Mr. Levinson). In its approval, the board specified that the Bonus Plan would be funded solely by holders of preferred stock and noteholders under the assumption that any company sale price would not exceed $1.0717 billion. The board never sought stockholder approval of the Bonus Plan. Further, it appears no one considered whether such a funding approach for the Bonus Plan should be different if sale proceeds exceeded $1.0717 billion. 

From April through May 2020, the special committee evaluated the four transaction proposals. After negotiations with the four bidders, the committee chose Amazon’s offer, which had improved significantly from an original $600 million purchase price to $1.3 billion. Other pertinent terms of the Amazon offer included a $30 million per month loan facility to provide Zoox with working capital through the closing of the transaction and post-closing cash and Amazon equity compensation for Mr. Levinson and Ms. Evans. On May 13, 2020, Zoox and Amazon signed a term sheet and exclusivity agreement.

Only after completing its evaluation process and selecting Amazon’s offer did the special committee revisit its mandate and earlier conclusion that all committee members were disinterested and independent with respect to a financing or sale transaction. Each committee member held common stock, RSUs or stock options, which aligned their economic incentives with the holders of common stock. However, Mr. Bass also held $1 million in convertible promissory notes. On May 26, 2020, the committee determined that certain committee members had “pecuniary interests” that gave rise to potential conflicts. The committee therefore renamed itself a “special committee.” However, neither the board nor the committee made any substantive changes to the committee’s mandate or governance processes for evaluating a transaction.

During the company’s negotiations with Amazon regarding the definitive transaction documents, funding of the Bonus Plan arose as a major issue among the various Zoox equityholder constituencies because the deal value was $228.3 million into the dead zone. The three equity constituencies unsuccessfully attempted to negotiate an allocation of funding obligations among themselves. Amazon ultimately broke the stalemate by proposing that it fund 30% of the Bonus Plan, preferred stockholders fund 45% and the common stockholders fund the remaining 25%.

Zoox and Amazon signed a definitive merger agreement on June 24, 2020 and thereafter obtained the required stockholder approval and closed the transaction on July 6, 2020. The company did not condition approval of the merger on a majority vote of the disinterested stockholders. Following the closing of the transaction, the CEO and CTO made public statements the Court construed as evidence that those management directors had not evaluated and selected a transaction with the best interests of all stockholders in mind, particularly the common stockholders. In a 2021 interview, CTO Levinson stated that Zoox was on a “unique and important mission” that most big companies would not appreciate or value. The Amazon offer allowed Zoox to “work on our full unbridled mission.”³ Similarly, during a 2022 interview, CEO Evans said they “weren’t looking for the biggest valuation. This was not about what’s the best exit you can get and then moving on to the next thing . . . . This is not a job. . . . This is a mission.”⁴

On March 11, 2023, the plaintiffs, former holders of Zoox common stock, sued on behalf of themselves and all other former common stockholders of Zoox alleging claims for breach of fiduciary duty against all Zoox board members and certain Zoox officers and an aiding and abetting claim against Amazon. The plaintiffs asserted that the directors’ and officers’ actions in connection with the Amazon transaction should be scrutinized under the exacting entire fairness standard. The defendants moved to dismiss the complaint. The defendants did not argue that the deferential business judgment rule should apply, which would have involved demonstrating that the board employed procedural safeguards to protect the interests of the common stockholders such as a fully empowered committee of independent and disinterested board members and “majority of the minority” stockholder approval.⁵ Rather, defendants argued the plaintiffs failed to allege a non-exculpated claim⁶ against any director defendant as required under Cornerstone Therapeutics v. Meeks.⁷

Court’s Analysis

Because the defendants relied on Cornerstone for their defense, the Court framed the issue consistent with that precedent: “[W]hether plaintiffs allege facts that call into question whether [each] director defendant was disinterested, independent or acted in good faith with respect to the Merger.”⁸ If plaintiffs could demonstrate that a majority of the Zoox directors failed to meet this standard of director conduct, then entire fairness would apply. Otherwise, Revlon would apply.⁹

The Court considered each of the three directors designated by the preferred stockholders to be dual fiduciaries—fiduciaries of both their respective venture capital employers and Zoox stockholders. The Court reiterated the Delaware principle that “[t]here is no dilution of [fiduciary] obligation where one holds dual or multiple directorships.”¹⁰ Relying heavily on In re Trados, Inc. Stockholders Litigation,¹¹ the Court then explained how the standard features of venture capital preferred stock can create economic incentives for the preferred stockholders that diverge from common stockholders’ interests. The Court emphasized that these “distorting effects” are “most likely to arise when...the [company] is neither a complete failure nor a stunning success”—the same “intermediate” company sale scenario presented by Zoox’s $1.3 billion sale price within the dead zone. In the Amazon transaction, preferred stockholders and convertible noteholders realized a return of substantially all their invested capital (subject to their Bonus Plan funding obligations) while the common stockholders received little in sale proceeds and funded a portion of the Bonus Plan from what little they received. The Court noted there were material questions of fact as to whether the board and special committee had maximized the value of the transaction. In addition, by selecting a sale transaction at that time, the Zoox special committee and board foreclosed any other type of transaction (such as an equity financing) that could have allowed holders of common stock to retain the “option value” of Zoox continuing as an independent and going concern.¹²

Above the $1.0717 billion sale price, the directors appointed by the preferred stockholders “were not motivated to risk the bird in hand by pressing for added consideration or rejecting a price that was not optimal to the common stockholders.” The Court rejected defendants’ argument that preferred and common stockholders had aligned incentives because the Bonus Plan prevented preferred stockholders from receiving their full liquidation preference. This alignment, the Court noted, “only applied up to a certain amount of consideration; it does not align the preferred stockholders’ interests with those of the common.”¹³

Turning to the two management directors, the Court found they suffered from “mission-driven” conflicts that rendered them interested in the transaction. While Delaware law has long recognized that both financial and non-financial benefits can create disabling conflicts, the Wei court extended this concept to include this new type of non-financial personal interest. The Court explained that Ms. Evans and Mr. Levinson negotiated and ultimately chose the Amazon proposal at least in part to continue their “mission”—a more attenuated but still cognizable conflict because it caused the directors to prioritize deal- and mission-certainty over value maximization. The Court noted that, during term sheet negotiations, Ms. Evans sought an increase in its initial $600 million offer by committing to use all of her “political capital with [the] [preferred investors]” to convince them to approve a transaction with Amazon if Amazon was “willing to increase its offer to clear the preference stack.”¹⁴

Further, the Wei court concluded it was reasonably conceivable that Ms. Evans and Mr. Levinson were conflicted based on Amazon’s promised cash transaction bonuses and post-closing Amazon RSUs for future employment that, all told, exceeded $5 million for each executive. Coupled with the officers’ mission-based statements, the Court held that plaintiffs’ allegations were sufficient to demonstrate at the pleadings stage that these unique financial benefits rendered both directors conflicted.

Regarding members of the special committee, the Court determined it was reasonably conceivable that Mr. Bass was conflicted because he owned $1 million in convertible promissory notes, which created divergent interests with the holders of common stock. The removal of the special committee’s designation as “independent” in the middle of the sale process was also a strong indication that the committee itself recognized a conflict. The Wei court dismissed the claims against Mr. Cooperman and Mr. Yoler, finding their only economic interests were in the form of common equity of Zoox, which aligned their economics interests with the common stockholders.

Court’s Holding

The Wei court ultimately denied motions to dismiss fiduciary duty claims against six of the eight directors, finding plaintiffs adequately alleged the six directors were conflicted. With a majority of the board likely to be conflicted, the Court concluded that the board’s and special committee’s actions would likely be evaluated under the entire fairness standard. The Court dismissed the aiding and abetting claim against Amazon, finding the buyer actually made concessions benefiting common stockholders rather than exploiting board conflicts.

Key Takeaways

• Dual Fiduciaries: The Wei decision reaffirms the challenges that dual fiduciaries face in satisfying their obligations as directors of a Delaware corporation. Director fiduciary obligations are indivisible. A director that is appointed by a stockholder that also employs that director (whether a venture capital or private equity firm, a corporate investor or otherwise) cannot be involved in or perceived to have influenced board decisions for a sale or financing of the company.
• Preferred versus Common Conflicts: Certain sale transactions (the “intermediate cases”) highlight the inherent conflict in economic incentives between customary venture capital preferred stock and common stock. Companies and their advisors must understand the nuances of the economic motivations of these various stakeholders in connection with a sale transaction, including when creating and approving an employee retention plan, determining how to fund such a plan, whether or not to pursue a better sale price from an acquirer and how hard to pursue that higher price.  
• Disinterested Stockholder Approval: Zoox did not seek separate approval of the Amazon transaction by disinterested stockholders (i.e., the common stockholders), presumably because it did not believe it would be successful. That is often the reality for sale transactions for venture-backed companies in both “intermediate” and distressed M&A situations. Whether the Zoox special committee could have pushed harder to increase the sale price above $1.3 billion, eliminated the common stockholders’ contribution to the Bonus Plan or identified other levers to enhance the common stockholders’ economics in the Amazon transaction, the Wei opinion suggests that Zoox directors could have and should have done more to optimize the deal consideration for the common stockholders. Doing so may have made separate approval of the transaction by the common stockholders a viable option, which could have resulted in the dismissal of this suit under Corwin.¹⁵
• Mission-Driven Conflicts: The Court appeared to create a new form of conflict that some commentators have labeled a “mission-driven” conflict. One should not read too much into this new category. The Court did not say that founders, board members and officers have to ignore their mission or otherwise stop being mission-driven. The Court held fiduciaries to their obligation to make important decisions that are in the best economic interests of stockholders. The CEO’s and CTO’s statements about their rationale for the sale to Amazon and the “clearing the preference stack” statement strongly suggested that those directors were not trying to maximize value for all stockholders. Value maximization was, according the Court, potentially secondary in the minds of those individuals.
• Buyer Risk: The Court dismissed the aiding and abetting claims against Amazon, explaining that plaintiffs “fail[ed] to plead the company took any actions to exploit” any of the conflicts at the board level.¹⁶ In noting that Amazon’s conduct was the opposite of exploiting any Zoox conflicts, the Court also indirectly underscored that there could be circumstances in which a buyer could be liable for aiding and abetting. Buyers in these situations should be careful not to exploit (and not to be perceived as exploiting or otherwise taking advantage of) conflicts within the target company’s board room during a sale transaction process.
• DGCL 144(a) Amendments: Amendments to Section 144(a) of the Delaware General Corporation Law, which became effective on March 25, 2025, eliminate liability for breach of loyalty claims against a corporation’s directors and officers for undertaking a conflict transaction (provided that it is not a “going private” transaction with a controlling stockholder) that is approved by a fully informed committee of at least two disinterested directors.¹⁷ Had these amendments been in effect during Zoox’s Amazon transaction, the Zoox board could have avoided this suit entirely by simply leaving Mr. Bass off the special committee.

¹ C.A. No. 2023-0521-KSJM (Del. Ch. June 3, 2025).
² This client alert uses “equityholders” as short-hand for stockholders and convertible promissory note holders. 
³ Wei at 17-18.
⁴ Wei at 18.
⁵ See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), holding that, in connection with a sale of a company or other similar “change of control” transaction, a company’s board of directors must take reasonable steps to obtain the best price available for the benefit of the target company’s stockholders rather than prioritize the company’s long-term corporate and financial objectives; Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), holding that a transaction otherwise subject to enhanced scrutiny under Revlon will instead be subject to the business judgment rule if the transaction has first been approved by holders representing a majority vote of the fully informed, uncoerced and disinterested stockholders; and Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014), holding that, in connection with a controlling stockholder “squeeze out” merger, courts will apply the business judgement rule to evaluate the conduct of the target company board of directors if the transaction is conditioned upfront on the approval of both a properly empowered, independent and disinterested board committee and holders representing a majority vote of the fully informed, uncoerced and disinterested stockholders. In recent years, the MFW doctrine has been expanded to include certain types of non-squeeze-out mergers where a controlling stockholder may have received a non-ratable benefit in the transaction. Amendments to Section 144(a) of the Delaware General Corporation Law that became effective on March 25, 2025 have narrowed the circumstances under which a corporation’s board of directors must employ MFW procedural safeguards, limiting them to controlling stockholder transactions that constitute “going private” transactions. 
⁶ §102(b)(7) of the Delaware General Corporation Law permits a corporation to exculpate its directors from personal liability for damages resulting from such directors’ violations of their duties of care (but not duties of loyalty or bad faith conduct).
⁷ 115 A.3d 1173 (Del. 2015).
⁸ Wei at 22. 
⁹ See footnote 5 above for a summary of Revlon duties.  
¹⁰ Quoting Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983).
¹¹ 73 A.3d 17 (Del. 2013).
¹² See Trados for an elaboration on the option value that common stock in a venture-backed company can represent. 
¹³ Wei at 27.
¹⁴ Wei at 10.
¹⁵ See Wei at 5 for Corwin approval requirements. 
¹⁶ Wei at 43.
¹⁷ See §144(a) of the Delaware General Corporation Law. Alternatively, §144(a) allows for approval by a majority vote of the fully informed and uncoerced stockholders, codifying Corwin.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Nate P. Gallon, an O’Melveny partner licensed to practice law in California and Amy S. Park, an O’Melveny partner licensed to practice law in California, New York, New Jersey, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

© 2025 O’Melveny & Myers LLP. All Rights Reserved. Portions of this communication may contain attorney advertising. Prior results do not guarantee a similar outcome. Please direct all inquiries regarding New York’s Rules of Professional Conduct to O’Melveny & Myers LLP, 1301 Avenue of the Americas, Suite 1700, New York, NY, 10019, T: +1 212 326 2000.