Fried, Frank, Harris, Shriver & Jacobson LLP

04/02/2026 | Press release | Distributed by Public on 04/02/2026 12:55

M&A/PE Quarterly - Winter 2026

M&A/PE Quarterly | April 2, 2026

Table of Contents:

Chancery Interprets SB 21's New Section 220 Requirements-Unation and Trematerra

The Court of Chancery issued its first two decisions interpreting the new amendments to DGCL Section 220 that were enacted as part of SB 21-Moran v. Unation (Dec. 22, 2025) and Trematerra v. The Affinity Group (Dec. 8, 2025).

Key Points

  • The court did not apply especially restrictive interpretations to new Section 220's undefined terms and standards. While new Section 220 generally imposes further restrictions on stockholders' rights to access corporate books and records, the court, in these two initial cases, while applying the statute's requirements precisely, did not apply especially restrictive interpretations to the statute's undefined terms and standards. The extent to which these decisions signal the court's general approach going forward is uncertain, however, as (i) both cases presented allegedly egregious factual contexts and (ii) Unation involved the unique circumstance that the company failed to appear in the Section 220 proceeding.
  • Unation establishes that companies cannot defeat a production of books and records under Section 220 by failing to appear in the proceeding. New Section 220 provides that, if certain "core" books and records specified in the statute do not exist, their "functional equivalents" may have to be provided. In Unation, the court stressed that a company cannot block a determination as to whether the records exist (and thereby block a determination whether their functional equivalents must be produced) by failing to appear in the Section 220 proceeding. As a consequence of Unation's failure to appear, the court accepted as true all of the Petitioner's allegations and the reasonable inferences flowing from them. We note that, therefore, the access the court granted might be broader than what may be expected in future cases, as, in this case, there was no "opportunity to more narrowly define the scope of production due to Unation's default."
  • The decisions confirm the strong advantage to a company in maintaining the "core" corporate records specified in the statute. The court clarified in Unation that, when the core books and records specified in the statute exist-including minutes of board, committee, and stockholder meetings; annual financial statements; and, for public companies, director questionnaires-the production of those records may be required, but the court is "forbidden" from ordering the production of additional documents as the "functional equivalent" of those records. The court found it plausible that, where the company did not provide any of the core documents to the Petitioner (and provided no further information to the court about their existence, given the default appearance), it was plausible that the documents did not exist and therefore ordering access to "functional equivalents" requested by the Petitioner was appropriate.
  • In Unation, the court, when determining what records were "functional equivalents" of the core records, considered the requested records "in combination." Specifically, the court found that the requested cap tables, tax returns, information used to support corporate valuations over the past two years, and records pertaining to an allegedly undervalued equity offering, when considered together, were the functional equivalent of the annual financial statements that allegedly did not exist.

Background. Unation. Unation, Inc. received a demand from its largest stockholder (who had been the former CEO) seeking to inspect corporate records for the stated purposes of valuing his shares and investigating potential mismanagement or wrongdoing. The board chair (who was Unation's founder) refused to produce any documents. The stockholder claimed that, although he was the CEO, he had been blocked from access to the corporate books and records generally and from corporate decision-making. Unation failed to appear in the Section 220 proceeding. Magistrate Christian Douglas Wright held that the stockholder was entitled to access to nearly all of the records he requested.

Treaterra. The Affinity Project, Inc. received a demand from a stockholder seeking to inspect corporate records for the stated purposes that included valuing his investment and evaluating a company offer to buy back his stock at a stated price. The company had provided some information to the stockholder over the years, but allegedly the information had lessened to a "trickle" in the most recent years. The company's buyback offer was at a per share price that was half the price the stockholder had paid. The company offered to provide certain records, but the stockholder sought additional records. Magistrate David Hume IV held that the stockholder was entitled to access to all of the documents he requested other than those that would provide only duplicative information.

Discussion

Amended Section 220 provides as follows:

  • A demand to inspect corporate records must be made "in good faith and for a proper purpose"; it must describe "with reasonable particularity the stockholder's purpose and the books and records the stockholder seeks to inspect"; and the books and records sought must be "specifically related" to the stockholder's purpose.
  • If the corporation refuses to permit inspection or does not reply to the demand within five business days, the stockholder can file suit, and if the stockholder proves that it has met the requirements above, the stockholder will be entitled to access to nine categories of "books and records" specified in Section 220(a)(1).
  • If certain of the specified "books and records" do not exist-namely, (i) minutes of stockholder, board, or board committee meetings; (ii) written consents evidencing stockholder action without a meeting; (iii) annual financial statements; and (iv) for publicly held corporations, director independence questionnaires-then, the court (under Section 220(f)) may order the corporation to produce the "functional equivalent" of these missing core books and records, but only to the extent they are "necessary and essential" for the stockholder's stated purpose.
  • If a stockholder seeks to inspect corporate records beyond the "books and records" specified-or, when applicable, their functional equivalents-then (under Section 220(g)) the court can order access to such additional records only if the stockholder shows a "compelling need" to inspect them, and shows by "clear and convincing evidence" that "such specific records are necessary and essential to further [the stockholder's proper] purpose."

Unation

The decision clarifies that a company cannot block a stockholder from establishing entitlement to functional equivalent documents by failing to appear at a Section 220 proceeding. Under the statute, if a stockholder and the corporation cannot agree on the production of corporate records beyond the statutorily defined books and records, then subsections (f) and (g) of Section 220 provide potential avenues through which the court-through litigation-can determine if the stockholder has satisfied the evidentiary burdens needed to obtain those additional records. The court wrote: "What this process does not contemplate-and what it should not encourage-is gamesmanship by a corporation where, rather than retain counsel and defend a Section 220 action on the merits, the corporation simply defaults. Construing a corporation's default to mean that the court is only able to order the production of Section 220(a)(1)'s core board materials and nothing further because no trial has occurred would create undesirable incentives and could encourage corporations to continue the very sort of 'trench warfare' SB 21 was intended to discourage." The court therefore imposed, as a consequence of Unation's failure to appear, that it would accept as true all of the Petitioner's alleged facts and all reasonable inferences flowing from those facts.

The court stated that the "reasonable particularity" requirement means that: the stockholder's demand must "enable[] the receiving corporation to understand why the stockholder seeks inspection and what sort of documents it needs to look for…." Based on other authorities' interpretations of "reasonable particularity" standards in other contexts, the court wrote: "[A] single theme emerges: the 'reasonable particularity' requirement does not impose a high threshold."

The court ruled that the Petitioner's request for information used by the company to support corporate valuations over the past two years, and for records supporting the valuation that resulted in an equity offering by the company at an alleged substantial discount, satisfied the "reasonable particularity" requirement. The Magistrate observed that the requested books and records "were used by Unation to support certain corporate valuations performed by Unation, so Unation should be well-positioned to know what records were used in the valuation process" and "[i]t would be unreasonable to expect a stockholder who was not involved in performing those valuations to identify the records sought with any greater particularity."

The court stated that the "specifically related" requirement means that: the requested records must be "essential and sufficient" to the stockholder's purpose-the same standard as has long been applicable under longstanding Delaware law, the court stated. The court concluded that "the better reading of the General Assembly's inclusion of 'specifically related' is that it was not meant to signal a change in our books-and-records law regarding a stockholder's obligation to establish that each category of the books and records requested is essential and sufficient to the stockholder's stated purpose." The court ruled that the books and records requested by the stockholder were "specifically related" to his stated investigative and valuation purposes.

The court stated that a document is a "functional equivalent" if: it "(1) contains or conveys, alone or combined with other documents, substantially the same information…and (2) would enable a reasonable individual…to learn substantially the same things, come to substantially the same conclusions, or draw substantially the same inferences…."

The Petitioner sought "functional equivalents" of core books and records specified in the statute. The court, accepting as true his allegations that he was prevented from accessing governance and financial records, concluded that it was plausible that the records did not exist. "It is, I think, a fair inference that when a company denies its CEO these materials it is because some or all of those materials do not exist," the Magistrate wrote. If there were a different reason, the court noted in a footnote, such as spite or tactical advantage, the company could have disclosed the existence of the materials if it had not failed to appear in the Section 220 proceeding. Therefore, the Petitioner was entitled to access to their functional equivalents, including any document that "reflects deliberations, decisions, or actions of Unation's Board…or any Board committee…or of…Unation's stockholders…or [that] pertains to or affects the valuation of Unation."

The Petitioner also sought certain other documents-a cap table, complete tax returns, and records used to generate corporate valuations-as "functional equivalents" of minutes or financial statements. The court, after comparing the components of annual financial statements to the requested documents, concluded that these documents were the functional equivalent of financial statements. These documents, the court stated, "are reasonably likely to contain or convey, as a group, substantially the same information as annual financial statements and would enable an individual to learn substantially the same things, come to substantially the same conclusions, or draw substantially the same inferences as the individual could do with the actual annual financial statements."

The court stated that "clear and convincing" evidence of a "compelling need" for "specific records" that are "necessary and essential" means as follows: "Clear and convincing" means "highly probable, reasonably certain, and free from serious doubt"; "compelling need" means that the records are "pivotal to the purpose"; "specific records" codifies the traditional requirement that the court's order granting inspection be "circumscribed with rifled precision," so that the stockholder receives only those records that are clearly and convincingly shown to be necessary and essential to the stockholder's proper purpose; and "necessary and essential" means "address[ed] to the crux of the shareholder's purpose and…unavailable from another source."

The court ruled that the Petitioner's request met these requirements. His "compelling need" for the requested documents was demonstrated by the allegations (presumed to be true) that the company had "intentionally left [him]-both as CEO and stockholder-in the dark as to wide swaths of Unation's operations," having refused to provide him with documents to review, and having engaged in equity offerings at half the price he paid for his shares without providing evidence to justify their value-combined with its having left him, including by not appearing in the Section 220 proceeding, with "no knowledge of or ability to find out what books and records Unation maintains…."

Trematerra

The court permitted access to books and records for purposes of valuing the plaintiff's stock. Access was granted, under Section 220(a)(1), to the company's stock ledger and annual financial statements for the three years preceding the date of the demand. In addition, the court found that the Plaintiff showed a "compelling need" to inspect the following and showed by "clear and convincing evidence" that they are "necessary and essential" to value his investment.

The court clarified the "compelling need" standard. The court observed, in a footnote, that the compelling need standard arises in Delaware's attorney work-product doctrine where a party may show a "compelling need" to access materials that are not subject to absolute privilege but are otherwise undiscoverable (for example, an attorney's mental impressions). In this case, the court wrote, "given Plaintiff's proper purpose to evaluate Defendant's offer to repurchase his shares for an amount considerably less than Plaintiff reasonably expected, Plaintiff has demonstrated a compelling need to access documents reflecting Defendant's appraisal of the stock." Further, certain records were "necessary and essential to further his evaluation purpose," as the core records specified in the statute "alone would provide an inadequate basis to value his shares and consequently evaluate Defendant's buyback offer." Finally, the court, applying the "necessary and essential" standard, which, it stated, "demands that no more than what is sufficient to meet Plaintiff's proper purpose," eliminated any "duplicative documents" requested.

The court ordered access to the following records: All Federal and state corporate income tax returns and supporting schedules for the three years preceding the demand; all valuations and appraisals of the company and its shares for the three years preceding the demand; and documents reflecting the Defendant's current assets and liabilities.

The court did not permit access to the following records on the basis that, although they related to valuation, they were duplicative: The requested forecasts, projections, and budgets would not provide as specific information as the stock ledger, tax returns, and valuations and appraisals of the company and its shares. The requested profit and loss statements and general ledgers would provide the same information as the annual financial statements and tax returns. The requested agreements encumbering the company's assets, documents for completed financings, loan agreements, and contracts that provide revenue, would be shown in the company's current assets and liabilities. The requested current capitalization table would be duplicated by the stock ledger. The court found that, with respect to certain other requested records, the Plaintiff had not "made out a compelling reason that it needs these items to arrive at a current stock valuation." The court stated that it had "distilled from the voluminous requests the documents that will most effectively and precisely accomplish that mission."

Practice Points

  • Maintaining core corporate records. The decision underscores the critical advantages to a corporation of maintaining the core corporate records now specified in DGCL Section 220 (namely, minutes of board, committee, and stockholder meetings; annual financial statements; and, for public companies, director questionnaires). If these documents are maintained, and are provided to a stockholder making a 220 demand, generally the court will not order that additional documents must be provided to the stockholders. If these documents are not maintained and provided, the court may order that other documents be provided (and these could include even internal emails or other informal communications).
  • Minutes. Note that, potentially, if minutes are extremely short-form, the court conceivably could view them as so unsubstantive as to be "non-existent for Section 220 purposes. A long series of recent Delaware decisions has underscored that, as a general matter, sparse board minutes do not aid directors when their actions are challenged. To the contrary, minutes provide an opportunity to establish a record of the proper procedures in which the directors engaged and the proper attention and consideration they provided before making material decisions. The court at times has drawn negative inferences from silence or sparse description in the minutes, concluding either that the issue was not considered at all or that the directors chose to hide their deliberations. Therefore, at least where corporate action is likely to be challenged, careful consideration, with the advice of legal counsel, should be given to what information should be included in corporate minutes.
  • Default appearance. At least under the approach the court took in Unation, a corporation's failure to appear in a Section 220 proceeding will advantage the stockholder-petitioner.

Chancery Decision Heightens Financial Advisors' Risk of Aiding and Abetting Liability

A decision issued in February 2026 by Vice Chancellor J. Travis Laster involved a challenge to a take-private transaction (the "Transaction") in which a private equity firm buyer (the "PE Firm") cashed out the public stockholders of a controlled target company (the "Company"). The Transaction was approved by a special committee of the Company's board (the "Committee") and the Company's public stockholders. The Committee's financial advisor (the "Committee Financial Advisor") provided a fairness opinion. The Company was advised by a separate financial advisor (the "Company Financial Advisor"). The Plaintiffs brought suit, claiming that the Transaction was unfair to the public stockholders. At the pleading stage of the litigation, the Vice Chancellor found it reasonably conceivable (the standard for survival of claims at the pleading stage) that certain of the Company's directors, the CEO, and the controlling stockholder breached their fiduciary duties in the transaction process, aided and abetted by the Company Financial Advisor.

Key Points

The decision heightens the risk of aiding and abetting liability for financial advisors with respect to alleged sell-side fiduciary breaches in a sale process. The Court of Chancery held that the standards for aiding and abetting liability that the Delaware Supreme Court recently explicated in Mindbody (2024) and Columbia Pipeline (2025) are not applicable when the claims are asserted against sell-side financial advisors (rather than, as was the case in Mindbody and Columbia Pipeline, against third party acquirors). The court reasoned that the heightened standards set forth most recently in Mindbody and Columbia Pipeline are appropriate where the claims are against third party acquirors because third party acquirors are "on the outside" with respect to the sale process, and they are expected to act in the process in their own self-interest. By contrast, however, the court stated, sell-side financial advisors are "on the inside" with respect to the sale process, and these advisors are expected to help the company's officers and directors meet their fiduciary duties in the process. Thus, "aiding and abetting might well exist for a sell-side financial advisor under circumstances where it could not exist for a third-party acquirer," the court wrote.

Further, the court suggested that it may be reasonable to presume that, when there were sell-side fiduciary breaches, the financial advisor aided and abetted them. The court stressed the sell-side advisor's "central role" in a sale process and extent of the sell-side directors' reliance on the advisor in the process. The court wrote: "Although breaches of duty in sale processes are likely rare and misconduct by financial advisors equally so, the financial advisor's central role makes it all the more conceivable that-when a breach happens-the financial advisor will have assisted in the act and understood its nature."

The decision also heightens the risk of aiding and abetting liability for financial advisors with respect to alleged sell-side disclosure violations. The court deferred a decision on whether it is reasonably conceivable that the Company Financial Advisor's failure to correct disclosure in the Company's proxy statement constituted aiding and abetting. Although the Delaware Supreme Court held in Mindbody and Columbia Pipeline that a buyer's not correcting flawed disclosure in a target company's proxy statement (even when there is a contractual duty to review the proxy statement) is not sufficient to establish aiding and abetting liability, the Court of Chancery stated that the conclusion may be different in the context of claims against financial advisors where those financial advisors directly participated in the events that give rise to the alleged disclosure violations.

The court rejected the Company Financial Advisor's contention that disclosure of its conflict of interest indicated that it did not act with scienter (a required element for aiding and abetting). The Company Financial Advisor stressed that the conflict was disclosed (to the board and stockholders), and that it had sought and received consent from the Committee to act as financial advisor for the Company. The court responded that the disclosure and consent did not " eliminate [the] effect [of the conflict]." The court wrote: "Indeed, disclosure [of a conflict] can turn out to be detrimental, because the disclosing party may feel it has discharged its obligations by making the disclosure, resulting in the disclosing party feeling less constrained in acting self-interestedly."

The decision offers new guidance, and provides reminders of past guidance, with respect to financial advisor-related disclosure. See "Practice Points" below.

Practice Points on Financial Advisor-Related Disclosure

  • Company financial advisor; advisor not rendering a fairness opinion; two advisors. The court stated that the standard of disclosure is not necessarily lower for a financial advisor who is representing the company (rather than a special committee) or who is not rendering a fairness opinion-at least, we would note, where the financial advisor played as central a role in the process as was the case here. Relatedly, the court stated that when a fairness opinion is rendered by a "supposedly conflict-cleansing" financial advisor with a "secondary" role in the valuation process, that does not obviate the need for disclosure about the "primary" financial advisor's conflicts. In each of these situations, the court stated, "full disclosure" of the advisor's conflicts and compensation is required
  • Conflicts. Based on the disclosure the court found potentially inadequate in this case, financial advisors and their legal counsel should consider whether their usual scope of disclosure is sufficient with respect to the financial advisor's compensation details, prior engagements, and concurrent engagements.
  • "May." Generally, a company should avoid disclosure that an advisor "may" have provided services to or co-invested with certain parties, or "may" do so in the future. Instead, depending on the circumstances, "specific facts" may have to be disclosed.
  • Publicly available information. Generally, a company should not omit material information from a proxy statement on the basis that it is publicly available elsewhere.
  • Partial disclosure. If a company provides "partial disclosure" on a topic, even if not material, it may have to provide further information to avoid that disclosure, even if technically true, from leaving an impression that is materially misleading.
  • Immaterial compensation but material relationship. Consideration should be given as to the appropriate disclosure where the compensation received by an advisor from a participant in the process was immaterial but "the relationship" was material-for example, if the advisor received an immaterial amount of compensation but from a firm that held a large minority stake in the company and had a director-designee on the board who served on the special committee. In addition, there could be a "partial disclosure problem" if some facts about the advisor's relationships with other participants in the transaction process, but not about this participant, are disclosed, as that could leave the impression that the advisor had no relationship with this participant.
  • Separate advisors for the company and the committee. Consideration should be given to the appropriate disclosure where there are separate financial advisors for the company and the special committee so that the disclosure accurately describes the role each played (for example, with respect to "leading" the process and having "control" over negotiations with potential buyers). Generally, they should not be described as "co-advisors" in the process if one of them played a clearly dominant role.

Chancery Finds Restrictive Covenants, Imposed in Connection With the Sale of a Business, Were Overbroad-BluSky

In BluSky Restoration Contractors, LLC v. Robbins and Popwell (Mar. 4, 2026), the Court of Chancery provided important-and seemingly frequently neglected-guidance for drafting restrictive covenants so that they will be enforceable. The restrictive covenants at issue were imposed in the Sale Agreement pursuant to which BluSky acquired the Defendants' business, and also in contemporaneous Employment Agreements pursuant to which the Defendants were employed by BluSky, as well as subsequent Equity Award Agreements.

Key Points

  • Although Delaware courts apply a more deferential standard toward restrictive covenants imposed in connection with the sale of business than in the employment context, the restrictions still must be appropriately tailored. Importantly, the geographic scope of a covenant not to compete generally must be limited to the competitive footprint of the acquired company, not the acquiror plus the acquired company.
  • The court reaffirmed that it is likely to view non-solicitation provisions as overbroad if they include: restrictions on "attempts to persuade," or restrictions that include all "affiliates."

Background. BluSky, a nationwide restoration firm, purchased SRP, the Defendants' regional Tennessee-based restoration business, for "tens of millions" of dollars and integrated SRP into its national platform. Contemporaneously with the purchase, BluSky employed the Defendants as Tennessee-based regional managers. Restrictive covenants were included in the Sale Agreement, and also in the contemporaneous Employment Agreements and subsequent Incentive Unit Agreements. The Employment Agreements awarded each Defendant a salary of $300,000 per year plus the possibility of bonuses. The Defendants eventually left BluSky and started their own restoration company based in Tennessee.

BluSky brought suit claiming the Defendants breached their obligations under the non-competition and non-solicitation covenants. Magistrate David Hume IV, while acknowledging that Delaware courts subject restrictive covenants in the context of the sale of a business to a lower level of scrutiny than those in the employment context, held that the non-competition and non-solicitation covenants at issue in this case, which were imposed on the Defendants in both contexts, were overbroad.

Discussion

The court held that BluSky was entitled to protect only the competitive footprint of the acquired company, not of the acquiror. The court acknowledged that a lower level of judicial scrutiny is applied to restrictive covenants that are entered into in the context of the sale of a business, rather than in the employment context. BluSky emphasized that, as the Employment Agreements were entered into on the same date as the Sale Agreement, the restrictive covenants in the Employment Agreements were imposed as "part of the sale"-and thus were entitled to the lower level of judicial scrutiny that is applied to restrictive covenants entered into in the context of the sale of a business rather than in the employment context. The court, however, emphasized that BluSky also argued that it had a "legitimate business interest" in protecting its full business reach-a standard applicable in the employment context, but not in the context of the sale of a business (where only the acquired company's business reach can be protected, not also the acquiror's). BluSky could not have it both ways, the court stated. It could not "benefit[] from the less searching inquiry in the context of a business sale, but…also reap[] the expanded footprint of a standalone employment contract." The court therefore found the restrictive covenants in the Employment Agreement overbroad as they protected the acquiror's business reach, not just the acquired company's reach. SRP had regional reach, whereas the non-compete restrictions had worldwide reach, and the non-solicitation restrictions had nationwide reach-both, "far exceeding" BluSky's legitimate business interest that it could protect through restrictive covenants, the court stated, citing Intertek (2023).

The court found the temporal and geographical scope of the restrictions to be overbroad. In the Sale Agreement and the Employment Agreements, the non-competition covenant covered a period of five years and the geographic scope was worldwide. The court stated: "[T]he restricted area is worldwide. BluSky's business lines are nationwide. Yet SRP's sphere was only regional. …[A] five-year limitation with these discordant physical boundaries is unjustified. The [provision] is unreasonable based on its geographic and temporal overbreadth." The non-solicitation covenant covered a period of two years and there was no geographic limitation stated. The court wrote: "This lack of limitation [on the geographical scope], especially when considering SRP's regional nature, is unreasonable."

The court found the non-solicitation restriction on "attempts to persuade" to be overbroad. The non-solicitation restrictions in the Sale Agreement and the Employment Agreements were overbroad due to their inclusion of "attempts to induce" or "attempts to persuade" employees or customers to terminate their relationships with BluSky. The court noted, and other recent Court of Chancery decisions have held, that such provisions may impermissibly capture conduct having nothing to do with business competition (for example, discussing with an employee whether he would be happier at a different company for various personal reasons).

The court found the non-solicitation restriction on "affiliates" to be overbroad. The court found that the non-solicitation restrictions were overbroad due to their inclusion of BluSky's and the Defendants' respective "Affiliates," which was defined as "any other Person directly or indirectly controlling, controlled by, or under common control with, such Person." The Magistrate emphasized that "including affiliates in a restrictive covenant greatly expands the covenant's breadth, and therefore requires a broader legitimate economic interest." The court noted that the definition "include[s] the Defendants' children," and that the court "has found similar restrictions that include a person's child to be excessive and unreasonable." Further, the court observed, the definition "would also include other businesses controlled by Defendants but outside the business area of BluSky, and other affiliates of BluSky in its corporate structure." As one example, the Magistrate noted, "if Robbins was also owner of a company that produced paper products, and an employee at that company suggested that a friend who worked at a paper company in BluSky's corporate structure quit her job for a better offer, that would be violative conduct under the…non-solicit."

The court found that the equities did not favor BluSky. While BluSky paid "a substantial sum" to acquire SRP, "it is not the amount paid that controls," the court wrote. The amount paid included compensating the Defendants for permissible non-competition and non-solicitation protection-not for protection that is impermissibly overbroad.

Payscale v. Norman and BetterComp (Mar. 19, 2026). In another recent restrictive covenants case, Payscale, which arose in the employment context only, the Delaware Supreme Court overturned the Court of Chancery's holding that the covenants were overbroad. In Payscale, the non-compete clause at issue had a nationwide, eighteen-month scope. The Supreme Court observed that the Court of Chancery had "correctly approached that restriction with skepticism, [as] Delaware courts rarely enforce such broad restrictions against employees." The lower court had concluded that it was not reasonably conceivable that the non-compete's scope was enforceable in light of the minimal value that the court ascribed to the equity units that Norman received as consideration for it. The Supreme Court, however, stressed that, at the pleading stage, the lower court should have considered further "Payscale's detailed allegations regarding its nationwide operations, Norman's role at the company, her involvement in key company-wide strategic decisions, and the client-driven reasons necessitating the duration of the restriction…." The lower court's holding, the Supreme Cout stated, "misapplied Delaware's low pleading burden." As to the non-solicitation and confidentiality clauses, the Court of Chancery had dismissed Payscale's allegations as conclusory. The Supreme Court stressed, however, that the lower court had not addressed the allegations that in the two months since Norman had joined the competitor, at least five clients had followed her-numbers that were not typical in the business. Those allegations, the Supreme Court stated, may "support a reasonable inference that Norman solicited clients or disclosed confidential information that permitted BetterComp to unfairly compete."

Practice Points

  • BluSky and Payscale highlight the facts-intensive nature of judicial determinations on challenges to restrictive covenants-and thus the importance of careful consideration of the scope of such covenants so that they are tailored to the particular facts and circumstances at hand.
  • Non-compete covenants imposed in the context of a business sale generally should be limited in geographic scope-to cover the competitive footprint of the acquired business, not the acquiror's business.
  • Non-solicitation covenants may be overbroad if there is a blanket inclusion of all of the company's "affiliates" broadly defined. Instead, consideration must be given to which affiliates fall within the scope of the company's legitimate competition-related business interests.
  • Non-solicitation covenants generally should not restrict "attempts to influence" or "attempts to persuade" employees or customers to terminate relationships with the company. Such restrictions may capture non-competitive activity (such as a discussion with an employee about his considering leaving the company to work at a different company that better aligns with his personal objectives or values).
  • Non-solicitation covenant restrictions generally should not include all "affiliates." The restrictions must be tailored to protect only the acquiror's legitimate business interests.

Chancery Finds LLC Member Consented to New Version of LLC Agreement by Having Accepted its Benefits-Corient

In Lafferty v. Corient Partners, LLC (Mar. 2, 2026), the Court of Chancery rejected the Plaintiff's claim that he had not consented to, and therefore was not bound by, the company's "Fifth LLC Agreement," which the majority member had created by unilaterally amending the company's "Fourth LLC Agreement." The Fourth LLC Agreement provided that it could be amended unilaterally by the majority member-but that no amendment that was material and adverse to, nor affected disproportionately, any member could be made without that member's consent. The amendment changed the Fourth LLC Agreements' Delaware forum selection provision to require instead mandatory arbitration.

Key Points

  • The court deemed the Plaintiff to have consented to the Fifth LLC Agreement through his electronic acceptance of a chain of incorporation of documents. The Plaintiff electronically executed an Equity Award Agreement, which referenced and hyperlinked a Notice of Conversion, which in turn incorporated by reference the Fifth LLC Agreement. The court held that a sophisticated person like the Plaintiff was bound notwithstanding that the chain of documents was "attenuated." The court emphasized, as it has in other recent decisions, that a party's failure to read a document before agreeing to it is the party's own responsibility.
  • The court deemed the Plaintiff to have consented to the Fifth LLC Agreement through his acceptance of the benefits of that Agreement. The Plaintiff's receipt of the benefits provided by the Agreement-the transformation of profit units into capital units and the issuance of additional units-constituted "an objective manifestation of his assent to the Fifth LLC Agreement's terms."

Background. When the Plaintiff, who was a member of and employed by the Company, left his position for other employment, the company claimed that he violated his non-competition obligations. The Plaintiff wanted those claims to be resolved in court (as the Fourth LLC Agreement provided for), not by arbitration (as the Fifth LLC Agreement provided for). The Plaintiff contended that his consent had been required for the amendments that created the Fifth LLC Agreement and, as he had not consented, he was still bound by the Fourth LLC Agreement and not bound by the Fifth LLC Agreement. He asserted that the mandatory arbitration requirement was material and adverse to him, as it caused a relinquishment of his litigation rights; and that, although it applied equally to all members, it had a disproportionate effect on him as compared to the majority member because "a private, confidential forum structurally advantages the majority member by shielding its conduct from public scrutiny and removing appeal rights." The court found it unnecessary to resolve this "novel interpretive question" because, the court concluded, the Plaintiff's consent, if it had been required, had been provided.

Discussion

Consent through a chain of incorporated documents. The Plaintiff had electronically executed an Equity Award Agreement, which stated that the award of membership units was "subject to all of the terms and conditions set forth in the applicable documents available for download in connection with th[e] Equity Award…all of which are incorporated herein in their entirety." He also had checked a box affirming that he had "read and underst[oo]d" the Notice of Conversion, which was hyperlinked, and which, in turn, stated that his units would be "eligible for distributions…in accordance with the terms of the Fifth [LLC Agreement]." The Plaintiff argued that the "chain of incorporation of documents-from the Equity Award Agreement, to the Notice of Conversion, to the Fifth LLC Agreement-[was] too attenuated to show a clear intent to waive his litigation rights." The court wrote: "A sophisticated party like [the Plaintiff] is bound by the terms of documents incorporated by reference in the contract he signs."

The court stressed that the Plaintiff had been "free to read the Fifth LLC Agreement before agreeing to the Notice of Conversion"-but that he had "opted not to" and "[n]evertheless,…voluntarily bound himself to a document explicitly referencing it." The court wrote: "He alone is responsible for his omission." Although the LLC's General Counsel had emailed the LLC members and described the amendment to the Fourth LLC Agreement as not materially, adversely, and disproportionately affecting any member, that description, the court stated, "cannot excuse Lafferty's failure to read [the amendment]."

Consent through the acceptance of benefits. The Plaintiff argued that he did not receive any "significant" new benefits under the Fifth LLC Agreement that he was not already entitled to receive under the Fourth LLC Agreement. The court disagreed, noting that (a) the Notice of Conversion transformed the Plaintiff's Class B profit interests into Class A capital interests with downside protection-"a meaningfully different, and valuable, structural change," and (b) the Plaintiff was awarded 238 new units to be issued under the Fifth LLC Agreement. The court wrote: "His acceptance of such benefits for almost a year-totaling over $7 million in value-constitutes an objective manifestation of his assent to the Fifth LLC Agreement's terms, including the arbitration provision. Having enjoyed the benefit of his bargain, [the Plaintiff] cannot now shirk the accompanying dispute resolution mechanism."

Practice Points

  • Equity award recipients should be aware that the awards often incorporate other agreements by reference. By accepting the award, the recipient is likely to be bound by the incorporated documents, even if the incorporation is through a chain of referenced documents-and, based on another recent decision, BankUnited v. Shulick (Jan. 2, 2026), even if the recipient apparently actually was unaware that it was agreeing to the incorporated documents. Thus, equity award recipients should be sure to read and understand documents that are incorporated by reference.
  • Companies should seek to ensure that the process for acceptance of an equity award is sufficient to bind the award recipient to incorporated agreements-for example, by ensuring that the recipient must press a button specifically acknowledging that the underlying agreements have been read and agreed to.

Other Developments of Note

Delaware Supreme Court Upholds Constitutionality of SB 21

In a much anticipated decision, Rutledge v. Clearway Energy (Feb. 27, 20126), the Delaware Supreme Court upheld the validity, under the Delaware Constitution, of amendments to the Delaware General Corporation Law that were enacted in 2025 (the "Amendments"). The Amendments, embodied in Senate Bill 21 ("SB 21"), were enacted against a backdrop of controversy surrounding the "DExit" movement. Among other things, the Amendments created safe harbors for deferential business judgment review of transactions involving conflicted controlling stockholders or conflicted boards of directors.

The decision supports Delaware's anti-DExit efforts. Over the last few years, corporations (mostly, controlled corporations) have been considering the possible benefits of incorporating in, or reincorporating to, states other than Delaware, where the standards for fiduciary duties of directors and officers, and thus the potential liability they face, may be lower than in Delaware. As the Amendments, through the safe harbors for conflicted transactions, lower potential liability for breaches of fiduciary duties by controlling stockholders and directors in connection with conflicted transactions, Clearway should support Delaware's efforts to stem the DExit movement and to continue as the preeminent jurisdiction for incorporation.

The decision supports Delaware's anti-DExit efforts. In the past two years, the Delaware Legislature has enacted two major sets of amendments to the DGCL, in each case swiftly after negative market reaction to court decisions that called into question the validity of longstanding corporate practices or that reflected heightened skepticism of certain kinds of transactions even when approved by purportedly independent directors. In Clearway, the Supreme Court emphasized the high bar to establishing unconstitutionality of laws enacted by the Delaware Legislature. The Legislature's quick actions and the Clearway decision may encourage the corporate bar to seek legislative responses in similar circumstances in the future when judicial decisions are issued that are viewed as particularly disadvantageous to corporations.

The Supreme Court addressed the issues of equitable jurisdiction and retroactive application. The Court of Chancery certified for the Delaware Supreme Court's consideration the following questions: (i) whether the Amendments' safe harbors violate the Delaware Constitution by divesting the Court of Chancery of equitable jurisdiction over conflicted transactions; and (ii) whether the Amendments' application, retroactivity, to cases filed before SB 21 was adopted, violates the Delaware Constitution by eliminating causes of action that accrued before SB 21's adoption. In a unanimous en banc decision, issued by Justice Gary F. Traynor, the Supreme Court answered both questions in the negative.

Equitable jurisdiction. The Supreme Court concluded that the Amendments do not strip the Court of Chancery of its jurisdiction over certain equitable claims. Rather, the Supreme Court stated, the Amendments create a new framework for review of certain equitable claims, which represents "a legitimate exercise of the Legislature's authority to enact substantive law that, in its legislative judgment, is in the best interests of the citizens of Delaware." The Supreme Court observed that the "DGCL's history" reflects deference to the Legislature's "authority to adopt DGCL provisions that shape the contours of equitable claims and affect the relief available in intra-corporate litigation." The Supreme Court noted that, "not surprisingly," as was the case here, the Legislature on occasion has amended the DGCL in response to judicial decisions.

Retroactivity. The Supreme Court, first, reiterated that there is a presumption against the retroactive application of legislation "unless the Legislature has made its intent plain and unambiguous," and in this case the legislation was clear that the Legislature intended the Amendments to be retroactive. Second, the Supreme Court reasoned that, although due process requires that acts of the Legislature do not "arbitrarily extinguish…a vested right of action," a vested right "is more than a mere expectation based upon an anticipated continuance of the existing law." Third, the Supreme Court stated that the Amendments do not extinguish the plaintiff's right of action-rather, they have (after the challenged transaction closed but before the lawsuit was filed) changed the statutory standards under which the court must review the transaction he challenges. Fourth, the Supreme Court stated that in any event due process was not violated, "[g]iven that the General Assembly has the constitutional authority to create and modify the general corporate law of Delaware" and "SB 21 is designed to further a permissible legislative objective."

Delaware Supreme Court Reverses Moelis Decision on Procedural Grounds

In Moelis v. West Palm Beach Firefighters' Pension Fund (Jan. 20, 2026), the Delaware Supreme Court held that challenges to the facial validity of Moelis & Co.'s stockholders agreement with its founder were barred by laches. The decision reversed the Court of Chancery's decision that the claims were timely and that the stockholders agreement violated the DGCL by restricting directors from managing the corporation's business and affairs.

First, the Supreme Court addressed a longstanding issue as to when a challenged contractual provision is "voidable" rather than "void." When the provisions are voidable rather than void, the challenge is subject to equitable defenses, including a laches defense. The Supreme Court clarified that contractual provisions are voidable (not void) when no mandatory provision of Delaware law would have prevented their adoption through alternative methods, such as a charter amendment. In this case, as the Court of Chancery acknowledged, the challenged governance rights granted in the stockholders agreement could have been effected through a charter amendment or issuance of a "golden share" of preferred stock. Therefore, the challenged provisions were voidable and subject to a laches defense.

Second, the Supreme Court held that the claims were time-barred. The lower court had held that equitable defenses such as laches did not apply because the challenged provisions were void; and, further, that, even if laches applied, the claims were timely because their alleged illegality was an ongoing statutory violation. The Supreme Court reversed, holding that the challenge was subject to a laches defense because the challenged provisions were voidable (not void); and that the claims were untimely because they had accrued when the stockholders agreement was entered into. Bringing the challenge nine years later constituted an unreasonable delay that presumptively prejudiced the company.

We note that, following the Court of Chancery decision, concern arose among practitioners about the uncertainties the decision created. In response, the Delaware legislature amended DGCL Section 122 to add subsection (18), which states that, notwithstanding Section 141(a)'s grant of authority to the board of directors to manage the corporation's business and affairs, a corporation may enter into contracts with current or prospective stockholders granting a variety of rights; and that consideration for such contracts is to be determined by the board. The amendment, by its terms, did not apply to the Moelis challenge-but makes it clear that corporations have broad authority to enter into agreements with stockholders granting them special rights.

Jury Finds Musk Liable for Misleading Twitter Stockholders

On March 20, 2026, a federal jury in San Francisco found that Elon Musk deliberately tried to depress Twitter's share price so that he could renegotiate or terminate his agreement to acquire the company for $44 billion. In the class action lawsuit, Musk was accused of falsely claiming on social media that Twitter had underreported the number of fake accounts ("bots") that were on its platform. In one statement, he stated that the acquisition of Twitter was "temporarily on hold" while he sought confirmation that bots represented less than 5% of users. In another statement, he stated that bots could represent "much" more than 20% of the accounts and that the takeover would not proceed unless Twitter's CEO proved that the correct percentage was less than 5%. In 2022, Musk ultimately acquired Twitter (which he renamed "X"), without renegotiating the price, following a Court of Chancery decision finding, at the pleading stage of that litigation, that it was reasonably conceivable that he was obligated to close the acquisition. Damages, which are expected to be over $2 billion, have yet ​to be determined. Separately, Musk is engaged in discussions with the SEC to settle an SEC civil lawsuit that accuses him of waiting too long in 2022 to disclose his initial purchases of ⁠Twitter shares, allegedly so that ​he could purchase more shares at low prices, before investors knew that he was buying.

Chancery "Equitably Extends" Earnout Period After the Acquiror's Impermissible Ouster of the CEO (Which Was Orchestrated by ChatGPT!)-Fortis v. Krafton

In Fortis Advisors v. Krafton, Inc. (Mar. 19, 2026), the Court of Chancery ruled that an acquiror's ouster of the acquired company's CEO was impermissible under the parties' transaction agreement. As a result, the court ordered that the earnout period the parties had agreed to be extended by the duration of the CEO's ouster. A startling aspect of the case was that the acquiror's strategy to defeat the earnout was directed through its CEO's consultations with ChatGPT.

Krafton, Inc., a South Korean gaming conglomerate, had acquired Unknown Worlds Entertainment, a U.S. video game studio best known for the underwater survival adventure game Subnautica. Under leadership of Unknown World's two founders (the "Founders"), the Subnautica franchise has sold over 17.5 million copies and exceeded $300 million in gross revenue. The parties' transaction agreement provided for an upfront purchase price of $500 million; contingent earnout payments of up to $250 million; and a guaranty that the Founders and Unknown World's CEO would retain operational control and could only be fired for cause. As Unknown Worlds prepared to release its hotly anticipated sequel, Subnautica 2, the parties' relationship fractured. Internal projections showed that the new game would generate significant revenue that would easily trigger the earnout.

The CEO of Krafton, "fearing he had agreed to a 'pushover' contract," consulted ChatGPT (an artificial intelligence chatbot) as to how to avoid the earnout. ChatGPT noted that, under the parties' agreement, Unknown World's Founders and CEO could be fired for cause but that the firing would not eliminate Krafton's earnout obligation. ChatGPT observed that it would be difficult to cancel the earnout. At ChatGPT's suggestion, Krafton's CEO formed an internal task force, dubbed "Project X" to determine whether to negotiate a "deal" on the earnout or to execute a "Take Over" of Unknown Worlds. Meanwhile, Krafton's CEO sought ChatGPT's counsel on how to proceed if Krafton failed to reach a deal with Unknown Worlds on the earnout. ChatGPT prepared a detailed "Response Strategy to a 'No-Deal' Scenario."

Over the next month, Krafton's CEO mostly followed ChatGPT's suggestions-including "preemptive framing" by "taking the fight directly to Unknown Worlds' fans"; using ChatGPT's "key summary of responses" to respond to Unknown World's Founders and CEO; "securing control points," by locking down publishing rights to ensure that Unknown Worlds could not publish (and therefore could not launch) Subnautica 2; and preparing "legal defense materials," including drafting letters to Unknown World's Founders and CEO and gathering materials suggesting that they were performing poorly.

Vice Chancellor Lori W. Will, following an expedited trial, found that Krafton breached the transaction agreement by firing United World's Founders and CEO and usurping their operational control. Notably, the court ruled that ChatGPT's responses to the CEO were not attorney-client privileged and therefore were discoverable in the litigation. The court found that Krafton's justifications for the terminations were pretextual. To remedy the breach, the court ordered that the CEO be reinstated as CEO with full operational authority over the studio, including the decision when to release Subnautica 2. Because restoring the CEO "vindicate[d] the sellers' operational rights," the court declined to return the Founders to their roles, which had been peripheral before their terminations. Further, "[t]o ensure this specific performance remedy is not illusory," the court "equitably extended the base earnout period by the duration of [the CEO's ouster]." The court reserved for a second phase of the litigation determinations as to whether Krafton's actions wrongfully impaired the earnout, and whether any resulting money damages are owed.

Chancery Decision Highlights that a Voting Agreement is Not the Equivalent of a Proxy-Ropko v. McNeill

In Ropko v. McNeill (Mar. 16, 2026), the Court of Chancery, in a post-trial decision, resolved a dispute over the control of McNeill Investment Group, LLC (the "Company"). The Company was governed by a three-person managing board, with two of those members holding their seats by virtue of being officers of the Company, and the third member being the company's founder and largest equity holder. The three managing board members were parties to a voting agreement that required the two officers to vote in their capacities as managing board members "in the same manner" as the founder. The founder became dissatisfied with the officers' performance and executed a unanimous written consent of the managing board to remove them.

Vice Chancellor Paul Fioravanti concluded that the purported removal of the officers was ineffective. The court held that the voting agreement did not grant the founder a proxy to vote on behalf of the other two members of the managing board. (Separately, the court also held that the founder lacked authority to remove the officers under the terms of the LLC's operating agreement.) The court concluded that the officers were entitled, under a contractual fee-shifting provision, to recover their attorneys' fees and expenses in the action.

The court found that the founder's argument-that he did not need the Plaintiffs' signatures on the Removal Consent because he had the authority to execute it on their behalf under the Voting Agreement-"conflate[d] the Voting Agreement with a proxy." The court wrote: "The Voting Agreement is not a proxy. It does not appoint [the founder] as Plaintiffs' agent, authorize him to cast their votes, or empower him to take unilateral action on behalf of the Managing Board, such as execute a written consent on Plaintiffs' behalf. It does not use appointment language. Instead, it is written as a covenant by Plaintiffs to 'vote in the same manner as' [the founder]." While a proxy grants the authority to cast another's votes, a voting agreement "reflects a contractual commitment governing how a party will exercise its voting rights." "Thus, absent a clear agency appointment, the Voting Agreement d[id] not authorize [the founder] to exercise Plaintiffs' voting rights unilaterally."

M&A Agreement Developments

Tariff refund provisions. In Learning Resources, Inc. v. Trump (Feb. 20, 2026), the US Supreme Court invalidated the tariffs imposed by the Trump Administration through executive authority under the International Emergency Economic Powers Act of 1977 (IEEPA). While complex issues relating to potential refund of the tariffs that were imposed and collected have yet to be determined, more than $150 billion in tariffs paid by importers may become refundable. Where the tariff refund issue may be material to the parties to an M&A transaction, they may want to consider specifically addressing in their agreement which party will be entitled to any IEEPA-based tariff refunds-and potential refunds of tariffs issued under other authority if declared invalid-that are attributable to pre-closing periods; the timing, level of efforts, and specific steps each party must take to seek to obtain the refunds; and which party will bear the expense associated with seeking to obtain the refunds.

MAEs. A "Material Adverse Effect" condition or qualifier in a merger agreement is generally interpreted narrowly by the courts, based on the specific language of the definition the parties set forth in the agreement. In light of the Iran war and other U.S. and global developments, depending on the facts and circumstances, M&A parties may want to consider specifically including in, or excluding from, their MAE definition: shortages or supply disruptions for oil or other fuel (perhaps limited to those tied to acts by Iran, government-ordered embargoes, and/or specific regional conflicts); disruption of electricity, natural gas or other energy sources; acts of terrorism; and/or domestic civil unrest.

RTFs. We note the increase in recent years of inclusion in merger agreements of reverse termination fees (RTFs) to allocate the risk of failure to obtain required antitrust and other regulatory clearances and approvals, and a corresponding decrease in the inclusion of hell-or-high-water (HOHW) commitments to obtain such clearances and approvals. In 2025, the percentage of deals (for public deals, over $100 million, and for private deals, over $25 million) including an RTF doubled from the number in 2021 (rising from 11% of deals to 24%); and the percentage of deals including a HOHW commitment halved (falling from 12% of deals to 6%). For deals with an RTF, the percentage of deals with a fee of 4% or higher has risen from 63% to 72%. (Data from Thomson Reuters "What's Market" database, which includes a sample of U.S. public deals over $100 million and U.S. private deals over $25 million). We note that continued uncertainty with respect to Hart-Scott-Rodino rules may encourage the use of RTFs.

eXp Proposes Reincorporation to Texas

In Los Angeles City Employees' Retirement System v. Sanford (Jan. 16, 2026), the Court of Chancery rejected dismissal of claims against eXp World, Inc.'s directors and officers for alleged aiding and abetting of sexual misconduct by others at the company's events (see below, "Other Briefings Issued This Quarter"). In the preliminary proxy statement eXp filed for its upcoming annual meeting on April 24, 2026, eXp is seeking stockholder approval to reincorporate from Delaware to Texas.

We note that, while the "DExit" movement has attracted significant attention over the past couple of years, there have been roughly twenty companies that have actually reincorporated from Delaware to other states. Almost all of them have been founder-led or controlled companies. Recently, however, a few large non-controlled companies-including Exxon, ArcBest, and Texas Capital Bancshares-have proposed reincorporating to Texas.

Non-controlled corporations face uncertainty in obtaining stockholder approval to reincorporate to a jurisdiction with arguably lesser fiduciary and other protections for stockholders. Notably, the three corporations mentioned above have taken different approaches with respect to the new law in Texas (Texas SB 1057), effective September 1, 2025, that establishes stricter ownership thresholds for stockholders to submit proxy proposals. SB 1057 provides that Texas corporations with their principal office in Texas or that are listed on a Texas stock exchange can opt into the threshold, which permits stockholder proposals to be submitted only by holders of at least 3% of the corporation's shares entitled to vote on the proposal (or having a market value of at least $1 million). In addition, such stockholder would have to have held such shares continuously for six months prior to the stockholder meeting, and would have to solicit the holders of shares representing at least 67% of the voting power of shares entitled to vote on the proposal. ArcBest adopted a charter amendment opting out of the threshold and provided that it will have to adopt a future charter amendment if it seeks to adopt the threshold in the future. Exxon rejected the threshold, but did not limit its ability to adopt the threshold in the future. Texas Capital Bancshares submitted the threshold to an advisory stockholder vote concurrently with, and contingent on, the stockholder vote to approve its reincorporation.

US Supreme Court to Clarify When Corporations May be Liable for a Role in Human Rights Abuses Committed Abroad

On January 9, 2026, the US Supreme Court agreed to hear a case, Cisco Systems, Inc. v. Doe I, that will clarify whether and when multinational companies and their executives can be held liable for aiding and abetting if their products and services contribute to human rights abuses and other violations of international law. The Plaintiffs, who are members of the Falun Gong religion in China, have alleged that Cisco and two of its executives knowingly aided and abetting human rights abuses that the Chinese government committed against Falum Gong members-by designing, building, and maintaining a nationwide surveillance system that allowed the government to identify, track, and arrest Falon Gong members.

The Supreme Court agreed to decide only the question whether aiding and abetting claims are permissible under the Alien Tort Statute (enacted in 1789). In recent years, several US Supreme Court decisions have narrowed the scope of the ATS. However, in 2023, the Ninth Circuit Court of Appeals rejected dismissal of the claims against Cisco, holding that Cisco's development of the surveillance system went beyond the kind of "corporate decision-making" that the Supreme Court, in a previous case, had held was outside the scope of the ATS. The Ninth Circuit Court also held that the Torture Victim Protection Act (enacted in 1992) permits aiding and abetting claims against Cisco's executives, but the Supreme Court has not agreed to address the TVPA. Also, the Supreme Court has not agreed to resolve the split among the Circuits as to whether a company must have had a certain mental state-i.e., certain "knowledge" or "purpose"-to be deemed an aider and abettor.

ABA to Move Forward with Repeal of DEI Standards for Law Schools

The American Bar Association's Council of the Section of Legal Education and Admissions to the Bar has voted to proceed with a plan to repeal its diversity, equity and inclusion (DEI) standards for law schools. The standards have been suspended since February 2025 in response to the U.S. Administration's general opposition to DEI programs. On February 20, 2026, the Council approved a plan to extend the suspension through August 2027; to solicit comments on a proposal to repeal the standards; and to vote on repeal of the standards at the Council's May 2026 meeting. The Chair of the Council's Standards Committee noted that the current "legal landscape" created difficulties for law schools in meeting the Council's DEI standards. She also noted that, while the Council's repeal of the standards would clarify that the standards would no longer be a factor for accreditation, it would not prevent law schools from "incorporating the values reflected in the [DEI] standard into their institutional missions."

Briefings Issued This Quarter

  • Delaware Supreme Court Guidance on ADR Provisions to Resolve Earnout Disputes-Stillfront⟶

    We discuss Fortis v. Stillfront, in which the Delaware Supreme Court concluded that an alternative dispute resolution (ADR) provision in a merger agreement, which called for an independent accounting firm to resolve disputes relating to "calculation of the earnout amount" payable by the buyer, permitted resolution by the accounting firm of claims that the buyer had breached earnout-related operational covenants and acted in bad faith-even though the claims involved no "calculation." Having decided that the ADR provision called for an "arbitration" rather than an "expert determination," the Supreme Court concluded that the accounting firm had broad authority to resolve all issues (including legal issues) relating to the earnout amount that was owed. Therefore, the Supreme Court upheld the Court of Chancery's decision that enforced the accounting firm's conclusions that no change was required to the buyer's calculations and the buyer was not entitled to any earnout or other recovery. The decision highlights the critical importance of clear drafting as to whether an ADR provision calls for an "arbitration" or, instead, an "expert determination."
  • When Does an Officer's Sexual Harassment of Employees Constitute a Fiduciary Breach?-Brola v. Lundgren⟶

    We discuss Brola v. Lungren (Credit Glory), in which the Court of Chancery rejected the court's approach in McDonald's and held that a director-officer's sexual harassment of employees, which resulted in fines and other damages to the corporation, constituted personal misconduct and not a breach of his fiduciary duties to the corporation and its shareholders. (See the Briefing above on eXp, which subsequently rejected the Credit Glory approach.)
  • In Novel Ruling with Potentially Broad Impact, Chancery Court Holds Grant of a Security Interest Was a "Transfer"-Commave v. Zevra⟶

    We discuss the Court of Chancery's Commave v. Zevra decision, in which the court held that the pledge of a License Agreement, as part of the collateral for a bank loan, constituted an "assignment" and "transfer" to the bank of the payments under the License Agreement. The License Agreement, which granted Commave an exclusive license to use certain intellectual property, granted Commave a right of first refusal on sales, assignments, or transfers to a third party of any or all of its rights to receive payments under the Agreement. In reaching the conclusion that the grant constituted a transfer or assignment, the court pointed to the specific language of the License Agreement-but that language, we note, is only subtly different from common language used in transfer restriction provisions. Also of note, the court interpreted the parties' specified carveout, from the definition of a "payment transfer," of a prior collateral assignment to a different lender as evidence that the parties intended that collateral assignments (other than the one expressly carved out) were included within the definition. The decision may have broad impact, as it potentially affects every secured financing and every commercial agreement containing transfer, assignment or change of control provisions.
  • Critical New Drafting Guidance from Delaware Supreme Court on Earnouts, Efforts Obligations, and Fraud-J&J/Auris⟶

    We discuss Johnson & Johnson v. Fortis Advisors, in which the Delaware Supreme Court reversed the Court of Chancery's decision that, based on the implied covenant of good faith and fair dealing, J&J had breached its efforts obligations with respect to the first earnout payment under the Merger Agreement pursuant to which it had acquired Auris Health, a medical robotics company. The Supreme Court emphasized a narrow interpretation of the implied covenant of good faith. Based on the decision, when drafting a regulatory approval provision, consideration should be given to the possibility (even if remote) that the regulator might eliminate, replace or modify the specified regulatory approval, and therefore whether a back-up, alternative approval pathway should be specified.
  • What the Tesla Decision Means for Executive Compensation and Other Corporate Issues⟶

    We discuss the Delaware Supreme Court's reversal of the Court of Chancery's decision in Tesla, Inc. Deriv. Litig. The Court of Chancery had ordered total rescission of the $56 compensation package awarded to Musk, finding that the board's process had been controlled by Musk and that the "unfathomable" amount of compensation was not entirely fair to the corporation and its shareholders. The Supreme Court, however, held that total rescission was an improper remedy, and awarded the Plaintiff nominal damages of $1. We discuss that the Supreme Court decision, as well as the new SB 21 safe harbors for conflicted-controller transactions, will facilitate super-sized executive compensation being provided by other companies-although few corporations are likely to want to, or be able to, award such super-sized compensation packages. We also note the key legal questions the Supreme Court's decision left unanswered.

    Chancery Holds Common Language Caused Non-Solicitation Restrictions to be Overbroad and Unenforceable-BankUnited v. Shulick⟶

    We discuss the Court of Chancery's decision in BankUnited v. Shulick, in which, following an evidentiary hearing on a preliminary injunction application, the court assumed that the duration and geographic scope of certain customer and employee non-solicitation restrictions were reasonable, but found that the provisions nonetheless were overbroad and unenforceable The decision highlights the continued trend of heightened judicial scrutiny of the subject matter scope of restrictive covenants; the Delaware courts' refusal, except in rare circumstances, to blue pencil overbroad restrictions to make them enforceable; and the need for careful drafting of non-solicitation and other restrictive covenants so that they will be enforceable.
  • 2025 M&A/PE Key Developments⟶

    We discuss key developments in 2025 in the following areas: AI, stockholder activism, advance notice bylaws, antitrust, board minutes, books and records demands, buyer aiding and abetting liability, Caremark liability, controllers, the Corwin doctrine, DGCL amendments (SB 21), the "DExit" movement, earnouts, the entire fairness doctrine, extension of merger agreements, fraud, hell-or-high-water efforts obligations, indemnification notice requirements, LLC agreements, limited partnership agreements, non-competes, proxy voting, proxy advisory firms regulation, purchase price adjustments, the Revlon doctrine, SPACs, Schedule 13G, and stockholder proposals.

    New HSR Rules Are Dead? Long Live the Old HSR Rules⟶

    We note that the "new" HSR rules that took effect on February 10, 2025 are no longer in effect, based on a Fifth Circuit court order denying the FTC's motion to stay a district court's order vacating the new HSR rules on the grounds that they exceeded the FTC's authority. The prior requirements, now again in effect, generally call for less information and fewer documents than the new rules. The FTC's appeal remains pending, but the denial of the stay suggests that the Fifth Circuit panel is receptive to the challenger's arguments that the new rules would impose a significant burden and should be permanently vacated. (See also, our prior Briefing, FTC Increases Thresholds for HSR Filings and Interlocking Directorates⟶, in which we discussed the new rules.)

    Antitrust Division Leadership Change Signals Heightened Enforcement⟶

    We discuss the mid-February leadership changes at the U.S. Department of Justice's Antitrust Division and that they may signal increased antitrust enforcement, including for merger reviews, under the Trump administration.

This communication is for general information only. It is not intended, nor should it be relied upon, as legal advice. In some jurisdictions, this may be considered attorney advertising. Please refer to the firm's data policy page for further information.

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