In the modern private capital markets, the traditional distinctions between equity and debt have become increasingly blurred and inadequate to capture the complexity of modern investment instruments. Sophisticated market participants – particularly private credit funds – have begun to craft bespoke financial structures that transcend these legal classifications.[1] In my new working paper, I coin the phenomenon chameleon capital to describe this dynamic category of capital.[2] It comes in three forms:
- Blended capital– traditional and modern hybrid instruments (e.g., debt-like PREF instrument);
- Braided capital– investments in which equity and debt rights are interwoven (braided) (e.g., debt investment and golden shares, debt investment with warrants, parallel debt and equity investment, debt investment with board representation and restriction rights to force the company to sell its subsidiary); and
- Blended + Braided capital – a dynamic combination of blending and braiding (e.g., debt-like PREF and HoldCo PIK financing and ordinary shares).
Each form is used by sophisticated investors with long-term interests and calculated objectives in mind.
Chameleon capital shows the reduced capacity of legal forms to deal with the complex realities of private ordering. I make a distinctive contribution to the broader discourse on the contractual nature of corporate law by anchoring this debate within the specific context of financial instruments. By enabling investors to blend and braid ‘equity’ and ‘debt’, chameleon capital shows that the conventional legal distinction between these two categories holds diminishing practical significance – except in the context of insolvency or bankruptcy proceedings and taxes. For a single investor or associated investors such as private credit and private equity firms, this division is often irrelevant in economic and governance terms. Chameleon capital also challenges foundational principles of corporate law and governance. When debt instruments are structured to produce equity-like returns, debtholders often adopt the incentives and behaviors of equity investors, focusing on wealth maximization and corporate control.
In the U.S. and the UK, the line between equity and debt in the private capital world is legally significant when looking at the question of investor accountability, such as analyzing the controlling stockholder’s or debtholder’s duty or the lack of it.[3] It is also significant to related issues, such as shadow directorship, equitable subordination, the majority abuse principle, shareholders’ agreements, golden shares, derivative proceedings, and unfair prejudice claim.
This distinction between equity and debt is also legally relevant to the incentives, behavior, and accountability of directors in the context of directors’ duties[4] and to investor protection. It also plays a crucial role in corporate law and governance, as legal frameworks worldwide typically offer different and often isolated protections and accountability mechanisms for shareholders and debtholders. A key legal distinction lies in how equity and debt are treated in insolvency/bankruptcy, which varies significantly across jurisdictions.
What role does corporate law play in distinguishing between debt and equity? The dilemma I highlight in my paper is that especially debt investors – and, to some extent, non-traditional equity investors – have a choice between two options: (i) What are the rules for equity, what are the rules for debt? and (ii) What types of rules do we want?
In my paper, I argue that legal responses to harm should not depend on how an instrument is classified. Law must address the challenges posed by chameleon capital – particularly when actors rely on chameleon capital for opportunistic reasons – regardless of the form of the instrument (i.e., equity or debt). The benchmark for response should be control or interference, akin to the UK concept on shadow directorship[5] or the U.S. doctrine of equitable subordination.[6] There should be instrument-neutral response to opportunistic behavior and accountability for it. Corporate law and corporate governance should provide an adequate response to chameleon capital, independent of the type of the instrument. Additionally, insolvency/bankruptcy law should adapt to evolving corporate finance practices that contract around the distinction between equity and debt. Importantly, corporate law plays an important role in minimizing costs of insolvency/bankruptcy.
Chameleon capital has several implications for U.S. and UK law.
Wealth maximization and interest in corporate control both for sharehodlers and debtholders. Debt investors, like shareholders, may be interested in wealth maximization and corporate control when their debt instruments provide them with equity-like returns that depend on long-term wealth maximization.
Directors’ duties and hybrid capital. Hybrid investors and chameleon capital challenge the idea that a board’s fiduciary duty is to maximize shareholder value. It also raises the bigger question of whether private and public companies should have different directors’ duties, especially since chameleon capital is more prevalent in private companies.
Controlling stockholder’s duty, controlling debtholders’ duty, and shadow directorship. Unlike in the U.S., there is no formal controlling stockholder’s duty or debtholder’s duty under UK law, and shadow directorship may functionally address this gap.
New definition of the DGCL Section 144 (e) (2) (b) and contractual control. While there is no formal controlling-debtholder duty in the U.S., following the new definition of the DGCL Section 144 (e) (2) (b), there is a question whether a holder of chameleon capital who might have bargained for contractual control via debt qualifies as a controlling stockholder.
Golden shareholder as a controlling stockholder or a shadow director. Golden shareholders may not have a controlling financial stake in the company but wield contractual authority to control it. In the U.S., should such shareholders owe controlling stockholder’s duty under the new DGCL section 144 (e) (2) (b)? In the UK, could they be considered shadow directors, and how do they affect majority or minority shareholder rules?
Functional equivalence and legal boundaries. The link between functionally equivalent rules, such as controlling stockholder or debtholder, shadow directorship, equitable subordination, and the abuse principle, suggests a need to reconsiderthe mandatory scope of corporate law.
Shareholders’ agreements and contracting out of a statute. Should shareholders’ agreements now evolve into debtholders’ agreements amid the rise of chameleon capital? The UK House of Lords’ decision in Russel v Northern Development[7] says that a company cannot contract out of statutory power, but shareholders via shareholders’ agreement can. Russel v Northern Development in the UK seems to be in contradiction with the Delaware Court of Chancery’s decision in Moelis, which was essentially overturned by the DGCL amendments.
Corporate finance influences corporate control. Equity and debt are not only sources of finance, but they should also be viewed as forms of control.[8] Corporate finance and corporate governance are deeply interconnected.
As private markets continue to expand, chameleon capital stands at the frontier of financial innovation, an embodiment of how corporate finance influences corporate control. Chameleon capital represents both momentous global opportunities but also raises a series of new critical challenges for global markets.
ENDNOTES
[1] Narine Lalafaryan, ‘Private Credit: A Renaissance in Corporate Finance’ (2024) 24 Journal of Corporate Law Studies 1, 41-95, https://www.tandfonline.com/doi/full/10.1080/14735970.2024.2351230
[2] Narine Lalafaryan, ‘Chameleon Capital’ (2025) University of Cambridge Faculty of Law Research Paper No 12/2025, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5331909
[3] In light of West Palm Beach Firefighters’ Pension Fund v Moelis & Co., No 2023-0309-JTL (Del. Ch. Feb. 23, 2024) (Moelis II); Tornetta v Musk 310 A.3d 430 (Del. Ch. 2024), In Re Match Group, Inc. Derivative Litigation No. 368, 2022 (Del. Apr.4, 2024); Senate Bill 313 amending the Delaware General Corporation Law (effective from 1 August 2024), in particular the new section 122 (18) and the amended section 122(5), overturning Moelis II, Senate Bill 21 introduced on 17 February 2025, ‘An Act To Amend Title 8 of The Delaware Code Relating To The General Corporation Law’, <https://legis.delaware.gov/BillDetail/141857>.
[4] In light of BTI 2014 LLC v Sequana SA and others [2022] UKSC 25; Wright v Chappell [2024] EWHC 1417 (Ch) (‘BHS’).
[5] The UK Companies Act 2006, section 251.
[6] E.g., In re Dura Medic Holdings, Inc. Consolidated Litigation Cons. C.A. No. 2019-0474-JTL.
[7] Russell v Northern Bank Development Corp Ltd [1992] BCLC 1016.
[8] Oliver Williamson, ‘Corporate Finance and Corporate Governance’ (1988) 43 The Journal of Finance 3, 567-591.
This post comes to us from Narine Lalafaryan, an assistant professor of corporate law at the University of Cambridge and a fellow of the Cambridge Endowment for Research in Finance. It is based on her recent paper, “Chameleon Capital,” available here.