Delaware Law Watch

Background

On June 6, 2025, the Delaware Court of Chancery denied a motion to dismiss in Namdar v. Fried et al., holding that a party may recover damages for breach of a forum selection clause, including litigation expenses incurred to litigate in a forum contrary to the clause.

David Namdar, a cryptocurrency entrepreneur/investor and the former president of Immutable Holdings Inc. (the “Company”), brought an action against the Company and Jordan Fried (another cryptocurrency investor affiliated with the Company) in Puerto Rico, alleging claims for breach of fiduciary duty, fraud, breach of contract, promissory estoppel, and unjust enrichment. The action was dismissed for improper venue based on a forum selection clause in an earlier settlement agreement between Namdar and the Company (the “Agreement”) providing that “[a]ny action or proceeding by [Namdar] to enforce this Agreement shall be brought only in the state or federal courts located in the State of Delaware” (the “Forum Selection Clause”). Namdar then brought suit in the Delaware Court of Chancery against the Company, Fried, and the Company’s Head of Legal. The Company filed a counterclaim for breach of the Forum Selection Clause in the Agreement and sought damages measured by the litigation expenses incurred in the Puerto Rico action.

The Court of Chancery’s Ruling

The Court denied Namdar’s motion to dismiss the Company’s counterclaim, finding that the Company stated a claim for breach of the Forum Selection Clause and can recover damages measured by the expenses incurred in the Puerto Rico action. The Court reasoned that the Forum Selection Clause entitled the Company to expect (i) that it would not have to litigate in the foreclosed forum (Puerto Rico) and (ii) that it would not have to incur expenses there. While the Puerto Rico action was dismissed for improper venue, fulfilling the first expectation, the Court found that to fulfill the latter expectation, the Company could recover damages measured by the expenses incurred litigating in Puerto Rico.

The Court relied on the Delaware Supreme Court’s decision in El Paso, which held that a party could invoke a forum selection clause to obtain dismissal of an action filed in the wrong forum and, “if successful, recover the costs of that litigation.” The Court rejected Namdar’s argument that the Delaware Supreme Court’s decision in Ingres made injunctive relief the exclusive remedy for enforcing forum selection clauses, explaining that while Ingres directed the Delaware Court of Chancery to issue anti-suit injunctions enforcing forum selection clauses, it did not rule out damages as an additional remedy.

The Court also rejected Namdar’s contention that the American Rule, under which litigants are normally responsible for paying their own litigation costs, foreclosed the Company’s recovery of litigation expenses. The Court explained that there is a distinction between the primary relief that a party seeks for breach of contract and the enforcement expenses that a party incurs obtaining the primary relief. In the Court’s formulation, “the American Rule bars a party from recovering enforcement expenses unless an exception applies,” but “does not bar a party from recovering primary relief.” The Court held that “[t]he expenses incurred in the foreclosed forum provide the measure of damages the non-breaching party suffered from the breach of the contractual right not to be sued there” and thus constitute primary relief that is not foreclosed under the American Rule. By contrast, the Court noted that a non-breaching party may also incur enforcement expenses to recover that primary relief, but seeking recovery of those expenses as damages would be barred by the American Rule. Here, however, the Agreement also included a fee-shifting provision, permitting the Company to recover the expenses incurred in this action to obtain the damages award.

Takeaways for Practitioners

• Parties can recover damages for litigation expenses incurred litigating in a foreclosed forum. 
• The Court of Chancery has issued conflicting decisions on whether a party can recover damages for breach of a forum selection clause. The Namdar decision provides a well-reasoned opinion which may settle this split in authority.

Background

On June 27, 2025, the Delaware Court of Chancery granted in part and denied in part motions to dismiss in Jhaveri v. K1 Investment Management LLC, et al., finding, among other things, that a stockholder-plaintiff's claims for breach of fiduciary duty, aiding and abetting, and fraudulent inducement were barred by releases of claims set forth in a merger agreement (the “Merger Agreement”).

Stockholder-plaintiff Ketan Jhaveri co-founded Bodhala, Inc. (“Bodhala”), a legal spend analytics and management platform, with his former law school classmate Raj Goyle. In 2021, Onit, Inc. (“Onit”) acquired Bodhala. As relevant here, the Merger Agreement included a broad release of any claims that may have arisen prior to closing and stated that such release was “a material inducement to the Released Parties to consummate the transactions contemplated by” the Merger Agreement and certain ancillary agreements, including a joinder agreement (the “Joinder Agreement”). The Merger Agreement further provided that stockholders and optionholders (“Equityholders”) would receive merger consideration in the amount of $40 million and that Equityholders would agree that their receipt of merger consideration would “constitute [their] express acceptance of the terms of the release.” Goyle executed the Merger Agreement on behalf of Jhaveri and the other Bodhala Equityholders. Jhaveri also voted to approve the Merger Agreement as a director and executed the Joinder Agreement and an option cancellation agreement in his stockholder capacity, which also contained releases.

Following the merger, Jhaveri resigned from Bodhala when it became clear that he would be fired from the combined company. In April 2024, Jhaveri commenced an action in the Delaware Court of Chancery, asserting claims for breach of fiduciary duty, aiding and abetting, and fraudulent inducement, among others, against Goyle, Onit, K1 Investment Management (Onit’s private equity owner), and related parties. Defendants moved to dismiss.

The Court of Chancery’s Ruling

The Court held that Jhaveri’s claims for breach of fiduciary duty, aiding and abetting, and fraud were “barred by the unambiguous releases” in the Merger Agreement and ancillary agreements. The Court distinguished this case from Cigna Health & Life Insurance v. Audax Health Solutions, wherein the Court of Chancery held unenforceable a release in a letter of transmittal, the return of which was a condition to stockholders receiving merger consideration. The Court of Chancery in Cigna reasoned that stockholders became entitled to their merger consideration upon closing under 8 Del. C. § 251, and therefore the release failed for lack of consideration, as the merger consideration was a preexisting entitlement. The Court explained that here, by contrast, the release was not effectuated by a separate agreement but was contained in the Merger Agreement itself. Additionally, Jhaveri had “full notice” of the releases before final approval and closing, and had confirmed his acceptance of the releases by signing the Joinder Agreement. Accordingly, the Court of Chancery dismissed most of Jhaveri’s claims as barred by the releases.

Takeaway for Practitioners

• Delaware courts may enforce general releases set forth in merger agreements or ancillary documents against stockholders where such stockholders have full notice and have demonstrated their consent to the releases.

Background

On July 23, 2025, the Delaware Supreme Court (“Supreme Court”) affirmed the Delaware Superior Court’s entry of summary judgment for the defendant in AM Buyer LLC v. Argosy Investment Partners IV, L.P., et al., which concerned a challenge to an independent accountant’s resolution of an earnout dispute.

In May 2020, Plaintiff-Buyers acquired certain companies from Defendant-Sellers through a membership interest purchase agreement (the “Agreement”), which provided for an earnout payment to Sellers contingent on the acquired companies’ earnout period EBITDA. The Agreement required the parties to submit any dispute concerning the EBITDA calculation to a jointly selected independent accountant, who was to resolve all disputes in a “final, conclusive, binding” report, reviewable only for fraud or clear and manifest error.

When a dispute arose regarding the EBITDA calculation, the parties followed the contractual process. The independent accountant resolved several disputed issues, including budgeting for the earnout period, Buyers’ obligation under the Agreement to maintain separate books and records, and the calculation and allocation of certain fees. Based on its resolution of these issues, the independent accountant concluded that Buyers owed Sellers the maximum earnout payment under the Agreement.

Buyers filed an action challenging the independent accountant’s decision; among other claims, Buyers requested declaratory judgments that the independent accountant’s decision exceeded the scope of its authority and constituted manifest error. Seller filed counterclaims alleging that the independent accountant’s decision was final, conclusive, and binding, and that Buyers’ failure to make the earnout payment constituted a breach of the Agreement.  Following limited discovery including the independent accountant’s report, Sellers moved for summary judgment on both Buyers’ claims and the counterclaims.

The Superior & Supreme Courts’ Decisions

The Superior Court granted summary judgment to Sellers. First, the Superior Court concluded that the accountant acted within the scope of its authority as an expert by resolving factual accounting disputes. Specifically, the Superior Court explained that the expert “was tasked with resolving a specific factual dispute—the appropriate Earnout Payment owed—and was thus granted authority to resolve all relevant disputations therein.” The Superior Court thus rejected Buyer’s argument that the accountant made legal conclusions when it (i) resolved a budgetary dispute related to the earnout calculation and (ii) found that Buyer failed to maintain separate books and records, as required by the Agreement. The Superior Court found that the accountant “did exactly what it was employed to do” “when making determinations regarding certain factual disputes attendant to the earnout issue.”

Second, the Superior Court found that the accountant committed no manifest errors. The Superior Court stated, pursuant to Delaware law, the accountant “only committed manifest error if it made a plain and obvious error, and the record demonstrates strong reliance on that error.” Emphasizing its “limited” role, the Superior Court declined Buyers’ invitation to “do a deep dive into each allegedly errant fact determination, scrutinize [] deposition answers, and conduct its own accountant-level review.” Buyers’ mere disagreement with the accountant’s determinations was insufficient to establish a “manifest” error, as “the ability to weigh documents one way or the other is within the province of this expert.”

The Supreme Court affirmed both determinations, adding that even though the accountant apparently confused two invoices when resolving one of the disputed items, the error was not “manifest” because the correct calculation would not have altered the determination that Sellers were entitled to the maximum earnout.

Takeaway for Practitioners

• Where a contract grants binding authority to an independent expert such as an accountant, Delaware courts will only disturb their findings and determinations upon a showing of clear and manifest error that, if known, would have altered the outcome of the expert’s decision.
• An independent expert’s authority is limited to deciding “a specific factual dispute concerning a matter within the special expertise of the decision maker, usually concerning an issue of valuation.” When examining whether an independent expert exceeded the scope of its authority, the Court’s analysis is guided by Delaware’s rules of contract interpretation and the terms of the independent expert provision.

Background

On July 23, 2025, the Delaware Court of Chancery issued a post-trial decision in Hartfield, Titus & Donnelly, LLC v. MarketAxess Holdings Inc., an earnout dispute where the seller sought reformation of a membership interest purchase agreement (“Agreement”) to correct an alleged erroneous omission of prorated terms.

On September 10, 2020, Plaintiff Hartfield, Titus & Donnelly, LLC (“HTD”) agreed to sell its municipal bonds trading platform (“MuniBrokers”) to Defendant MarketAxess Holdings Inc. (“MarketAxess”). The parties negotiated a purchase price that included an up-front cash payment and the opportunity for HTD to earn multiple earnout payments over a three-year period. To incentivize HTD to remain a client of the platform, HTD could receive an earnout by achieving targets measured by the amount of annual system license fees HTD paid MarketAxess to use the acquired platform, with a maximum earnout target of $3.25 million in system license fees (the “System License Fee Earnout Payment”). If HTD paid between $2.75 million and $3.25 million in system license fees, HTD could elect to pay an amount in cash to “top up” to the maximum $3.25 million earnout target (the “Cash Top-Up Option”), provided that electronic order flow exceeded certain thresholds (the “Cash Top-Up Threshold”).

Several months later, HTD and MarketAxess made certain amendments to the Agreement.  Among other things, the parties agreed to decrease the cash component of the deal consideration and shorten the length of the earnout period from three to two years. In conjunction with the parties’ agreement to an April 9, 2021 closing, the parties also agreed to prorate the System License Fee Earnout Payment targets for the first earnout period. The parties, however, did not similarly prorate the minimum threshold triggering HTD’s ability to pay cash to “top up” the maximum prorated earnout target.

At the end of the first earnout period, the system license fees fell short of the $2.75 million Cash Top-Up Threshold by less than $10,000. HTD took the position that the parties had “mistakenly” failed to prorate the Cash Top-Up Threshold, as they had done for the System License Fee Earnout Payment targets in the amendment. MarketAxess denied that was a mistake, and HTD filed an action to reform the Agreement to prorate the Cash Top-Up Threshold on July 6, 2023.

The Court of Chancery’s Ruling

After trial, the Court of Chancery entered judgment in favor of MarketAxess. To obtain reformation based upon either a theory of unilateral or mutual mistake, a plaintiff must present clear and convincing evidence that the parties came to a “specific prior understanding that differed materially from the written agreement.” The Court held that HTD failed to meet this burden because it did not put forth clear and convincing evidence that the parties reached a prior understanding to prorate the Cash Top-Up Threshold. The record showed that the parties “never discussed, let alone agreed” to prorate the Cash Top-Up Threshold. Nor did the parties propose any language prorating the threshold in any of the four drafts they exchanged. The parties simply “missed” the issue during negotiations, and it was not until the first earnout period was nearly over that HTD claimed the Cash Top-Up Threshold should have been prorated.

The Court found that HTD’s arguments at most suggested that “if the parties had thought to prorate the Cash Top-Up Threshold, they might have agreed to do so.” HTD claimed that when the parties negotiated the Agreement, they intended for the Cash Top-Up Threshold to match the System License Fee Earnout Payment targets of $2.75 million and $3.25 million. As evidence that the Cash Top-Up Threshold and the System License Fee Earnout Payment were “inextricably linked,” HTD argued that both definitions incorporated many of the same defined terms and that the parties placed the earnout targets and the Cash Top-Up Option in the same rider when negotiating the Agreement. The Court found it “obvious” that the earnout targets and the Cash Top-Up Option were “part of the overall earnout structure,” but that such evidence failed to demonstrate that the parties reached a “specific understanding” that the Cash Top-Up Threshold would always correspond with the earnout targets.

Takeaway for Practitioners

• A party cannot obtain reformation for an alleged mistake without clear and convincing evidence that the parties came to a “specific prior understanding that differed materially from the written agreement.” If the parties intend for the value of contractual earnout targets to track other parts of the “overall earnout structure,” like the thresholds to trigger a “top-up” option, the earnout provision should state this relationship directly.

Background

On July 11, 2025, the Delaware Court of Chancery granted a motion to dismiss in Transdev North America, Inc. v. Recess Holdco LLC, which concerned a restrictive covenant dispute arising from a transaction between transit services companies.

On October 25, 2022, Plaintiff Transdev North America, Inc. (“Buyer”) entered into a stock purchase agreement (the “Agreement”) with Defendant Recess Holdco LLC (“Seller”) to facilitate Buyer’s acquisition of Seller’s subsidiary First Transit Topco Inc. (“Target”). The transaction closed on March 6, 2023. After closing, Seller continued to provide transportation services through other controlled affiliates (collectively, “Seller Group”).

The Agreement included a nonsolicitation provision (the “Nonsolicit”) and a noncompete provision (the “Noncompete”), which applied for three years after closing. The Nonsolicit barred Seller Group from hiring any employee who was employed at Buyer and its affiliates “immediately prior to the Closing.” The Noncompete prevented Seller Group from competing with Buyer in transportation markets in the United States or Canada, except for “FS Businesses,” defined as “the business of Seller . . . and/or their respective controlled Affiliates and parent entities . . . as of the date of this Agreement and/or the Closing Date.”

Between signing and closing, a Seller Group affiliate acquired a company that competed in the Canadian transportation markets. Additionally, after closing, Buyer’s and Seller Group’s respective affiliates submitted competing bids for three transit services contracts, and Seller hired a former employee of Target (the “Former Employee”).

In October 2023, Buyer filed an action alleging primarily that Seller breached the Nonsolicit and Noncompete. Seller moved to dismiss, which the Court of Chancery granted.

The Court of Chancery’s Ruling

The Court rejected all three of Buyer’s claims, finding that Seller did not breach either the Nonsolicit, the Noncompete, or the implied covenant of good faith and fair dealing.

First, the Court found that Seller’s hiring of the Former Employee did not breach the Nonsolicit based upon Buyer’s admission that the Former Employee was not employed by Target “immediately prior to the Closing.” Notably, the Court also excoriated Buyer for advancing this claim without a good faith factual basis and for Buyer’s lack of candor and accountability when arguing the issue.

Second, the Court found that Seller Group did not breach the Noncompete because each of the contested bids fell under the “FS Business” exception. The Court reasoned that the company’s “business” was equivalent to the company’s “overall commercial enterprise,” which encompassed both “existing service contracts” and “efforts to secure new contracts for services the company currently provides, both with existing clients and prospective clients for whom the company has already undertaken business development efforts.” Accordingly, Seller Group’s bids were permissible under the FS Business exception because “pursuing that contract was part of [Seller Group’s] business as of Closing.” Additionally, the Court separately found that the acquisition of the Canadian subsidiary between signing and closing fell under the FS Business exception, as the subsidiary’s business qualified as Seller Group’s business “as of the date of this Agreement and/or the Closing Date.”

Finally, the Court dismissed Buyer’s alternative theories under the implied covenant on the ground that Buyer failed to identify a contractual gap for the covenant to fill.

Takeaways for Practitioners

• Delaware courts may read carve-outs expansively, giving full effect to connective phrases like “and/or” and broad definitions to words like “business.”  When interpreting the scope of such carve-outs, Delaware courts uphold the principle that “[p]arties have a right to enter into good and bad contracts, the law enforces both.”
• In the context of a noncompete, the scope of a company’s “business” can be interpreted to be as broad is its “overall commercial enterprise,” including efforts to obtain new clients and contracts.  It is therefore important to carefully define the contours of a noncompete, including any carveouts to it, to ensure that it is capturing or excluding precisely the actions desired.

Background

On June 17, 2025, the Delaware Supreme Court (“Supreme Court”) reversed the Court of Chancery’s post-trial judgment in In re Columbia Pipeline, holding that a buyer may be liable for aiding and abetting a target’s breach of fiduciary duty only where the acquiror has actual knowledge of both the target’s breach and the wrongfulness of its own conduct.

Columbia Pipeline Group, Inc. (“Columbia”) was spun off from NiSource Inc. in July 2015. Two executives who were seeking to retire, Roberts Skaggs, Jr. and Stephen Smith, asked to join Columbia with the understanding that a third-party sale would trigger certain change-in-control benefits and allow them to retire in their desired timeframe. Columbia received inquiries from potential bidders after the spin-off, but its Board of Directors (“Columbia Board”) decided to pursue a dual-track strategy of pursuing an equity offering while simultaneously pursuing a potential sale with select bidders. Columbia entered into NDAs containing don’t-ask-don’t-waive standstill provisions with each bidder, including TC Energy Corp. (“TransCanada”). The standstill prevented TransCanada from offering to acquire Columbia without permission from the Columbia Board.

Despite the standstill, a TransCanada executive leveraged his prior relationship with Smith, an “M&A neophyte,” to engage in a multi-month dialogue with Columbia executives about TransCanada’s proposed acquisition. These discussions revealed key insider information about competing bidders and the eagerness of Columbia’s management to close. Columbia’s officers never attempted to enforce the standstill and did not disclose the violations to the Columbia Board. After TransCanada expressed an interest in acquiring Columbia for a price per share in the range of $25 to $28, the Columbia Board agreed to temporary exclusivity with TransCanada. Following negotiations, the parties agreed in principle for TransCanada to buy Columbia at $26 per share.

Although another potential buyer expressed interest in exploring a transaction, Columbia’s management persuaded the Columbia Board to renew exclusivity with TransCanada. TransCanada interpreted this as evidence that Columbia’s management was wedded to the sale and lowered its bid to $25.50 per share. TransCanada also threatened to publicly disclose that it was terminating negotiations (despite the NDA but in compliance Toronto Stock Exchange rules) if Columbia did not accept within three days. The Columbia Board accepted.

After the deal closed in July 2016, plaintiffs filed a class action on behalf of Columbia’s former stockholders alleging Columbia’s directors and officers breached their fiduciary duties during the sales process and by failing to disclose the discussions with TransCanada in the proxy statement. Plaintiffs also sued TransCanada for aiding and abetting. By trial, all defendants settled, except TransCanada.

The Court of Chancery’s Post-Trial Decision

The Court of Chancery entered judgment for the plaintiffs. First, the Court found that Columbia’s directors and officers breached their fiduciary duties, a prerequisite for holding TransCanada liable for aiding and abetting. Applying enhanced scrutiny, the Court held the officers breached their fiduciary duties during the sales process because they “pursued a transaction that would enable them to retire in 2016 with their full change-in control benefits,” rather than seeking the best transaction for Columbia’s stockholders, and “took actions that fell outside the range of reasonableness” because of those conflicts. Additionally, the Columbia Board breached its duty of care by failing to “provide sufficiently active and direct oversight of the sales process.”

Next, the Court found TransCanada liable for aiding and abetting on the grounds that it constructively knew of, and culpably participated in, the sales-process breaches and remained silent when the proxy failed to disclose its discussions with Columbia during the sales process despite its obligation to inform Columbia of any material omissions. In assessing TransCanada’s knowledge of the sales-process claim, the Court found that Columbia exhibited “a series of signals” from which TransCanada should have realized that their negotiating counterparts—Smith and Skaggs—“were focused on selling at a defensible price and retiring with their change-in-control benefits, rather than seeking the best transaction reasonably available.” The Court also found that TransCanada knew “[a]t a minimum” that Skaggs and Smith “were breaching their duty of care by acting like a bunch of noobs who didn’t know how to play the game.”

TransCanada was found liable for approximately $200 million in damages. TransCanada appealed the judgment on the aiding and abetting claim, but did not challenge the finding that Columbia’s directors and officers breached their fiduciary duties.

The Delaware Supreme Court Reverses

The Supreme Court reversed. After the Court of Chancery issued its decision, the Supreme Court issued a decision in In re: Mindbody, inc., Stockholder Litigation clarifying that the “knowing participation” element of a claim that a buyer aided and abetted a sell-side breach required the plaintiff to prove “two types of knowledge”: specifically, the defendant’s actual knowledge of the sell-side breach and that its own conduct was wrongful. Constructive knowledge is insufficient. Accordingly, the Supreme Court examined whether the conduct that evidenced TransCanada’s constructive knowledge could support a finding of actual knowledge.

The Court found that TransCanada did not have actual knowledge that the sell-side fiduciaries were breaching their fiduciary duties during the sale process. TransCanada did not know that Skaggs and Smith planned to retire or that that they would sell Columbia at any price. At most, Skaggs’ and Smith’s eagerness to sell sent ambiguous signals, which could not justify an inference of disloyalty or bad faith. Additionally, the standstill violations did not signal that Skaggs and Smith were breaching their fiduciary duties because, at the time, neither TransCanada nor Columbia thought that TransCanada’s communications violated the standstill. Moreover, since TransCanada did not directly interact with the Columbia Board, it did not have actual knowledge of the Columbia Board’s breaches of care. Thus, lacking any knowledge of sell-side breaches, TransCanada did not have the requisite knowledge that its conduct was legally improper.

While the analysis could have ended there, the Supreme Court also reversed the finding that TransCanada culpably participated in the breaches. The Supreme Court emphasized that in arm’s-length negotiations, an aider and abettor’s participation in the breaches must be “of an active nature” and must be more than “taking advantage of the other side’s weakness and negotiating aggressively for the lowest possible price.” Thus, “taking advantage of a personal relationship and superior negotiating skills and experience to secure the best reasonably available price” will not “expose a party to aiding-and-abetting liability.” While the evidence that showed that TransCanada engaged in “hard bargaining,” this did not amount to “knowing participation” in the breach.

Finally, regarding TransCanada’s liability for aiding and abetting the disclosure violations, the Supreme Court found that TransCanada had actual knowledge of some deficiencies in Columbia’s proxy statements, such as omissions regarding the discussions during the sales process. However, the Supreme Court determined that TransCanada did not culpably participate in the disclosure breaches because it did not propose any statements that were found to be misleading, nor did it suggest omitting material information. The Supreme Court explained that culpable participation cannot be based on “a failure to act, without some kind of active role.” Additionally, the record did not contain any evidence that TransCanada knew its failure to correct the proxy was wrongful in the sense that it affirmatively aided the fiduciary duty breaches by Skaggs, Smith, and the Columbia Board. Thus, the record did not support a finding that TransCanada knowingly participated in the disclosure breaches.

Takeaways for Practitioners

• The Delaware Supreme Court has twice reaffirmed its reluctance to impose aiding and abetting liability in a buyer involved in third-party arm’s length negotiations. First, the buyer must have actual knowledge of the sell side breach, and second, the buyer must have actual knowledge that its own conduct is legally improper.  
• As the Delaware Supreme Court has indicated, aiding and abetting claims are some of the most difficult to prove which could reduce potential liability for our buy-side clients involved in arm’s-length acquisitions.
• Delaware law strongly protects arm’s-length negotiations, even if the seller’s side is conflicted or inexperienced, and aiding and abetting liability will not be found simply because a party takes advantage of the other side’s weaknesses and negotiates aggressively for the lowest possible price.

Background

On May 23, 2025, the Delaware Court of Chancery granted a motion to dismiss in P-5 GRA, LLC v. Ivankovich, et al., holding that a minority member of a Delaware LLC was not entitled to distributions for a sale of assets by the LLC’s downstream subsidiary.

P-5 GRA, LLC (“P-5”) held a 7% membership interest in Overlook Managing Member LLC (“Overlook”). The remaining 93% was held by Steven Ivankovich. Overlook’s LLC Agreement designated Ivankovich as “Manager” and provided him “the right, power, and authority to manage, operate and control the business and affairs of [Overlook]” and to do “any and all acts . . . deemed by [him] to be necessary or appropriate to effectuate the purposes of [Overlook].” Overlook’s purpose was to serve as the manager of, among other entities, two wholly-owned subsidiaries of Overlook (together, the “Pilgrim Entities”).

The Pilgrim Entities were each 50% members of Alliance HTFL GP, LLC (“Alliance GP”). Alliance GP and the Pilgrim Entities respectively held .01% and 99.99% membership interests in Alliance ATFL Limited Partnership (DE) Property Borrower LP (“Alliance LP”). P-5 was not a member of Alliance GP. In 2022, Alliance LP sold two real properties in Florida for $35 million (the “Florida Properties”). None of these proceeds were sent upstream to the Pilgrim Entities or Overlook. A few days after closing, Ivankovich caused Alliance LP to transfer $30 million to a company controlled by and for the benefit of Ivankovich’s family.

P-5 filed an action against Ivankovich, alleging primarily that Ivankovich was obligated to distribute the sale proceeds upstream to Overlook and make a pro rata distribution to P-5 of $2.5 million. P-5 relied on a term in the LLC Agreement requiring pro rata distribution of any “Cash Available for Distribution” that arose “from a sale or refinancing of the LLC Assets,” defined as “[a]ll assets and property . . . owned by or held for the benefit of [Overlook].” Ivankovich filed a motion to dismiss, which was granted.

The Court of Chancery’s Ruling

The Court held that P-5 was not entitled to a pro rata distribution because the Florida Properties were not “LLC Assets.” Rather than being property “owned by or held for the benefit of [Overlook],” the Florida Properties “belonged to a downstream entity of Overlook—Alliance LP.” P-5 also did not plead that Overlook ever received cash from the sale of the Florida Properties, but rather conceded that the proceeds were “realized by Overlook’s downstream entities.” The Court characterized P-5’s claims as apparently resting on a belief that “a subsidiary’s sale of assets entitles the parent LLC’s members to a cut of the proceeds.” The Court explained that this belief ran afoul of Delaware’s presumption of corporate separateness, as “[t]he assets of an LLC’s subsidiary—or, here, the assets of its subsidiary’s subsidiary—are not the assets of the parent LLC.”

Takeaways for Practitioners

• In Delaware, “there exists a presumption of corporate separateness, even when a parent wholly owns its subsidiary and the entities have identical officers and directors.” An extension of this principle is that a subsidiary’s sale of assets does not necessarily entitle the parent LLC’s members to a share of the proceeds.
• Minority holders in parent level LLCs should draft explicit contractual protections with regard to activities occurring at the subsidiary level, particularly given the difficulty in making fiduciary duty claims if the LLC Agreement waives fiduciary duties.

Background

On June 27, 2025, the Delaware Supreme Court issued an order affirming the Court of Chancery’s dismissal of a post-closing earnout dispute in STX Business Solutions, LLC v. Financial-Information-Technologies, LLC, et al. Goodwin’s Jordan Weiss, Matt White and Jesse Lempel represented Defendants Financial-Information-Technologies, LLC (“Fintech”) and Fintech Holdco, joined by Ryan Stottmann and Cassandra Baddorf of Morris Nichols Arsht & Tunnell LLP.

In 2021, Fintech acquired the assets of STX Business Solutions, LLC (“Seller” or “STX”) pursuant to an Asset Purchase Agreement (the “Agreement”). The Agreement called for Seller to receive an earnout payment of up to $5.5 million if the purchased assets met specified revenue goals (the “Earnout”). The Chancery Court noted that the language of “[t]he Agreement did not obligate the Buyer to use best efforts, commercially reasonable efforts, or even good faith efforts to achieve the Earnout.” Instead, Fintech was entitled to “use the Purchased Assets and operate the Business in a manner that is in the best interests of [Fintech] or its Affiliates” and had “the right to take any and all actions regardless of any impact whatsoever that such actions or inactions have on the earn-out.” Fintech was required only to refrain from “action in bad faith with respect to Seller’s ability to earn the Earn-Out Consideration or with the specific intention of causing a reduction in the amount thereof.” Additionally, the Earnout would become due and owing upon a “Sale of the Company,” including any transaction where a party acquired majority control over the board of Fintech’s parent company (“Parent”).

Before entering into the Agreement, STX had started pursuing a contract with Walmart for data management services. In April 2023, almost two years after the Agreement closed, Walmart invited Fintech to submit a proposal for a five-year contract by May 1. Although Fintech obtained the information necessary to prepare and submit a proposal, Fintech ultimately informed Walmart on May 1 that it would not submit a proposal due to “constraints” imposed by an “exclusive relationship” with Information Resources, Inc. (“IRI”).

By agreement dated May 16, 2023, affiliates of General Atlantic, L.P. (“New Investor”) agreed to acquire a 48.1% membership interest in Fintech’s parent entity (“Parent”). Before the transaction, almost all of Parent’s equity was owned by TA Associates Management (“TA”). After the transaction, New Investor and TA held equal membership stakes in Parent and shared control of Parent’s board of managers. On May 17—about two weeks after Seller demanded information about the “exclusive relationship”—Fintech’s CEO informed Seller that Fintech declined to respond to Walmart because Parent was negotiating with New Investor and did not want the pursuit of the Walmart contract to “muddy the waters” and threaten the transaction.

In January 2024, Seller and its former founder filed an action alleging primarily that Fintech breached the Agreement and/or the implied covenant of good faith and fair dealing by (i) failing to pursue the Walmart opportunity for the purpose of preventing the Earnout and (ii) structuring the transaction with New Investor to evade the definition of a “Sale of the Company,” thereby preventing the transaction from triggering the Earnout. Fintech moved to dismiss.

The Court of Chancery’s and Supreme Court’s Rulings

The Court of Chancery granted the motion to dismiss. First, the Court of Chancery found that Fintech did not breach the Agreement by failing to respond to Walmart’s request because the “plain language” of the Agreement permitted Fintech to “operate the acquired business as it deemed fit, even if that would interfere with the Seller’s ability to earn the Earnout, so long as [Fintech] did not take action in bad faith or with the specific intention of causing a reduction in the Earnout.” The Court of Chancery held that “deciding whether to pursue the Walmart contract required a business judgment that [Fintech] was empowered to make,” as “[a] party does not act in bad faith by relying on contract provisions for which that party bargained where doing so simply limits the advantage to another party.” Because it was impossible to infer that Fintech failed to pursue the Walmart opportunity in bad faith, the plaintiffs failed to state a breach of contract claim.

Second, the Court of Chancery found that Fintech did not breach the Agreement by structuring the transaction with New Investor in bad faith to evade a Sale of the Company. The plaintiffs claimed that TA intended to sell control over Fintech to New Investor, but only sold a 48% interest so as to avoid triggering the Earnout. The Court of Chancery found that this was not a reasonably conceivable inference, as the transaction with New Investor established a “joint-control regime at both the manager and member level.” Because “[s]hared control differs from unilateral control,” it was “impossible to infer bad faith from a decision to establish shared control.” The only reasonable inference from the structure of the transaction was that TA “did not want to sell control” and “was only willing to accept shared control.” Given the “obvious business purpose for insisting on shared control,” it was not reasonable to infer that TA decided to cap New Investor’s ownership stake at 48.1% to avoid triggering the Earnout.

Additionally, the Court of Chancery dismissed the plaintiffs’ parallel claims under the implied covenant, finding that there was no contractual gap for the covenant to fill. The Court of Chancery also dismissed their fraudulent inducement claim alleging that Fintech failed to disclose the relationship with IRI that ultimately led to Fintech’s refusal to pursue the Walmart contract, as the plaintiffs identified no reason why Fintech would have a duty to speak.

Following appeal, on June 27, 2025, the Delaware Supreme Court issued an order summarily affirming the Court of Chancery’s ruling.

Takeaways for Practitioners

• Delaware courts continue to reaffirm Delaware’s strong respect for freedom of contract between sophisticated parties including where, as here, the contractual language gave the buyer broad discretion with respect to post-closing operations.
• When negotiating earnout payments, it is important to carefully define the buyer’s obligations with regards to achieving the earnout targets.

Background

On May 21, 2025, the Court of Chancery issued a decision in Vejseli v. Duffy et al., which addressed a board resolution reducing the number of director seats up for election at a company’s annual meeting and the rejection of a director nomination notice under an advance notice bylaw.

Celsius Network, LLC (“Celsius”), a cryptocurrency lending platform, filed for Chapter 11 bankruptcy in 2022. In January 2024, Ionic Digital, Inc. (“Ionic”) emerged to hold and operate digital currency mining assets formerly owned by Celsius, with many Celsius creditors becoming Ionic stockholders. By the summer of 2024, stockholders began publicly complaining about Ionic’s leadership and, in particular, their failure to publicly list Ionic shares. Soon after, stockholders Veton Vejseli, Brett Perry, and Christopher Villinger (“Plaintiffs”) partnered with Figure Markets Inc. (“Figure Markets”) and GXD Labs, LLC (“GXD”)—non-parties that did not own Ionic stock but had proposed commercial arrangements with Ionic—to first seek stockholder support to call a special stockholder meeting to replace certain directors of Ionic, and then to run a proxy contest at Ionic’s first annual meeting.

In light of the impending proxy contest, Ionic’s board of directors (“Board”) executed a written consent setting the date of the annual meeting and resolving to reduce the size of the Board to eliminate one director seat up for election at the meeting (“Board Reduction Resolution”). Ionic did not immediately disclose the Board Reduction Resolution but did announce the meeting date, triggering the window for stockholders to submit a director nomination under Ionic’s advance notice bylaw. Plaintiffs, with financial backing from Figure Markets and GXD, submitted a notice nominating candidates for the two seats that Plaintiffs believed were up for election (“Nomination Notice”). Ionic then disclosed the Board Reduction Resolution, and the Board rejected the Nomination Notice for failing to disclose and attach copies of all agreements between Plaintiffs, Figure Markets, and GXD.

In response, Plaintiffs filed an action alleging that Ionic’s directors breached their fiduciary duties by adopting the Board Reduction Resolution and rejecting the Nomination Notice.

The Court of Chancery’s Ruling

After trial, the Court held that Ionic’s directors breached their fiduciary duties by reducing the size of the Board, “not for a valid corporate purpose, but as an inequitable defensive measure.” Because the Board Reduction Resolution affected the number of director seats on which Ionic stockholders could vote, it was reviewed under the enhanced scrutiny standard. The Court distinguished several decisions where similar resolutions were reviewed under the business judgment rule, as the resolutions in those cases were adopted on a “clear day” and not in response to an anticipated proxy contest like the Board Reduction Resolution.

To meet its burden, the Board needed to prove it adopted the Board Reduction Resolution for a valid, non-pretextual business purpose. The Court was not persuaded by the principal justification offered in the litigation, which was that the Board Reduction Resolution “increase[d] efficiencies, including to have an odd number of directors in order to avoid deadlock, and to decrease costs.” Notably, the Court emphasized that there was no “contemporaneous record suggesting that the Board actually considered those purposes before approving the Board Reduction Resolution”; there were “no minutes memorializing any deliberation,” and the Board Reduction Resolution itself did not “identify the corporate purposes the Board sought to achieve through its adoption.” Moreover, even though the justifications had “some truth to them,” there was no record that the Board considered any alternative cost saving measures that did not involve “eliminating a director seat immediately prior to the stockholders’ first opportunity ever to elect directors.”

Additionally, the Court held that the Board did not meet its burden of showing that the Board Reduction Resolution was reasonable and not preclusive. Even if the Board had proven its alleged purposes, the Board Reduction Resolution was “not necessary to accomplish those objectives,” and the Board had not explored any alternatives. The Resolution was preclusive because it deprived stockholders of the opportunity to elect a director and imposed the Board’s favored outcome on the stockholders: “no new directors.” Thus, the Court issued an injunction to reopen the ten-day nomination window under the advance notice bylaw to permit stockholders to submit new director nominations.

However, the Court held that the Board properly rejected the Nomination Notice under the advance notice bylaw. The Court first rejected the Plaintiffs’ argument that the Nomination Notice did not need to disclose the agreements in question because they “were no longer operative at the time of the Nomination Notice,” as bylaws’ informational purpose is “ill served if a stockholder omits disclosing an agreement terminated the same day it submits a nomination notice, as Plaintiffs did here.” In any event, the Court observed that the Nomination Notice still failed to disclose a material provision in a “terminated” agreement that expressly survived termination. Additionally, the Court found that the Board’s rejection of the Nomination Notice was not inequitable, as the advance notice bylaw served the legitimate objective of informing stockholders “whether a nomination is part of a broader scheme.”

Takeaways for Practitioners

• A board’s decision to reduce board seats will likely be reviewed under the business judgment rule if adopted on a “clear day,” while enhanced scrutiny will apply if adopted in anticipation of a proxy challenge (enhanced scrutiny is a heightened standard of review under which the board bears the burden of proof).
• It is crucial to build a contemporaneous record to support the reasons for governance changes that are likely to invite stockholder challenges, including board minutes, consideration of alternatives, and a statement of purpose within the relevant resolutions.

Background

On March 24, 2025, the Delaware Court of Chancery issued a post-trial opinion in Desktop Metal, Inc. v. Nano Dimension Ltd, where the Court awarded specific performance of a hell or high water (“HOHW”) provision in a merger agreement, forcing a buyer to close.

Desktop Metal, Inc. (“Desktop”) provides industrial-use 3D printers that create specialized parts for commercial and military applications. Desktop experienced significant cash flow problems in the early 2020s and began exploring options for a sale. In July 2024, Desktop entered into a merger agreement (the “Merger Agreement”) with Nano Dimension Ltd. (“Nano”), an Israeli company. The Merger Agreement conditioned closing on approval by the Committee on Foreign Investment in the United States (“CFIUS”), and further contained a HOHW provision requiring that Nano take all actions necessary to obtain CFIUS approval and a “reasonable best efforts” provision requiring Nano to close as soon as reasonably possible.

Nano’s second-largest stockholder, a hedge fund called Murchinson Ltd. (“Murchinson”), opposed the deal, arguing to its fellow shareholders that Nano should wait for Desktop to become insolvent and then buy Desktop during bankruptcy proceedings. After the Nano board of directors (the “Nano Board”) approved the merger over Murchinson’s objection, Murchinson launched a proxy contest and gained control of the Nano Board in December 2024, by which time CFIUS approval was the sole condition to closing the Merger Agreement. After Murchinson’s takeover, Nano ceased meaningful engagement with CFIUS, missing deadlines, failing to respond promptly, and actively delaying the approval process. For example, Nano delayed responding to CFIUS’s draft national security agreement (“NSA”) for 38 days and, when Nano finally began negotiating, suggested drastic revisions to prolong negotiations.

In December 2024, Desktop filed an action for specific performance to enforce Nano’s obligation to take all actions necessary to obtain CFIUS approval and use reasonable efforts to close as soon as possible.

The Court of Chancery’s Ruling

The Court ruled in favor of Desktop, finding that Nano breached both the reasonable best efforts and HOHW provisions by intentionally and strategically delaying the CFIUS process. Emphasizing that HOHW provisions are “the strongest possible commitment” that a party can make with respect to obtaining regulatory approval, the Court observed that Nano faced an “uphill battle” in light of the fact that Nano’s controlling stockholder, Murchinson, had repeatedly made public statements condemning the deal and vowing to unwind it. Indeed, Desktop proved that Murchinson’s board nominees had intended to use CFIUS approval to scuttle the deal and attempted to obstruct CFIUS approval through a “pattern of delay and backtracking.”

Because CFIUS approval remained the sole unresolved condition, and since Nano’s own actions caused the delay, the Court awarded Desktop specific performance, ordering Nano to fulfill its obligations under the Merger Agreement by signing the NSA and closing the merger.

Takeaways for Practitioners

• Delaware courts will enforce to the letter a “hell-or-high-water” covenant requiring a buyer to undertake all necessary actions to secure regulatory approval, highlighting the importance of clear contractual language detailing the relative obligations of the parties to obtain such approvals.
• Practitioners should be particularly mindful of the potential complexities involved in cross-border mergers and the need for clear drafting relating to necessary CFIUS and other regulatory approvals.

SB 21—which amends Sections 144 and 220 of the Delaware General Corporation Law—was passed by the Delaware House of Representatives and signed into law by Governor Matt Meyer on March 25, 2025. SB 21 takes effect with the amendments passed by the Delaware Senate in SS 1 to SB 21 on March 13, 2025.

The amendments apply retroactively with respect to all acts or transactions, except with respect to actions that were pending, or Section 220 demands that were made, on or before February 17, 2025. Summaries of both amendments are provided below.

The amended Section 144 (Interested directors and officers; controlling stockholder transactions; quorum):

1. Provides a safe harbor for a conflicted transaction (other than a controller transaction) if (1) the material facts as to the director’s or officer’s conflict are disclosed to the board or committee, and the board or committee in good faith and without gross negligence authorizes the act or transaction by a majority vote of disinterested directors then serving on the board or committee (as applicable), even if the disinterested directors are less than a quorum; provided, however, that if the majority of the directors are not disinterested, then the act or transaction must be approved by a committee consisting of at least two directors determined by the board to be disinterested; (2) the act or transaction is approved or ratified in good faith by an informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholders; or (3) the act or transaction is fair as to the corporation and its stockholders.
2. Provides a safe harbor for a controlling stockholder transaction (other than a going private transaction) if (1) the material facts are disclosed to all members of a disinterested committee to which the board has delegated authority to negotiate and to reject the transaction, and the transaction is approved in good faith and without gross negligence by a majority of that disinterested committee; (2) the transaction is conditioned on the approval of or ratification by disinterested stockholders, and the transaction is approved or ratified or by an informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholders; or (3) the transaction is fair as to the corporation and its stockholders. 
3. Provides a safe harbor for a going private transaction with a controlling stockholder if it satisfies both requirements (1) and (2) in the preceding paragraph or is fair as to the corporation and its stockholders.  
4. Sets forth criteria for determining the independence and disinterestedness of directors and stockholders; among other things, a director of a publicly traded corporation is presumed to be disinterested with respect to an act or transaction to which such director is not a party if the director satisfies the exchange’s criteria for director independence. In addition, the designation of a director to the board by any person that has a material interest in an act or transaction shall not, of itself, be evidence that a director is not disinterested with respect to an act or transaction to which such director is not a party.
5. Defines a controlling stockholder as one that (a) owns or controls a majority in voting power of the outstanding stock entitled to vote generally in director elections; (b) controls the election of directors possessing a majority of the board’s total voting power; or (c) has the power functionally equivalent to that of a stockholder that owns or controls a majority in voting power of the outstanding stock of the corporation entitled to vote generally in the election of directors by virtue of ownership or control of at least one-third in voting power of the outstanding stock entitled to vote generally in the election of directors or in the election of directors who have a majority in voting power of the votes of all directors on the board and power to exercise managerial authority over the business and affairs of the corporation.
6. Defines a control group as two or more persons that, by virtue of an “agreement, arrangement, or understanding” between them, constitute a controlling stockholder. The amendment also defines “controlling stockholder transaction,” “disinterested director,” “disinterested stockholder,” “going private transaction,” “material interest,” and “material relationship.”
7. Provides that controlling stockholders and control groups, in their capacity as such, cannot be liable for monetary damages for breach of the duty of care.

The amended Section 220 (Inspection of books and records):

1. Defines “books and records” to mean: (1) the certificate of incorporation and any agreement or other instrument incorporated by reference therein; (2) the current bylaws and any agreement or other instrument incorporated by reference therein; (3) any agreement entered into under DGCL § 122(18) (i.e., contracts the company entered into with current or prospective stockholders in their capacity as such); (4) minutes of all stockholders meetings and executed stockholder consents for the past three years; (5) all written communications to stockholders generally within the past three years; (6) board and committee meeting minutes and records of any actions of the board or committee; (7) materials provided to the board or a committee in connection with actions taken by the board or committee; (8) annual financial statements for the past three years; and (9) director and officer independence questionnaires.
2. Sets forth certain conditions that a stockholder must satisfy to make an inspection of books and records, including a requirement that the demand be made in good faith and the documents sought be “specifically related” to the stockholder’s stated proper purpose.
3. Provides that the company can require the stockholder to agree that the documents from a Section 220 production will be deemed incorporated by reference into any complaint filed by or at the direction of a stockholder on the basis of information obtained through a demand for books and records.
4. Provides that if the corporation does not have items (4), (6), (8), or (in the case of a public company) (9) in the above-listed “books and records,” the Court of Chancery may order the production of additional corporate records necessary and essential for the stockholder’s proper purpose.
5. Provides that the Court of Chancery may compel a corporation to produce books and records beyond those defined in Section 220 if the demanding stockholder has met the threshold requirements for production of books and records and the stockholder has shown a “compelling need” for inspection of such records to further the stockholder’s proper purpose and the stockholder has demonstrated by clear and convincing evidence that such records are “necessary and essential” to further its purpose.

On February 17, 2025, the Delaware General Assembly introduced a proposed bill (SB 21) to amend Sections 144 and 220 of Delaware General Corporation Law; both are described below.

Section 144 (Interested directors). If passed, the amendment will provide safe harbor procedures for transactions involving interested directors/officers, a control group, or a controlling stockholder. Specifically, the proposed amendment:

1. Provides that a transaction with an interested director or officer would be protected if (1) approved by the votes of a majority of the disinterested directors (even if less than a quorum), or (2) approved or ratified by a majority of the votes cast by the disinterested stockholders entitled to vote thereon.

2. Provides that a controlling stockholder transaction that is not a “going private transaction” may be entitled to the statutory safe harbor protection if it is approved or recommended, as applicable, (1) by a committee consisting of a majority of disinterested directors, or (2) by a majority of the votes cast by the disinterested stockholders and the transaction was conditioned on a vote of the disinterested stockholders at or prior to the time it is submitted to stockholders for their approval or ratification.  But a controlling stockholder transaction that constitutes a “going private transaction” would be protected only it satisfied both requirements under (1) and (2) described in the preceding sentence. 

3. Defines a control group as “2 or more persons that are not controlling stockholders that, by virtue of an agreement, arrangement, or understanding between or among such persons, constitute a controlling stockholder.” And a controlling stockholder would be defined as “any person that, together with such person’s affiliates and associates a. Owns or controls a majority in voting power of the outstanding stock of the corporation entitled to vote generally in the election of directors; or b. Has the power functionally equivalent to that of a stockholder that owns or controls a majority in voting power of the outstanding stock of the corporation entitled to vote generally in the election of directors by virtue of ownership or control of at least one-third in voting power of the outstanding stock of the corporation entitled to vote generally in the election of directors or for the election of directors who have a majority in voting power of the votes of all directors on the board of directors and power to exercise managerial authority over the business and affairs of the corporation.”

4. Provides that controlling stockholders and control groups, in their capacity as such, cannot be liable for monetary damages for breach of the duty of care. 

5. Sets forth criteria for determining the independence and disinterestedness of directors and stockholders; among other things, a director of a corporation that is listed on a national securities exchange is “presumed to be a disinterested director with respect to an act or transaction to which such director is not a party” if the director satisfies the exchange’s criteria for director independence. 

Section 220 (Inspection of books and records). If passed, the amendment may narrow stockholders’ rights to inspection by specifying what constitutes books and records. Specifically, the proposed amendment:

1. Defines the “books and records” that a stockholder may inspect pursuant to a demand, including a corporation’s organizational documents, minutes from board and committee meetings, and materials provided to directors in connection with such meetings.

2. Sets forth certain conditions that a stockholder must satisfy in order to make an inspection of books and records, including a requirement that the documents sought must be “specifically related” to the stockholder’s proper purpose.

3. Provides that the company can require the stockholder to agree that the documents from a Section 220 production will be deemed to be incorporated by reference into any complaint filed by or at the direction of a stockholder on the basis of information obtained through a demand for books and records.

4. Provides that if the corporation does not have specified books and records, including minutes of board and committee meetings, actions of board or any committee, financial statements and director and officer independence questionnaires, the Court of Chancery may order the production of additional corporate records necessary and essential for the stockholder’s proper purpose.

We will keep you updated as these matters advance through the legislature.

For more information regarding any of the material provided herein, or if you have any questions (or suggested source material for future updates) relating to private M&A under Delaware law, please reach out to the Private Company Delaware Law Committee or its members Jim Matarese, Mike Kendall, Jennifer Chunias, Joe Rockers, Jordan Weiss, Christina Ademola, Dylan Schweers, Trey O’Callaghan, S. Toni Wormald, and Connor Hannagan.

Background

On November 15, 2024, the Court of Chancery issued a post-trial opinion in GB-SP Holdings, LLC v. Walker, which considered whether certain directors of Bridge Street Worldwide, Inc. (“BSW”) breached their fiduciary duties by entering into a forbearance agreement with BSW’s creditor, Domus BWW Funding LLC (“Domus”), a subsidiary of Versa Capital Management, LLC (“Versa”).

BSW was in default under its senior secured debt when Domus attempted to gain control and economic ownership of BSW by purchasing such senior secured debt from BSW’s existing creditors. Following this acquisition and after BSW continued to default on such debt, BSW and Domus entered into a forbearance agreement, pursuant to which BSW provided Domus first-priority security interests in additional collateral in exchange for additional first-lien loans to cover past-due interest and working capital needs.

While negotiating the forbearance agreement, BSW’s board blocked its largest stockholder’s (the “Major Stockholder”) information rights and right to appoint a board designee. Domus (with knowledge of these facts) (i) agreed to indemnify the existing directors (the “Pre-Forbearance Directors”) for any claims asserted or supported by the Major Stockholder, and (ii) entered into MOUs with BSW’s management (including two Pre-Forbearance Directors) for continued employment and bonuses from Domus.

After the forbearance agreement became effective, five new directors were elected to join BSW’s board (the “Post-Forbearance Directors”), four of whom required the approval of Domus and the fifth of whom was the Major Stockholder’s designee. When BSW breached the forbearance agreement, the Post-Forbearance Directors approved the foreclosure on collateral by Domus, and BSW transferred the equity of its operating subsidiaries to Domus in exchange for Domus cancelling the majority of BSW’s senior secured debt. 

Following foreclosure, the Major Stockholder asserted a variety of claims against the Pre-Forbearance Directors, the other Post-Forbearance Directors, Versa, Domus, and BSW, claiming, among other things, that the BSW’s directors breached their duty of loyalty in approving the forbearance agreement and the foreclosure, and further that Versa and Domus aided and abetted such breaches.

The Delaware Court of Chancery’s Decision

The Court held that the Pre-Forbearance Directors breached their duty of loyalty and found the Pre-Forbearance Directors liable to BSW for all amounts paid to them and their counsel under the indemnity agreement and further ordered that the bonuses paid as part of the forbearance agreement be disgorged and returned to BSW.

In analyzing whether the Pre-Forbearance Directors breached their duty of loyalty in approving the forbearance agreement, the Court considered whether the benefits the Pre-Forbearance Directors received made them “materially interested.” While the Court noted the receipt of indemnification is “[n]ormally” insufficient to “taint related director actions with a presumption of self-interest,” the Pre-Forbearance Directors had negotiated the forbearance agreement with knowledge that BSW had no “colorable argument” for refusing to seat the Major Stockholder’s board designee and that they therefore faced a “real, unmitigated litigation risk.” The Court noted that the indemnity that the Pre-Forbearance Directors obtained from Domus went “beyond what is provided in the ordinary course” because it indemnified not only claims arising from the forbearance agreement, but also any claims related to BSW asserted by or with Major Stockholder’s assistance; in other words, it was “tailored to specifically address a litigation risk the Pre-Forbearance Directors created for themselves by refusing to seat” Major Stockholder’s designee. Thus, the high risk of litigation and personal liability arising from violating the Major Stockholder’s rights, coupled with the Pre-Forbearance Directors’ insistence on indemnification, made such benefits material enough to make the Pre-Forbearance Directors materially interested.

Because more than half of the Pre-Forbearance Directors were materially interested in the forbearance transaction, the Court applied the entire fairness standard, under which the Pre-Forbearance Directors held the burden of proving that the forbearance transaction was the product of a fair process and resulted in a fair price to BSW. Ultimately, Domus’ agreement to indemnify the Pre-Forbearance Directors provided them a material benefit not shared by BSW or its stockholders, and the Court concluded that Defendants failed to show a fair process or fair price.

Separately, the Court held that at least half of the Post-Forbearance Directors were materially interested in or not independent with respect to the consensual foreclosure because (i) the terms of the foreclosure ensured that the management directors would retain their management positions and retention bonuses, (ii) Versa had selected one of the non-management director’s insolvency company to administer (and receive significant fees from) an assignment for the benefit of creditors anticipated to occur after the foreclosure, and (iii) a Domus-selected director was not independent from Versa and Domus because the director had been appointed to the board of another Versa portfolio company and thus had an expectation of receiving future directorships if he acted in Versa’s best interests. Nevertheless, the directors’ thorough process caused the Court to conclude that these conflicts did not affect their decision-making, and the foreclosure was financially fair given the Company’s financial position and lack of alternatives.

Takeaways for Practitioners

• While the receipt of indemnification is generally insufficient to impugn a director’s independence, this analysis is still highly fact specific, and directors can be deemed materially interested under the circumstances of a particular transaction where it involves a high and specific risk of litigation. Such circumstances may trigger entire fairness review of the underlying transaction, which is the most stringent standard of review under Delaware law. 
• Creditors may be held liable for aiding and abetting where they have knowledge of a potential conflict of interest and exploit that conflict for the creditor’s own benefit.
• If an investor frequently places individuals from a roster of individuals as its director designee, the designated director may be found to expect future selections on the portfolio boards and thus may not be considered independent from the investor.

Background

On January 7, 2025, the Delaware Court of Chancery issued a post-trial opinion in Manti Holdings, LLC v. The Carlyle Group Inc., in which the Court held that the business judgment rule applied to the sale of a company because the private equity controlling stockholder did not have a liquidity-based conflict and its interests were aligned with the minority in the sale. 

In 2017, after years of declining valuations, Authentix Acquisition Company, Inc. (“Authentix”) was sold following an auction process. At the time of the sale, the Carlyle Group Inc. (“Carlyle”) was Authentix’s controlling stockholder, holding 70% of Authentix’s preferred stock and 52% of its common stock. The primary Carlyle fund had a fund life of ten years (expiring in 2017), although the partnership agreement of the primary Carlye funds did not impose a contractual obligation to exit any particular investment at that time.

The plaintiffs, minority stockholders of Authentix, alleged Carlyle compelled the Authentix board to approve a “fire sale” of Authentix to meet Carlyle’s own liquidity needs coinciding with the end of the primary Carlyle fund’s fund life, and argued the Court should apply the heightened entire fairness standard of review. 

The Delaware Court of Chancery’s Decision

The Court concluded the business judgment rule, not entire fairness, was the appropriate standard. The Court recognized that, if plaintiffs established that Carlyle determined it needed to sell immediately, “consequences (and price) be damned, that would create a conflicted controller transaction, and Carlyle would be liable, absent entire fairness.” But neither the contractual arrangements governing the fund nor the evidence introduced at trial supported such a finding.

As for the fund’s term, the Court found that ten years “is the lifecycle typical of most private equity firms,” encompassing periods of fundraising, investing in and working to create value in the companies in which the fund invests, and finally “looking for exit opportunities and to monetize its investments.” The Court acknowledged that a “preference to exit around the ten-year mark exists because when a fund reaches the end of its term, it can no longer obtain additional capital from its investors and thus, cannot make further investments in portfolio companies.” The Court observed, however, that a fund “can continue to hold and manage its remaining portfolio companies after its term ends,” or, alternatively, the general partner can “seek an extension of the fund life” from investors, in which case it could continue to make investments in portfolio companies. Therefore, the ten-year term “did not impose a deadline for selling its portfolio of companies,” and Carlyle “has had funds where they continued to hold investments after term expiration.” In this case, Carlyle investors also approved a two-year extension of the fund’s term. As a result, the Court found that Defendants were not operating under such time pressure “to sell Authentix so that they were willing to do a fire sale of the Company, accepting far less than the fair value of their shares in return for an immediate sale.”

The Court also rejected plaintiffs’ argument that Carlyle received a unique benefit because the sale eliminated the potential for Carlyle, pursuant to the fund’s clawback provisions, to have to return to limited partners distributions it previously received associated with its Authentix investment. The Court found no evidence indicating Carlyle was “so concerned with avoiding a clawback that it was a potent motivator that colored their judgment.” Moreover, the clawback provision had “an incentive structure that does not place pressure on Carlyle’s deal team members to sell portfolio companies at less than fair value in a fire sale.” Instead, the incentive structure implied Carlyle was “interested in selling Authentix because it may decline in value; and that it would be best for all shareholders, regardless of the clawback, to sell before the value further declined.” Because Carlyle did not have any conflicts of interest that triggered entire fairness, notwithstanding its status as the controlling stockholder, the Court reviewed the sale of Authentix under the more deferential business judgment rule, and ultimately found in favor of the defendants.

Takeaway for Practitioners

• Controller transactions are vigorously scrutinized under Delaware law, which mandates that entire fairness review is required where a transaction involves a controlling stockholder who receives a non-ratable benefit.
• Standing alone, ordinary course private equity fund structures and compensation arrangements—for instance, that Carlyle wanted the sale to go forward in 2017 but without an imperative that they needed it to go forward—are insufficient to support a finding that a fund obtained a non-ratable benefit distinct from other stockholders and thus tantamount to a disabling conflict. 
• Even where, as here, a finding that a non-ratable benefit has been sufficiently pled to defeat a motion to dismiss does not mean it cannot be successfully litigated and defeated at trial.

Background

On August 28, 2024, the Delaware Court of Chancery issued a post-trial final report in Peneff Holdings LLC v. Nurture Life, Inc., which addressed the circumstances where a stockholder may waive its right to inspect a corporation’s books and records under DGCL § 220. Nurture Life, Inc.’s (the “Company”) Investors’ Rights Agreement (the “IRA”) required it to deliver to each “Major Investor” certain categories of information within specified time periods. Plaintiff Peneff Holdings LLC (“Peneff”) was initially a Major Investor under the IRA. However, the Company amended the IRA (the “Amended IRA”), which stated that an investor ceased to be a “Major Investor” if the investor or its affiliates engaged in any legal action against the Company. Since one of Peneff’s non-stockholder affiliates was engaged in separate litigation against the Company, the Company took the position that Peneff was no longer a qualifying Major Investor and thus no longer had any inspection rights under the Amended IRA.

The Company contended that Peneff waived its statutory inspection rights because the intent of the inspection rights in the Amended IRA was to supplant all other sources of information rights, including DGCL § 220. The Court held that the Amended IRA was not a waiver of Peneff’s statutory inspection rights.

The Delaware Court of Chancery’s Decision

Setting aside the question of whether a stockholder can waive its statutory inspection rights in a private contract under Delaware law, the Court found that the Amended IRA provided that “a Major Investor is contractually entitled to information; it does not say the inverse—that a stockholder who no longer qualifies as a Major Investor forfeits other information rights.” Thus, the Amended IRA did not “clearly waive Peneff’s statutory inspection rights.”

Takeaway for Practitioners

• While it is unsettled whether a stockholder can waive its statutory inspection rights in a private contract under Delaware law, practitioners should note that any attempt at such a waiver must be clearly stated.

Background

On September 27, 2024, the Delaware Superior Court issued a ruling in Wellgistics, LLC v. Welgo, Inc., which addressed a parent entity’s failure to enforce its subsidiary’s contracts. Welgo, Inc. (the “Parent”) generated revenue through its subsidiary Welgo, LLC (the “Subsidiary”). Due to the Subsidiary’s business, it kept its list of medications and distributors confidential. Shortly after the formation of the Parent, one of its founders sought to sell 50% of the Parent’s Stock to Wellgistics, LLC (“Wellgistics”). During diligence, Wellgistics requested information about the Subsidiary’s products and business. The Parent refused to disclose anything until the parties executed a Mutual Confidentiality Agreement (“MCA”). Once the parties executed the MCA, Wellgistics learned of the identity of the Subsidiary’s medications and distributors.

Thereafter, Wellgistics began purchasing large quantities of the medications that the Subsidiary normally bought and contacted its distributors. The Parent alleged Wellgistics’ actions increased national utilization rates and triggered unwanted scrutiny. As a result, the medications that the Subsidiary normally sold were no longer fully covered by insurance. This reduced the number of medications that the Subsidiary was able to sell, decreasing the Parent’s profit. The Parent—not the Subsidiary—filed suit against Wellgistics for breach of the MCA and for tortious interference.

The Delaware Superior Court’s Decision

Breach of Contract
The Court found that Wellgistics had a duty to only use the confidential information it received under the MCA for the purchase of the Parent’s stock. However, Wellgistics only owed that duty to the Subsidiary—not the Parent. Under Delaware law, a parent entity generally “does not have a claim for improper disclosure of confidential information belonging to a subsidiary.” Here, the Parent alleged disclosure of the Subsidiary’s confidential information—not the disclosure of the Parent’s confidential information. Thus, the Court held that the Parent failed to plead a claim for breach of the MCA.

Tortious Interference
The Parent argued that it was a third-party beneficiary of the Subsidiary’s contracts with its distributors because it wholly-owned the Subsidiary and the Subsidiary was operated for the benefit of the Parent. The Court disagreed. Under Delaware law, a parent entity is not automatically a third-party beneficiary of its subsidiary’s contracts. Further, the fact that the Subsidiary paid some of its revenue to the Parent, made the Parent, at most, an incidental beneficiary; not enough to support a tortious interference claim.

Takeaways for Practitioners

• Under Delaware law, parent entities generally do not have a claim for improper disclosure of confidential information belonging only to a subsidiary, absent clear contractual language providing the parent this right.
• The fact that a parent entity wholly-owns its subsidiary and receives portions of the subsidiary’s revenue does not automatically make the parent entity a third-party beneficiary to a subsidiary’s contract(s).

Background

On August 21, 2024, the Delaware Court of Chancery issued an Order in Potts v. SYFS Intermediate Holdings, LLC which addressed the failure to impose implied obligations in the face of clear contractual language. SYFS Intermediate Holdings LLC (“SYFS”) adopted an LLC Agreement that stated managers owe “no fiduciary duties (including duties of care and loyalty) to [SYFS] and the members.” Although the LLC Agreement eliminates fiduciary duties, it does not by its terms and cannot under the Delaware LLC Act eliminate the implied contractual covenant of good faith and fair dealing. Plaintiffs Sybill Potts and others (“Potts”) were unit holders and filed suit against SYFS, challenging its asset sale. Potts alleged that SYFS violated the implied covenant of good faith and fair dealing by obtaining income outside of the LLC Agreement’s waterfall provision through the asset sale. Specifically, Potts argued that the waterfall provision provided the exclusive framework through which SYFS equity holders were to profit from SYFS. SYFS countered that Potts’ argument was “nothing more than a backdoor attempt to assert a claim for breach of fiduciary duty,” despite “an express provision in the [LLC Agreement] that eliminate[d] all fiduciary duties.”

The Court of Chancery’s Decision

The Court held that Potts’ implied covenant claim was nothing more than a backdoor attempt to assert breach of fiduciary duty claims—despite an express provision eliminating such claims. Under Delaware law, the implied covenant of good faith and fair dealing “cannot be used to circumvent the parties’ bargain.” Here, the parties explicitly bargained for and agreed to a provision unequivocally eliminating all fiduciary duties. Thus, the Court dismissed Potts’ implied covenant claim.

Takeaway for Practitioners

• Delaware courts will seldom entertain arguments for breach of fiduciary duties with a limited liability companies where the parties explicitly eliminated them.

Background

Two Delaware decisions recently sustained implied covenant claims challenging the termination of at-will corporate officers. In Schatzman v. Modern Controls, Inc., a corporate officer (“Schatzman”) was contractually entitled to 10% of the net proceeds from a sale of his employer if the sale occurred during his employment. The Company terminated Schatzman after investigating several employee complaints against him for harassment and defamation; several months later, the company announced a sale. Schatzman claimed that his termination violated the implied covenant of good faith and fair dealing, notwithstanding his status as an at-will employee, because, he alleged, the company terminated him in bad faith for the “improper purpose” of depriving him of his share of the sale proceeds. Denying the employer’s motion to dismiss, the Superior Court found that Schatzman sufficiently alleged that his employer terminated him for an improper purpose because, before his termination, his employer did not give him information about the accusations against him, no opportunity to participate in the investigation, and no forum to defend himself.

Roth v. Sotera Health Co. concerned a dispute about a former corporate officer’s (“Roth”) unvested equity units in his employer (the “Company”). The units were to vest if the Company’s private equity sponsor received cash distributions equal to a specified return rate on their investment; however, the units would be forfeited if they remain unvested when Roth’s employment ended. Roth resigned after receiving a demotion, and sued the Company for the value of his equity. Roth argued that the Company violated the implied covenant of good faith and fair dealing by constructively terminating him in bad faith to cause a forfeiture of his equity. The Court of Chancery sided with Roth and denied the Company’s motion for judgment on the pleadings.

Delaware courts are generally hesitant about recognizing the implied covenant in at-will employment contracts, but they recognize an exception where the employer “uses its superior bargaining power to deprive an employee of compensation that is clearly identifiable and is related to the employee’s past services.” The Court found that Roth sufficiently plead bad faith based on his allegations that the Company’s CEO “felt that [his] equity package was excessive and manufactured reasons for his demotion to avoid paying him for it” and that the company’s board of directors “took no efforts towards meeting the vesting conditions.”

Takeaways for Practitioners

• Delaware courts are hesitant to recognize implied covenant claims in the context of an at-will employment contract but may do so “where the employer used its superior bargaining power to deprive an employee of clearly identifiable compensation related to the employee’s past service” (as in Sotera) or “where the employer falsified or manipulated employment records to create fictious grounds for termination” (as in Schatzman).
• Bad faith may arise when a corporate officer is terminated in circumstances that suggest the company was motivated by a desire to avoid paying a benefit tied to the officer’s continued employment.

Background

On September 23, 2024, the Court of Chancery issued a ruling in Roth v. Sotera Health Co., which addressed a compensation dispute between an officer and his former employer relating to his unvested equity.

Plaintiff Kurtis Roth (“Roth”) was a former officer of Defendant Sotera Health Company’s (“Sotera”) operating subsidiary, as well as a member of Sotera holding Class B-2 Units. Pursuant to Sotera’s limited liability company agreement (the “LLC Agreement”), Class B-2 Units would vest if Sotera’s private equity sponsors received a specified multiple on their investment. However, any Class B-2 Units that remained unvested at the time Roth’s employment was terminated would be forfeited.

In 2016, Sotera was converted to a limited partnership and its limited partnership agreement (the “L.P. Agreement”) retained the same vesting and forfeiture term for Class B-2 Units set forth in the LLC Agreement.

In 2020, Sotera became a public corporation, and Roth executed a restricted stock agreement (the “RSA”) pursuant to which Roth’s Class B-2 Units were exchanged for restricted shares of common stock (the “Restricted Stock”). Notably, the RSA incorporated the terms of the L.P. Agreement by reference, generally providing unvested shares of Restricted Stock would be subject to the same vesting and forfeiture restrictions that applied to unvested Class B-2 Units.

In 2022, Roth resigned and was advised that his unvested shares of Restricted Stock would be forfeited. Roth then filed this action.

The Chancery Court’s Decision

On summary judgment, the Court held that the pre-IPO vesting and forfeiture terms applied to the Restricted Stock Roth received in exchange for his Class B-2 Units. The Court noted that the terms of the LLC Agreement were “carefully revised” into the L.P. Agreement when Sotera converted from a limited liability company to a limited partnership. Specifically, the Court highlighted that the defined terms in the LLC Agreement matched those in the L.P. Agreement. The RSA, on the other hand, “simply incorporate[d] the terms of the [L.P. Agreement] by reference.” The Court highlighted that this practice created several “ill-fitting” terms. Nevertheless, the Court found that “sloppy drafting does not necessarily create ambiguity.”

Despite the RSA’s “imperfect[ions],” the Court held that the LLC Agreement’s vesting and forfeiture terms, which “carried forward in identical provisions” in the L.P. Agreement, “continue[d] to apply to Roth’s unvested Sotera stock” through the RSA’s “clear incorporation provision,” which expressly stated those terms were “incorporated herein by reference as if fully set forth herein.” Accordingly, any shares of Restricted Stock that were unvested when Roth left Sotera were “forfeited and cancelled for no consideration.”

Finally, the Court rejected Roth’s argument that the incorporation failed under 8 Del. C. § 202(a) because the restrictions on his shares were not “contained in the notice or notices” provided with the stock grant. Section 202(b) allows restrictions to be imposed “by an agreement . . . among . . . security holders . . . and the corporation,” and Section 202(a) includes an exception for “persons with actual knowledge of the restriction.” Thus, the Court found that Roth had “signed and consented to the [RSA], which incorporate[d] vesting and forfeiture provisions he had been aware of since 2015.”

Takeaways for Practitioners

• When incorporating another instrument by reference, Practitioners should consider whether any of the terms to be incorporated (especially defined terms) are “ill-fitting” for the instrument interpreting them. For example, avoid incorporating terms by reference from an earlier instrument that refer to an entity as the “Partnership” into a later contract if the entity has since been re-organized into a limited liability company or a corporation.
• Even if “sloppy drafting does not necessarily create ambiguity” in a contract, it may still invite otherwise avoidable litigation.

A recent decision out of the Delaware Court of Chancery in John D. Arwood et al. v. AW Site Services, LLC, sheds significant light on whether a party to a contract governed by Delaware law.

Read the full article: “Delaware Law Allows Buyers to ‘Sandbag’ Sellers” (March 2022)