Court of Chancery Hands Squeezed-Out Co-Founder His Equity Back via Restitution — No Unwinding Required

A controller who used a reverse-forward stock split to cash out his co-founder has been ordered to hand back the equity. The Delaware Court of Chancery held that the controller and two hand-picked directors breached their duty of loyalty, rejected the defense that a “fair price” can excuse a concededly unfair process, imposed a constructive trust restoring the co-founder’s 36.5% stake, and shifted attorneys’ fees under the bad-faith exception to the American Rule.

What Happened

• Destiny co-founders Samvit Ramadurgam and Sohail Prasad built a business offering public-market access to private tech companies via Destiny Tech100, a closed-end fund. After a 2020 reorganization, Prasad held about 63.5% and control; Ramadurgam held about 36.5% and remained a director.
• In late 2022, Prasad sought a 3,000,000-share grant representing roughly 20% of outstanding shares. Ramadurgam’s approval was required; he balked and proposed governance protections, including independent directors to decide founder equity.
• Prasad instead hired outside counsel to run “Project Activation,” whose objective was to squeeze out Ramadurgam before Tech100 went public. Counsel—not the company—engaged Houlihan Capital Advisors for a valuation that was expressly not a fairness opinion, built largely on Prasad-supplied inputs.
• Three days before a special board meeting, Prasad installed two friends as directors by written consent. Ramadurgam learned of them 30 minutes before the meeting; the notice contained no agenda.
• At the Zoom meeting, Prasad shared the 69-page report for about 15 minutes, misdescribed it as a “fair value” determination, and secured approval of a 1,850,000-to-1 reverse split followed by a forward split—a ratio chosen because only Prasad held more shares than that. The new directors asked no questions. Certificate amendments were filed within minutes. Ramadurgam was cashed out for about $710,000; Prasad became the sole stockholder.
• Tech100 listed on the NYSE in March 2024 and never traded below NAV, averaging a premium above 400% through March 2025. Destiny later re-granted equity to several other cashed-out holders.

The Court’s Holdings

1. Fair price cannot rescue an unfair process here. Defendants conceded unfair process and bet on price alone. The court refused to let that strategy carry the day, noting Destiny was on the cusp of its key milestone and Ramadurgam’s shares had real value. The opinion stressed that entire fairness is a unitary inquiry and that a tainted process can infect the price analysis.
2. Fair dealing failed on every Weinberger factor. The squeeze-out was initiated for retribution, timed ahead of the Tech100 listing, structured as a split rather than a merger to avoid notice and appraisal rights, concealed from Ramadurgam, and rubber-stamped by compliant directors.
3. The valuation got little to no weight. The report was commissioned for the controller’s counsel (not a fairness opinion), built on management-fed inputs, used a below-median revenue multiple, excluded and discounted Tech100 shares at a 15% NAV discount contrary to Destiny’s own access-premium thesis, deducted SAFEs dollar-for-dollar, dropped a control premium described in the report’s own narrative, and applied minority and marketability discounts. Every key judgment call pushed value down. Even the defendants’ rebuttal expert’s adjusted figures put Ramadurgam’s stake at roughly $2.1 million—about triple the cash-out price.
4. “Independent” directors were liable despite exculpation. Lack of pay or business ties to the controller did not matter. The directors knowingly served as instruments of the controller, were willfully blind, and acted in bad faith—a non-exculpable loyalty breach.
5. Remedy: restitution without rescission. Full rescission was impractical given post-transaction grants, capitalization changes, and the 2025 LLC conversion. Money damages were inadequate. The court imposed a constructive trust on Prasad’s ownership interests (now LLC units) traceable to the equity Ramadurgam would have retained, restoring his 36.5% stake without disturbing others’ later grants.
6. Fee shifting. The court found pre-litigation conduct glaringly egregious—including Prasad’s post-deal message essentially daring Ramadurgam to sue given litigation costs—and shifted reasonable fees and expenses to the individual defendants under the bad-faith exception. The court rejected the unclean-hands defense, credited the retained cash-out proceeds against fees, and found no need for separate relief on the Section 155 claim.

Key Takeaways

• Process still matters. Conceding unfair process and litigating price alone may be a high-risk strategy, especially where the target’s equity has real value.
• Reverse splits are cash-out mergers by another name. Using a split to sidestep merger notice and appraisal will draw entire fairness review and heightened skepticism.
• Who hires the valuator—and for what—matters. A controller-commissioned, non-fairness valuation built on controller inputs is unlikely to carry the burden on price.
• Minority and marketability discounts are risky in controller cash-outs.
• Newly installed directors are not a shield. Formal independence is not enough; directors who rubber-stamp a controller’s plan risk personal, non-exculpated liability, and charter indemnification is no comfort.
• Chancery will apply equitable remedies. When unwinding is impossible, the court may return the equity itself via constructive trust—a meaningful tool for minority holders and real exposure for controllers.
• Egregious conduct can shift fees. Pre-suit conduct—including taunting the other side about litigation costs—can be costly.