Custom Context Menu for folder conflict with windows default behaviour

There are 2 workarounds. Include another subcommand (after cmd1) and it should be the last one under the cascading menu, with the command pointing to explorer.exe "%1". But this item will always show up in your cascading menu, if you don't mind.

Another option (which is perfectly clean) is that you implement it in AllFileSystemObjects rather than under Directory. Next, to prevent the menu from showing up for files, add a check like:

AppliesTo (REG_SZ) setting it something like "kind:folder" so that it shows up only for file system folders. With this done, Pinned items from File Explorer Jumplist work fine as well.

Here is a sample REG from my testing.

;- - -

Windows Registry Editor Version 5.00

[HKEY_CLASSES_ROOT\AllFilesystemObjects\shell\CustomMenu]
"Icon"="notepad.exe,0"
"MUIVerb"="MyMenu"
"SubCommands"=""
"AppliesTo"="kind:folder"

[HKEY_CLASSES_ROOT\AllFilesystemObjects\shell\CustomMenu\shell\test1]
"Icon"="c:\\windows\\notepad.exe,0"

[HKEY_CLASSES_ROOT\AllFilesystemObjects\shell\CustomMenu\shell\test1\command]
@="notepad.exe"

[HKEY_CLASSES_ROOT\AllFilesystemObjects\shell\CustomMenu\shell\test2]
"Icon"="c:\\Program Files\\Windows NT\\Accessories\\wordpad.exe"

[HKEY_CLASSES_ROOT\AllFilesystemObjects\shell\CustomMenu\shell\test2\command]
@="wordpad.exe"

;- - -

It seems you were the first one to have found the bug. Hope the solution works.