Highlights
- The Delaware Court of Chancery upheld Iqbaljit Kahlon's decision to remove Leo Investments under the business judgment rule, finding his actions rational given SpaceX's refusal to sell shares to a fund with Chinese investors.
- Although the court found no breach of loyalty or care, it held Kahlon liable for breaching his duty of candor by failing to disclose his role in approving regulatory disclosures, awarding only nominal damages but underscoring that fiduciaries must communicate truthfully.
In a post-trial opinion issued on June 30, 2025, the Delaware Court of Chancery largely ruled in favor of a fund manager who removed a Chinese investor from a fund established to purchase SpaceX shares, while finding the manager liable for breach of the duty of candor.
In Leo Investments Hong Kong Limited v. Tomales Bay Capital Anduril III, L.P.,1 Vice Chancellor James Travis Laster addressed claims arising from the forced withdrawal of a Chinese public company from an investment fund after media coverage of its SpaceX investment drew the ire of SpaceX executives.
The case involved Iqbaljit Kahlon, who managed special purpose vehicles that purchased SpaceX shares. Kahlon admitted Leo Investments, a publicly traded Chinese company, as a limited partner in a fund formed to acquire SpaceX shares. After negotiating a side letter permitting the Leo Group to make required regulatory disclosures identifying SpaceX as the investment target, Kahlon was surprised when news of the investment received significant media attention in China, including headlines suggesting SpaceX had "backing" from a Chinese company.
When SpaceX executives discovered the coverage, they informed Kahlon that the fund could not purchase SpaceX shares if the Leo Group remained a limited partner. Kahlon promptly expelled the Leo Group from the fund, returning its $50 million investment, but did not otherwise disclose that he had previously authorized the regulatory disclosures through the side letter.
Key Holdings
Business Judgment Rule Protected the Withdrawal Decision
The court upheld Kahlon's decision to remove the Leo Group from the fund under the business judgment rule. Vice Chancellor Laster determined that Kahlon's interests, though plainly self-interested, were nevertheless aligned with the fund's primary purpose: to acquire SpaceX shares. Given SpaceX's refusal to sell shares to a fund with Chinese investors following the media coverage, Kahlon's actions were rational.
The court otherwise rejected the Leo Group's arguments that Kahlon 1) breached his duty of loyalty by prioritizing his relationship with SpaceX, 2) acted in bad faith by serving his self-interest and 3) failed to exercise proper care in making the withdrawal decision.
Limited Partners as Contractual Counterparties, Not Fiduciary Beneficiaries
Citing well-established precedent, the court emphasized that when exercising contractual rights such as a withdrawal provision, a general partner owes fiduciary duties to the fund and partners as a whole, not to an individual limited partner who is a contractual counterparty. This framing was critical to the court's analysis of both the fiduciary and contract claims.
Breach of the Duty of Candor
While clearing Kahlon of loyalty and care violations, the court found he breached his duty of candor when communicating with the Leo Group about the withdrawal.
Absent contractual modification, a general partner owes fiduciary duties that include a duty of full disclosure. That duty includes an obligation not to speak falsely, whether through affirmative falsehoods or material omissions. Partial disclosure, in which some material facts are not disclosed or are presented in an ambiguous, incomplete or misleading manner, is not sufficient to meet a fiduciary's disclosure obligations. The duty applies when one partner communicates directly with another.2
Initially, Kahlon created "what he described as a 'b******t' communication plan to convince the Leo Group"3 to withdraw from the fund consensually. In doing so, Kahlon failed to disclose his own role in approving the regulatory disclosures that led to the media attention.
Ultimately, the court awarded only $1 in nominal damages for this breach, finding that the Leo Group suffered no meaningful harm. Although the court criticized Kahlon's actions, it recognized that the Leo Group could not have avoided withdrawal regardless of what Kahlon disclosed, the Leo Group made no detrimental investment decisions based on the misrepresentations, and Kahlon gained no improper benefit from the breach.
Contractual Withdrawal Provision Properly Invoked
The court found that Kahlon properly exercised the limited partners agreement's withdrawal provision, which permitted removal if a limited partner's status would "reasonably likely result in a significant and adverse delay"4 or "material adverse effect"5 on the fund. SpaceX's refusal to permit the fund to purchase shares while the Leo Group remained an investor satisfied both conditions.
Takeaways
This opinion provides a useful overview of Delaware's approach to fiduciary duties, which are particularly important to understand in a true court of equity.
While the court protected Kahlon's business judgment in making a decision under time pressure, it simultaneously held him accountable for his failure to be candid. As Vice Chancellor Laster observed, "Kahlon's conduct was hardly commendable from a moral standpoint"6 but fell short of fiduciary breach warranting meaningful damages. The nominal damages nevertheless reflect the court's recognition that even when economic harm is absent, fiduciary breaches merit remedy. The dollar amount may not be large, but the implications of the finding could prove to be – especially given that the fund later sued the Leo Group in California and Delaware Superior Court for alleged fraud.
For fund managers and investors alike, the case demonstrates that although Delaware courts give substantial deference to business decisions, they still expect fiduciaries to speak truthfully when communicating with their investors, even when delivering unwelcome news.
Footnotes:
1 Leo Invs. Hong Kong Ltd. v. Tomales Bay Cap. Anduril III, No. 2022-0175, 2025 WL 1807887 (Del. Ch. June 30, 2025).
2 Id. at *25.
3 Id. at *26.
4 Id. at *28.
5 Id.
6 Id. at *23.
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