{"id":212,"date":"2023-05-03T20:13:07","date_gmt":"2023-05-04T00:13:07","guid":{"rendered":"https:\/\/blogs.duanemorris.com\/delawarebusinesslaw\/?p=212"},"modified":"2023-05-05T07:31:23","modified_gmt":"2023-05-05T11:31:23","slug":"212","status":"publish","type":"post","link":"https:\/\/blogs.duanemorris.com\/delawarebusinesslaw\/2023\/05\/03\/212\/","title":{"rendered":"Chancery Finds Stockholders’ Covenant Not to Sue for Breach of Fiduciary Duty of Loyalty Partially Enforceable"},"content":{"rendered":"

The Court of Chancery on Tuesday held that stockholders\u2019 covenants not to sue for breach of fiduciary duty are enforceable subject to public policy limitations in New Enterprise Associates 14, L.P. v. Rich<\/a><\/em>, C.A. 2022-0406-JTL.\u00a0 Conducting a deep-dive into the history and philosophical underpinnings of fiduciary law, the Court reasoned that specific, limited, and reasonable covenants not to sue are valid, but that Delaware abhors pre-dispute waivers of suit for intentional harms.\u00a0 The Court laid out a two-part test, sure to join the corporate practitioner\u2019s lexicon of eponymous capital-t Tests swiftly:<\/p>\n

First, the provision must be narrowly tailored to address a specific transaction that otherwise would constitute a breach of fiduciary duty. \u00a0The level of specificity must compare favorably with what would pass muster for advance authorization in a trust or agency agreement, advance renunciation of a corporate opportunity under Section 122(17)<\/a>, or advance ratification of an interested transaction like self-interested director compensation. \u00a0If the provision is not sufficiently specific, then it is facially invalid.<\/p>\n

. . .<\/p>\n

Next, the provision must survive close scrutiny for reasonableness. In this case, many of the non-exclusive factors suggested in Manti<\/a><\/em> point to the provision being reasonable. Those factors include (i) a written contract formed through actual consent, (ii) a clear provision, (iii) knowledgeable stockholders who understood the provision\u2019s implications, (iv) the Funds\u2019 ability to reject the provision, and (v) the presence of bargained-for consideration.<\/p><\/blockquote>\n

Finding the covenant at issue passed the test, the Court held the covenant enforceable subject to Delaware\u2019s policy against exculpating intentional harms.\u00a0 To invoke that policy, and thereby avoid the covenant and obtain damages, a plaintiff must plead and prove that the fiduciaries acted in a manner contrary to the company\u2019s best interest in \u201cbad faith,\u201d a more stringent standard than even recklessness.<\/p>\n

Critical to the Court’s analysis was the anti-suit covenant’s placement in a stockholder-level agreement.\u00a0 As the Court explained in an over-1200-word footnote discussing different conceptions of the fundamental nature of the corporate form, the covenant’s contractual placement means it merely “addresses a stockholder right appurtenant to the shares that the Funds owned as their private property” without raising the logical, practical, and normative difficulties arising from placement in the corporation’s constitutive documents, i.e. <\/em>the bylaws or charter.\u00a0 \u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

The Court of Chancery on Tuesday held that stockholders\u2019 covenants not to sue for breach of fiduciary duty are enforceable subject to public policy limitations in New Enterprise Associates 14, L.P. v. Rich, C.A. 2022-0406-JTL.\u00a0 Conducting a deep-dive into the history and philosophical underpinnings of fiduciary law, the Court reasoned that specific, limited, and reasonable … <\/p>\n

Continue reading “Chancery Finds Stockholders’ Covenant Not to Sue for Breach of Fiduciary Duty of Loyalty Partially Enforceable”<\/span><\/a><\/p>\n","protected":false},"author":598,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[],"ppma_author":[166],"class_list":["post-212","post","type-post","status-publish","format-standard","hentry","category-general"],"authors":[{"term_id":166,"user_id":598,"is_guest":0,"slug":"mbgonen","display_name":"Michael Gonen","avatar_url":"https:\/\/blogs.duanemorris.com\/delawarebusinesslaw\/wp-content\/uploads\/sites\/16\/2023\/01\/gonenmichael-100x100.jpg","0":null,"1":"","2":"","3":"","4":"","5":"","6":"","7":"","8":""}],"_links":{"self":[{"href":"https:\/\/blogs.duanemorris.com\/delawarebusinesslaw\/wp-json\/wp\/v2\/posts\/212","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.duanemorris.com\/delawarebusinesslaw\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.duanemorris.com\/delawarebusinesslaw\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/delawarebusinesslaw\/wp-json\/wp\/v2\/users\/598"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/delawarebusinesslaw\/wp-json\/wp\/v2\/comments?post=212"}],"version-history":[{"count":0,"href":"https:\/\/blogs.duanemorris.com\/delawarebusinesslaw\/wp-json\/wp\/v2\/posts\/212\/revisions"}],"wp:attachment":[{"href":"https:\/\/blogs.duanemorris.com\/delawarebusinesslaw\/wp-json\/wp\/v2\/media?parent=212"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/delawarebusinesslaw\/wp-json\/wp\/v2\/categories?post=212"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/delawarebusinesslaw\/wp-json\/wp\/v2\/tags?post=212"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/delawarebusinesslaw\/wp-json\/wp\/v2\/ppma_author?post=212"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}