IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

NEW ENTERPRISE ASSOCIATES 14, L.P., NEA VENTURES 2014, L.P., NEA:SEED II, LLC, and CORE CAPITAL PARTNERS III, L.P., Plaintiffs,

v. GEORGE S. RICH, SR., DAVID RUTCHIK, JOSH STELLA, FUGUE, INC., GRI VENTURES, LLC, JMI FUGUE, LLC, RICH FAMILY VENTURES, LLC, and RUTCHIK DESCENDANTS ’ TRUST, Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) C.A. No. 20 22

- 0406

- JTL

OPINION DENYING MOTION TO DISMISS BASED ON COVENANT NOT TO SUE FOR BREACH OF FIDUCIARY DUTY

Date Submitted: January 24 , 202 3 Date Decided: May 2, 2023 C. Barr Flinn, Paul J. Loughman, Michael A. Carbonara, Jr. , YOUNG CONAWAY STARGATT & TAYLOR , LLP , Wilmington, Delaware; Michele D. Johnson, LATHAM & WATKINS LLP, Orange County, California; Eric Leon, Nathan Taylor, Meredith Cusick, LATHAM & WATKINS LLP, New York, New York; Attorneys for Plaintiff s . John P. DiTomo , Sebastian Van Oudenallen , MORRIS, NICHOLS, ARSHT & TUNNELL LLP , Wilmington Delaware; Patrick Montgomery , Paul Weeks, KING & SPALDING LLP , Washington , District of Columbia ; Attorneys for Defendants

. LASTER, V.C.This decision grapples with a conflict between two elemental forces of Delaware

corporate law: private ordering and fiduciary accountability. Ordinarily, those forces operate harmoniously. Here, they pull in opposite directions. Viewed from the standpoint of private ordering, this might seem like an easy case for contract enforcement: Sophisticated stockholders granted another investor a contract right to engage in a transaction that met specified criteria, and they promised not to sue the invest or or its affiliates and associates if the investor exercised that right. The investor committed capital to the corporation in reliance on the stockholders’ promise. Later, the investor exercised its contract right. Now, the stockholders are doing what the y said they wouldn’t do : sue over the transaction. But like an Escher lithograph, the image changes with the viewer’s perspective. The claims that the stockholders promised not to assert include claims for breach of fiduciary duty. The investor became the corporation’s controlling stockholder, and individu als affiliated or associated with the investor took over the board of directors. The stockholders contend that by engaging in the contractually authorized transaction, the investor and the directors breached their duty of loyalty. In contrast to Delaware’s alternative entity statutes, the Delaware General Corporation Law (the “DGCL”) permits only limited fiduciary tailoring. Viewed from the standpoint of fiduciary accountability, this might seem like an easy case for contractual invalidity. With the stage s et, let’s dig in. The plaintiffs are investment funds (the “ Funds ” ) managed by sophisticated venture capital firm s . The Funds invested in a startup company called Fugue, Inc. (the “ Company ” ). After backing the Company for half

- a - dozen years,2

the Funds enco uraged management to seek a liquidity event. The Company spent six months looking for a buyer , but no one expressed i nterest. After declaring the sale process a failure, the Company needed capital. The Funds did not want to increase their financial commit ment. Management represented that the only option was a recapitalization led by George Rich (the

“ Recapitalization ” ) . He would only commit if (i) all existing preferred stock became common stock , (ii) Rich and his fellow investors received a new class of p referred stock (the “Preferred Stock”), and (ii i ) the Funds and other significant investors executed a voting agreement (the “ Voting Agreement ” or “VA” ). The Funds accepted Rich’s terms

. They were given the chance to participate in the Recapitalization , bu t they declined. The Voting Agreement contains a drag

- along right. It provides that if the Company’s board of directors (the “Board”) and the holders of a majority of the Preferred Stock approve a transaction that meets a list of eigh t criteria, then the s ignatories must participate ( the “Drag

- Along Sale”). Critically for this case, the signatories covenanted not to sue Rich or his affiliates or associates over a Drag

- Along Sale, including by asserting claims for breach of fiduciary duty (the “ Covenant ” ).
A n opportunity to sell the Company soon materialized. The Company and the acquiror negotiated a Drag

- Along Sale. That transaction has now closed. In Counts VI, VII, and VIII of their complaint (the “Sale Counts”), t he Funds have challenged the Drag

- Along Sa le and asserted claims for breach of fiduciary duty. The defendants argue that in light of the Covenant, the Sale Counts must be dismissed.3

The Funds acknowledge that the Covenant covers their claims, and t hey concede that it was an inducement for Rich to invest

. They assert that the Covenant is facially invalid

. The argument for facial invalidity starts from the settled proposition that fiduciary relationships are creat ures of equity. The key move comes next and asserts that equity does
not countenance limitations on fiduciary duties except to the extent authorized by statute. The DGCL does not authorize a provision like the Covenant. Therefore, the argument goes, it is cont rary to Delaware public policy and cannot be enforced. The argument against facial invalidity takes longer to unspool. It starts by recognizing that fiduciary duties can be tailored, even without statutory authorization. At the heart of every fiduciary re lationship is an obligation of loyalty that cannot be eliminated without destroying its fiduciary character. Parties can, however, orient the obligation by specifying a purpose for the relationship, and they can authorize the fiduciary to take specific act ions that otherwise would constitute a breach. Two paradigmatic fiduciary relationships

— that of trustee to beneficiary and agent to principal

— exemplify those opportunities for tailoring. The argument next shows that Delaware corporate law adheres to those longstanding principles. The DGCL permits corporate planners to orient the fiduciary relationship between the directors and the corporation and its stockholders through a purpose clause. The directors must pursue the corporate purpose selflessly for the b enefit of the corporation and its stockholders, but they are limited to pursuing the corporation’s purpose. They cannot pick another path simply because they prefer it . The DGCL also4

a llows more space for fiduciary tailoring and greater limits on fiduciary accountability than is widely understood. Delaware common law goes further, with existing doctrines achieving outcomes comparable to what the Covenant contemplates. Having shown that corporate fiduciary duties are not immutable, the argument against faci al invalidity turns to the contractarian nature of Delaware corporate law. A close analysis of the DGCL shows that through a private agreement, stockholders can agree to more constraints on their ability to exercise stockholder

- level rights than corporate planners can impose through the charter or bylaws. The Covenant appears in a stockholder

- level agreement and concerns a stockholder

- level right. This in

- depth analysis indicates that the Covenant is not out of bounds as a form of fiduciary tailoring . The a nalysis next turns to other indications of where Delaware might draw a public policy line. An intuitively appealing argument asserts that a claim for breach of the duty of loyalty is too big to waive. One way to evaluate that argument is to consider what else is waivable. Delaware law permits individuals to waive significant liberty and property interests that are arguably weightier than a right appurtenant to a share. Th e comparison suggests that the Covenant is not facially invalid. A rhetorically powerful argument asserts that permitting stockholders to covenant
not to sue for breach of the duty of loyalty would conflict with Delaware’s corporate brand , which promise s standardized terms, including an immutable duty of loyalty

. The pr omise of standardized terms should not be overstated, because Delaware’s support for private ordering means that an investor cannot assume that one Delaware corporation is like5

another. The promise of an immutable duty of loyalty is also overstated, becaus e the duty can be oriented and tailored. Regardless, a stockholder

- level agreement about the exercise of stockholder

- level rights does not undermine the corporate brand, because the underlying rights remain intact. Each stockholder receives the underlying rights and can exercise them. The stockholder

- level agreement only binds its signatories and only affects how they exercise their rights. Another rhetorically powerful argument asserts that permitting a stockholder to
covenant not to sue for breach of the duty of loyalty will collapse the distinction between

a corporation and an LLC. That is not so , as the fundamental differences between corporation s and LLC s operate at the basal level of their statutes and constitutive documents

. There is a superficial similarity between the ability of investors in corporations and LLCs to contract about their investor

- level rights, but that resemblance does not turn corporat ions into LLC s . A final argument for invalidity relies on the Delaware Supreme Court ’s decision in Manti Holdings, LLC v. Authentix Acquisition Co. 1 There, sophisticated s tockholders agreed to a drag

- along provision in which they covenanted not to pursue their appraisal rights. The stockholders sought to escape their promise by argu ing that the prov ision conflicted with the DGCL and was contrary to Delaware public policy.

1 261 A.3d 1199 (Del. 2021)

.6

A majority of the Delaware Supreme Court upheld the appraisal waiver , stressing the contractual freedom that Delaware corporate law provides and citing a list of factors that apply equally to th is case . But the justices also emphasized that they were not upholding all waivers of appraisal rights , and they admonished that Delaware law might not permit a stockholder to waive other rights. A dissent ing justice would not have upheld the appraisal waiver

. The majority and dissenting opinions in Manti raise questions about whether a provision like the Covenant goes too far. This decision’s review of t rust law, agency law, the DGCL, and Delaware common law reveals that each authorizes provisions that allow fiduciaries to engage in specific transaction s that otherwise would constitute a breach. The
Covenant is sufficiently specific because it only applies to a transaction that meets the eight criteria required for a Drag

- Alon g Sale. The Funds did not broadly covenant not to assert any claims for breach of fiduciary duty. They agreed not to sue over a specific transaction with specific characteristics. The Covenant is therefore not facially invalid. It is also not invalid on the facts of the case. In Manti , the Delaware Supreme Court considers a series of factors, including (i) the presence of a written c ontract, (ii) the clarity of the waiver , (iii) the stockholder’s
understandi ng of the waiver’s implications, (iv) the stockholder’s ability to reject the provision, (v) the existence of bargained

- for consideration, and (vi) the stockholder’ s sophistication

. The proponent of the provision must establish that enforcement is reasonab le.7

Th is case provides an optimal scenario for enforcement. The Covenant appears in the Voting Agreement. It is a clear and specific

. The Funds are sophisticated repeat players who understood its implications. It tracks a provision that appears in a model agreement sponsored by the National Venture Capital Association (the “NVCA”), and one of the venture capital firms behind the Funds is a member of the NVCA. T he Covenant was part of a bargained

- for exchange that induced Rich to lead the Recapitalization , h is fellow investors to participate , and Rich and his colleague to serve on the Board . The Funds were the dominant incumbents in the cap table . If they did not like the Recapitalization , they could have blocked it, forced the Company to seek different terms , or fund ed the Company themselves. If they saw no alternative but thought Rich had secured a great deal, then they could have joined the investor group. They decided to pass , agree d to the Covenant , and let Rich and his investor group take the risk. This decision cannot conclude that the Covenant is invalid as applied to these facts. That does not mean that the Delaware courts will enforce similar provisions. A covenant not to sue resembles another powerful provision: the covenant not to compete. Like a
covenant no t to sue, sophisticated parties can use a covenant not to compete to create value , but covenants not to compete can be abused , and this court examines them closely. Parties should expect a similar hard look for covenants not to sue. A broad waiver of any a bility to assert claims for breach of fiduciary duty would be a non

- starter. Even a narrowly tailored provision would likely be unreasonable if it appeared in an agreement that purported to restrict the rights of retail stockholders.8

Although the Covenant is not wholly invalid, either facially or as applied, its scope still stretches beyond what Delaware law allows . Delaware law generally prohibits contractual provisions that purport to exculpate a party for tort liability resulting fr om intentional or reckless harm. Delaware corporate law is more permissive and treat s recklessness as a form of gross negligence, thereby expanding the power to exculpate to
encompass recklessness. There is only one situation where Delaware law has gone fu rther and held that a provision restricting tort liability for intentional harm was not facially invalid: In Abry Partners , 2 this court permitted a sophisticated party to disclaim reliance on any representations that d id not appear in a written contract, thereby covenanting not to sue for extracontractual fraud. Subsequent decisions have refused to authorize other types of provisions that could restrict tort liability for intentional harm. The Covenant purports to bar all challenges to the Drag

- Along Sale . It cannot insulate the defendants from tort liability based on intentional wrongdoing, but it can protect against other claims. The Sale Counts rely on facts supporting an inference that the defendants could have acted intentionally and in bad faith to b enefit themselves and harm the common stockholders during the lead up to the Drag

- Along Sale. T he Sale Counts therefore cannot be dismissed at the pleading stage

. The defendants’ motion to dismiss based on the Covenant is denied.

2 See Abry P ’ rs V, L.P. v. F&W Acq. LLC , 891 A.2d 1032, 1057

– 59 (Del. Ch. 2006). The Delaware Supreme Court subsequently endorsed that innovation

. RAA Mgmt. , LLC v. Savage Sports Hldgs., Inc. , 45 A.3d 107, 119 (Del. 2012).9 I. FACTUAL BACKGROUND The f acts are drawn from the operative complaint and the documents that it incorporates by reference. 3 The defendants argued that the complaint failed to state a claim on which relief could be granted for reasons other than the Covenant , and the court issued

a n opinion addressing those contentions (the “ Pleading Decision ” )

. 4 The Sale Counts survived dismissal , necessitating consideration of the Covenant. This decision incorporates
the fact ual background from the Pleading Decision and only summarizes the information pertinent to the Covenant

. A. The Company Founded in 2012, the Company provides tools to build, deploy , and maintain a cloud infrastructure security platform. Josh Stella serve d as its Chief Executive Officer. In 2013, pla intiff Core Capital Partners III, L.P. ( “ Core Capital ” ) led the Company ’ s seed round. Core Capital is an investment fund sponsored by Core Capital Partners, a venture capital firm based in Washington, D.C. In 2014, plaintiffs New Enterprise Associates 14, L.P., NEA Ventures 2014, L.P., and NEA: Seed II, LLC , invested in the Company . Each is an investment fund sponsored

3 Citations in the form “ Ex. __ ” refer to documents attached to the Affidavit of Sebastian Van Oudenallen, which collects documents operated by reference in the operative complaint. Dkt. 14

. Citations in the form “ VA § __ ” refer to provisions in the Voting Agreement. Ex. 1 at Ex

. E.

4 New Enter. Assocs. 14, L.P. v. Rich , — A.3d

— , 2023 WL 2417271, at *1 (Del. Ch. Mar. 9, 2023).10

by New Enterprise Associates, a name

- brand venture capital firm. The term “ Funds ” refers
to the entities sponsored by NEA and Core Capital that invested in the Company

. Over multiple financing rounds, the Funds invested almost $3 9 million in the Company. In return , they received shares of preferred stock that carried special rights

. Each of the Funds also received the right to appoint one member of the Board.
B. The Failed Sale Process And The Recapitalization By 2020, Core Capital had been invested in the Company for seven years, and NEA had been invested for six. Those investments were getting long in the tooth. The Funds urged Stella to seek a liquidity event. Starting in the second half of 2020, the Company sought a buyer

. Toward the end of the first quarter of 2021, Stella told the Board that the effort had failed . Stella represented that th e Company needed capital , and he recommended that the Company engage in the Recapitalization. T he Board authorized him to proceed

. C. The Terms Of The Recapitalization In the Recapitalization, the Company raised roughly $8 million by issuing shares of
Series A

- 1 Preferred Stock (the “ Preferred Stock ” ) to Rich and his investor group. Rich invested through two vehicles , one of which was desig nated as the “ Lead Investor ” under the transaction agreements

. Rich controlled the investment vehicles through a third entity. All three entities are defendants ( together, the “ Rich Entities ” ). Twenty

- three other investors participated in the Recapitaliza tion. Eleven already owned common stock in the Company. Another five were Company employees. Only seven appear to be new investors. The Funds declined to participate.11

The terms of the Recapitalization were onerous for the incumbent stockholders. Rich insisted that a ll of the preferred stock convert into common stock and that key stockholders execute the Voting Agreement. All of the investors in the Recapitalization executed the Voting Agreement , as did t wenty

- nine of the existing stockholders (the

“ Signatories ” ). The Funds were Signatories

. In the Voting A greement, the Signatories agreed to vote for (i) one director designated by the Lead Investor , (ii) a second director de signated by the holders of a majority of the Preferred Stock , (iii) a third director elected by a majority of the Preferred Stock held by investors other than the Lead Investor , (iv) the CEO, and (v) one director designated by all the outstanding stock vot ing together as a single class. After the Recapitalization, the Board ’ s five members were Stella , two independent directors who carried over from before the Recapitalization , and two representatives of the new investors

. Rich joined the Board as the design ee of the Lead Investor. David Rutchik joined as the director designated by the holders of a majority of the Preferred Stock

. Rutchik had participated in the Recapitalization through his affiliate, the Rutchik Descendants ’ Trust (the “ Rutchik Trust ” ). Importantly for this decision , Section 3.2 of the Voting Agreement contain s the Drag

- Along Right . That provision obligate s the Signatories to support a Drag

- Along Sale and include s the Covenant

.12

D. An Expression Of Interest And The Interested Transactions In late June 2021, a potential acquirer contacted Stella. The outreach contrasted with the Company ’ s failed sale process. T he contact was preliminary, but it put a different cast on the Company ’ s situation. On July 14, 2021, the two independent d irectors res igned, leaving Stella , Rich, and Rutchik as the only members of the Board . One week later, the y authorize d the Company
to issue another 3, 938 ,941 shares of Preferred Stock

. The buyers were nine entities and individuals , including t he Rich and Rutchik

. Rather than treating the i ssuance as a new transaction, the Board amend ed the terms of the Recapitalization and pretended that the second issuance was part of the original deal. That move enabled t he buyers to acquire the shares at the same price and on the same terms that Rich had extracted in April 2021 when the Company was low on cash and had no alternatives

. Later that same month, on July 29, 2021, the Board approved grants of stock options

. Many of the recipients were Company employees , but l arge grants went to the three directors

. The Funds contend that the second issuance of Preferred Stock and the grants of options to the insiders (together, the “ Interested Transactions ” ) constituted breaches of fiduciary duty. They allege that the Interes ted Transactions were obvious instances of self

dealing on terms that appear facially unfair to the Company and highly beneficial to Rich and his confederates.13

E. The Merger While th o se events were transpiring, discussions with the acquirer moved forward. By September 2021, they were negotiating a merger agreement. In December, the Board told the stockholders about an agreement in princip le to sell the Company for $120 million
in cash. On February 12, 2022, the Company sent the Funds a draft merger agreement with a joinder agreement and v oting f orm. The Company told the Funds that they were obligated to sign the joinder agreement and voting form

. Section 1.1 of the joinder agreement b ound each signatory to vote in favor of the
merger and against any competing proposal. In Section 1.2 of the joinder agreement , each signatory release d any and all claims against the Company, the directors, and their associates and affiliates. The Funds a greed to sign the documents if Stella and Rich attested that they had not had any communications with the acquirer about a potential transaction before the Recapitalization. Their counsel promised to provide the affirmations. On February 17, 2022, the Com pany announced that it had executed the merger agreement and closed the transaction. On February 18, 2022, Stella and Rich ’ s counsel proposed substantially narrower affirmation s . The Funds refused to sign the joinder agreement and voting form. On February 21, the Company circulated a distribution waterfall that revealed the Interested Transactions

.14

F. This Litigation On May 9 , 2022, the Funds filed this lawsuit. The complaint contained eight counts, three of which comprise the Sale Counts

. Count VI contends that Rich, Rutchik , and Stella breached their fiduciary duties as directors by approving the Drag

- Along Sale . Count VII contends that the Rich Entities breache d their fiduciary duties as controlling stockholders by approving the Drag

- Along Sale . Count VIII alleges that the R u tchik Trust aided and
abetted the fiduciaries ’ breaches of duty. The gist of those claims is that the Drag

- Along Sale (i) failed to provide any consideration for derivative claims relating to the Interested
Tran s actions and (ii) conferred a unique benefit on Rich, R u tchik, Stella, and their affiliates by extinguishing the standing of sell

- side stockholders to pursue those claims. The Funds contend that the Drag

- Along Sale was therefore an interested transaction subject to the entire fairness test and that the defendants cannot establish that it was entirely fair. The defendants moved to dismiss the complaint. In the Pleading Decision, the c ourt held that the Sale Counts stated claims on which relief. The Pleading Decision did not reach the defendants ’ argument that the Covenant foreclosed the Sale Counts.
II. LEGAL ANALYSIS The defendants contend that the Covenant bars the Funds from asserting the Sale
Counts

. The defendants invoke d the Covenant through a motion to dismiss under Rule 12(b)(6). When considering a Rule 12(b)(6) motion, the court (i) accepts as true all well

pled factual allegations in the complaint, (ii) credits vague allegations if they give the opposing party notice of the claim, and (iii) draws all reasonable inferences in favor of the15

plaintiffs. Dismissal is inappropriate “ unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstanc es. ” 5 The existence of a contractual bar to suit, such as a release or a covenant not to sue, is an affirmative defense that must be asserted in a responsive pleading. 6 A court can consider a contractual bar to suit under Rule 12(b)(6) if the complaint incorporates the document by reference or if the document is subject to judicial notice. 7 In this case, the court can consider the Covenant because it is part of the Voting Agreement, which the complaint incorporate s by reference. A. The Nature Of A Covenant Not To Sue A covenant not to sue is a contract in which a potential claimant commit s not to
assert specified claims against a potential defendant

. A covenant not to sue and a release are different things. “ A covenant not to sue or execute is dis tinguished from a release as a

5 Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC , 27 A.3d 531, 535 (Del. 2011).

6 See Ct. Ch. R. 8(c) ; Seven Invs., LLC v. AD Cap ., LLC , 32 A.3d 391, 396 (Del. Ch. 2011). See generally 66 Am. Jur. 2d Release § 4 , Westlaw (database updated Feb. 2023) (describing the invocation of a covenant not to sue as “ an affirmative defense to an action ” ).

7 See, e.g. , Seven Inv s . , 3 2 A.3d at 396 (considering implications of general release at the pleading stage where it appeared in a document incorporated by reference in the complaint); Meer v. Aharoni , 2010 WL 2573767, at *3 (Del. Ch. June 28, 2010) ( “ In evaluating defendant ’ s motio n to dismiss, the Court may also consider the unambiguous terms of the Original and Amended Stipulations, the Proposed Settlement, and the Release, which are integral to the complaint and the resolution of this motion. ” ); Canadian Co m. Workers Indus. Pensi on Plan v. Alden , 2006 WL 456786, at *2 n. 9 (Del. Ch. Feb. 22, 2006) ( “ The Court may consider the Release in deciding a motion to dismiss because the Complaint makes reference to it. ” )

.16

forbearance of a right rather than a discharge of liability. ” 8 Historically, that distinction carried significance , because in most jurisdictions , a release of one joint tortfeasor extinguished the cause of action as to all joint tortfeasors. 9 That rule created problems for partial settlements, because a settlement and release with one joint tortfeasor extinguished the settling party ’ s claim against all other joint tortfeasors. A covenant not to sue avoided th at problem, because the covenant did not extinguish the claim

. 10

8 76 C.J.S. Release § 51 , Westlaw (database updated Apr. 2023 ); accord 66 Am. Jur. 2d Release § 4; see Andrew M. Hinkes, The Limits of Code Deference , 46 J. Corp. L. 869, 891 (2021) ( “ A covenant not to sue is an agreement to not file a lawsuit, rather than an abandonment of any right. ” ). The California Supreme Court re jects the distinction as artificial on the grounds that the result for the claimant is the same regardless of whether the claimant gives a release of the claim or covenants not to assert it . Bradford P. Anderson, Please Release Me, Let Me Go! Releases of U nknown Claims in the Penumbra of California Civil Code Section 1542 , 9 U.C. Davis Bus. L.J. 1, 7 (2008). When parties settle all claims relating to a past transaction or event , a release and a covenant likely are equivalent . But part of the value of a cove nant l ies in its ability to address claims relating to future conduct. A release can extinguish claims based on past conduct that a party might learn of or assert in the future , but it cannot cover claims based on future conduct. Compare Christiana Care Health Servs. v. Davis , 127 A.3d 391, 395 (Del. 2015) (upholding release of future claims arising from past conduct) , and Spadaro v. Abex Corp. , 1993 WL 603378, at *2 (Del. Super. Ct. Sept. 9, 1993) ( same) with UniSuper Ltd. v. News Corp ., 2006 WL 4804015, at *3 (Del. Ch. May 31, 2006) (rejecting release that attempted to release claims arising out of future conduct).

9 See 66 Am. Jur. 2d Release § 4

. 10 Id. ; 76 C.J.S. Release § 75. Jurisdictions also addressed the problem of claim extinction by altering the common law rule. E.g. , 10 Del. C. § 6304; Clark v. Brooks , 377 A.2d 365, 372 (Del. Super. Ct. 1977), aff ’ d sub nom. Blackshear v. Clark , 391 A.2d 747 (Del. 1978)

.17

When determining the scope of a covenant not to sue , a court construes its terms like any other contract

. 11 When multiple claims or multiple defendants are involved, the
covenant not to sue onl y applies to the claims and defendants that fall within its scope . 12 A covenant not to sue can apply “ to future as well as to present claims. ” 13 Unlike a release, where the cancellation of the claim and the discharge of the released party are complete
upon execution, the covenant not to sue is an executory contract that contemplates ongoing performance. 14
Covenants not to sue are generally valid, “ as public policy is in no way concerned with the option which a person has to sue or to forbear suit. ” 15 Some jurisdictions impose public policy limitations on covenants not to sue

. 16 Illinois common law prevents covenants not to sue from “ exculpating persons from the consequences of their willful and wanton
acts. ” 17 New York common law prohibits contracts that prospectively limit a party from

11 76 C.J.S. Release § 51.

12 66 Am. Jur. 2d Release § 4

. 13 Id.

14 76 C

. J

. S

. Release § 3.

15 17A C

. J

. S

. Contracts § 338 , Westlaw (database updated Apr. 2023)

. 16 76 C

. J

. S

. Release § 53

. 17 Id. (citing Dyson, In c . v . Bissell Homecare, Inc. , 951 F. Supp. 2d 1009, 1035 (N.D. Ill. 2013)).18

liability for willful or grossly negligent acts. 18 Delaware applies the same public policy limitations to covenants not to sue that it applies to contracts generally . Extant dec isions hold that a provision in a commercial contract cannot eliminate tort liability for intentional or reckless conduct

. 19
B. The Scope Of The Covenant The Covenant in this case is part of the Drag

- Along Right

. It is not part of a
settlement of all claims arising out of or relating to a particular transaction or event . If it were, there would be no question about its validity, because parties can release claims for breach of fiduciary duty as part of a settlement. 20

18 See, e.g. , Kalisch

- Jarcho, Inc. v. New York , 448 N.E.2d 413, 416 (N.Y. 1983) ( “ But an exculpatory agreement, no matter how flat and unqualified its terms, will not exonerate a party from liability under all circumstances. Under announced public p olicy, it will not apply to exemption of willful or grossly negligent acts. ” (internal citation omitted) ); Schwartz v. Martin , 919 N.Y.S.2d 217, 219 ( N.Y. App. Div. 2011) ( “ [A]n enforceable release will not insulate a party from grossly negligent conduct

. . . . ” ); Goldstein v. Carnell Assocs., Inc ., 906 N.Y.S.2d 905, 905 ( N.Y. App. Div. 2010) ( collecting cases; stating that “ t he public policy of this State dictates that ‘ a party may not insulate itself from damages caused by grossly negligent cond uct

. ’ ” (quoting Sommer v. Fed. Signal Corp. , 593 N.E.2d 1365, 1370 (N.Y. 1992) ).

19 See Part III.G , infra.

20 See Nottingham P ’ rs v. Dana , 564 A.2d 1089, 110 5

– 0 6 (Del. 1989) (permitting release to extinguish all claims relating to the challenged transaction, including claims for breach of fiduciary duty); Seven Invs. , 32 A.3d at 398 ( “ Because Seven Investments released all claims relating to the Purported Accumulated Expenses , Seven Investments cannot bring its claim in Count III to recover the amounts paid under a theory of unjust enrichment. Seven Investments ’ effort to repackage all of its claims under a breach of fiduciary duty theory is likewise barred. Discala became a f iduciary of Canvas Companies in accordance with the Contribution Agreement and under the LLC Agreement. The General Release extinguished all claims arising out of or relating to these agreements. ” ) ;19

The Covenant creates issues because it is forward

- looking

. It applies when the Drag

Along Right is properly exercised. For that to happen, the transaction must qualify as a

“ Sale of the Company, ” defined as either (i) a stockholder

- level sale in which the stockholders sell shares representing more than 50% of the Company ’ s outstanding voting power, (ii) a merger in which the Company ’ s pre - merger stockholders end up holding less than 50% of the Company ’ s outstanding voting power, or (iii) a sale of all or substantially all of the Co mpany ’ s assets. 21 For the Drag

- Along Right to apply, the Sale of the Company must receive approval from both (i) the holders of a majority of the issued and outstanding shares of Preferred Stock, and (ii) the Board, including the director appointed by t he Lead Investor and at least one other director approved by the holders of the Preferred Stock. 22 If the Drag

- Along Right applies , then the Signatories must fulfill a series of contractual commitments. But no Sig natory has to comply with those obligatio ns unless the Sale of the Company satisfies eight requirements

. This decision defines a Sale of the Company that meets the eight requirements as a Drag

- Along Sale. In abbreviated form, the requirements include :

see also Griffith v. Stein. , 283 A.3d 1124, 1134 (Del. 20 22) ( “ To satisfy due process concerns, a settlement can release claims that were not specifically asserted in an action but can only release claims that are based on the same identical factual predicate or the same set of operative facts as the underlying action

. ” (cleaned up) )

.

21 VA § 3. 1.

22 Id. § 3.2.20

• Each holder of shares of stock of eac h class or series must r eceive the same form and amount of consideration as the other shares in their class or series , 23

• The transaction consideration must be distributed in order of priority as set forth in the charter, 24

• If there is a choice of consideration, then each holder receives the same choices , 25

• Signatories cannot be required to make representations and warranties except as to the ownership of, authority over, and ability to covey title to their shares, 26

• Signatories cannot be required to agree to restrictive covenants , 27

• Signatories cannot be required to terminate or alter any contractual agreements with the Company , 28

• Signatories cannot have any liability for a breach of any re presentation, warrant, or covenant, except to the extent paid from an escrowed portion of the transaction consideration designated for that purpose, 29 and

• Signatories cannot be required to fund the escrow beyond their pro rata share of the negotiated amount

. 30

23 Id. § 3. 3 (f)

. 24 Id.

25 I d. § 3. 3 (g)

. 26 I d. § 3. 3 (a)

. 27 I d. § 3. 3 (b)

. 28 I d. § 3. 3 (c).

29 I d. § 3. 3 (d).

30 I d. § 3. 3 (e).21

Because of these conditions, the Drag

- Along Right does not apply to a transaction in which the Rich Entities extract additional or unique consideration for themselves. If the Drag

- Along Right applies , then each Signatory must take a series of actions

. They include:

• Voting for the Drag

- Along Sale if it requires stockholder approval, 31

• E xecut ing and deliver ing documentation in support of the Sale of the Company that the Company reasonably requests, 32

• Agreeing to appoint a stockholder re presenta tive with authority to take action under the transaction documents after closing, 33 and

• Agreeing to the Covenant

. 34 Under the Covenant , each Signatory commits to refrain from (i) exercising any dissenters ’ rights or rights of appraisal under applicable la w at any time with respect to such Sale of the Company, or (ii) asserting any claim or commencing any suit (x) challenging the Sale of the Company or this Agreement, or (y) alleging a breach of any fiduciary duty of the Electing Holders or any affiliate or associate thereof (including, without limitation, aiding and abetting breach of fiduciary duty) in connection with the evaluation, negotiation or entry into the Sale of the Company, or the consummation of the transactions contemplated thereby. 35

31 I d . § 3. 2 (a).

32 I d. § 3. 2 (c).

33 I d. § 3. 2 (g)

. 34 Id. § 3.2(e).

35 Id.22

Each Sign atory thus covenants both to waive appraisal rights and not to assert any challenge to the Sale of the Company or any claim for breach of fiduciary duty or aiding and abetting against “ the E lec ting Holders or any affiliate or associate thereof. ” The parties agree that the Drag

- Along Sale met the contractual requirements and triggered the Signatories ’ obligations. The parties agree that the Covenant encompasses all of the defendants. They agree that it covers the Sale Counts. 36
The Funds have not a rgue d that the Covenant was induced by fraud or overreaching. The y have not claimed that they failed to understand the Covenant or its implications.

36 The Funds might have pointed to a mismatch between the Covenant and the Funds ’ challenges to the Drag

- Along Sale. As discussed below, commentary to the NVCA model provision describes its purpose as preventing signatories from using claims for breach of fi duciary duty to obtain a quasi

- appraisal remedy. It thus most clearly covers a claim that the Board and the holders of the Preferred Stock breached their fiduciary duties by failing to disclose material information to the Company ’ s stockholders or by appro ving a deal that was not the best transaction reasonably available. The Funds have not asserted that the defendants breached their duty of disclosure in connection with the Drag

- Along Sale (they only assert disclosure claims based on the Interested Transac tions). They also do not claim that the buyer or another bidder might have offered a better deal. They object to the Interested Transactions through which the directors allegedly enriched themselves and their affiliates at the expense of the Company and it s unaffiliated stockholders during the lead up to the Drag

- Along Sale . The Covenant sweeps in those claims only because Delaware law compensates for a bright

- line rule that causes a cash

- out merger to extinguish the sell

- side stockholders ’ standing to sue derivatively by recharacterizing the derivative claims as direct challenges to the merger. See Pleading Decision, 2023 WL 2417271, at *28

– 45. The Funds might have argued that the Covenant does not apply to self

- dealing in the lead

- up to a Drag

- Along Sale. When the court raised the arguable mismatch at oral argument, the Funds picked up on it. Dkt. 34 at 26, 38. Because this decision declines to hold that the Covenant forecloses the Sale Counts, the Funds can explore this issue in discovery, and the parties can address it later should it prove salient.23

Particularly for NEA, that would be a difficult argument to make, because NEA is a member of the N VCA, and the Covenant tracks a provision in the model voting agreement sponsored by that organization. 37 Under th at provision , a signatory agrees to refrain from (i) exercising any dissenters ’ rights or rights of appraisal under applicable law at any time with resp ect to such Sale of the Company, or [(ii); asserting any claim or commencing any suit [ (x) ] challenging the Sale of the Company or this Agreement , or [ (y) alleging a breach of any fiduciary duty of the Selling Investors or any affiliate or associate thereo f (including, without limitation, aiding and abetting breach of fiduciary duty) in connection with the evaluation, negotiation or entry into the Sale of the Company, or ] the consummation of the transactions contemplated thereby ]

. 38 The Covenant adopts the most expansive formulation of the model provision by including the bracketed language. A comment in the model provision explains the intent of the bracketed language : [C]ommon and subordinate preferred stockholders are increasingly filing breach of fiduciary duty claims seeking quasi

- appraisal

— i.e. , damages that mirror the recovery available in an appraisal suit

— in transactions subject to drag

- along provisions where the junior preferred or common shareholders are to receive no c onsideration for their shares. Because the directors are often representatives of the senior preferred holders, these suits are difficult to dismiss at an early stage. Accordingly , consideration should be given to expanding the agreement

. . . to cover bre ach of fiduciary suits in transactions subject to the drag along. 39

37 See NVCA, Model Voting Agreement § 3.2(e) (updated Mar. 2022) , available at https://nvca.org/model

- legal

- documents

.

38 Id. (footnotes omitted).

39 Id. n.18.24

The commentary confirms that the Covenant is intended to do what it says and bar breach of fiduciary duty claims based on the Drag

- Along Sale

. Th e defendants’ motion squarely prese nts the question of the Covenant ’ s validity. This is not a case where ambiguity exists about whether a waiver extends to breach of fiduciary duty claims. C. The Case For Facial Invalidity The Funds ’ case for holding the Covenant facially invalid is s hort and sweet: “Under well

- settled law, parties cannot waive fiduciary duties of loyalty in Delaware corporations.” 40 In support of that proposition, the Funds cite Section 102(b)(7) of the DGCL, which l imits the extent to which a charter provision can limit or eliminate a director or officer’s liability for money damages for breach of fiduciary duty. They also cite three decisions (including one of my own) which, in dictum , contrast the broad flexibility of parties to waive or limit fiduciary duties in an alternative entity agreement with the more limited ability to waive or limit fiduciary duties in a corporate charter

. 41 Th ose are

40 Dkt. 16 at 56.

41 See Miller v. HCP & Co. , 2018 WL 656378, at *2 (Del. Ch. Feb. 1, 2018) (interpreting forced

- sale provision in an LLC agreement that waived all fiduciary duties and that majority member used to effectuate a sale to a third party; noting tha t “ if the parties had chosen to employ the corporate form here, with its common

- law fiduciary duties, this matter would be subject to entire fairness review ” but that “ the members forwent the suite of common

- law protections available with the corporate form, and instead chose to create an LLC ” in which they explicitly waived fiduciary duties, “ despite the presence of a controller with an incentive to take a quick sale, and a Board with sole discretion to approve such a sale, with the single saf eguard that the sale must not be to an insider ” ), aff ’ d sub nom. Miller v. HCP Trumpet Invs., LLC , 194 A.3d 908 (Del. 2018) ; Dieckman v. Regency25

relatively few authorities for an absolutist proposition. The Funds seem to treat it as self

evident that a provision like the Covenant is facially invalid. The Funds would have done better to rely on Totta v. CCSB Financial Corp. , 42
where Chancellor McCormick addressed the ability of corporate planners to displace equity’s po wer to impose fiduciary duties, evaluate compliance through standards of review, and impose equitable remedies

. Totta involved a provision in the certificate of incorporation of a bank holding company th at prohibited any stockholder from exercising more than 10% of the company ’ s voting power in an election . To minimize disputes over the application of the provision, the charter provided that “ [a]ny constructions, applications, or determinations made by the Board of Directors pursuant to th is section in

GP LP , 2016 WL 1223348, at *8 (Del. Ch. Mar. 29, 2016) ( “ In the limited partnership context, absent contractual modification, a general partner owes fiduciary duties that include a duty of full disclosure. But in stark contrast to the corporate context, in which fiduciary duties cannot be waived, a limited partnership may eliminate all fiduciary duties, including t he duty of disclosure

. ” (cleaned up)) , rev ’ d on other grounds , 155 A.3d 358 (Del. 2017) ; In re Ezcorp Inc. Consulting Agr. Deriv. Litig., 2016 WL 301245, at *23 (Del. Ch. Jan. 25, 2016) ( “ If a controller does not want to assume fiduciary obligations, then it can choose not to issue stock to the public, or not to acquire a dominant stake in a publicly funded firm. If a controller wants to use other people ’ s money, it can do so using debt, which establishes a contractual relationship that does not carry fiduc iary obligations. Or a controller can use an alternative entity vehicle and eliminate or restrict fiduciary duties. ” ). Each of these decisions commented in passing on the differences between the degree to which the constitutive documents of a corporation c ould tailor fiduciary duties and the degree to which the constitutive documents of an alternative entity could do so. None called the question of the extent to which an investor could commit contractually in an investor

level agreement to refrain from asse rting investor

- level claims that the investor otherwise could freely elect not to assert.

42 2022 WL 1751741 ( Del. Ch. May 31, 2022) , cert. denied , 2022 WL 4087800 (Del. Ch. Sept. 7, 2022), and appeal dismissed , 284 A.3d 713 (Del. 2022)

.26

good faith and on the basis of such information and assistance as was then reasonably available for such purpose shall be conclusive and binding upon the Corporation and its stockholders ” (the “ Conclusive

- And

- Binding Provision ” ). 43 Facing a p roxy conte s t, the incumbent directors interpreted the voting power limitation to apply not only to ownership by a single stockholder, but also to stockholders acting in concert . T he new interpretation resulted in the defeat of the insurgent slate. The Cha ncellor explained that because the incumbent directors interfered with a
proxy contest, they bore the burden of justifying their actions under the form of enhanced scrutiny that applies to elections

. 44 The incumbent directors argued that enhanced scrutiny did not apply because of the Conclusive

- And

- Binding Provision, which contemplated a standard of review comparable to the business judgment rule. Chancellor McCormick held
that the Conclusive

- And

- Binding Provision could not alter the directors ’ fiduciary ob ligations or the attendant standard of review: Fiduciary duties arise in equity and are a fundamental aspect of Delaware law. The constitutive agreements that govern an entity can only eliminate or modify fiduciary duties and the attendant judicial standards of review to the extent expressly permitted by an affirmative act of the Delaware General Assembly. The General Assembly has granted broad authorization to modify or eliminate fiduciary duties and attendant standards of review in some types

43 Id. at *2

. 44 See MM Cos., Inc. v. Liquid Audio, Inc. , 813 A.2d 1118, 1129

– 31 (Del. 2003); Blasius Indus

. , Inc. v. Atlas Corp. , 5 6 4 A.2d 651 , 659 (Del. Ch. 1988) (Allen, C.) ; s ee generally Pell v. Kill , 135 A.3d 764, 784

– 93 (Del. Ch. 2016) (collecting authorities addres sing the operation of Blasius as a form of enhanced scrutiny)

.27

of entities. The General Assembly has granted only limited authority to corporations. 45 The Chancellor cited Sections 102(b)(7) and 122(17) of the DGCL as the sole provisions through which the General Assembly ha s authorized limitations on equitable review and fiduciary accountability

. 46 She noted that the General Assembly had never expressly authorized a charter provision that could modify the standard of review. As a result, the Chancellor concluded that the Conclusive

- A nd

- Binding Provision was invalid. Chancellor McCormick grounded the persistent power of equity on the constitutional grant of equit y jurisdiction to this court: “ T he Constitution of 1897 retains the distinction between law and equity, and the General Assembly has empowered [the Court of Chancery] to hear and determine all matters and causes in equi ty. ” 47 After citing

45 Totta , 2022 WL 1751741 , at *14.

46 Id. at *16

– 17 (discussing 8 Del. C. § 102(b)(7) and 8 Del. C. § 122(17)) . The Chancellor also discussed one potential statutory limitation that the parties had not explored and one ineffective statutory limitation

. Id. at *18, * 2 1 n.215. The unexplored limitation appears in Section 141(a) of the DGCL , and this decision addresses that statutory path below. Th e ineffective statutory limitation appears in Section 152, which states that

“ [i]n the absence of actual fraud in the transaction, ” the board ’ s determination regarding the value of the consideration that a corporation receives for its shares “ shall be conc lusive. ” 8 Del. C. § 152 (d) . Despite the seemingly clear “ actual fraud ” standard in the statutory text, Delaware courts have subjected the board ’ s determination to fiduciary review by applying either the business judgment rule or the entire fairness test depending on whether or not the decision was made by a board majority comprising disinterested and independent directors. See Parfi Hldg. AB v. Mi rror Image Internet, Inc. , 794 A.2d 1211, 1235 (Del. Ch. 2001) (Strine, V.C.) , rev ’ d on other grounds , 817 A.2d 149 (Del. 2002).

47 Totta , 2022 WL 1751741 , at *15.28

the Delaware Supreme Court ’ s decision in DuPont v. DuPont , 48 she made the following observation: In the hierarchy of law

- making in a democratic regime, courts defer to legislatures. Within constitutional limits, the General Assembly can replace equity with statutory law. For purposes of entity law, that means the General Assembly has the authority to eliminate or modify fiduciary duties and the standards that are applied by this court, or to authorize their elimination or mod ification through private ordering. 49 Thus , if the General Assembly has authorized provisions in the constitutive documents of an entity that eliminate or modif y the fiduciary duty regime, then a court will enforce them. Otherwise, practitioners cannot use the constitutive documents of an entity for that
purpose. 50

48 85 A.2d 724 (Del. 1951)

. 49 Totta , 2022 WL 1751741, at *15 (footnote omitted).

50 I agree wi th the Chancellor ’ s assessment of where the allocation of authority among the separate branches of government rest s today. The DuPont case, however, contemplates a more muscular role for this court ’ s equity jurisdiction

. T he Delaware Supreme Court analyzed Article IV, Section 10 of the Delaware Constitution of 1897, which provides that this court “ shall have all the jurisdiction and powers vested by the laws of this State in the Court of Chancery. ” Del. Const. art. IV, § 10

. After tracing the history of the provision, the high court held that th e constitutional grant of jurisdiction empowers the Court of Chancery with , at a minimum, “ all the general equity jurisdiction of the High Court of Chancery of Great Britain as it exi sted prior to the separation of the colonies, ” except “ where a sufficient remedy exists at law. ” DuPont , 85 A.2d at 727 , 729

. Based on that constitutional grant, the high court held that the General Assembly cannot enact legislation that reduces this court ’ s jurisdiction below the constitutional minimum, unless the General Assembly ensures that there is an adequate remedy at law. Id . at 729. The29

In Delman v. GigAcquisitions 3 , LLC , 51 Vice Chancellor Will relied on Totta to hold that stockholders were not estopped from asserting a claim for breach of the duty of loyalty simply because the potential conflicts of interest faced by the corporate fiduciaries “ were disclosed in the prospectus when the plaintiff invested

. . . and again in the Proxy ” issued in connection with the transaction they c hallenged. 52 She posited that “ [s]uch an approach

Delaware Supreme Court explained that through this grant of authority , the framers of the Constitution of 1897 in tended to establish for the benefit of the people of the state a tribunal to administer the remedies and principles of equity. They secured them for the relief of the people. This conclusion is in complete harmony with the underlying theory of written cons titutions. Its result is to establish by the Judiciary Article of the Constitution the irreducible minimum of the judiciary. It secures for the protection of the people an adequate judicial system and removes it from the vagaries of legislative whim

. Id. One scholar has argued that DuPont creates “ substantial doubt ” about whether fiduciary duties can be waived or eliminated at all, even with statutory authorization from the General Assembly . Lyman Johnson, Delaware ’ s Non

- Waivable Duties , 91 B.U. L. Rev. 701, 702 (2011). I would not go that far, because the weight of authority demonstrates that fiduciary duties can be tailored. There is arguably an open question as to whether the General Assembly can constitutionally authorize provisions that purport to eliminate all fiduciary duties or capaciously limit them without ensuring the existence of an adequate remedy at law

. Experience has shown that contractual remedies and the implied covenant of good faith and fair dealing are not fiduciary s ubstitutes

. See generally Leo E. Strine, Jr. & J. Travis Laster, The Siren Song of Unlimited Contractual Freedom, in Research Handbook on Partnerships, LLCs and Alternative Forms of Business Organizations (Robert W. Hillman & Mark J. Loewenstein eds., 2014 )

. Although it hardly seems likely that the Delaware courts would rely on DuPont to pare back the blanket authorization for waiving or limiting fiduciary duties that appear in the alternative entities statutes , the DuPont decision provides insight into equ ity ’ s true potential

.

51 288 A.3d 692 (Del. Ch. 2023).

52 Id. at 714.30

would be inconsistent with the fundamental principles of our law ” and stated that that

“ Delaware corporate law ‘ does not allow for a waiver of the directors ’ duty of loyalty. ’” 53 Relying on Totta , she observed that “ [t]he Delaware General Assembly alone ‘ has the authority to eliminate or modify fiduciary duties and the standards that are applied by this court, or to authorize their elimination or modification. ’” 54 She concluded that “ [u]nless and until that occurs, ” an entity that chooses the “ corporate form promises investors that equity will provide the important default protections it always has. ” 55 The Funds argue that the Covenant disguise s the wolf of an impermissible limitation on fiduciary duties in the sheep ’ s clothing of a stockholder

- level agreement. That, they say, is no distinction at all. Under the ir bright

- line approach, the Covenant is facially invalid. The Funds have advanced one reasonable interpretation of the law, but it is a sta rk
account that elevates fiduciary accountability above all else , fails to explore the permissible bounds of fiduciary tailoring, and ignores the difference between limitations in the constitutive documents of an entity and limitations in a stockholder

- lev el agreement

. T he Funds ’ absolutist framing pays no heed to the importance of private ordering, which is another fundament of Delaware entity law.

53 Id. at 715 (quoting Schock v. Nash , 732 A.2d 217, 225 n.21 (Del. 1999) )

. 54 Id. (quoting Totta , 2022 WL 1751741, at *15 ).

55 Id. (internal quotations omitted).31

I have no quarrel with Totta because that case dealt with a charter provision. The creation of a body corpor ate through the issuance of a charter constitutes an exercise of state authority, equivalent in its efficacy to the enactment o f a statute ( notwithstanding the now longstanding practice of the state approving charters under a general incorporation law ) . Through the issuance of a charter, the state creates an otherwise impossible being

— an artificial person

— capable of exercising the powers conferred by the state and with the limitations that the state wishes to impose

. T o use the charter to modify the duties attendant to that state

- created relationship , parties should need express authority from the state. I also have no quarrel with GigAcquisitions 3 , where the defendants sought to achieve fiduciary tailoring through disclosure plus a not ion akin to assumption of risk. The reasoning of th o se

cases does not apply to the current dispute , where the Funds voluntarily restricted their ability to exercise stockholder

- level rights in a negotiated agreement

. The Funds ’ position may well be correct , but the ir authorities do not go that far.
D. The Case Against Facial Invalidity The argument against the Covenant ’ s facial invalidity take s time to unspool . It starts by showing that fiduciary obligations can be tailored . A t the heart of a fiduciary relationship lies a nucleus of other

- regarding loyalty that cannot be altered or eliminated without rendering the relationship non

- fiduciary. But the orientation and scope of the relationship can be modified. Rather than disavowi ng that framework, Delaware corporate law deploys it , and both the DGCL and the common law permit a greater space for fiduciary tailoring than is commonly recognized

. Set within that broader landscape, t he Covenant achieves an outcome that tracks what Dela ware law already permits. The analysis next32

incorporates Delaware ’ s support for private ordering, and the Delaware Supreme Court ’ s embrace of the contractarian theory of corporate law in Salzberg v. Sciabacucchi 56 and
Manti . The analysis also takes into account the ability of stockholders to agree to greater restrictions on their stockholder

- level rights in a negotiated agreement than what corporate planners can impose through the constitutive documents. With a deeper understanding of what Delaware corporate law permits, the case against the facial in validity of the Covenant is strong

. 57

56 227 A.3d 102 (Del. 2020).

57 As an aside, this case is not about whether fiduciaries must comply with a contract that purports to limit their ability to fulfill their duties. Some have read Paramount Comm uni c ation s Inc. v. QVC Network Inc., 637 A.2d 34 (De l. 1994), as suggest ing that a contract cannot limit fiduciary duties, thereby giving fiduciaries a get

- out

- of

- contract

- free card, but learned commentators reject that interpretation. See , e.g. , R. Franklin Balotti & A. Gilchrist Sparks, III, Deal

- Protection Measures and the Merger Recommendation , 96 Nw. U. L. Rev. 467, 468

– 69 (2002) ( “ In Smith v. Van Gorkom , the Delaware Supreme Court established that Delaware law does not give directors, just because they are fidu ciaries, the right to accept better offers, distribute information to potential new bidders, or change their recommendation with respect to a merger agreement even if circumstances have changed. ” (footnote omitted) ); John F. Johnston, Recent Amendments to the Merger Sections of the DGCL Will Eliminate Some

— But Not All

—

Fiduciary Out Negotiation and Drafting Issues, 1 Mergers & Acquisitions L. Rep. 20, 777, 778 (July 20, 1998) (BNA) ( “ [T]here is

. . . no public policy that permits fiduciaries to terminate an otherwise binding agreement because a better deal has come along, or circumstances have changed. ” ); John F. Johnston & Frederick H. Alexander, Fiduciary Outs and Exclusive Merger Agreements

—

Delaware Law and Practice , 11 Insights: The Corp. & Sec. L. Adviso r No. 2, 15, 15 (Feb. 1997) ( “ [T]he Delaware Supreme Court held that directors of Delaware corporations may not rely on their status as fiduciaries as a basis for (1) terminating a merger agreement due to changed circumstances, including a better offer; or (2) negotiating with other bidders in order to develop a competing offer. ” ); A. Gilchrist Sparks, III, Merger Agreements Under Delaware Law

— When Can Directors Change Their Minds? , 51 U. Miami L. Rev. 815, 817 (1997) ( “ [ Van Gorkom ] makes it clear that unde r Delaware law there is no implied fiduciary out or trump card permitting a board to terminate a merger33

1. Contractual Tailoring Of Fiduciary Duties

“ Contractual and fiduciary relationship s are the two dominant legal forms of interaction through which persons ca n pursue individual and shared interests. ” 58 The two domains, while separate , are deeply intertwined, because many fiduciary relationships are formed through contract. 59 The extent to which fiduciary roles can be tailored implicates two competing polic ies : First, in a legal order founded on liberal values, individuals should in general be free to set the normative terms on which they interact. This points in favour [sic] of permitting opt outs, so long as relevant legal and other requirements are satisfied. On the other hand, the mediating function of social roles depends on stability in the normative constitution of these roles; where this is lost, roles may lose their traction as normative resources and people m a y stop organizing their affairs with referenc e to them. Where fiduciary law too readily permits opt outs, there is a risk that fiduciary roles might cease to be comprehensible to those whose actions engage with them, and this might generate costs.

. . . There are reasons to think that social roles ca n contribute to human autonomy by providing socially recognized o p tions

agreement before it is sent to a stockholder vote. ” ). To the extent some have viewed Omnicare, Inc. v. NCS Healthcare, Inc. , 818 A.2d 914, 933 (Del. 200 3), as supporting a similar fiduciary trump card, I have argued otherwise

. See J. Travis Laster, Omnicare ’ s Silver Lining , 38 J. Corp. L. 795, 81 8

– 27 (2013)

. This case is not about fiduciaries limiting their freedom of action by contract; it is about non

- fiduciary stockholders agreeing to a transaction

- specific limitation on their ability to assert stockholder

- level claims against fiduciaries.

58 Paul B. Miller & Andrew S. Gold, Introduction to Contract , Status , and Fiduciary Law 1 (Paul B. Miller & Andrew S. Gold, eds., 2016) [hereinafter Contract and Fiduciary Law].

59 Id. at 2, 5.34

that may be the subject of autonomous choice; thus, there are reasons to be sceptical [sic] about opt outs from a liberal point of view. 60 Those twin concerns manifest themselves in De laware law through the dual principles of private ordering and fiduciary accountability. For different types of fiduciaries , the law may balance the policies differently. 61

“ [ T ] he word ‘ fiduciary ’ is anglicized Latin, meaning trustee

- like. ” 62 Fiduciary duties are thus obligations that are similar to those of a trustee, and a fiduciary relationship is one that is analogous to that between an express trustee and beneficiary. 63 Delaware trust law curr ently authorizes a trust agreement to modify nearly ever y aspect of a trustee ’ s duties

. 64 By statu t e, a trust instrument governed by Delaware law may restrict, eliminate, or otherwise vary “ [a] fiduciary ’ s powers, duties, standard of care, rights of indemn ification and liability to persons whose interests arise from that instrument , ” subject only to a floor that prevents “ exculpation or indemnification of a fiduciary for the fiduciary ’ s own wilful [sic] misconduct ” or “ a court of competent jurisdiction from removing a fiduciary on

60 Matthew Harding, Fiduciary Undertakings , in C ontract and Fiduciary Law 88 (footnote omit ted)

.

61 Id.

62 Gregory Klass , What if Fiduciary Obligations are like Contractual Ones? , in Contract and Fiduciary Law 93.

63 Id. at 93

– 94.

64 E.g. , 12 Del. C. § 3303(a) ( “ The rule that statutes in derogation of the common law are to be strictly construed shall have no application to this section. It is the policy of this section to give maximum effect to the principle of freedom of disposition and to the enforceability of governing instruments. ” ).35

account of the fiduciary ’ s wilful [sic] misconduct. ” 65 For purposes of that statutory floor

“ [t]he term ‘ wilful [sic] misconduct ’ shall mean intentional wrongdoing, not mere negligence, gross negligence or recklessness and ‘ wrongdo ing ’ means malicious conduct or conduct designed to defraud or seek an unconscionable advantage. ” 66 Somewhat strangely , Delaware corporate law now stand s as the bastion of traditional dut ies , even

65 Id. ( “ N otwithstanding any other provision of th is Code or other law, the terms of a governing instrument may expand, restrict, eliminate, or otherwise vary any laws of general application to fiduciaries, trusts, and trust administration, including, but not limited to, any such laws pertaining to:

. . . (5) A fiduciary ’ s powers, duties, standard of care, rights of indemnification and liability to persons whose interests arise from that instrument

. . . provided, however, that nothing contained in this section shall be construed to permit the exculpation or indemnification of a fiduciary for the fiduciary ’ s own wilful [sic] misconduct or preclude a court of competent jurisdiction from removing a fiduciary on account of the fiduciary ’ s wilful [sic] misconduct. ” ) ; see 12 Del. C. § 3586 ( “ A trustee who acted in good faith reliance on the terms of a written governing instrument is not liable to a beneficiary for a breach of trust to the extent the breach resulted from the reliance. ” ); 12 Del. C. § 3588(a) (addressing ability of beneficiary to consent cond uct by trustee constituting a breach of fiduciary duty).

66 E.g. , 12 Del. C. § 3301(g).36

though director duties were less onerous than those of trustees 67 and partners

. 68 To the
extent that trustee duties establish the model for director duties , Delaware ’ s current trustee paradigm suggests that director duties should be almost fully contractable. In such a world, the Covena nt c ould not be facially invalid.
Let ’ s assume , however, that the contractarian ism only conquered trust law by statute, such that that director duties remain modeled on those that a trust ee owed at common law. Even then , a trust instrument could provide fo r fiduciary tailoring. A trust instrument could not eliminate the trustee’s core fiduciary obligation to exercise its powers

67 Rather than declaring that directors had the same duties as trustees, Delaware decisions descr ib ed their duties as in the nature of trustees. See Bovay v. H. M. Byllesby & Co. , 38 A.2d 808, 813 (Del. 1944) (describing stock to be “in the nature” of a trust fund); Bodell v. Gen. Gas & Elec. Corp. , 132 A. 442 , 446 (Del. Ch. 1926), aff ’ d , 140 A. 264 (Del. 1927) (“ There is no rule better settled in the law of corporations than that directors in their conduct of the corporation stand in the situation of fiduciaries. While they are not trustees in the strict sense of the term, yet for convenience they have often been described as such. ”). Scholars have noted that the application of fiduciary duties to directors was “less rigorous, since the business situation demands greater flexibility than the trust situation.” A dolf A. Berle, Jr., Corporate Powers As Powers in Trust , 44 Harv. L. Rev. 1049, 1074 (1931) ; accord Deborah A. DeMott, Beyond Metaphor: An Analysis of Fiduciary Obligation , 1988 Duke L.J. 879, 908

– 09 (1988) (“As the law has developed, trustees are under more stringent restrictions in their dealings with trust property than are corporate directors in their personal transactions with the corporation.”); see Restatement (Third) of Trusts § 78 (Am. L. Inst. 2007), Westlaw (database updated Mar. 2023) (“The duty of loyalty is, for trustees, particularly strict even by comparison to the standards of other fiduciary relationships.”).

68 When describing the duties owed by partners, Justice Cardozo famously invoked the “punctil io of an honor most sensitive.” Meinhard v. Salmon , 249 N.Y. 458, 464, (N.Y. 1928). By statute, fiduciary duties in Delaware general and limited partnerships are fully contract a ble. See 6 Del. C. §§ 15

- 103, 17

- 1101.37

in pursuit of what the trustee believe d was in the best interests of the beneficiary. 69 A trust instrument could specify the beneficiaries of the trust, thereby identifying for whose benefit the trustee had to selflessly pursue the trust’s purpose. 70 A trust instrument could orient the
trustee ’ s fiduciary duties through a purpose clause or by cabin the trustee’s discretion by gi ving specific instructions to the tru s tee

. 71 Most importantly for present purposes, t he trust instrument could authorize the trustee to engage in transactions that otherwise would be disloyal. 72

69 Lionel D. Smith, Contract, Consent, and Fiduciary Relationships , in Contract and Fiduciary Law 128, 134 ; accord George G. Bogert et al., Bogert ’ s The Law of Trusts & Trustees § 541 at 232 (3d ed. 2020) ( “ Although a settlor can modify a trustee ’ s duties to a degree, the existence of certain duties is critical to the existence of the trust relationship. ” ); Restatement (Third) of Trusts , supra , § 86 cmt. b ( “ A trustee ’ s duties

. . . may be modified by the terms of the trust, but the duties of trusteeship are subject to certain minimum s tandards that are fundamental to the trust relationship and normally essential to it. ” )

.

70 S ee Bogert, supra , § 541 at 252

– 53 (“A settlor may provide guidance to the trustee to prefer one beneficiary or category of beneficiaries over others, and the trustee must follow that guidance.”); see also Restatement (Third) of Trusts, supra , § 49 (“[T]he existence and ex tent of the trustee’s duty of loyalty to the beneficiary . . . may of course be imposed by the terms of the trust; or the terms of the trust may limit the extent of such duties, or in some cases may prevent such duties from being imposed.”).

71 Bogert, supr

a , § 541 at 235

– 37 ( “ A fundamental duty of the trustee is to carry out the directions of the testator or settlor as expressed in the terms of the trust. Any attempt to take action contrary to the settlor ’ s direction may be deemed to constitute a unilateral and invalid deviation from the trust terms. ” (footnotes omitted) ) ; see Restatement (Third) of Trusts , supra , § 76(1) ( “ The trustee has a duty to administer the trust, diligently and in good faith, in accordance with the terms of the trust and applicable l aw. ” )

.

72 Bogert, supra , § 543 at 371 , 579

– 83 (noting that express grants of authority to trustees to perform specific acts that otherwise would be disloyal have often been upheld ; collecting cases); see Restatement (Third) of Trusts , supra , § 78 ( “ Except as otherwise provided in the terms of the trust , a trustee has a duty to administer the trust solely in the38

Th o se accommodations for fiduciary tailoring suggest that if the Covenant appeared in a trust instrument, then it would not be facially invalid. The Covenant is part of the Drag

Along Right, which authorizes a contractually specified transaction . That transaction might otherwise constitute a loyalty breach, but a c ommon law trust instrument could authorize such a transaction explicitly. T he Covenant becomes a belt

- and

- suspenders provision that adds an obligation not to sue where a court applying trust law would find no claim

. Another prototypical fiduciary relationship exists between agent and principal. As with trust law, an agency agreement cannot eliminate the core fiduciary obligation that the agent exercise its authority to fulfill its charge from the principal by acting s elflessly to pursue what the agent believes to be the principal ’ s best interest. 73 An agency agreement

can orient the agent ’ s duties through a narrow purpose clause or cabin the agent’s discretion

interest of the beneficiaries, or solely in furtherance of its charitable purpose. ” (emphasis added)) ; id. cmt. c(2) ( “ A trustee may be autho rized by the terms of the trust, expressly or by implication, to engage in transactions that would otherwise be prohibited by the rules of undivided loyalty stated in Subsections (1) and (2). For example, the terms of a trust may permit the trustee persona lly to purchase trust property or borrow trust funds, or to sell or lend the trustee ’ s own property or funds to the trust. ” ) ; cf. Berle, supra , at 1073 ( “ In this respect, corporation law is substantially at the stage in which equity was when it faced the s ituation of a trustee who had been granted apparently absolute powers in his deed of trust. So far as the law and the language went, the power was absolute; the trustee could do as he pleased; could perhaps trade with himself irrespective of his adverse in terests; could, perhaps, sell the trust assets at an unfairly low price. ” ).

73 Restatement (Third) o f Agency § 8.06 (Am. L. Inst. 2006), Westlaw (database updated Mar. 2023)

.39

with specific instructions. 74 Most significantly for presen t purposes, agency law permits a principal to consent in advance to specific conduct that otherwise would constitute loyalty breach. Under the blackletter rule, Conduct by an agent that would otherwise constitute a breach of duty

. . . does not constitute a breach of duty if the principal consents to the conduct, provided that (a) in obtaining the principal ’ s consent, the agent (i) acts in good faith, (ii) discloses all material facts that the agent knows, has reason to know, or should know would reasonably affect the principal ’ s judgment unless the principal has manifested that such facts are already known by the principal or that the principal does not wish to know them, and (iii) otherwise deals fairly with the principal; and (b) the principal ’ s consent concerns either a specific act or transaction, or acts or transactions of a specified type that could reasonably be expected to occur in the ordinary course of the agency relationship. 75 The commentary explains that the se conditions impose “ mandat ory limits on the circumstances under which an agent may be empowered to take disloyal action. ” 76

74 Restatement (Third) o f Agency , supra , § 8.08, cmt. b (“A contract may also, in appropriate circumstances, raise or lower the standard of performance to be expected of an agent .

. . .”) ; see Deborah A. DeMott, Corporate Officers As Agents , 74 Wash. & Lee L. Rev. 847, 869 (2017) (“Agency law acknowledges the possibility of contractual solutions by embracing a role for agreements between principals and agents that define in advance the applicable standard of performance.”)

75 Restatement of Agency (Third) , supra , § 8.06.

76 Id. cmt. b.40

The agency standard draws an important distinction between general attempts at fiduciary waivers and narrowly tailored authorizations. [A] n agreement that contains general or broad language purporting to release an agent in advance from the agent ’ s general fiduciary obligation to the principal is not likely to be enforceable. This is because a broadly sweeping release of an agent ’ s fiduciary d uty may not reflect an adequately informed judgment on the part of the principal; if effective, the release would expose the principal to the risk that the agent will exploit the agent ’ s position in ways not foreseeable by the principal at the time the pri ncipal agreed to the release. 77

“ In contrast, when a principal consents to specific transactions or to specified types of conduct by the agent, the principal has a focused opportunity to assess risks that are more readily identifiable. ” 78 The “ agent bears the burden of establishing that the requirements stated in this section have been fulfilled. ” 79
If the Covenant addressed an agency relationship in which the Funds acted as principals and Rich and his affiliates and associates acted as agents, then the Cov enant would not be facially invalid. Rich openly sought the Funds ’ consent to effectuate a Drag

Along Sale in a setting where it was clear what he wanted to accomplish. As sophisticated investors, the Funds knew what was being asked of them. The Drag

- Along Sale was specific transaction that reasonably be expected to occur in the ordinary course of the relationship. Although a sale of the C ompany is not generally an ordinary course

77 Id.

78 Id.

79 Id.41

transaction for the Company itself, it is the ever

- present goal for venture c apital investors. 80 In VC heaven, successful exits are ordinary course events. The Funds had wanted a liquidity event and knew that Rich would want one too. In this setting, the Drag

- Along Sale was not a breach of duty, and t he Covenant again becomes a bel t

- and

- suspenders provision that adds an obligation not to sue where a court applying agency law would find no claim. The examples from trust and agency law indicate that if judged by traditional standards for fiduciary tailoring, the Covenant would not be facially invalid. It would be upheld. 2. Delaware Corporate Law And Fiduciary Tailoring The next question is whether Delaware corporate law has restricted the traditional space for fiduciary tailoring. Delaware corporate law is popularly understood to impose mandatory fiduciary duties that cannot be modified . Although monetary liability for t he duty of care can be eliminated, the underlying duty cannot be altered, and the duty of loyalty stands inviolate . That view gains currency from contrasting Delaware corporations

80 See In re Trados Inc. S’holder Litig. , 73 A.3d 17, 50

– 51 (Del. Ch. 2013) (describing types of VC exits) ; Victor Fleischer, Two and Twenty: Taxing Partnership Profits in Private Equity Funds , 83 N.Y.U. L. Rev. 1, 8

– 9 (2008) (“In the case of venture capital funds, the portfolio companies are start

- ups. . . . After some period of time, the fund sells its interest in the portfolio company to a strategic or financial buyer, or it takes the company public and sells its securities in a secondary offering.”) ; D. Gordon Smith, The Exit Structure of Venture Capital , 53 UCLA L. Rev. 315, 316 (2005) (“Before venture capitalists invest, they plan for exit.”); id. at 356 (“Any venture capitalist who desires to remain in business ... must successfully raise funds, invest them in portfolio companies, then exit the companies and return the proceeds to the fund investors, who in turn are expected to reinvest in a new fund formed by the same venture capitalist

. ”).42

with alternatives entities , where the governing statutes authorize the full elimination of fiduciary duties . While it is true that Delaware corporate law has not forged as far afield as its alternative

- entity brethren, the corporate form has not reject ed the traditional methods of fiduciary tailoring. To the contrary, both the DGC L and Delaware common law accommodate the traditional forms , and the common law has gone further through a concept of contractual preemption articulated most prominently in Nemec v. Shrader

. 81

a. Statutorily Authorized Tailoring Sections 102(b)(7) and 122(17) are the two widely acknowledged paths for fiduciary tailoring in the DGCL. Upon closer review, t hose are not the only routes that the DGCL makes available. i. Section 102(b)(7) The most well

- known provision in the DGCL that perm its fiduciary tailoring is Section 102(b)(7) . It currently provides : T he certificate of incorporation may also contain .

. . [a] provision eliminating or limiting the personal liability of a director or officer to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director or officer , provided that such provision shall not eliminate or li mit the liability of : (i) A director or officer for any breach of the director ’ s or officer ’ s duty of loyalty to the corporation or its stockholders; (ii) A director o r officer for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;

81 991 A.2d 1120 , 1129 (Del. 2010) (explaining that where parties have e ntered into a contract, competing claims for breach of fiduciary duty arising out of the same facts are “foreclosed as superfluous”).43

(iii ) A director under § 174 of this title; (iv) A director or officer for any transaction from which the director or officer derived an improper personal benefi t; or (v) An officer in any action by or in the right of the corporation. 82 The five exclusions thus prevent a charter provision from eliminating monetary liability for breaches of the duty of loyalty , including its subsidiary requirement that a fiduciar y
must act in good faith. For directors, the combination of exc lusions only permits a charter provision to eliminate monetary liability for breaches of the duty of care. For officers , the combination of exclusions only permits a charter provision to eliminate monetary liability to the stockholders for direct claim s fo r breaches of the duty of care

. Section 102(b)(7) does not speak directly to the Covenant because th e statut e addresses the extent to which the const itu tive documents of the corporation can limit or eliminate monetary liability for breach of fiduciary duty. Section 102(b)(7) expressly addresses the extent to which a provision in the corporate charter can do so

. B ecause a bylaw provision cannot conflict wi th a contrary provision in the charter or in the DGCL, Section 102(b)(7) implicitly addresses whether a bylaw can do so . 83 The plain language of 102(b)(7) does not address a stockholder

- level agreement in which a stockholder commit s
to refrain from asserti ng a claim that the stockholder could freely decline to pursue.

82 8 Del. C. § 102(b)(7).

83 Sinchareonkul v. Fahnemann , 2015 WL 292314, at *6 (Del. Ch. Jan. 22, 2015) ( “ A bylaw that confl icts with the charter is void, as is a bylaw or charter provision that conflicts with the DGCL. ” ).44

As discussed below, the structure of the DGCL demonstrates that stockholders have greater freedom to enter into private agreements that constrain their stockholder

- level rights than what can b e accomplished in the charter and bylaws. 84 Because of the distinction between a private stockholder agreement and a provision that appears in the charter or bylaws. Section 102(b)(7) does not render the Covenant facially invalid. Conversely, Section 102( b)(7) does provide some signals about what stockholders

can agree to in a stockholder

- level agreement. To the extent a particular measure can appear in the more restricted domain of the charter or bylaws, then stockholders should be able to restrict themse lves to at least the same degree in a stockholder

- level agreement. By analogy to Section 102(b)(7), a covenant in a stockholder

- level agreement in which the signatories agreed not to assert claims for breach of the duty of care is not contrary to Delaware public policy. The analogy to Section 102(b)(7) also indicates that, relatively speaking, Delaware law is less concerned about limiting liability for direct claims than for derivative claims. Section 102(b)(7)’s approach to officers illustrates the
distinc tion, because Section 102(b)(7) authorizes a provision that limits or eliminates monetary liability for direct care claims while foreclosing similar exculpation for corporate

84 See Part II. D.3.b , infra

. There is one decision which applies the limitations in Section 102(b)(7) to a settlement agreement. See Hills Stores Co. v. Bozic , 1997 WL 153823, at *6 (Del. Ch. Mar. 25, 1997) (Strine, V.C.) . After citing Section 102(b)(7), the court stated simply, “ I see no reason why the public policy behind § 102(b)(7) should not also apply to settlement agreements. ” Id. The court did not delve into the issue any more deeply, nor did the decision consider any other authorities

.45

care claims. The Covenant only addresses direct claims, making it relatively more acceptable. The Covenant extends to all direct claims for breach of fiduciary duty that the Signatories could assert against a Drag

- Along Sale. That broad framing includes direct claims for the duty of care, and at least that much of the Covenant should b e valid. By analogy to Section 102(b)(7), a covenant in a stockholder

- level agreement in which the signatories agreed not to assert direct claims for breach es of duty based on recklessness are not contrary to Delaware public policy. When analyzing the scope of exculpation under Section 102(b)(7), Delaware cases have held consistently that that gross negligence encompasses recklessness. 85 In civil cases not involving business entities, the

85 In re Lear Corp. S ’ holder Litig. , 967 A.2d 640, 652 n.45 (Del. Ch. 2008) (Strine, V.C.) ( “ [T]he definition [of gross negligence in corporate law] is so strict that it imports the concept of recklessness into the gross negligence standard .

. . . ” ); Albert v. Alex. Brown Mgmt. Servs., Inc. , 2005 WL 2130607, at *4 (Del. Ch. Aug. 26, 2005) ( “ Gross negligence has a stringent meaning under Delaware corporate (and partnership ) law, one which involves a devil

- may - care attitude or indifference to duty amounting to recklessness. ” (cleaned up)); Tomczak v. Morton Thiokol, Inc. , 1990 WL 42607, at *12 (Del. Ch. Apr. 5, 1990) ( “ In the corporate context, gross negligence means reckles s indifference to or a deliberate disregard of the whole body of stockholders or actions which are without the bounds of reason. ” (cleaned up)); Solash v. Telex Corp. , 1988 WL 3587, at *9 (Del. Ch. Jan. 19, 1988) (Allen, C.) (explaining that to be grossly negligent, a decision “ has to be so grossly off

- the

- mark as to amount to reckless indifference or a gross abuse of discretion ” (cleaned up)) ; see McPadden v. Sidhu , 964 A.2d 1262, 1274 (Del. Ch. 2008) ( “ [F]rom the sphere of actions that was once classified as grossly negligent conduct that gives rise to a violation of the duty of care, the Court has carved out one specific type of conduct

— the intentional dereliction of duty or the conscious disregard for one ’ s responsibilities

— and redefined it as bad faith conduct, which results in a breach of the duty of loyalty. Therefore, Delaware ’ s current understanding of gross negligence is conduct that constitutes reckless indifference or actions that are without the bounds of reason. ” ).46

Delaware Supreme Court has defined gross negli gence as “ a higher level of negligence representing ‘ an extreme departure from the ordinary standard of care. ’” 86 Under that framework, gross negligence “ signifies more than ordinary inadvertence or inattention , ” but it is “ nevertheless a degree of neglige nce, while recklessness connotes a different type of conduct akin to the intentional infliction of harm. ” 87 In Delaware entity law, by contrast, gross negligence encompasses recklessness, such that Section 102(b)(7) permits exculpation for recklessness. 88 The Covenant encompasses all direct claims for breach of

86 Browne v. Robb , 583 A.2d 949, 953 (Del. 1990) (quoting W. Prosser, Handbook of the Law of Torts 150 (2d ed. 1955)). This test “ is the functional equivalent ” of the test for “ [c]riminal negligence. ” Jardel Co., Inc. v. Hughes , 523 A.2d 518, 530 (Del. 1987). By statute, Delaware law defines “ criminal negligence ” as follows: A person acts with criminal negligence with respect to an element of an offense when the person fails to perceive a risk that the element exists or will result from the conduct. The risk must be of such a nature a nd degree that failure to perceive it constitutes a gross deviation from the standard of conduct that a reasonable person would observe in the situation. 11 Del. C. § 231(a). The same statute provides that a person acts recklessly when “ the person is aware of and consciously disregards a substantial and unjustifiable risk that the element exists or will result from the conduct. ” Id. § 231(e). As with criminal negligence, the risk “ must be of such a nature and degree that disregard thereof constitutes a gros s deviation from the standard of conduct that a reasonable person would observe in the situation. ” Id. ; see id. § 231(a).

87 Jardel , 523 A.2d at 530

. 88 See In re Columbia Pipeline Gp., Inc. , 2021 WL 772562, at *50 n.22 (Del. Ch. Mar. 1, 2021) ( “ The reality that a care claim requires recklessness warrants re

conceptualizing what exculpation accomplishes. Exculpation does not eliminate liability for negligence, because that form of liability does not exist in the first place. In the corporate context, a breac h of the duty of care requires recklessness. The real function of exculpation is to eliminate liability for recklessness. ” ).47

fiduciary duty that the Signatories could assert against a Drag

- Along Sale, which includes direct claims grounded in recklessness. That aspect of the Covenant appears valid

. Because of the Covenant validly forecloses claims for the duty of care, it is not facially invalid

. Section 102(b)(7) therefore does not lead ineluctably to illegitimacy

. Section 102(b)(7) imposes limitations on what can appear in the charter and bylaws, a nd it supports inferences about what Delaware law may otherwise permit or foreclose , but it does not answer the question of the Covenant ’ s validity

. To the contrary, analogies to what Section 102(b)(7) permits in the more constrained context of a charter i ndicate that a significant portion of the Covenant ’ s scope complies with Delaware law.

ii. Section 122(17) A second provision in the DGCL that contemplates fiduciary tailoring is Section 122(17)

. Under that section, every Delaware corporation has the power to [r] enounce, in its certificate of incorporation or by action of its board of directors, any interest or expectancy of the corporation in, or in being offered an opportunity to participate in, specified business opportunities or specified classes or categories of business opportunities that are presented to the corporation or 1 or more of its officers, directors or stockholders. 89 A claim for usurpation of a corporate opportunity is a claim for breach of fiduciary duty. 90 With the adoption of Section 122(17), “ Delaware corporations and managers became free

89 8 Del. C. § 122(17).

90 See Thorpe v. CERBCO, Inc. , 676 A.2d 436, 442 (Del. 1996); Guth v. Loft , Inc. , 5 A.2d 503, 511 (Del. 1939).48

to contract out of a significant portion of the duty of loyalty. ” 91 Not only that, but the opt

out arrangement need not appear in the charter , disconfirming the theory that all forms of fiduciary tailoring must be charter

- based . Under Section 122(17), t he board of directors can renounce a specified type or class of opportunities by resolution. Conceptually, Section 122(17) achieves this result by authorizing the board to accelerate a decision it could make once a corporate opportunity arises. A fiduciary that wishes to pursue a corporate opportunity can present it to the board, and if the board renounces the opportunity, then the fiduciary can proceed

. 92 By autho rizing advance renunciations of corporate opportunities, Section 122(17) enables a board to commit in advance to reject a particular type or class of opportunities. In practice , a corporate opportunity waiver functions like a covenant not to sue. “ The
boa rd ’ s authority to govern corporate affairs extends to decisions about what remedial actions a corporation should take after being harmed, including whether the corporation should file a lawsuit against its directors, its officers, its controller, or an out sider. ” 93 A

91 Gabriel Rauterbe r g & Eric Talley, Contracting Out of the Fiduciary Duty of Loyalty: An Empirical Analysis of Corporate Opportunity Waivers , 117 Colum. L. Rev. 1075, 1078 (2017) ; see Edward P. Welch & Robert S. Saunders, Freedom and Its Limits in t he Delaware General Corporation Law , 33 Del. J. Corp. L. 845, 85 9 (2008) (citing Section 122(17) as a provision in the DGCL that “provide[s] some measure of protection to directors for approving transactions that might otherwise be seen as a breach of the duty of loyalty”).

92 See Johnston v. Greene , 121 A.2d 919, 925 ( Del. 1956)

. 93 United Food & Com. Workers Union & Participating Food Indus. Emp l s. Tri

State Pension Fund v. Zuckerberg , 262 A.3d 1034, 1047 (Del. 2021).49

board can decide whether or not to assert a claim for usurpation of a corporate opportunity

. Through a corporate opportunity waiver, the board commits not to assert a claim for usurpation of a corporate opportunity that falls within specified parameters

. The advance renunciation of a specific type of class of corporate opportunities has obvious parallels to the ability of a trust agreement or an agency agreement to authorize a specific transaction that otherwise would constitute a breach of duty. The parallel also explains why the advance renunciation must be narrowly tailored to “ specified business opportunities or specified classes or categories of business opportunities. ” 94 Section 122(17) shows that the DGCL follows trust and agency law by permitting the authorization of specific transactions that otherwise could constitute a fiduciary breach. The Covenant operates at the stockholder level to achieve a comparable result. S ection

94 8 Del. C. § 122(17); accord Alarm.com H ldgs. , Inc. v. ABS Cap. P ’ rs Inc. , 2018 WL 3006118, at *8

– 9 & n.46 (Del. Ch. June 15, 2018) (discussing specificity requirement), aff ’ d on other grounds , 204 A.3d 113 (Del. 2019); Rauterberg & Talley, supra , at 1096 ( “ On its face, [Section 122(1 7)] requires a [corporate opportunity waiver] to be worded with some particularity. ” ). The synopsis to the bill adopting Section 122(17) elaborates on this point by explain ing that

c ategories of business opportunities may be specified by any manner of def ining or delineating business opportunities or the corporation ’ s or any other party ’ s entitlement thereto or interest therein, including, without limitation, by line or type of business, identity of the originator of the business opportunity, identity of t he party or parties to or having an interest in the business opportunity, identity of the recipient of the business opportunity, periods of time or geographical location

. Senate Bill 363, 72 Del. Laws 619 (2000).50

122(17) is a powerful indication that that the Covenant is not contrary to Delaware public policy and is not facially invalid.

iii. Section 102(a)(3) A third way the DGCL permits the corporate planners to tailor the powers of corporate fiduciaries and th e duties they owe is through a limited purpose clause . A corporation ’ s charter must state “ [t]he nature of the business or purposes to be conducted or promoted. ” 95 The DGCL authorizes the charter to say that “ the purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, ” w ith the effect that that “ all lawful acts and activities shall be within the purpose s of the corporation, except for express limitations. ” 96 Adopting that broad purpose is advisable, because if a corporation has a
narrow purpose, t hen the corporation lacks the power to engage in activities that exceed or fall outside of its purpose, render ing those actions void. 97

95 8 Del. § 102(a)(3).

96 Id.

97 See Applied Energetics, Inc. v. Farley , 239 A.3d 409, 442 (Del. Ch. 2020) (“[A] corporation retains the ability to introduce uncertainty about its capacity or power by including provisions in its charter that disavow particular powers or forbid the corporation from en tering into particular lines of business or engaging in particular acts .”); 1 R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations and Business Organizations § 2. 1 ( 4th ed. & Supp. 20 23

- 1 ) (explaining the general inapplicability of the ultra vires doctrine based on lack of corporate power or capacity, while identifying remaining applications of the doctrine , including a charter provision that forbids the corporation from into particular lin es of business or engaging in particular acts) ; see also Carsanaro v. Bloodhound Techs., Inc ., 65 A.3d 618, 648

– 54 (Del. Ch. 2013) (discussing51

By denying the corporation the power to engage in acts outside of a narrowly defined purpose and rendering non

- compliant acts void, a narrow purpose clause limits the directors ’ powers and concomitant duties. 98 Absent a narrow pu rpose clause, corporate directors have an obligation to seek to maximize the long

- term value of the corporation for the benefit of its stockholders. 99 Directors are obligated to pursue the course that they believe in good faith will achieve that goal, meaning that if the directors subjectively believe that existing one business and entering another will maximize the value of the corporation, then acting loyally calls for means acting on that substantive belief and alter ing the corporation ’ s business. But if the corporation has a limited purpose , then the directors cannot pursue the profit

- maximizing option. The purpose clause limits the

ultra vires acts and the implications of Section 124 of the DGCL), abrogated on other grounds by El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff , 152 A.3d 1248, 1264 (Del. 2016) (rejecting Carsanaro ’ s analysis of post

- merger derivative standing)

.

98 See Rauterberg & Talley, supra , at 1090 (explaining that a Delaware corporation could “ cabin the breadth of the [corpora te opportunity ] doctrine by narrowing the purpose articulated in its charter to specified lines of business, effectively using that scope limitation to cabin the reach of all corporate activity ” ); cf. Zenichi Shishido, Conflicts of Interest and Fiduciary D uties in the Operation of a Joint Venture , 39 Hastings L.J. 63, 94

– 95 (1987) (noting that a court cannot find a misappropriation of a corporate opportunity when th e opportunity falls outside the scope of the corporation ’ s purposes). For a decision illustrating the effect of a limited purpose provision in the context of a partnership, see JER Hudson GP XXI LLC v. DLE Investors, LP , 275 A.3d 755, 787

– 88 (Del. Ch. 2022) ( “ The partnership ’ s purpose limits the general partner ’ s authority and therefore circumscribes its fiduciary duties.

. . . Because a general partner only has the authority to act in furtherance of the partnership ’ s purpose, it cannot owe a duty inconsistent with that purpose. ” )

99 See generally Frederick Hsu Living Tr. v. ODN H ld g . Corp. , 2017 WL 1437308, at *22 (Del. Ch. Apr. 14, 2017) (collecting authorities).52

directors to the identified purpose , and they have no ability or obligation to pursue a contrary purpose. 100 Through this mechanism, a limited purpose clause effectively modifie s the orientation of the directors ’ fiduciary duties. Rather than being able to seek freely to

ma ximize the value of the corporation, the board ’ s options are constrained in a manner that inherently confers benefits on other stakeholders. If, for example, a corporation has the narrow purpose of purs u ing only the business of operating a river ferry , the n its directors

can not decide to exit that business and construct a toll bridge

. In practice, t he limitations imposed by the narrow purpose clause confer benefits on other stakeholders, such as workers in the ferry industry, customers who prefer ferries , and suppliers of ferry boats and tools and parts for the ferry industry

. The ability to specify a narrow corporate purpose has clear parallels to the ability of a trust agreement to specify a purpose for the trust or an agency agreement to specif y a purpose for the agent. If the agreement creating the fiduciary relationship specifies a
narrow purpose for the relationships, then the fiduciary must pursue that purpose selflessly and in a manner that the fiduciary subjectively believes is in the best interests of the beneficiaries , but he t he fiduciary cannot deviate from the purpose . The clause thereby both orients the fiduciary ’ s duties and constrains the fiduciary ’ s freedom of action.

100 See JER Hudson , 275 A.3d at 787

– 88 (explaining that narrow purpose clause in partnership agreement constrained ability of general partner to act and with it the general partner ’ s fiduciary duties).53

Section 102(a)(3) and the implications of a narrow purpose claus e demonstrate that Sections 102(b)(7) and 122(17) do not occupy the field when it comes to fiduciary tailoring

. Other means are available . That suggests in turn that the Covenant is not attempting the impermissible and is not facially invalid.

iv. Section 141 (a) The next path for modifying fiduciary duties appears in Section 141(a) itself. 101 That
section is the cornerstone of Delaware ’ s board

- centric regime , under which “ directors,

101 The use of Section 141(a) has been relatively unexplored by caselaw, but has been deployed by practitioners. A real world example is the tailoring of the charters of AT&T Inc. and Liberty Media Corporation after the f ormer acquired the latter so as to preserve a broad sphere of action for John Malone and Liberty. For an allusion to that highly structured governance arrangement, see Bank of New York Mellon Tr. Co. v. Liberty Media Corp. , 29 A.3d 225, 228 (Del. 2011) (referring to a governance structure under which AT&T “ allowed liberty to operate autonomously ” ). For a decision upholding tailoring under Section 141(a), see Lerman v. Cohen , 222 A.2d 800, 807

– 08 (Del. 1966) (enforcing chart er provision that empowered general counsel to resolve board deadlocks; noting that although directors may not delegate their duty to manage the corporation, “there is no conflict with that principle where, as here, the delegation of duty, if any, is made not by the directors but by stockholder action under [section] 141(a), via the certificate of incorporation”). See generally Welch & Saunders, supra , at 856 (“ Various scholars have compiled lists of aspects of Delaware corporation law they believe are mand atory. Some of these terms are not really mandatory because the same effect can be achieved through a different method . ... Indeed, th e very existence of the board of directors, which has sometimes been identified as a mandatory feature of the Delaware corpo ration, can be modified by provision in the certificate of incorporation adopted under [the Board Power Exception].”); Ernest L. Folk, III, The Delaware General Corporation Law 54 (1972) (citing Lerman as recognizing “ the power of stockholders to establish any type of internal corporate structure they desire so long as it does not violate some other statutory provision or public policy. At the very least, there is nothing in the Delaware statute to require rigid adherence to the traditional corporate norm, and every reason to conclude that the statute and case law tolerate, if not actually encourage, deviations from the corporate norm which have a ‘ proper purpose. ’ ” ).54

rather than shareholders, manage the business and affairs of the corporation. ” 102 “ The existence and exercise of [ the board ’ s authority under Section 141(a) ] carries with it certain fundamental fiduciary obligations to the corporation and its shareholders. ” 103 Because the board ’ s authority under Section 141(a) provides the foundation for the directors ’ fiduciary duties, it follows that modifying the board ’ s aut hority under Section 141(a) should modify the directors ’ fiduciary duties. Many practit i oners can recite the first twenty

- four words of Section 141(a) by heart. For present purposes, the next sixty

- five words are more important. In its entirety, Section 141(a ) states: The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any suc h provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certifi cate of incorporation. 104 Section 141(a) thus consists of a grant of authority followed by an exception. T he first
sentence gives the board nearly plenary authority over the business and affairs of the corporation “ except as may be provided otherwise in thi s chapter or in its certificate of

102 Aronson v. Lewis , 473 A.2d 805, 81 1 (Del. 1984) (subsequent history omitted).

103 Id

. 104 8 Del. C. § 141(a).55

incorporation ” (the “ Board Power Exception ” ). 105 T he Board Power Exception authorizes modifications to the board

- centric regime that appear in the DGCL ( “ in this chapter ” ) or the charter ( “ in its certificate of incorporati on ” ). T he second sentence confirms that if a modification appears it the charter, then the board ’ s powers and duties “ shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation. ” 106 The Board Power Exception hearkens back to Section 102(b)(1), which states: Any provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulat ing the powers of the corporation, the directors, and the stockholders, or any class of the stockholders, or the governing body, members, or any class or group of members of a nonstock corporation; if such provisions are not contrary to the laws of this St ate. 107 This provision explicitly authorizes a provision “ defining, limiting and regulating the powers of

. . . the directors

. ” In Salzberg , the Delaware Supreme Court interpreted Section 102(b)(1) as “ broadly enabling, ” with the only limitation found in t he phrase “ if such provisions are not contrary to the laws of this State. ” 108 Under this standard, a charter may depart from the common law “ provided that it does not transgress a statutory enactment or a public policy settled by the common law or implicit in the General Corporation law

105 Id

. 106 Id.

107 8 Del. C. § 102(b)(1).

108 227 A.3d at 115.56

itself. ” 109 In Manti , the Delaware Supreme Court reiterated that the “ public policy favoring private ordering ” reflected in Section 102(b)(1) “ allows a corporate charter to contain virtually any provision that is related to the corporation ’ s governance, ” subject only to the requirement that it not be “ contrary to the laws of this State. ” 110
The Board Power Exception treats provisions that appear in the DGCL or in the charter as equally effective for tailoring the board ’ s power and authority . It follows that
extant statutory provisions should provide insight into what types of charter

- based modifications are permissib le and consistent with public policy

. One statutory ex e mpl ar appears in in Subchapter XIV of the DGCL , titled Close Corporations, 111 and authorizes a close corporation to provide for management by its stockholders. 112 When a corporation elects to be a close corporation and for the
stockholders to manage some or all aspects of its business and affairs, t he Board Power Exception comes into play to eliminate any conflict with Section 141(a) and confirm that the “ b usiness and affairs of [ the ] corporation

. . . shall be managed

. . . as . . . otherwise

109 Id. (cleaned up).

110 Manti , 261 A.3d at 1217.

111 A close corporation under Subchapter XIV is not synonymous with “ closely held corporation. ” The former is a specific type of corp oration contemplated by the DGCL, like a non - stock corporation or a public benefit corporation. The latter is a colloquialism for a privately held corporation with relatively few stockholders.

112 See 8 Del. C. § 351.57

provided in this chapter

. ” 113 Because the Board Power Exception treats statutory provisions and charter provisions as equally effective, charter

- based allocations of the board ’ s authority should b e similarly permissible. A second statutory exemplar also appears in Subchapter XIV and authorizes the holders of a majority of the outstanding stock entitled to vote in a close corporation to enter into a written agreement among themselves or with anothe r party to “ restrict or interfere with the discretion or powers of the board of directors

. ” 114 The same provision states that such an agreement will “ relieve the directors and impose upon the stockholders

. . . the liability for managerial acts or omissions which is imposed on directors to the extent and so long as the discretion or powers of the board in its management of corporate affairs is controlled by such agreement. ” 115 Once again, the Board Power Exception comes into play to avoid any conflict with Se ction 141(a). By implication, a charter provision could deploy the authority provided by the Board Power Exception to “ restrict or interfere with the discretion or powers of the board of directors. ” 116 A charter provision also could assign discretion and po wer otherwise enjoyed by the board of directors to another party, with the effect of relieving the directors and imposing on the other party the liability for managerial

113 Id. § 141(a).

114 Id. § 350.

115 Id.

116 Id.58

acts or omissions which otherwise would be imposed on the directors to the extent and so long as the discretion or powers of the board are exercised by the other party. 117 A third statutory exemplar appears in Subchapter X V of the DGCL , Public Benefits Corporations , where Section 361 authorizes the charter of a public benefit corporation to identify a public benefit, with the effect that the corporation “ shall be managed in a manner that balances the stockholders ’ pecuniary interests, the best interests of those materially affected by the corporation ’ s condu ct, and the public benefit or public benefits identified in its certificate of incorporation

. ” 118 Both the authority provided for narrow purpose provisions in Section 102(a)( 3 ) and the Board Power Exception suggest that a comparable charter provision would be permissible

. This decision has already discussed how a narrow purpose provision can channel a board ’ s power and associated fiduciary duties to confer
benefits on stakeholders

. The Board Power Exception provides a route for orienting fiduciary duties exp licitly. The ability to tailor a board ’ s authority and concomitant fiduciary duties using the Board Power Exception parallels the ability of a trust agreement to provide specific instructions to the trustee or to name specific beneficiaries whose interest s the trustee must

serve . It likewise parallels the ability of an agency agreement to provide specific instructions to an agent, including parameters for carrying out the agent ’ s duties. Th ose

117 See id.

118 See id. § 36 2 (a).59

fiduciary antecedents and existence of the statutory exemplar i n Section 361 suggest other possible use cases, such as shifting the fiduciary maxim and from equity value to enterprise value , 119 or authorizing conditions for a board to extend a dual

- class capital structure beyond an existing su nset without generating a loyalty issue that would trigger entire fai r ness review. 120 The Board Power Exception shows that the DGCL provides greater space for fiduciary tailoring than is commonly understood. 121

119 See Trados , 73 A.3d at 56 n.32.

120 Cf. David J. Berger, Jill E. Fisch, & Steven Davidoff Solomon, Extending Dual Class Stock: A Proposal (U. Pa. Inst. L. & Econ. Rsch. Paper, No. 13, 2023) , available at https://ssrn.com/a bstract=4399551

.

121 To the extent using Section 102(a)(3) or the Board Power Exception to reorient or tailor fiduciary duties seems extreme , consider a thought experiment in which the General Assembly still granted corporate charters by special act. The Gen eral Assembly undoubtedly would have the power to provide for this type of reorientation or tailoring. Under the Constitution of 1897, the General Assembly no longer grants charters by special act; the DGCL is the sole means of obtaining a corporate charte r. Del. Const. art IX § § 1

– 2

. What then are the restrictions on how private actors can deploy the state ’ s chartering power ? If a provision in the DGCL expressly forecloses a DGCL charter from accomplishing a result that previously could be accomplished by special act, then obviously the General Assembly has withheld that authority. For example, no corporation formed under the DGCL after April 18, 1945, may confer academic or honorary degrees. 8 Del. C. § 125. No corporation formed under the DGCL can exercise banking power. 8 Del. C. § 126(a). A D elaware corporation that is designated as a private foundation under the Internal Revenue Code must comply with certain tax provisions, unless its charter provides that the restriction is inapplicable. 8 Del. C. § 127. A corporation cannot include a provision in its charter that is contrary to Section 102(b)(7) , and a charter “ may not c ontain any provision that would impose liability on a stockholder for the attorneys ’ fees or expenses of the corporation or any other party in connection with an internal corporate claim. ” 8 Del. C. § 102(f). The requirements for naming a Delaware corporat ion reflect more trivial restriction on the ability of private actors to deploy state power. See 8 Del. C. § 101(a)(1).60

Because the Board Power Exception only applies to a charter provision, it does not bear directly on the Covenant . It nevertheless provides further evidence that the DGCL provides greater space for fiduciary tailoring than is commonly understood. Th at flexibility suggests that the Covenant is not contrary to public policy and is not facially invalid

.

Except where explicit restrictions apply, the chartering power under the DGCL would seem co

- extensive with the chartering power that t he General Assembly could exercise by special act

. From that standpoint, the fact that the General Assembly enacted subchapters of the DGCL that confirmed the ability of corporate planners to use the DGCL to charter close corporations and public benefit co rporations eliminated any doubt on that subject, but it does not imply that the power did not already exist. Section 102(a)(3) , and the Board Power Exception , and Section 102(b)(1) indicate that it did

. This court’s decision in eBay Domestic Hldgs., Inc. v . Newmark , 16 A.3d 1 (Del. Ch. 2010) , is not to the contrary. There, the court rejected an attempt by corporate fiduciaries to operate a Delaware corporation for an eleemosynary purpose: T he corporate form in which craigslist operates, however, is not an a ppropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. Jim and Craig opted to form craigslist, Inc. as a for

- profit Delaware corporation and voluntarily accepte d millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for

- profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards includ e acting to promote the value of the corporation for the benefit of its stockholders. The “Inc.” after the company name has to mean at least that. Id. at 34. The charter of craigslist did not contain a narrow purpose clause or a provision that sought to deploy the authority provided by the Board Power Exception or Section 102(b)(1) to reorient the board’s fiduciary duties. The controllers of the corporation simply asserted that they wer e pursuing a philanthropic purpose, which was a confession as stark as Henry Ford ’ s insistence on benefiting his workers

. Dodge v. Ford Motor Co. , 170 N.W. 668 , 683

– 84 (Mich. 1919) ; see M. Todd Henderson, The Story of Dodge v. Ford Moto Company: Everything Old Is New Again , in Corporate Law Stories 37

– 76 (J. Mark Ramseyer ed., 2009)

. Without any charter

- based fiduciary tailoring, the eBay analysis is spot on.61 v. Section 145 The next DGCL provision does not accommodate fiduciary tailoring, but rather authorizes limitations on fiduciary accountability. Section 145 permits a Delaware corporation to provide indemnification and obtai n insurance. Exculpation, i ndemnification , and insurance are means of protecting fiduciar ies against the consequences of misconduct

. With exculpation, monetary damages are prohibited. With indemnification, the corporation picks up the tab. With insurance, a third party pays. There are obviously differences in implementation and operation, 122 but to the extent each is fully available, the endpoint is the same: the fiduciary does not bear the financial consequences of breach. 123

122 For example, the insolvency of the corporation can render indemnification ineffective, just as the insol vency of a third

- party insurer can render insurance ineffective. For insurance coverage, market availability and pricing are additional constraint s . For purposes of fiduciary duty litigation, the biggest difference among the three is that exculpation opera tes as a pleading

- stage defense, akin to sovereign immunity. See In re Ezcorp Inc. Consulting Agr. Deriv. Litig. , 130 A.3d 934, 940 (Del. Ch. 2016). Indemnification only comes into effect after final disposition of the case, although advancement can cover attorneys ’ fees and expenses in the interim. See S un - Times Media Gp., Inc. v. Black , 954 A.2d 380, 391 (Del. Ch. 2008) . Insurance can provide both for indemnification of liabilities and coverage of litigation expenses. Robert P. Redemann & Michael F. Smith, Law and Prac. of Ins. Coverage Litig. § 4:19 , Westlaw (database updated July 2022) (“ It is well established that the insurer may be obligated to pay the costs of defending a suit against the insured, although these expenses may bring the total amou nt paid beyond the coverage limits set out in the policy. Courts have read the standard duty to defend language in general liability agreements very broadly to include all costs and fees reasonably related to defending the underlying litigation. ” (footnote s omitted)).

123 See generally Joan MacLeod Heminway, Corporate Purpose and Litigation Risk in Publicly Held U.S. Benefit Corporations , 40 Seattle U. L. Rev. 611, 634 (2017) ( “ As a general matter, assuming a viable fiduciary duty claim, the liability or fina ncial responsibility of corporate directors for breaches of fiduciary duty may be narrowed through the application of up to four mandatory or permissive aspects of corporate law.62

The parameters of Section 145 provide insight into the limits of Delaware public policy for loyalty breaches. Section 145( a ) addresses i ndemnification for direct claims and authorizes a corporation to indemnify a director or officer for “ expenses (including attorneys ’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with su ch action, suit or proceeding , ” as long as “ the
person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation

. ” 124 A corporation thus c an indemnify a fiduciary for all expenses, in cluding a judgment, incurred for a direct claim for a loyalty breach, as long as the fiduciary acted in good faith and reasonably believed that the decision was not opposed to the best interests of the corporation. Not only that, but

These include exculpation for breaches of the duty of care, indemnification ( statutory and privately ordered), director and officer liability insurance, and the possible application of the business judgment rule in the judicial review process. ” ); Todd M. Aman, Cost

- Benefit Analysis of the Business Judgment Rule: A Critique in Light of the Financial Meltdown , 74 Alb. L. Rev. 1, 11 (2011) ( “ Exculpation provisions, indemnification, and insurance all operate to shield directors from liability risk to varying extent s. ” ) ; James E. Joseph, Indemnification and Insurance: The Risk Shifting Tools (Part I ) , 79 Pa. Bar Ass ’ n Q. 156, 156 (2008) (describing indemnification, exculpation, and insurance as “ risk shifting tools ” ); Welch & Saunders, supra , at 860 (citing the power to obtain insurance un der Section 145(g) as a provision in the DGCL that “provide[s] some measure of protection to directors for approving transactions that might otherwise be seen as a breach of the duty of loyalty”); E. Norman Veasey, Jesse A. Finkelstein & C. Stephen Bigler, Delaware Supports Directors with A Three

- Legged Stool of Limited Liability, Indemnification, and Insurance , 42 Bus. Law. 399, 421 (1987) (describing the triad of exculpation, indemnification, and insurance as a “ ‘ three

- legged ’ approach to director/officer protection . . . designed to ensure that directors and officers are adequately protected from liability resulting from the performance of their duties ” ).

124 8 Del. C. § 145(a).63

[t] he termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation

. 125 Like Section 145(a), t he Covenant addresses direct claims. By analogy to Section 145(a), the Covenant could operate as a permissible limitation on fiduciary accountability as long

as it does not foreclose a claim where the fiduciary acted in bad faith or had an unreasonable belief that the decision could be at least not opposed to the interests of the corporation. The defendants in this case undoubtedly will argue (and intimated in briefing the motion to dismiss) that they acted in good faith both when engaging i n the Interested Transactions and when effectuating the Drag

- Along Sale. The possibility that the Covenant could operate validly to foreclose that type of claim indicates that it is not facially invalid.

125 Id. Section 145(c) goes further by providing for mandatory indemnification r egardless of the fiduciary ’ s mental state. That section states a director or officer “ shall be indemnified against expenses (including attorneys ’ fees) actually and reasonably incurred ” in connection with an action, suit, or proceeding, “ [t]o the extent th at a present or former director or officer of a corporation has been successful on the merits or otherwise. ” Id. Any dismissal of a claim for any reason constitutes success “ on the merits or otherwise ” an d triggers mandatory indemnification

. Id. “ Whether an individual acted in good faith or what she perceived to be in the corporation ’ s best interests is irrelevant in the context of that provision. ” Evans v. Avande, Inc. , 2021 WL 4344020, at *3 (Del. Ch. Sep t. 23, 2021). A director charged with criminal conduct who escapes on a technicality is entitled to full indemnification under Section 145(c). See Cochran v. Stifel Fin. Corp. , 2000 WL 1847676, at *9 (Del. Ch. Dec. 13, 2000) (Strine, V.C.) , aff ’ d in pertin ent part, rev ’ d in part on other grounds , 809 A.2d 555 (Del. 2002) . The Covenant does not operate analogously to Section 145(c) because the Covenant protects the defendants in the absence of a favorable adjudication.64

For purposes of insurance, Section 145(g) does not i mpose any limitations. 126 Recent amendments to Section 145(g) permit a corporation to form its own captive insurer and provide insurance for all claims except “ (i) personal profit or other financial advantage to which such person was not legally entitled or (ii) deliberate criminal or deliberate fraudulent act of such person, or a knowing violation of law by such person

. ” 127 By analogy to Section 145(g), the Covenant could operate as a permissible limitation on fiduciary accountability as long the Interested Transactions and the Drag

- Along Sale did not confer

a “ personal profit ” to which the defendants “ were not legally entitled, ” and as long as the defendants did not deliberately act with criminal or fraudulent intent. The possibility that the Covenant could operate validly to foreclose claims under those circumstances indicate s that it is not facially invalid. Section 145 does not speak directly to the Covenant, but by authorizing significant protection against some types of loyalty breaches , it suggests that much of the scope of the
Covenant falls within the boundaries of Delaware public policy. Section 145 thus indicates that the Covenant is not facially invalid.

vi. Litigation
- Limiting Provisions Finally, two provisions in the DGCL limit claims for breach of f iduciary duty regardless of content

. One is Section 327, which imposes the contemporaneous ownership

126 See 8 Del. C. § 145(g).

127 Id. § 145(g )(1).65

rule and requires that a stockholder have owned stock at the time that the corporation suffered the wrong to have standing to assert a derivative claim. 128 Even if the wrong involved a self

- dealing loyalty breach or bad faith conduct , the stockholder cannot sue. 129
Section 327 effectively operates as a covenant not to sue derivatively for wrongs predating the stockholder ’ s purchase of shares. A second litiga tion

- limiting provision is Section 36 7 , which appears in Subchapter XV addressing Public Benefit Corporations. That section states: An y action to enforce the balancing requirement of § 365(a) of this title, including any individual, derivative or any othe r type of action, may not be brought unless the plaintiffs in such action own individually or collectively, as of the date of instituting such action, at least 2% of the corporation ’ s outstanding shares or, in the case of a corporation with shares listed o n a national securities exchange, the lesser of such percentage or shares of the

128 For reasons that I have discussed elsewhere, I do not believe that a coherent and credible policy justification has ever been offered for the contemporaneous ownership requirement. See J. Travis Laster, Goodbye to the Contemporaneous Ownership Requirement , 33 Del. J. Corp. L. 673 (2008). The requirement was created by the Supreme Court of the United States to address the problem of the collusive federal diversity jurisdiction, and s tate courts ( including this court ) consistently reject ed efforts to inject it into state corporate law

. See Quadrant Structured Prod s . Co. v. Vertin , 102 A.3d 155, 1 77

– 80 (Del. Ch. 2014) (collecting authorities). The Delaware General Assembly enacted Section 327 in 1945, after New York ’ s implementation of a s imilar provision under circumstances that smack of anti

- Semitism. See Bamford v. Penfold, L.P. , 2020 WL 967942, at *24 n.18 (Del. Ch. Feb. 28, 2020) ; Lawrence E. Mitchell, Gentleman ’ s Agreement: The Antisemitic Origins of Restrictions on Stockholder Litiga tion , 36 Queen ’ s L.J. 71, 72 & n.1 (2010). The ill

- fitting justifications that subsequent courts have offered read like rationalization s , making Section 327 a provision that cries out for reexamination. See SDF Funding LLC v. Fry , 2022 WL 1511594, at *6 (D el. Ch. May 13, 2022) (calling for the General Assembly to revisit Section 327)

.

129 E.g. , In re Smile D irectclub, Inc. Deriv

. Litig. , 2021 WL 2182827, at *12 (Del. Ch. May 28, 2021), aff ’ d , 270 A.3d 239 (Del. 2022); 7547 P ’ rs v. Beck , 1995 WL 106490, at *2 (Del. Ch. Feb. 24, 1995), aff ’ d , 682 A.2d 160 (Del. 1996)66

corporation with a market value of at least $2,000,000 as of the date the action is instituted. 130 The plain language of the ownership requirement applies even if the wrong inv olve s a loyalty breach or bad faith conduct. For public benefit corporations, Section 367 operates
as a covenant not to sue unless the stockholder can meet the ownership threshold. Sections 327 and 367 demonstrate that Delaware law does not prohibit limit ations on loyalty claims. Both sections apply to all stockholders and encompass all claims for breach of fiduciary duty, regardless of subject matter. The Covenant is far narrower: It only restricts the Signatories and only applies to a Drag

- Along Sale. Co mpared to Sections 327 and 367, the Covenant attempts less. The presence of Sections 327 and 367 in the DGCL indicate that the Covenant is not facially invalid. 131

130 8 Del. C. § 367.

131 In addition to the provisions discussed in this section, the Delaware Supreme Court held in Glassman v. Unocal Expl oration Corp. , 777 A.2d 242 (Del. 2001 ) , that the short

- form merger statute forecloses a stockholder ’ s ability to assert a claim for breach of the duty of loyalty that could trigger entire fairness review : By enacting a statute [8 Del. C. § 253] that authorizes the elimination of the minority without notice, vote, or other traditional indicia of procedural fairness, the General Assembly effectively circumscribed the parent corporation ’ s obligations to the minority in a short

- form merger. The parent corporation does not have to establish entire fairness, and, absent fraud or illegality, the only recourse for a minority stockholder who is dissatisfied with the merger consideration is appraisal. Id. at 243. Section 253 is thus another example of a DGCL provision that limits loyalty claims

.67 b. Common Law Tailoring The preceding discussion addressed statutor il y authorized paths for fi duciary tailoring

. The common law goes further and authorizes outcomes comparable to what the
Covenant achieve s . The existence of common law doctrines that authorize similar outcomes strongly indicates that the Covenant is not facially invalid.

i. Contractual Preemption Of Fiduciary Claims One powerful common law doctrine asserts that contractual obligations preempt

o verlapping fiduciary duty claims that arise out of the same set of facts . In Nemec , the leading case , the Delaware Supreme Court stated:
I t is a well

- settled principle that where a dispute arises from obligations that are expressly addressed by contract, that dispute will be treated as a breach of contract claim. In that specific context, any fiduciary claims arising out of the same facts that underlie the contract obligations would be foreclosed as superfluous. 132 The stockholder plaintiffs contend ed that the defendant directors acted in their own self

interest when they caused the corporation to exercise a contractual right to redeem the

The outcome in Glassman reflected a conscious decision by the Delaware Supreme Court to change the law. Two decades earlier, the Delaware Supreme Court had reac he d precisely the opposite conclusion and rejected the same arguments that Glassman accepted. See Roland Int ’ l Corp

. v. Najjar , 407 A.2d 1032 , 1036 (Del. 1979) ( “ T he short form permitted by [Section] 253 does simplify the steps necessary to effect a merger, and does give a parent corporation s ome certainty as to result and control as to timing . But, we find nothing magic about a 90% ownership of outstanding shares which would eliminate the fiduciary duty owed by the majority to the minority. ” ). The Glassman decision reinforces the conclusion th at limiting duty of loyalty claims is not inherently contrary to Delaware public policy , which implies that the Covenant is not facially invalid.

132 Nemec , 991 A.2d at 1129.68

plaintiffs’ shares. By exercising the redemption right, the directors deprived the plaintiffs of greater consideration from a then

- anticipated transaction. 133 The consideration went to the remaining stockholders, including the directors. The Delaware Supreme Court held that the contractual right preempted the fiduciary claim. 134
Other decisions likewise hold that a claim for breach of contract occupies the field and preempts overlapping claims for breach of duty against corporate fiduciaries

. 135 For

133 Id. at 1125.

134 Id. at 1128

– 29.

135 See In re WeWork Litig. , 2020 WL 6375438, at *12 (Del. Ch. Oct. 30, 2020) ; Ogus v. SportTechie, Inc. , 2020 WL 502996, at *11 (Del. Ch. Jan. 31, 2020) ; MHS Cap. LLC v. Goggin , 2018 WL 2149718, at *8 (Del. Ch. May 10, 2018) ; Veloric v. J.G. Wentworth, Inc. , 2014 WL 4639217, at *19 (Del. Ch. Sept. 18, 2014); Blaustein v. Lord Balt

. Cap. Corp. , 2013 WL 1810956, at *13 (Del. Ch. Apr. 30, 2013), aff ’ d , 84 A.3d 954 (Del. 2014). Sometimes, the authorities cited in the corporate decisions can be traced back to one or more decisions addressing an alternative entity, but the corporate decisions invariably articulate the concept of contractual preemption as a general principle of Delaware law and do not limit its application to the alternative entity context. See, e.g

. , Stewart v. BF Bolthouse Holdco, LLC, 2013 WL 5210220, at *12 (Del. Ch. Aug. 30, 2013) (asserting generally that “ Delaware law recognizes the primacy of contract law over fiduciary law. ” ); Seibold v. Camulos P ’ rs LP , 2012 WL 4076182, at *21 (Del. Ch. Sep t. 17, 2012) ( “ It is settled that an agent may not misuse the confidential information of its principal. Here, however, Camulos ’ claim that Seibold breached his fiduciary duty by misusing confidential information alleges facts identical to Camulos ’ claim t hat Seibold breached his contractual duties by misusing Confidential Information, and is thus foreclosed as superfluous. ” (cleaned up); Solow v. Aspect Res., LLC , 2004 WL 2694916, at *4 (Del. Ch. Oct. 19, 2004) ( “ Because of the primacy of contract law over fiduciary law, if the duty sought to be enforced arises from the parties ’ contractual relationship, a contractual claim will preclude a fiduciary claim. This manner of inquiry permits a court to evaluate the parties ’ conduct within the framework created a nd crafted by the parties themselves. Because the four fiduciary duty counts in the complaint arise not from general69

example, w hen addressing the implication of a voting agreement , one decision summarized the rule as follows: Under Delaware law, if the contract claim addresses the alleged wrongdoing by the director , any fiduciary duty claim arising out of the same conduct is superfluous. The reasoning behind this is that to allow a fiduciary duty claim to coexist in parallel with a contractual claim, would undermine the primacy of contract law over fiduciary law in matters involving contractual rights and obligations. 136 The court posited that fiduciary duty claims could only persis t under “ a narrow exception ” that applies when “ there is an independent basis for the fiduciary duty claims. ” 137

fiduciary principles, but from specific contractual obligations agreed upon by the parties, the fiduciary duty claims are precluded by the contractual claims. ” (footnotes omitted)). A related line of authority holds that when a corporate fiduciary exercises its right s as a creditor , the fiduciary acts free of fiduciary constraint. See Odyssey P ’ rs, L.P. v. Fleming Cos

. , Inc. , 735 A.2d 386, 414 (Del. Ch. 1999); Solomon v. Pathe Commc ’ ns Corp. , 1995 WL 250374, at *5 (Del. Ch. Apr. 21, 1995) (Allen, C.), aff ’ d , 672 A.2d 35 (Del. 1996)

. See generally In re CNX Gas Corp. S ’ holders Litig. , 4 A.3d 397, 409 (Del. Ch. 2010) (discussin g Odyssey Partners and Solomon ).

136 Grayson v. Imagination Station , Inc. , 2010 WL 3221951, at *7 (Del. Ch. Aug. 16, 2010) (cleaned up)

.

137 Id. Isolated decisions, including my own, have pushed back against the concept of contractual preemption

. E.g. , Metro S torage Int ’ l LLC v. Harron , 275 A.3d 810, 857

– 58 (Del. Ch. 2022); In re MultiPlan Corp. S ’ holders Litig. , 268 A.3d 784, 806 (Del. Ch. 2022); ODN Hdlgs. , 2017 WL 1437308, at *24 ; Lee v. Pincus , 2014 WL 6066108, at *7

– 9 (Del. Ch. Nov. 14, 2014). Scholars explain that a contract claim can coexist with a fiduciary duty claim , because fiduciary obligation s overlay all of the rights and powers that the fiduciary can exercise

. See Smith, supra , at 13 5 (describing fiduciary capacity as a “transversal concept: it cuts across the sources of legal powers, since those sources may be contractual or not”); Harding, supra , at 79 ( “ The fact that a fiduciary undertaking may be made in a given contract does not bear on what counts as sufficient performance of that undertaking as a matter of contract law. It instead means that non

- performance of the undertaking is susceptible of analysis in more than one frame, as involving fiduciary breach70

Under Nemec ’s doctrine of contractual preemption, the Drag

- Along Right displace s competing claim s for breach of fiduciary duty. The Covenant be comes an unobjectionable belt

- and

- suspenders provision that confirms a result that Delaware law would already reach. That outcome suggests that the Covenant is facially invalid.

as well as breach of co ntract. Moreover, the promisor may be liable for fiduciary breach even in circumstances where she has fully performed her undertaking from the perspective of contract law. ” (footnote omitted)). Under this alternative to contractual preemption, a fiduciary can face both a claim for breach of contract and a claim for breach of fiduciary duty arising from the same conduct. Metro Storage , 275 A.3d at 858. “If the contract provides the sole source of the specific prohibition, then the plaintiff only can sue in c ontract, because the duty only arises from the contractual relationship. If, however, the plaintiff also would have a claim under general fiduciary principles, then the plaintiff also can assert the claim for breach of fiduciary duty.” Id. Agency law illus trates this approach: The overlap between duties derived from tort law and from an agent ’ s contract with the principal will often provide the principal with alternative remedies when a breach of duty subjects the agent to liability. In particular, an agent is subject to liability to the principal for all harm, whether past, present, or prospective, caused the principal by the agent's breach of the duties stated in this section. Restatement of Agency, supra , § 8.08 cmt. b

. In Nemec , the fiduciary duty claim would have failed even without preemption , because (i) directors do not owe fiduciary duties to particular stockholders but rather to the stockholders as a collective, and (ii) when exercising the redemption right, the directors did not receive any benefi t other than the value that accrued to them indirectly and pro rata as remaining stockholders. See ODN Hdlgs. , 2017 WL 1437308, at * 17, * 24 . But Nemec went in a different direction and held that a contract claim preempts overlapping fiduciary duty claims arising from the same facts. If Delaware law were to retreat from the contractual preemption of overlapping fiduciary claims, at least in the corporate context, that would not render the Covenant facially invalid. Through the Covenant, the Funds agr eed not to exercise a stockholder right (the right to sue for breach of duty) that they could freely decline to assert. If the underlying right is preempted, then the Covenant is redundant and inoffensive. If the underlying right is not preempt ed, then the Funds still can commit not to exercise it.71 ii. Advance Ratification The next common law doctrine is r atification , which perm its stockholders to extinguish a claim for breach of fiduciary duty by authorizing an act that otherwise would constitute a breach

. When a corporation does not have a controlling stockholder, a fully informed, non

- coerced stockholder vote cleanse s an inter ested transaction and change s the standard of review from entire fairness to an irrebuttable version of the business judgment rule where the only remaining challenge is waste. 138 Stockholders can ratify specific types or classes of interested transactions in advance. The clearest example involves directors setting their own compensation, which is

a self

- dealing transaction implicating the duty of loyalty such that the directors bear the burden of showing that their compensation is en tirely fair. 139 Directors cannot use advance ratification to give themselves a blank check, nor can they secure broad authority subject only to a cap. They can, however, obtain authorization for specific payments or for the use of a predictable formula. 140

138 Corwin v. KKR Fin. Hldgs. LLC , 125 A.3d 304, 308

– 09 (Del. 2015). The waste challenge is more theoretical than realistic, because a waste claim contends that the transaction was on terms that no rat ional person would approve. When stockholders have ratified a transaction in a fully informed and non

- coerced vote, they have demonstrated that rational people could approve the transaction. See In re Books

- A

- Million, Inc. S ’ holders Litig. , 2016 WL 5874974 , at *19 (Del. Ch. Oct. 10, 2016).

139 In re Invs. Bancorp, Inc. S ’ holder Litig. , 177 A.3d 1208, 12 22 (Del. 2017)

. 140 Id. at 1222.72

The doctrine of advance ratification has obvious parallels to the concept of advance authorization in trust law or agency law

. Advance authorization permits a fiduciary to engage in a transaction that otherwise would constitute a breach of duty. Advance

ra tification does the same thing. The Covenant functions like advance ratification . Through the Covenant , the Funds agreed in advance to a Drag

- Along Sale. The Funds did not give the defendants a blank check. They only agreed not to sue over a transaction th at met eight specific criteria. Viewed in this manner, the Covenant accomplishes w hat advance ratification already allows. The doctrine of advance ratification indicates that the Covenant is not facially invalid. iii. Laches The final common law doctrine is laches . Unless a tolling doctrine applies or other extraordinary circumstances exist, laches bars a stockholder plaintiff from asserting a claim for breach of fiduciary duty if more than three years have passed since the claim accrue d

. 141
It does not matter whether the claim involves a loyalty breach or bad faith conduct. 142 Stated more generally, a stockholder can choose not to assert a claim for fiduciary duty , and if the stockholder waits long enough, the claim is lost. Through the Covenant,

141 Lebanon Cnty. Empls. ’ Ret. Fund v. Collis , 287 A.3d 1160, 1194

– 95 (Del. Ch. 2022).

142 Id. at 1219.73

the Funds agreed to that outcome in advance. From th at standpoint, the Covenant is not facially invalid, but rather unexceptional.

c. Summing Up The C orporate Law Limitations Delaware corporate law provides more space for fiduciary tailoring tha n is commonly understood. Several of those paths authorize outcomes comparable to what the
Covenant achieve s . Section 122(17) authorizes advance renunciation of corporate opportunities, which is equivalent to a covenant not to s ue for usurpation of the renounced opportunities. The Covenant operates similarly. The common law doctrine of contractual preemption indicates that the Drag

- Along Right may already foreclose a loyalty claim , leaving the Covenant as an unobjectionable add

- o n. Both the common law doctrine of advance ratification and the Covenant foreclose litigation over a specific transaction. Finally, the comparison to laches shows that the Funds simply agreed in advance to do something they could do of their own volition: give up their claims by declining to sue

. The se options make it difficult to say that the Covenant violates Delaware public policy and is facially invalid. 3. The Contractarian Framework And Private Ordering The next step in the analysis is the role of contract. “Contractual and fiduciary relationships are the two dominant legal forms of interaction through which persons can pursue individual and shared interests.” 143 Although often perceived as constituting

143 Contract and Fiduciary Law, supra , at 1.74

separate domains, the boundaries between the fi elds are fluid rather than fixed, and the two areas, “while distinctive, are deeply intertwined.” 144

a. The Power Of Private Ordering To say that Delaware prides itself on the contractarian nature of its law risk s understatemen t: This jurisdiction respects t he right of parties to freely contract and to be able to rely on the enforceability of their agreements; where Delaware ’ s law applies, with very limited exceptions, our courts will enforce the contractual scheme that the parties have arrived at through the ir own self

- ordering, both in recognition of a right to self

- order and to promote certainty of obligations and benefits. 145 “S ophisticated parties” can and should “ make their own judgments about the risk they should bear ,” and Delaware courts are “ especiall y chary about relieving sophisticated business entities of the burden of freely negotiated contracts. ” 146 Within this framework, public policy plays a limited role. “When parties have ordered their affairs voluntarily through a binding contract, Delaware l aw is strongly inclined to respect their agreement, and will only interfere upon a strong showing that dishonoring the contract is required to vindicate a public policy interest even stronger than

144 Id. at 1

– 2.

145 Ascension Ins. Hldgs., LLC v. Underwood , 2015 WL 356002, at *4 (Del. Ch. Jan. 28, 2015).

146 Abry P ’ rs , 891 A.2d at 1061

– 62.75

freedom of contract.” 147 More significant interests “are not to be lightly found, as the wealth

- creating and peace

- inducing effects of civil contracts are undercut if citizens cannot rely on the law to enforce their voluntarily

- undertaken mutual obligations.” 148 [T]he right to contract is one of the great, inalienab le rights accorded to every free citizen.

. . . “ If there is one thing more than any other which public policy requires it is that men of full age and competent understanding shall have the utmost liberty of [] contracting ” and that this freedom of contract shall not lightly be interfered with. We also recognize that freedom of contract is the rule and restraints on this freedom the exception, and to justify this exception unusual circumstances should exist. 149 Delaware courts will “ not rewrite the contract to appease a party who later wishes to rewrite a contract he now believes to have been a bad deal. Parties have a right to enter into good and bad contracts, the law enforces both. ” 150 Delaware’s embrace of contractarianism extends to the corporate form, whe re it manifests as the concept of private ordering. 151 “ Delaware ’ s corporate statute is widely

147 Libeau v. Fox , 880 A.2d 1049, 1056 (Del. Ch.), aff ’ d in part, rev ’ d in p art on other grounds , 892 A.2d 1068 (Del. 2006).

148 Id. at 1056

– 57.

149 State v. Tabasso Homes , 28 A.2d 248, 252 (Del. Gen. Sess. 1942) (citations omitted).

150 Nemec , 991 A.2d at 1126

. 151 See generally Mohsen Manesh, The Corporate Contract and the Internal Affairs Doctrine , 71 Am. L. Rev. 501, 526

– 34 (2021) (describing Delaware’s contractarian approach to corporate law); Megan Wischmeier Shaner, Interpreting Organizational “Contracts” and the Private Ordering of Public Company Governance , 60 Wm. & M ary L. Rev. 985, 1010 (2019) ( “ [I]n Delaware, the courts have embraced and endorsed the contract metaphor, holding that contract law presides over issues involving both the76

regarded as the most flexible in the nation because it leaves the parties to the corporate contract (managers and stockholders) with great leeway to structure their relations, subject to relatively loose statutory constraints and to the policing of director misconduct through equitable review. ” 152 “Our law st r ives to enhance flexibility in order to engage in private ordering[, and] our DGCL was intended to provide directors and stockholders with flexibility and wide discretion for private ordering and adaptation to new situations. ” 153 Other decisions similarly s tress the “great flexibility” that the DGCL provides and its role as “an enabling statute.” 154

enforcement and interpretation of the charter and bylaws. ” ) ; Jill E. Fisch, Governa nce by Contract: The Implications for Corporate Bylaws , 106 Cal. L. Rev. 373, 380 (2018) ( “ Delaware courts have largely accepted the contractual theory of corporate law. ” ); George Geis, Ex

- Ante Corporate Governance , 41 J. Corp. L. 609, 611 (2016) ( “ [T]he i nfluential Delaware courts seem to be taking a more permissive attitude, based in part on the parallels between contract law and the corporate relationship. ” ).

152 Salzberg , 227 A.3d at 116 (cleaned up).

153 Id. at 137.

154 Shintom Co. v. Audiovox Corp. , 888 A.2 d 225, 227 (Del. 2005) (describing the DGCL as “ an enabling statute that provides great flexibility for creating the capital structure of a Delaware corporation ” ); accord In re Topps Co. S ’ holders Litig. , 924 A.2d 951, 958 (Del. Ch. 2007) (Strine, V.C.); J ones Apparel Gp., Inc. v. Maxwell Shoe Co., Inc. , 883 A.2d 837, 845 (Del. Ch. 2004) (Strine, V.C.); see Matter of Appraisal of Ford Hldgs., Inc. Preferred Stock , 698 A.2d 973, 976 (Del. Ch. 1997) (Allen, C.) (explaining that

“ unlike the corporation law of the nineteenth century, modern corporation law contains few mandatory terms; it is largely enabling in character ” )

.77

The contractarian theory of the corporation envisions the firm as a nexus of explicit and implicit contracts. 155 Under the contractarian approach, “[c]orporate law

— and in particular the fiduciary principle enforced by courts

— fills in the blanks and oversights [in the corporate contract] with the terms that people would have bargained for had they anticipated the problem and been able to transact costlessly in advanc e.” 156 Because fiduciary duties function in this framework as default rules in an otherwise incomplete corporate contact, parties can modify them by agreement. “On this view corporate law

155 See , e.g. , S tephen M. Bainbridge, Community and Statism: A Conservative Contractarian Critique of Progressive Corporate Law Scholarship , 82 Cornell L. Rev

. 856, 859 (1997) ( “‘ [C]ontractarians ’ model the firm not as a single entity, but as an aggregate of various inputs acting together with the common goal of producing goods or services. ” ); Henry N. Butler & Larry E. Ribstein, State Anti

- Takeover Statutes and the Contract Clause , 57 U. Cin . L. Rev. 611, 616 (1988) ( “ According to the contractual theory of the corporation, the corporation, like any firm

— whether a sole proprietorsh ip, partnership or corporation

— is a nexus of contracts among many different parties involving mutually beneficial exchanges. ” ); Frank H. Easterbrook & Daniel R. Fischel, The Corporate Contract , 89 Colum. L. Rev. 1416, 1418 (1989) ( “ The corporation is a com plex set of explicit and implicit contracts, and corporate law enables the participants to select the optimal arrangement for the many different sets of risks and opportunities that are available in a large economy. ” ) ; Roberta Romano, Metapolitics and Corp orate Law Reform , 36 Stan . L. Rev . 923, 933 (1984) ( “ The contract approach regards the corporation as a shell or form created by consenting individuals. A firm is a nexus of explicit and implicit contracts, facilitating the implementation of the contractin g parties ’ wishes. ” ). For recent critiques of contractarianism, see Klass, supra , at 93

– 115 ; Smith, supra , at 117

– 38 ; and Irit Samet, Fiduciary Law as Equity’s Child , in Contract and Fiduciary Law 119

– 66. For an earlier crit i que , see Victor Brudney, Corporate Governance, Agency Costs, and the Rhetoric of Contract , 85 Colum. L. Rev. 1403, 1444 (1985) ( explaining that theories of the corporation as “ a ‘ nexus of contract s ’

. . . embody serious descriptive inaccuracies, which, in turn, infect the normative consequences implicitly suggested by a regime of private autonomy ” )

.

156 Easterbrook & Fischel, supra , at 1444

– 45.78

supplements but never displaces actual bargains

— save in situations of third

- party effects or latecomer terms.” 157 For the contractarian theory of corporate law, fiduciary duties are
not immutable, mandatory terms but rather freely modifiable defaults

. 158 Delaware’s embrace of contractarianism suggests that the Covenant is not facially invalid. Under the contractarian approach, state law

— including the law of fiduciary

157 Id. at 1445.

158 Easterbrook & Fischel, supra , at 1445; see Henry N. Butler & Larry E. Ribstein, Opting Out of Fiduciary Duties: A Response to the Anti

- Contractarians , 65 Wash. L. Rev. 1, 6 (1990) ( “ [T]he existence of fiduciary duties and remedies for breach should be viewed as part of this contractual protecti on rather than contrary to the contractual theory of the corporation. ” ) ; id. at 19 (“ While anti

- contractarian writers see these duties as mandatory rules that supplement private ordering, under our analysis, fiduciary duties and remedies are actually part of this contract. It follows that shareholders should be free to alter these duties and remedies by agreement. ”); id. at 28 (“An important aspect of the contract theory of the corporation . . . is that fiduciary duties are a term of the corporate contract and therefore consensual in nature.”); see also John C. Coffee, Jr., The Mandatory/ E nabling Balance in Corporate Law: An Essay on the Judicial Role , 89 Colum. L. Rev. 1618, 1623 (1989) (arguing for treating fiduciary duties as defaults but permitting optou t “when [courts] can find that the term has been accurately priced,” meaning that “the actual operation of the provision must be relatively clear and specific and not simply confer on management a right to behave in a way that market forces or moral standa rds would usually constrain”); s ee generally J. William Callison, Seeking an Angle of Repose in U.S. Business Organization Law: Fiduciary Duty Themes and Observations , 77 U. Pitt. L. Rev. 441, 469 (2016) (“A contractarian model of fiduciary law, which emphasizes the origin of the business association as an agreement of its owners and conceives of fiduciary duties as a form of the parties’ contract, has become American law’s conventional wisdom over the last several decades. This contractarian approach to fiduciary law is related to an economic perspective describing business firms as a ‘nexus of contracts’ among the firm’s constituencies, including owners, employees, cr editors, suppliers, managers, and the public.”). For an example of a contractarian approach to the duty of loyalty, see Ian Ayres & Joe Bankman, Substitutes for Insider Trading , 54 Stan. L. Rev. 235, 267

– 75 (2001) (proposing “ a default prohibition against insider trading by the firm (or its non

- managerial delegate) ” with the power to opt out in the certificate of incorporation)

.79

duties

— supplies contractable defaults

. There are accounts of the corporation that incorporate mandatory, non

- waivable fiduciary duties, but they are not contracta rian

ones. 159 From a contractarian standpoint, there is nothing wrong with parties contracting

159 See, e.g. , Melvin A. Eisenberg, The Structure of Corporation Law , 89 Colum. L. Rev. 1461, 1469

– 70, 1480

– 85 (1989) ( arguing that “core” fiduciary duties should be mandatory in both closely held and public corporations) ; Jeffrey N. Gordon, The Mandatory Structure of Corporate Law , 89 Colum. L. Rev. 1549, 1554, 159 3

– 97 (1989) ( arguing for mandatory fiduciary duties for directors, offi cers, and controlling stockholders; explaining “ contractarianism is not an adequate account of corporate law, and that despite contractarian strands, large chunks of corporate law continue to serve goals other than private wealth maximization ” and include “ procedural, power allocating, economic transformative, and fiduciary standards setting ” ). When it comes to corporate theory, I am not a contractarian. My conception of the corporation (and entity law generally) starts from the proposition that jural entit ies like corporations are creations of state power, and they have characteristics that only the state can provide, such as separate legal existence, presumptively perpetual life, limited liability for investors, the ability to contract and own property, an d access to the judicial system, which gives them the ability to invoke the power of the state to obtain redress for injuries and enforce commitments. Jural entities are thus never wholly creatures of contract. Nor are they a nexus of contracts. However at tractive that metaphor might be for economic modeling, entities are reified constructs. It is only because they are reified (personified) that they can move through the legal landscape. This is a type of con cession theory. See Manesh, supra , 535

– 47. But concession theory is only a starting point , because it leaves open the question of what the state has created when it charters an entity. The answer is an autonomous form of intangible property, with biological humans serving as the ghost in the machine that enables the form of property to engage with the world. Someday, artificial intelligence may animate corporations, but for now only biological humans can make decisions on their behalf and cause them to act. Th e resulting theory of the corporation starts with concession theory and adds a superstructure of property rights, so let’s call it modern concession theory ( MCT )

. Because of the state’s role in creating, maintaining, and eventually terminating the entity, the state has a persistent policy interest in establishing its characteristics, including wh at the entity can do and how it operates. But the state ’s persistent policy interest does not mean that MCT carries a pre

- determined set of political commitments. Different80

jurisdictions can charter entities with different public polic y visions . Delaware c harters entities with a vision of providing significant freedom for private ordering, which MCT easily accommodates. U nlike contractarianism, MCT also explains why the state can and does impose limits on private ordering. See Manesh, supra , at 539 (describi ng MCT ’s ability to explain “facets of contemporary corporate law that conflict with pure contractarianism,” including a “mandatory fiduciary duty of loyalty”); s ee also In re Coinmint, LLC , 261 A.3d 867, 908

– 13 (Del. Ch. 2021) (discussing role of state in creating a jural entity and its implications for a jurisdiction’s power to dissolve an entity created by another state). W hile accommodat ing private ordering, MCT acknowledges limit ation s on what a state can use entity law to accomplish. See Manesh, sup ra , at 541

– 43. Because an entity is a form of autonomous property that the state creates, the state can define its attributes, the interrelationships among its component parts, and the internal processes by which it acts (or the methods by which parties ca n select attributes, form interrelationships, and establish internal processes). The state does not, however, act in a vacuum. J ust like real property in the physical world, an autonomous entity has borders, and there can be other jurisdictions on the other side of those borders. In those situations, the requireme nts for passage must be co

- created with other sovereigns. Our neighbor to the north can determine what is required to enter Canadian soil, but the United States can dictate what is required to leave American soil. T here are also senior sovereigns whose law dominates (preempts) the law of junior sovereigns. Within our own republic, the United States Constitution and the protection for interstate travel secured by Privileges & Immunities Clause dominate the ability of Delaware and Pennsylvania to regulat e t heir shared boundary

. The concepts of borders and trans

- border domains provide helpful analogies for the limits on what a state can regulate through its power to create an entity. Consider the limits on a state ’s ability to regulate real property. Even if the General Assembly enact ed legislation that purported to govern all of the Delmarva peninsula, those statutes would have no effect south of the Transpeninsular Line, east of the low tide mark of the Delaware River, or west of Tangent Li ne. The contrast between the Delaware Supreme Court’s decision in Salzberg and my trial

- level ruling illustrates how contractarianism and MCT can lead to different results. The Delaware Supreme Court grounded its analysis on Section 102(b)(1) and whether a federal forum provision came within the plain language of that statutory section. See Salzberg , 227 A.3d at 115

– 16. After determining that it did, the Delaware Supreme Court held that the provision was authorized by statute and therefore valid. Id. at 12 5. At the trial level, I was concerned about whether Delaware had the power to regulate a domain outside of the corporation’s boundary, raising a threshold question about whether Section81

over a stockholder ’s ability to assert a specified type of claim for breach of fiduciary duty

. The Covenant is therefore not facially invalid.

b. Private Ordering A nd Stockholder Agreements Delaware’s commitment to contractarianism should be at its height when stockholders enter into agreements about how they will exercise stockholder

- level rights , because at that level, individual owners are bargaining over their pr ivate property

. Consistent with that intuition, the DGCL demonstrates that stockholders can agree to

102(b)(1) could be used by private actors to claim the ability to reg ulate that external space. See Sciabacucchi v. Salzberg , 2018 WL 6719718, at *2, *18

– 23 (Del. Ch. Dec. 19, 2018), rev’d , 227 A.3d 102 (Del. 2020). To continue the metaphor, I was concerned that Delaware both lacked authority to legislate about land north o f the Twelve

- Mile Circle and also could not grant its citizens the power to claim territory beyond that line. By treating Section102(b)(1) as coextensive with the space that Delaware law can regulate (or authorize others to regulate), the Delaware Supreme Court embraced a strongly contractarian view of the corporation . Manesh, supra , at 505

– 08. Illustrating that contractarian foundation, the Delaware Supreme Court supported the ability of a forum selection provision to encompass federal securities law clai ms by relying on a decision that addressed a forum

- selection provision in a private agreement. See Salzberg , 227 A.3d at 132 (citing Rodriguez de Quijas v. Shearson/American Express, Inc. , 490 U.S. 477 (1989)). I had not cited Rodriguez , because I viewed t he private agreement in that case as evidencing how parties can contract regarding their own rights. The case did not speak to whether a state could use its power to create entities to regulate a domain governed by federal law. As Professor Manesh has not ed, the Delaware Supreme Court’s embrace of contractarianism in Salzberg has broad implications. See Manesh, supra , at 547

– 75. For purposes of the Covenant, I do not perceive any conflict between what MCT call s for and what contractarianism would envision. The Covenant appears in a bargained

- for agreement between contracting parties and is thus comparable to Rodriguez . The agreement addresses a stockholder right appurtenant to the shares that the Funds owned as their private property. The limitations on sta te power implied by MCT do not restrict the ability of stockholders to make contractual commitments regarding property rights that they could otherwise freely exercise.82

greater constraints on their rights in a stockholders agreement than a corporation can impose in its charter or bylaws. As long as the contractual provisio n addresses a type of action that one stockholder or a group of stockholders can take, then there is greater space for private ordering, not less, when the provision appears in a stockholders agreement. The Covenant appears in a stockholder

- level agreement , providing further support for the conclusion that it is not facially invalid. “A share of stock represents a bundle of rights defined by the laws of the chartering state and the corporation’s certificate of incorporation and bylaws.” 160 By statute, a share of stock is the personal property of its owner. 161 T he rights associated with and appurtenant to a share of stock are therefore rights that the owner can freely exercise or decline to exercise. Three rights are viewed as fundamental: th e rights to sell, vote, and sue. 162 Delaware law permits stockholders to contract over their right to sell : A restriction on the transfer or registration of transfer of securities of a corporation, or on the amount of a corporation’s securities that may b e owned by any person or group of persons, may be imposed . . . by an agreement among any number of security holders or among such holders and the corporation. 163

160 Bamford , 2020 WL 967942, at *23.

161 8 Del. C. § 159.

162 See Williams Cos

. S ’ holder Litig ., 2021 WL 754593, at *20 (Del. Ch. Feb. 26, 2021)

. 163 8 Del

. C. § 202(b).83

Delaware law specifically permits stockholders to (i) grant a right of first refusal on share s in favor the corporation or any person, 164 (ii) grant a right to purchase or sell the shares to the corporation or any person, 165 (iii) agree to obtain the consent of the corporation or the holders of any class or series of securities before selling shares , 166 (iv) commit to sell or transfer the shares to the corporation or any person, 167 and (v) restrict or prohibit the transfer of shares to designated persons, as long as the designation is not manifestly unreasonable. 168 Delaware law expansively permits “any other lawful restriction on transfer or registration of the restricted securities, or on the ownership of the restricted securities by any person.” 169 The DGCL thus authorizes a stockholder to covenant not to sell. Delaware law also permits stockholders to contract over their right to vote: An agreement between 2 or more stockholders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as provided b y the agreement, or as the parties may agree, or as determined in accordance with a procedure agreed upon by them. 170

164 Id. § 202(c)(1).

165 Id. § 202(c)(2).

166 Id. § 202(c)(3).

167 Id. § 202(c)(4).

168 Id. § 202(c)(5).

169 Id. § 202(e).

170 Id. § 218(c).84

The DGCL thus authorizes a stockholder to covenant not to vote. The DGCL confirms that a stockholder has greater freedom to restrict its r ight s to vote or sue in a private agreement than a corporation can impose through its charter or bylaws. For the right to sell, Section 202(b) provides that a restriction on the transfer, registration, or ownership of shares can be imposed through the char ter, the bylaws, or by private agreement. 171 But if a restriction is imposed through the charter or bylaws, the restriction is not binding “with respect to securities issued prior to the adoption of the restriction unless the holders of the securities are p arties to an agreement or voted in favor of the restriction.” 172 Actual consent is required. A similar structure exists for the right to vote. The DGCL requires that any “qualifications, limitations or restrictions” on the powers associated with a share of stock appear in the charter. 173 The power to vote is a power associated with a share of stock. 174 Through the charter, a corporation can create shares with or without voting rights or with tailored voting rights

. 175 What the corporation cannot do thr ough its charter is dictate how

171 Id. § 202(b).

172 Id.

173 Id. §§ 102(a)(4), 151.

174 Id. §§ 102(a)(4), 218(a).

175 Id. § 151(a).85

individual stockholders exercise the ir voting rights Yet through a voting agreement, stockholders can bind themselves to vote or not vote to any degree imaginable. 176 The different levels of permissible constraints comport w ith the doctrine of independent legal significance. [T]he general theory of the Delaware Corporation Law is that action taken under one section of that law is legally independent, and its validity is not dependent upon, nor to be tested by the requirement s of other unrelated sections under which the same final result might be attained by different means. 177 To state the obvious, a stockholders agreement is not a charter or bylaw provision, so restrictions on charter or bylaw provisions do not govern stockh olders agreements

. The different levels of permissible constraint reflect different levels of consent. 178

• A provision in a pre

- IPO charter does not receive express approval from the publicly held shares. Holders of shares become bound when they buy shares, making their consent implicit. The same is true in a private company for the original charter. 179

• Under the DGCL, a midstream charter amendment requires both approval from the board and approval by the holders of a majority of the outstanding voting power o f the corporation

. 180 The adoption of a midstream charter amendment means that holders of a majority of the outstanding voting power have consented to it , which

176 Id. § 218(c).

177 Orzeck v. Englehart , 195 A.2d 375, 378 (Del. 1963)

. 178 Verity Winship, Shareholder Litigation by Contract , 96 B.U. L. Rev. 485, 495

– 96 (2016) (noting that “[h]ow closely .

. . corporate organizational documents approach robust ideas of consent depends on the type of document and when a particular provision is adopted” (footnote omitted) )

.

179 See Helen Hershkoff & Marcel Kahan, Forum

- Selection Provisions in Corporate

“ Contracts ” , 93 Wash. L. Rev. 265, 269 (2018) (describing this form of implied consent).

180 8 Del. C. § 242(b).86

indicates some level of consent. 181 But “ a ny shareholder who did not vote in favor of the midstre am amendment did not consent at all. . . . At most, such a shareholder consented to the rules for changing [the] charter . . . (to the extent these rules were established when the company initially sold the shares).” 182 A midstream charter amendment binds stockholders regardless of actual consent.

• Under the DGCL, a bylaw amendment provides ambiguo us indicat ions of consent. The board and the stockholders can typically each adopt, amend, alter, or repeal bylaw s unilaterally. 183 If a board implements a bylaw , then stockholders are bound without any affirmative act of consent, other than having accepted the rules for amendment

. 184 But because stockholders can amend the provision without board approval, the continued presence of the bylaw provides some indicatio n of stockholder consent

. 185 None of these forms of consent resemble s what contract law traditionally contemplates

. 186 By contrast, w hen stockholders execute a stockholder

- level agreement , they provide the

181 See Randall S. Thomas, What Should We Do About Multijurisdictional Litigation in M&A Deals? , 66 Vand. L. Rev. 1925, 1953

– 54 (2013) (describing this form of consent).

182 Hershkoff & Kahan, supra , at 282.

183 See 8 Del. C. § 109 (a)

. 184 Browning Jeffries, The Plaintiffs ’ Lawyer ’ s Transaction Tax: The New Cost of Doing Business in Public Company Deals , 11 Berkeley Bus. L.J. 55, 95

– 98 (2014) (noting that although “corporate bylaws and charters have frequently been analogized to contracts[,] . . . the analogy to a contractual relationship weakens” in light of the fact that “the bylaws can be adopted or amended unilaterally by the board without shareholder c onsent”).

185 Hershkoff & Kahan, supra , at 283

– 85.

186 See Ann M. Lipton, Manufactured Consent: The Problem of Arbitration Clauses in Corporate Charters and Bylaws , 104 Geo. L.J. 583, 608 (2016) (“T he legal framework for the corporation therefore does not rese mble anything like the legal framework for contracting parties .”); Fisch, supra , at 381, 409 (describing the contractarian approach to charters and bylaws as “a powerful endorsement of contractual freedom in corporate law” while questioning whether Delawar e decisions “may stretch the contract analogy too far”).87

level of consent that contract law traditionally con templates , which in turn supports greater freedom to allocate rights. At this point in the analysis, confusion can arise because of the hierarchy of authorities that govern a corporation. As I have written elsewhere, When evaluating corporate action for legal compliance, a court examines whether the action contravenes the hierarchical components of the entity

specific corporate contract, comprising (i) the Delaware General Corporation Law, (ii) the corporation ’ s charter, (iii) its bylaws, and (iv) other e ntity

specific contractual agreements, such as a stock option plan, other equity compensation plan, or, as to the parties to it, a stockholder agreement

. 187

“ Each of the lower components of the contractual hierarchy must conform to the higher components. ” 188 When does a provision in a stockholders agreement conflict with the DGCL, the charter, or the bylaws such that the higher

- level component override s it? The DGCL, charter, and bylaws establish the rights that stockholders possess. If the stockholder

- level agreement binds the stockholders as to how they exercise tho se rights , then th ere is no conflict. But if a stockholders agreement purports to alter or ignore the structure that the higher

- level component s created , then the effort is ineffective, and the higher

- level component prevail s . 189

187 Quadrant Structured Prod s . Co. v. Vertin , 2014 WL 5465535, at *3 (Del. Ch. Oct. 28, 2014)

.

188 Sinchareonkul , 2015 WL 292314, at *6

. 189 See Abercrombie v. Davies , 123 A.2d 893, 8 98

– 99 ( Del. Ch. 1956) (Seitz, C.) (holding that provision in stockholders agreement that purported to bind director to vote in88

Take a provision in a stockholders agreeme nt that attempt s to define the number of directors comprising the whole board. Section 141(b) provides that the bylaws must identify the number of directors comprising the whole board, or the charter must specify a procedure for making that determination. 190 Stockholders therefore cannot contract to have

a greater number of directors than the charter or bylaws specif y . Stockholders can, however, contract about how to exercise their voting power to elect directors, and they could agree to maintain a lesser nu mber of directors in office by making commitments about how to vote. That agreement would bind the stockholders as to the exercise of their rights qua stockholders, and it would not conflict with the charter or bylaws. Schroeder v. Buhannic 191 provides a mo re complex illustration. The stockholders committed in a voting agreement to elect the following directors: (i) three designated by the holders of a majority of the common stock, one of whom shall be the CEO, (ii) two designated by the holders of a majorit y of the preferred stock, and (iii) two independent,

non - employee directors selected by the holders of a majority of the common stock and approved by the holders of a majority of the preferred stock. The stockholders disagreed over whether the common stock holders could select the CEO, at which point the signatory stockholders had to vote for him as one of the three directors designated by the common

the same manner as a stockholder agent conflicted with Section 141(a) and was ineffective) , rev ’ d on other grounds , 130 A.2d 338 (Del. 1 957).

190 8 Del. C. § 141(b).

191 2018 WL 11264517 (Del. Ch. Jan. 10, 2018) (ORDER).89

stock, or whether the board selected the CEO, at which point the common stockholders had to designate him as one of their directors. 192 Appointing a CEO is a core board function , and the bylaws provided that the board selected the CEO, so the voting agreement could not override that allocation of authority. It followed that the board had the power to identify the CEO, the common stockholders bound themselves to name him as one of their three designees, and all of the signatory stockholders bound themselves to vote for him

. 193 These principles point to a simple test for determining whether a provision in a stockholde rs agreement conflicts with the DGCL, charter, and bylaws: Does the contractual provision address an action that a stockholder individually or a group of stockholders collectively could take? If yes, then a stockholder can contract over that action in adva nce, without violating the corporate hierarchy. The DGCL, charter, and bylaws specify what rights are appurtenant to the shares and available for the stockholders to exercise. The stockholder gets to choose whether to exercise those rights and can agree co ntractually to constrain its exercise of those rights

. By analogy to the right to vote and the right to sell, limitations on the right to sue that appear in the charter or bylaws should be more suspect than limitations in a stockholders agreement. Once the DGCL, charter, and bylaws have established the rights appurtenant to the shares, including the rights that a stockholder can sue to enforce, the

192 Id.

193 Id. at *3.90

stockholder should have relatively unconstrained freedom to contract about asserting those rights. Just as a stockholder can covenant not sell or vote , a stockholder should be able to covenant to not sue. This reasoning suggests that the Covenant is not facially invalid.
E. Other Considerations The preceding tour through traditional fiduciary law, the DGCL, Delaware corporate law, and Delaware’s support for private orde ring indicate s that the Covenant is not facially invalid. But to hold that stockholders in a Delaware corporation can commit
not to sue for breach of fiduciary duty is a significant step , so it is worth considering other possible arguments against it

. This section considers (i) whether the right to sue for breach of fiduciary duty is too big to waive , (ii) whether enforcing a provision like the Covenant threaten s Delaware’s corporate brand, (iii) whether upholding a provision like the Covenant collapse s the distinction between corporations and LLCs, and (iv) the majority and dissenting opinions in Manti . Those considerations do not support declaring the Covenant facially invalid. 1. Is A Claim For Breach Of Fiduciary Duty Too Big T o Waive? An intuitively attrac tive argument for declaring the Covenant facially invalid is that a claim for breach of fiduciary duty is simply too important to waive. One way to evaluate that contention is to consider what other rights are waivable

. 194

194 See Manti , 261 A.3d at 1219 (comparing waiver of appraisal rights to waiver of jury trial when considering whether public policy bars the former).91

Delaware law permit individuals to waive fundamental rights associated with their personal liberty:

• Both the United States Constitution and the Delaware Constitution guarantee a criminal defendant the right to trial by jury. 195 That right can be waived

. 196

• B oth the United States Constitution and the Delaware Constitution provide a criminal defendant with a right to be present for trial and confront the witnesses against him. 197 That right can be waived. 198

• Both the United States Constitution and the Delaware Co nstitution provide a witness with a right to counsel in a criminal case. 199 That right can be waived. 200

195 U.S. Const. art. III, § 2 (“ The Trial of all Crimes, except in Cases of Impeachment, shall be by Jury

. . . . ”); U.S. Const. Amend. VI (“ In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of t he state and district wherein the crime shall have been committed . . . .”); Del. Const. art. I, § 7 (“ In all criminal prosecutions, the accused hath a right

. . . to

. . . a speedy and public trial by an impartial jury

. . . . ”)

.

196 Davis v. State , 809 A.2d 565, 568 (Del. 2002).

197 U.S. Const. Amend. VI (“ In all criminal prosecutions, the accused shall enjoy the right

. . . to be confronted with the witnesses against him

. . . . ”); Del. Const. art. I, § 7 (“ In all criminal prosecutions, the accused hath a right

. . . to meet the witnesses in their examination face to face . . . .”)

.

198 Illinois v. Allen , 397 U.S. 337, 342

– 43 (1970 ); Wells v. State , 396 A.2d 161, 162

– 63 (Del. 1978)

.

199 U.S. Const. Amend. VI (“ In all criminal prosecutions, the accused shall enjoy the right

. . . to have the assistance of counsel for his defense. ”); Del. Const. art. I, § 7 (“ In all criminal prosecutions, the accused hath a right to be heard by himself or herself and his or her coun sel. ”)

.

200 Faretta v. California , 422 U.S. 806, 835 (1975); Briscoe v. State , 606 A.2d 103, 107 (Del. 1992).92

• Both the United States Constitution and the Delaware Constitution protect against self

- incrimination. 201 That right can be waived. 202

• A criminal defendant can waive all of his rights to personal liberty by entering a guilty plea, freely and voluntarily. 203 As the Delaware Supreme Court has observed, “Clearly, our legal system permits one to waive even a constitutional right.” 204 Delaware law permit s individuals to waive important rights associated with their property

. A waiver of a property right is generally effective so long as it is voluntary, knowing, and intelligently made, or reflects an intentional relinquishment or abandonment or of a known ri ght or privilege. 205 For example, u nder the Due Process Clause of the Fourteenth Amendment to the United States Constitution, a civil debtor has a constitutional right to notice and a hearing before judgment is entered

. Delaware law permit s a debtor to waiv e that right by agreeing to a confession of judgment clause. 206 In a civil case, a plaintiff

201 U.S. Const. Amend. V (“ No person

. . . shall be compelled in any criminal case to be a witness against himself . . . .”); Del. Const. art. I, § 7 (“ In all criminal prosecutions, the accused hath a right to be heard by himself or herself and his or her counsel [and] he or she shall not be compelled to give evidence against himself or herself. ”)

.

202 Rogers v. United States , 340 U.S. 367, 371 (1951); Ra tsep v. Mrs. Smith ’ s Pie Co. , 221 A.2d 598, 599 (Del. Super. Ct. 1966).

203 Boykin v. Alabama , 395 U.S. 238, 242 (1969); Sheppard v. State , 367 A.2d 992, 994 ( Del. 1976).

204 Baio v. Com

. Union Ins. Co. , 410 A.2d 502, 508 (Del. 1979)

. 205 D.H. Overmeyer Co. Inc. v. Frick Co. , 405 U.S. 174, 186 (1972); Mazik v. Decision Making, Inc. , 449 A.2d 202, 204 (Del. 1982)

.

206 See Overmeyer , 405 U.S. at 185; Mazik , 449 A.2d at 204

.93

can waive the right to a jury trial by agreeing to arbitrate 207 or simply by failing to request a jury trial. 208
Delaware law generally permits individuals to waive statutory rights

. 209 Real property owners can agree to deed restrictions that waive the ir ability to use the ir property in specified ways

. 210 Individuals can agree to covenants that restrict their ability to work for a competitor. 211 Individuals can enter into non

- disclosure agreements that limit their ability to speak

. 212

207 Graham v. State Farm Mut. Auto. Ins. Co. , 565 A.2d 908, 913 (Del. 1989).

208 Brown v. State , 721 A.2d 1263, 1266 (Del. 1998).

209 See , e.g. , Tang Cap

. P ’ rs, LP v. Norton , 2012 WL 3072347, at *7 (Del. Ch. July 27, 2012) (holding that the plaintiff contractually waived its rights to seek a receivership under Section 291 of the DGCL); Libeau , 880 A.2d at 1056 (holding that the plaintiff waived her right to statutory partitio n by contract, noting that “[b]ecause it is a statutory default provision, it is unsurprising that the absolute right to partition might be relinquished by contract, just as the right to invoke § 273 to end a joint venture or to seek liquidation may be wai ved in the corporate context”); Red Clay Educ. Ass ’ n v. Bd. of Educ. of Red Clay Consol. Sch. Dist ., 1992 WL 14965, at *6 (Del. Ch. Jan. 16, 1992) (holding that a provision in a collective bargaining agreement constituted an effective waiver of negotiation right under unfair labor practices statute).

210 See Indus. Rentals, Inc. v. New Castle Cnty. Bd. Of Adjustment , 776 A.2d 528, 529

– 30 (Del. 2001); Save Our Cnty., Inc. v. New Castle Cnty. , 2013 WL 2664187, at *2 (Del. Ch. June 11, 2013).

211 Rsch. & Trading Corp. v. Pfuhl , 1992 WL 345465, at *6

– 7 (Del. Ch. Nov. 18, 1992) (Allen, C.).

212 SphereCommerce, LLC v. Caulfield , 2022 WL 325952, at *1 (Del. Ch. Feb. 2, 2022).94

It is not self

- evident why Delaware law would afford greater protection to a property interest associated with a share of stock that enables the owner to sue for breach of fiduciary duty than it does for those fundamental liberty and property interests. A comparison to what else individuals can waive suggests that the Covenant is not facially invalid. 2. The Threat To Delaware’s Corporate Brand A rhetorically powerful argument for declaring the Covenant facially invalid asserts that it would undermine Delaware ’s corporate brand. In a well

- known article, two practitioners argue that Delaware offers a corporate product that comes with commonly understood attributes, including mandatory and generally immutable fiduciary duties. 213 Although the authors did not addre ss stockholder

- level agreements, the branding argument posits that to permit a stockholder to waive a mandatory feature of Delaware law would undermine the common understanding of a Delaware corporation

. Therefore, the argument
goes, a provision like the C ovenant should be invalid. While m aintaining the value of Delaware’s corporate brand is important, it does not call for invalidating a private agreement in which stockholders make commitments about how to exercise their stockholder

- level rights. The argument about Delaware’s corporate brand stresses the benefits of standardization

. 214 There are benefits from standardized roles and relationships, because

213 See Welch & Saunders, supra , at 846

– 47.

214 Id. at 865

– 66.95

standardization reduces transaction costs, creates shared understandings, influences conduct, and enables the law to promote values beyond efficiency. 215 Delaware’s embrace of private ordering already goes a long way towards limiting the benefits of standardization for Delaware corporation s . A prudent investor must review the charter and b ylaws to understand the rights appurtenant to the corporation’s shares and any limitations that exist on the exercise of those rights. . Even if a corporation has not itself engaged in private ordering, the potential for private ordering requires investiga tion. An investor cannot assume that one Delaware corporation is just like the other s . The practitioners who emphasize brand value argue that mandatory terms are nevertheless essential to Delaware’s corporate brand: Merely by branding itself as a Delaware corporation, a firm can signal easily that it has certain core characteristics that provide basic protections to investors. Anyone contemplating buying shares of stock in a Delaware corporation can be confident , without having to obtain and examine the ce rtificate of incorporation, that the directors of the corporation will be subject to a duty of loyalty; that stockholders will have the right to inspect corporate books and records for a proper purpose; and that the stockholders will have the right, period ically, to elect the directors. 216

215 See Harding, supra , at 88 (“[T]he mediating function of social roles depends on stability in the normative constitution of these roles; where this is lost, roles may lose their traction as normative resources and people may stop organizing their affairs with reference to them. Where fiduc iary law too readily permits opt outs, there is a risk that fiduciary roles might cease to be comprehensible to those whose actions engage with them, and this might generate costs.”).

216 Welch & Saunders, supra , at 866 (emphasis added).96

True, an investor need not review the certificate or bylaws to confirm those three features , but an investor needs to examine the charter and bylaws to assess all of the other features that can change

. Tellingly , the authors spend much of their article discussing the considerable space for private ordering that the DGCL provides. 217 When turning to the rare mandatory features in the DGCL , the author s focus exclu sively on what corporate planners can not modify in the charter or bylaws. 218 They do not make claims about what stockholders can agree to in stockholder

- level agreements

. That editorial decision is understandable, because stockholder

- level agreements do not alter the rights that the DGCL, charter , and bylaws bestow . Through a stockholder

- level agreement, stockholders can make commitments about how they exercise their rights , bu t they cannot change those rights

. A stockholder

- level agreement only binds its si gnatories,
and other stockholders remain free to exercise their rights differently

. Even if some of the stockholders have entered into agreements among themselves, it remains true that “[a]nyone contemplating buying shares of stock in a Delaware corporatio n can be confident, without having to obtain and examine the certificate of incorporation, that the directors of the corporation will be subject to a duty of loyalty; that stockholders will have

217 Id. at 847

- 855. When the authors reach the topic of mandatory provisions, they caution that even those are subject to change, and “[i]t may be that the mandatory rules that exist today will be loosened tomorrow.” Id. at 855.

218 Id. at 855

- 60.97

the right to inspect corporate books and records for a proper purpose; and that the stockholders will have the right, periodically, to elect the directors.” 219 That said, s ome stockholder

- level agreements are sufficiently weighty that they can affect the shared expectations created by the corporation’s constitutive documents. When a critical mass of stockholders have bound themselves to exercise their stockholder

- level rights in a particular way , then their agreement can e xert a gravitational pull that distorts the corporate governance space. Most stockholder

- level agreements do not have that effect

. A proxy is a stockholder

- level agreement, and the vast majority of proxies are routine. A call or put option is a stockholder

- level agreement , and those are mostly r outine as well. The agreement that creates a control group obviously does have a field

- distorting effect, and e ven generally inconsequential agreements like proxies and options can become consequential, such as an irrevocable proxy to vote a control block or a call right on a majority of the shares. 220 Investors should know about consequential stockholder

- level agreements. 221 The logical answer to non

- disclosure is not to invalidate the agreements, but to require

219 Welch & Saunde rs, supra , at 866.

220 E.g. , Daniel v. Hawkins , 289 A.3d 631 (Del. 2023) (analyzing purportedly irrevocable proxy conferring corporate control); Hokanson v. Petty , 2008 WL 5169633 (Del. Ch. Dec. 10, 2008) (enforcing option to acquire a majority of the shares of the corporation and dictate the form of the transaction).

221 See generally Jill E. Fisch, Stealth Governance: Shareholder Agreements and Private Ordering , 99 Wash. U.L. Rev. 913, 947

- 53 (2021); Gabriel Rauterberg, The98

disclosure . The DGCL could state that a stock holder agreement meeting certain criteria is only enforceable if a copy is provided to the corporation, which then must either (i) file the agreement or a summary with the Delaware Secretary of State or (ii) note its existence on the stock ledger and make it available for inspection upon request. The DGCL already takes the former course for merger agreements 222 and the latter for voting trust agreements. 223 It would be important to craft the criteria with care, because so many stockholder

- level
contracts do n ot warrant that treatment. For purposes of a Delaware corporation, a stockholder

- level agreement that allocates how stockholders exercise their rights is on

- brand, not off. Private ordering and fiduciary accountability are key components of Delaware’s cor porate brand. A stockholder

- level agreement is a quintessential form private ordering, because it involves stockholders making commitments about their own rights. Other stockholders remain free to exercise their rights as they wish, including by exercising their rights to pursue corporate accountability.
T his case involves two key elements of Delaware’s corporate brand, so an appeal to brand value is unlikely to be dispositive . An advocate could assemble citations suggesting that one policy or the other is more important, but the result would reveal more about the

Separation of Voting and Control: The Role of Contract in Corporate Governance , 38 Y ale J. Reg. 1124 , 1144

– 48 (2021)

.

222 See 8 Del. C. § 251(c).

223 See id. §§ 218(a)

– (b).99

research team’s skill than the relative importance of the policies. Because brand value is elusive, 224 appeals to br and value could lead to broad normative claims, less emphasis on traditional authorities, and the possibility that personal preferences sneak into the analysis. Scholars may attempt to capture or characterize the value of Delaware’s brand as a way of expla ining Delaware’s success. 225 Practitioners a nd Delaware’s Division of Corporations may market Delaware as a brand. 226 They are not deciding cases. To that end, when the authors who emphasize mandatory features as important to Delaware’s corporate brand

224 See Omari Scott Simmons, Branding the Small Wonder: Delaware’s Dominance and the Market for Corporate Law , 42 U. Rich. L. Rev. 1129, 1144

– 45 (2008) (“ Despite its undeniable importance, branding, at times, seems like an amorphous concept without a precise definition.

. . . In a broad sense, branding describes a range of elements that form a complete service or product experience. The branding concept has traditionally focused on points of differentiation, i.e., unique benefits, which set a product or service apart from the competition .” (internal footnotes omitted)); Kevin Lane Keller, The Brand Report Card , Har v. Bus. Rev. (Jan.

– Feb. 2000), https://hbr.org/2000/01/the

- brand

- report

- card (“ Why do customers really buy a product? Not because the product is a collection of attributes but because those attributes, together with the brand’s image, the service, and many other tangible and intangible factors, create an attractive whole. In some cases, the whole isn’t even something that customers know or can say they want.

. . . In strong brands, brand equity is tied both to the actual quality of the product or service an d to various intangible factors. ”).

225 William J. Moon, Delaware’s Global Competitiveness , 106 Iowa L. Rev. 1683, 1692

– 700, 1734 & n.250 (2021) (discussing characteristics of the Delaware “brand”); Simmons, supra , at 1146 (“Delaware’s brand equity is tied both to tangible aspects of its service and to various intangible factors.”); Peter Molk, Delaware’s Dominance and the Future of Organizational Law , 55 Ga. L. Rev. 1111, 1122

– 30 (2021) (discussing the role Delaware’s brand plays in its “dominance” over Uni ted States corporate law).

226 Why Businesses Choose Delaware , Del. Div. Corp., https://corplaw.delaware.gov/why

- businesses

- choose

- delaware/ (last visited Apr. 29, 2023).100

assess which features are mandatory, they rely on traditional legal authorities. 227 Even for them, brand value is not an input , but an output. It is not a means of determining which aspects of De laware’s corporate regime cannot be tailored; it is the result of making that determination by other means. There may be cases where considering brand value might be helpful. Particularly when aspects of brand value are easily identified and all point in the same direction, then referring to brand value could provide support for an outcome. In this case, two core components point in opposite directions , making brand value too uncertain to use as a tiebre aker . The argument about Delaware’s corporate brand d oes not warrant holding the Covenant facially invalid. 3. Corporate Law As LLC Law A nother rhetorically powerful argument for declaring the Covenant facially invalid asserts that to permit stockholders to waive claims for breach of fiduciary through a private agreement would blur the distinction between corporations and LLCs. T here is value in distinguishing between the two types of entities, but stockholder

- level contracting about stockholder

- level rights does not collap se the divide

. For starters, the line be tween corporate law and LLC law is already blurred, albeit from the other side. Decisions frequently observe that LLCs “ are creatures of contract, ” 228

227 Id. at 856

- 60.

228 TravelCenters of Am., LLC v. Brog , 2008 WL 1746987, at *1 (Del. Ch. Apr. 3, 2008) ; accord, e.g. , Henson v. Sousa , 2015 WL 4640415, at *1 (Del. Ch. Aug. 4, 2015)101

which they primarily are. 229 The Delaware Limited Liability Company Act (the “LLC Act”) provides that “[i] t is the policy of this chapter to give maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements. ” 230 Because of this freedom, “[v]irtually any management structure may be implemented through the company’s governing instrument.” 231 Using the contractual freedom that the LLC Act confers, the drafters of an LLC agreement can create a manager

managed entity, label the managers a “board of directo rs,” refer to the LLC interests as

( “ LLCs, as this Court has repeatedly pointed out, are creatures of contract. ” ) ; Touch of It

. Salumeria & Pasticceria, LLC v. Bascio , 2014 WL 108895, at *4 (Del. Ch. Jan. 13, 2014) ( “ [R]ecognizing that LLCs are creatures of contract, I must enforce LLC agreements as written. ” ) ; Kuroda v. SPJS Hldgs

. , L

. L

. C

. , 971 A.2d 872, 880 (Del. Ch. 2009) (“ Limited liability comp anies are creatures of contract . . . .”) ; s ee Fisk Ventures LLC v. Segal , 2008 WL 1961156, at *8 (Del. Ch. May 7, 2008) ( “ In the context of limited liability companies, which are creatures

. . . of contract, those duties or obligations [among parties] must be found in the LLC Agreement or some othe r contract. ” (footnote omitted) )

.

229 See In re Seneca Invs. LLC , 970 A.2d 259, 261 (Del. Ch. 2008) ( “ An LLC is primarily a creature of contrac t. . . .” ) . The adverb “primarily” recognizes the critical non

contractual dimensions of the entity that this decis ion has discussed in connection with MCT, such as “ separate legal existence, potentially perpetual life, and limited liability for its members. ” In re Carlisle Etcetera LLC , 114 A.3d 592, 605

– 06 (Del. Ch. 2015). See generally Daniel S. Kleinberger, Two Decades of “ Alternative Entities ” : From Tax Rationalization Through Alphabet Soup to Contract As Deity , 14 Fordham J. Corp. & Fin. L. 445, 460

– 71 (2009) (identifying historical, jurisprudential, and policy reasons why LLCs should not be regarded as purely contractual entities).

230 6 Del. C. § 18

- 1101(b).

231 Robert L. Symonds, Jr. & Matthew J. O ’ Toole, Delaware Limited Liability Companies § 9 .0 1 [ B ] , at 9

- 9 ( 2d ed. 2019 ).102

“shares,” and provide that the LLC will be governed by the DGCL and operate as if it were a Delaware corporation. 232 Returning to the corporate side of the divide, a stockholder

- level agreement does
not risk blurring the distinctions between the entities, because those distinctions exist at the level of the governing statutes and the constitutive documents. 233 Regardless of what investors might agree to in investor

- level agreements , there are fundamental differences between what a certificate of formation must contain (virtually nothing) and what a certificate of incorporation must contain (six enumerated items including the number and types of shares the corporation can issue and any special rights, powers, privileges,

232 See id. ( “ A limited liability company may be struc tured on the basis of a corporate model . . . . ” ); see, e.g. , Fla

. R & D Fund Invs

. , LLC v. Fl a. BOCA/Deerfield R & D Invs

. , LLC , 2013 WL 4734834, at *2, * 7 (Del. Ch. Aug. 30, 2013) (addressing LLC agreement that created a board of directors to manage the entity); Kahn v. Portnoy , 2008 WL 5197164, at *4 (Del. Ch. Dec. 11, 2008) (interpreting LLC agreement which created board of directors to manage the entity and which provided that the “‘ authority, powers, functions and duties (including fiduciary duties) ’ of the bo ard of directors will be identical to those of a board of directors of a business corporation organized under the Delaware General Corporation Law . . . unless otherwise specifically provided for in the LLC Agreement ” ) ; Seneca Invs. , 970 A.2d at 261 (inter preting LLC agreement which provided that, subject to certain exceptions, “ the Company will be governed in all respects as if it were a corporation organized under and governed by the Delaware General Corporation Law

. . . and the rights of its Stockholder s will be governed by the DGCL ” ); see also Matthew v. Laudamiel , 2012 WL 2580572, at *1 (Del. Ch. June 29, 2012) (interpreting LLC agreement that created board of managers to oversee business and affairs of entity) ; VGS, Inc. v. Castiel , 2003 WL 723285, at *2 (Del. Ch. Feb. 28, 2003) (same)

.

233 See Welch & Saunders , supra , at 864

- 65 (contrasting what the DGCL permits the charter or bylaws of a corporation to contain with what the LLC Act permits an LLC agreement to contain; not engaging with what investors can agree to in investor

- level agreements).103

qual ifications, and limitations on those shares)

. 234 And there are fundamental differences between what an LLC can achieve through its constitutive document (minimally constrained) and what a corporat ion can achieve (moderately constrained). Most notably, the constitutive document of an LLC (the LLC agreement) can (i) fully eliminate any duties existing at law or in equity, including fiduciary duties, 235 (ii) provide indemnification and

234 Compare 6 Del. C. § 18

- 201(a) with 8 Del. C. § 102(a)

. 235 See 6 Del. C. § 18

- 1101(c) (“To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary dutie s) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member ’ s or manager ’ s or other person ’ s duties may be expanded or restricted or el iminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing. ”). When the General Assembly adopted Section 18

- 110 1(e), Delaware decisions had not yet distinguished cleanly between the concept of good faith in fiduciary law and the role that the implied covenant of good faith and fair dealing plays as a source of implied contractual terms. See, e.g ., Gerber v. Enter. Prods. Hldgs., LLC , 67 A.3d 400, 418

– 19 (Del. 2013), overruled on other grounds by Winshall v. Viacom Int ’ l, Inc. , 76 A.3d 808 (Del. 2013); Renco Gp., Inc. v. MacAndrews AMG Hldgs. LLC , 2015 WL 394011, at *7 n.74 (Del. Ch. Jan. 29, 2015). The statement tha t an LLC agreement “ may not eliminate the implied contractual covenant of good faith and fair dealing ” seems like an attempt to preserve some form of obligation to act in good faith. But in its role as a source of implied terms, the implied covenant cannot fulfill that mission, because the implied covenant does not operate as a fiduciary substitute. Wood v. Baum , 953 A.2d 136, 143 (Del. 2008) ( “ The implied covenant of good faith and fair dealing is a creature of contract, distinct from the fiduciary duties that the plaintiff asserts here. ” ). And express terms displace it, enabling alternative entity agreements to authorize a decision maker to consider and act based on its own interests, irrespective of the entity ’ s interests. See, e.g. , Norton v. K

- Sea Trans

p. P ’ rs L.P. , 67 A.3d 354, 361 (Del. 2013) (enforcing provision that allowed a general partner to “consider only such interests and factors as it desires”); Allen v. El Paso Pipeline GP Co., L.L.C. , 113 A.3d 167, 181 (Del. Ch. 2014) (upholding provision that “confers contractual discretion on the Conflicts Committee to balance the competing interests of the Partnership’s various entity constituencies when determining whether a conflict

- of

- interest transaction is in the best interests of the Partnership”), aff ’ d , 2015 W L 803053 (Del. Feb.104

advancement unconstrained by any statutory standards, 236 and (iii) fully elim inate any and all liabilities, except for bad faith breaches of the implied covenant of good faith and fair dealing. 237 By contrast, the constitutive document of a corporation (the charter and bylaws)

26, 2015) (TABLE); Paul M. Altman & Srinivas M. Raju, Delaware Alternative Entities and the Implied Contractual Covenant of Good Faith and Fair Dealing Under Delaware Law , 60 Bus. Law. 1469, 1484 (2005) (recommending that alternative en tity agreements provide that the decision maker be granted discretion to “ consider only such interests and factors as it desires, including its own interests, ” and eliminate any “ duty or obligation to give any consideration to any interest of or factors af fecting the ” entity or its investors). Nor does the statutory mandate to preserve the implied covenant provide incremental protection, because t he implied covenant of good faith and fair dealing already inheres in every contract governed by Delaware law an d cannot be eliminated. See Dunlap v. State Farm Fire & Cas. Co. , 878 A.2d 434, 442

– 43 (Del. 2005).

236 See 6 Del. C. § 18

- 108 (“ Subject to such standards and restrictions, if any, as are set forth in its limited liability company agreement, a limited liabi lity company may, and shall have the power to, indemnify and hold harmless any member or manager or other person from and against any and all claims and demands whatsoever. ”).

237 See id. § 18

- 1101(e) (“ A limited liability company agreement may provide for t he limitation or elimination of any and all liabilities for breach of contract and breach of duties (including fiduciary duties) of a member, manager or other person to a limited liability company or to another member or manager or to another person that i s a party to or is otherwise bound by a limited liability company agreement; provided, that a limited liability company agreement may not limit or eliminate liability for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing. ”). Like the statutory preservation of the implied covenant of good faith and fair dealing in Section 18

- 1101(c), the statutory preservation of liability for bad faith violations of the implied covenant was likely a n attempt to retain accountability for intentional misconduct that ran contrary to the best interests of the entity. But here again, the implied covenant cannot fulfill its mission, because it is not a fiduciary substitute. See Wood , 953 A.2d at 143 . It is also wickedly difficult under Delaware law to prove a claim for breach of the implied covenant , and all the more so to prove a bad faith breach of an implied term. “ Rather than preserving a measure of accountability by imposing a meaningful floor, the statutory limit on exculpation sets the bar at the band sill. ” Bamford v. Penfold, L.P. , 2022 WL 2278867, at *33 n.18 (Del. Ch. June 24, 2022).105

(i) can shape fiduciary duties but cannot eliminate them , 238 (ii) cannot eliminate monetary liability for breach of fiduciary duty except for breaches of the duty of care, 239 (iii) cannot provide indemnification or advancement that goes beyond statutory standards, 240 and (iv) cannot constrain liability for breach of the implied covenant of good faith and fair dealing. 241
Those profound differences make LLCs and corporations resolutely different things. Those differences remain even though each type of entity confers bundles of rights on investors that manifest as a form of personal property ( a member interest or a share). 242 Those differences persist when the holders of those investor

- level rights (i) decide in real time whether or not to exercise their rights and (ii) make contractual commitments about rights that they otherwise could exercise freely. True, there is a superficial similarity in the ability of both LLC members and stockholders to make exercise

- or - refrain decisions and to enter into investor

- level agreements about those decisions, but that resemblance does

238 See Part II.D, supra.
239 See 8 Del. C. § 102(b)(7).

240 See id. § 145

. 241 See, e.g. , In re Delphi Fin. Gp. S ’ holde r Litig. , 2012 WL 729232, at *17 (Del. Ch. Mar. 6, 2012) (explaining that implied covenant of good faith and fair dealing inhered in charter and bylaws); Hollinger Int ’ l, Inc. v. Black , 844 A.2d 1022, 1032 (Del. Ch. 2004 ) (deploying implied covenant of goo d faith and fair dealing when interpreting certificate of incorporation) , aff ’ d , 872 A.2d 559 (Del. 2005)

.

242 See 6 Del. C. § 18

- 701; 8 Del. C. § 159.106

not alter the basal gulf between the underlying form s of state

- created property ( the entit ies themselves )

. 243 The argument about collapsing the entity divide is not a basis to declare the Covenant facially invalid. 4. The Opinions In Manti The majority and dissenting opinions in Manti provide insight into how the Delaware Supreme Court viewed a similar public policy issue. In Manti , the justices considered whether to enforce a covenant not to assert appraisal rights, which the high
court labeled the “ Refrain Obligation. ” Like the Covenant, the Refrain Obligation appeared in a drag

- along provision in a voting agreement. As in this case, investment funds who had entered into the voting agreement sought to escape their promise by arguing that t he Refrain Obligation was invalid. The majority opinion in Manti upheld the Refrain Obligation, but it contains language which could be read to suggest that the Covenant is facially invalid. The dissent would have invalidated the Refrain O bligation, suggesting a similar outcome for the

243 To take a simplistic example, I may own a bicycle and a motorcycle, which are different types of vehicle s. Regardless of which I ride on a particular day, I can select my destination, pick a route, choose to stop for coffee, and decide where to park. My ability to make similar choices does not collapse the distinction between the two forms of transportation. Nor would the distinction collapse if I made similar promises about how I would use or not use the forms of transportation, or even if I promised to not use one form of transportation in a manner prohibited for the other form of transportation. I could pr omise my spouse that I would not ride my bicycle on a path closed to motorized vehicles, and by making that promise, I have agreed not to use my bicycle in a manner prohibited for motorcycles. That does not make my bicycle a motorcycle. Nor does a stockhol der’s promise to not assert a claim for breach of fiduciary duty that a member of an LLC might not be able to assert turn the corporation into an LLC.107

Covenant. Spurred by the opinions in Manti , this decision has sought to engage deeply with traditional fiduciary principles, the DGCL, Delaware common law , and private ordering

. This decision concludes that u nder Manti , a narrow provision like the Covenant in not facially invalid, but a court must scrutinize the facts and circumstances carefully to determine whether the provision is valid as applied. The Manti decision points to a range of factors that a court can consider. At bottom, the proponent of the provision must show that it is reasonable.

a. The Manti Majority The investment funds in Manti advanced two grounds for invalidating the Refrain Obligation. First, they claimed that the provi sion violated Section 262 , which governs appraisal rights

. Second, they argued that the provision violated Delaware public policy. A majority of the Delaware Supreme Court rejected both arguments. The argument for statutory invalidity relied on language i n Section 262 stating that “[a] ppraisal rights shall be available for the shares of any class or series of stock of a constituent or converting corporation in a merger or consolidation or conversion [subject to specified exceptions].” 244 The investment fund s contended that the statut e’s use of the auxiliary verb “shall” meant that appraisal rights were mandatory and could not be waived through a voting agreement. The majority rejected that assertion , citing (i) Delaware ’ s

244 8 Del. C. § 262(b).108

public policy in favor of private or dering, 245 (ii) the absence of any express prohibition in the DGCL on the waiver of appraisal rights, 246 (iii) the general principal that parties can waive mandatory rights, 247 and (iv) the fact that the stockholders who signed the agreement

were “ sophisticat ed and informed investor s , represented by counsel, that used their bargaining power to negotiate for funding

. . . in exchange for waiving their appraisal rights .” 248 Under the majority’s reasoning, the DGCL create d a stockholder

- level right to seek appraisal, and a stockholder could decide whether or not to exercise that right . Just as a stockholder could make that decision in real time, a stockholder could commit in advance to refrain from exercising that right. Th e Refrain Obligation therefore did not conflict with the DGCL. The public policy argument for invalidity asserted that appraisal rights were too important for stockholders to waive. The majority rejected that argument as well and deemed the Refrain Obliga tion enforceable. The reasons the majority offered can be sorted into two categories: responses to a facial challenge, and responses to an as

- applied challenge. Under the first heading, the majority observed that (i) appraisal rights did not play “ a suffic iently important role in regulating the balance of power between corporate

245 Manti , 261 A.3d at 1216, 1217

– 18

. 246 I d. at 1218

– 20

. 247 I d. at 1219

. 248 I d. at 1220

.109

constituencies to forbid sophisticated and informed stockholders from freely agreeing to

an ex ante waiver, ” 249 and (ii) the waiver of appraisal rights was a logical consequence of

a drag

- along provision, which generally required signatory stockholders to vote for the qualifying transaction and thereby indirectly waiv e their appraisal rights

. 250 Under the second heading, the majority noted that (i) the Refrain Obligation was not impose d on stockholders unilaterally , 251 (ii) the signatory stockholders were not retail investors and there was no imbalance of information, 252 and (ii i) the sophisticated investors who agreed
to the Refrain Obligation could understand its implications and knowin gly waive their rights

. 253 In light of these points, the Refrain Obligation was not contrary to public policy. At various points in the decision, the majority cited factual considerations that apply equally to the Funds, the defendants, and the Covenant :

• The Funds a re “ sophisticated investors, represented by counsel, that agreed to a clear waiver of their [right to challenge a Drag

- Along Sale ] in exchange for valuable consideration. ” 254

• The Voting Agreement is “ not a contract of adhesion. ” 255

249 I d. at 1224

. 250 I d. at 1225

. 251 I d.

252 I d.

253 I d. at 1226.

254 See id. at 1221; accord id. at 1225.

255 See id. at 1221.110

• The Funds “ have not argued that they were ignorant of the [ Covenant ] when they signed the contract or that the inclusion of the [ Covenant ] was a mistake. ” 256

• It would have been “ easy for the [Funds] to predict the circumstances in which the [ Covenant ] would be invoked, namely, [Rich] and the board might approve a [ Drag

Along Sale ]. ” 257

• The Covenant is not being enforced “ against a retail investor that was not involved in negotiating the [Voting] Agreement. ” 258

• The Covenant is not being enforced “ against outsiders that lack material knowledge of [the Company ’ s] corporate governance dynamics. ” 259

• The Funds were “ insiders for t he purpose of negotiating the [Voting] Agreement. ” 260

• There is no suggestion that Rich “ coerced the [Funds] into ” agreeing to the Covenant

. 261

• There is no suggestion that the Funds “ did not know that the [Voting] Agreement contained the [ Covenant ]. ” 262

• There is no suggestion that Rich “ had any secret knowledge when [he] negotiated the [Voting] Agreement. ” 263

256 See id.

257 See id. at 1222.

258 See id. at 1225.

259 See id.

260 See id.

261 See id.

262 See id.

263 See id.111

• The Funds are “ capable investors ” who “ do not need protection of the courts to escape a bad bargain. ” 264

• The Covenant does not raise “ concern s about a lack of consent .” 265

• The Covenant does not involve “ enforce[ing] a contract of adhesion against a stockholder that lacked bargaining power. ” 266

• The Funds “ specifically assented to the [Voting] Agreement. ” 267

• The Funds were “ represented by counsel and had ne gotiating leverage. ” 268

• The Funds “ freely and knowingly consented to the [ Covenant ] i n exchange for valuable consideration. ” 269 Through its analysis, the Manti majority built on Salzberg ’s embrace of contractarian principles. But while upholding the Refrain Obligation, the majority cautioned that its decision did not mean that all appraisal waivers were valid: Allowing [the company] to enforce this Refrain Obligation against these Petitioners does not mean that all ex ante waivers of appraisal rights are enforceable or that the waiver of any other stockholder right would be enforceable. To the contrary, there are other contexts where an ex ante waiver of appraisal rights would be unenforceable for public policy reasons. 270

264 See id.

265 See id.

266 See id.

267 See id.

268 See id.

269 See id.

270 I d. at 1226.112

The multi

- factor analysis conducted by the Manti majority suggests that if some or all of those factors were absent, then a similar provision would be suspect. The Manti majority also admonished corporate planners that all stockholder

- level rights were not automatically fair game for contractual waivers : [T]here may be other stockholder rights that are so fundamental to the corporate form that they cannot be waived ex ante , such as certain rights designed to polic e corporate misconduct or to preserve the ability of stockholders to participate in corpora te governance. Allowing [the company] to enforce the Refrain Obligation against the Petitioners does not mean that the ex ante waiver of all other stockholder rights would be enforceable. 271 Fairly read, that warning seems to refer to the duty of loyalty, w hich is “fundamental to the corporate form” and the principal means by which Delaware courts “ polic e corporate misconduct .” The Manti majority did not specifically call out the duty of loyalty, but if not that duty, then what? Not the right to vote for dir ectors or on fundamental transactions like mergers, because the DGCL permits stockholders to constrain their right to vote in a stockholder

- level agreement. 272 No t the right to sell their shares, because the DGCL permits stockholders to constrain their righ t to sell in a stockholder

- level agreement. 273 Perhaps the right to seek books and records , 274 but right is instrumental to the ability to exercise other rights, and if a stockholder

- level agreement can constrain the ultimate rights,

271 Id.

272 See 8 Del. C. § 218(c).

273 See id. § 202(c).

274 See id. § 220.113

it should be able to con strain the instrumental right. Two Court of Chancery decisions indicate that a stockholder can waive or limit its ability to exercise Section 220 rights through a clear and express provision in a bilateral agreement. 275 Prompted by the majority’s cautionary statements in Manti , this decision has explore d whether all fiduciary waivers are facially invalid. As this decision has shown, traditional fiduciary principles, the DGCL, and Delaware common law permit significant degrees of fiduciar y tailoring, most pertinently through provisions that specifically authorize a fiduciary to engage in a type of transaction that otherwise would constitute a breach. In light of that authority, this decision cannot conclude that all fiduciary waivers

275 See Schoon v. Troy Corp. , 2006 WL 1851481, at *2 (Del. Ch. June 27, 2006) ; Kortum v. Webasto Sunroofs, Inc. , 769 A.2d 113, 125 (Del. Ch. 2000) . A charter

- based waiver, however, would be invalid. See State v. Penn

- Beaver Oil Co. , 143 A. 257, 260 (Del. 1926) (“[T]he provision in defendant's charter which permits the directors to deny any examination of the company’s records by a sto ckholder is unauthorized and ineffective.”); Marmon v. Arbinet

- Thexchange, Inc. , 2004 WL 936512, at *5 (Del. Ch. Apr. 28, 2004) (“Nor could they rely upon a certificate provision prohibiting disclosure to avoid a shareholder’s inspection right conferred by statute.”); BBC Acq. Corp. v. Durr

- Fillauer Med., Inc. , 623 A.2d 85, 90 (Del. Ch. 1992) (holding that a contract with a third party could not be used to limit inspection rights, which “cannot be abridged or abrogated by an act of the corporation”); Loew’s Theaters, Inc. v. Com

. Credit Co. , 243 A.2d 78, 81 (Del. Ch. 1968) (holding that charter provision which limited inspection rights to holder of 25% of shares was void as conflicting with statute); State v. Loft, Inc. , 34 Del. 538, 156 A. 170, 173 (Del. Ch . 1931) (following Penn

- Beaver ). An article by leading practitioners that identifies Section 220 rights as “mandatory” and collects authorities in support of that characterization only discusses limitations in the charter or bylaws, not in private stockhol der

- level agreements. Welch & Saunders, supra , at 858

- 59 , 865 . The differences between how a stockholder

- level agreement and a charter provision can affect Section 220 rights is another manifestation of the more general distinction Delaware law draws betwe en restrictions on stockholder

- level rights in stockholder

- level agreement s and restrictions in the charter or bylaws. See Part II.D.3.b , supra .114

are f acially invalid. A strong argument exists that a broad, unspecified waiver is facially invalid, such as a covenant not to assert any claims for breach of fiduciary duty under any facts. A narrow and targeted provision like the Covenant, however, is not fac ially invalid. But that conclusion does not end the analysis, because the justices in Manti also considered a case - specific factors when determin ing that the Refrain Obligation was not contrary to public policy. Their reasoning indicates that in an as - appl ied challenge, a court

can consider (i) the presence of the provision in a bargained

- for contract, (ii) the clarity and specificity of the provision, (iii) the stockholder’s level of knowledge about the provision and the surrounding circumstances, (iv) the stockholder’s ability to foresee the consequences of the provision, (v) the stockholder’s ability to reject the provision, (vi) the stockholders’ level of sophistication, and (vi i ) the involvement of counsel. Those factors are necessarily illustrative and not exclusive. The factors that the Manti majority considered all relate to whether it was reasonable to enforce the Refrain Obligation on the facts of the case. The Manti decision thus indicates that to survive an as

- applied challenge, the party seeking to enforce a waiver must convince the court that the waiver is reasonable. 276

276 Lawyers should be familiar with that type of requirement. As with other agency agreements, a lawyer’s engagem ent letter can authorize a lawyer to represent a client notwithstanding a conflict of interest that otherwise would constitute a breach of duty. Restatement (Third) of the Law Governing Lawyers § 122 (Am. L. Inst. 2000) , Westlaw (database updated Mar. 2023) . Each affected client or former client must give informed consent, the representation cannot be prohibited by law, and the conflict cannot involve one client against the other in the same litigation. Id. But even where those requirements are met, the waiver must be reasonable, meaning it is ineffective if “in the circumstances,115 b. The Manti Dissent One justice dissented in Manti and would have invalidated the Refrain Obligation. The dissent cited (i) ambiguity in the Refrain Obligation, 277 (ii) a mismatch between when the Refrain Obligation terminated and the operation of the appraisal statute, 278 (iii) the presence of the Refrain Obligation in a stockholder

- level agreement rather than in the corporation’s constitutive documents, 279 (iv) conc ern about permitting common

it is not reasonably likely that the lawyer will be able to provide adequate representation to one or more of the clients.” Id. “ In general, if a reasonable and disinterested l awyer would conclude that one or more of the affected clients could not consent to the conflicted representation because the representation would likely fall short in either respect, the conflict is nonconsentable. ” Id. cmt. g(iv). The Restatement also exp lains that the validity of a waiver of future conflicts turns on its breadth and the surrounding circumstances: C lient consent to conflicts that might arise in the future is subject to special scrutiny, particularly if the consent is general. A client’s open - ended agreement to consent to all conflicts normally should be ineffective unless the client possesses sophist ication in the matter in question and has had the opportunity to receive independent legal advice about the consent.

. . . O n the other hand, particularly in a continuing client

- lawyer relationship in which the lawyer is expected to act on behalf of the cl ient without a new engagement for each matter, the gains to both lawyer and client from a system of advance consent to defined future conflicts might be substantial. A client might, for example, give informed consent in advance to types of conflicts that a re familiar to the client. Such an agreement could effectively protect the client ’ s interest while assuring that the lawyer did not undertake a potentially disqualifying representation. Id. cmt. d.

277 261 A.3d at 1235 (Valihura, J., dissenting) .
278 Id. at 1234.

279 Id. at 1237

– 41.116

stockholders to waive appraisal rights, 280 (v) concern that permitting waivers of appraisal rights and other mandatory statutory provisions in stockholder agreements “would transform the corporate governance documents into gap

- fi lling defaults and collapse the distinction between a corporation and alternative entities,” 281 and (vi) a view that appraisal rights are a mandatory, non

- waivable feature of Delaware corporate law because of their historical role in protecting minority sto ckholders from underpriced transactions. 282
The dissent argued convincingly that the Refrain Obligation was in effective because a drafting bust caused the obligation to terminate before the time came to exercise or waive appraisal rights. 283 The dissent als o raised an important concern about “ stealth” corporate governance arrangements in which significant stockholders enter into stockholder

- level agreements governing the exercise of their rights without other stockholders knowing about the agreements or thei r implications. 284 This decision differs only in the response to that concern: It proposes disclosure rather than invalidity. Otherwise, the dissent took the other side of the arguments considered by the majority. The dissent provided an additional spur fo r this decision’s extensive engagement

280 Id. at 1241

– 42.

281 Id. at 1243.

282 Id. at 1243

– 49.

283 See id. at 1233

– 34.

284 Id. at 1241.117

with traditional fiduciary principles, the DGCL, the Delaware common law , and contractarian principles . Only after conducting that analysis has this decision concluded that the Covenant is not facially invalid.
F. The Altor Bioscience Decision Although the parties did not cite it, a Delaware decision has addressed the validity of a covenant in which stockholders agreed not to assert claims for breach of fiduciary duty. 285 In the Altor Bioscience case, Vice Chancellor Slights held that a bargained

- for covenant not to sue barred claims for breach of fiduciary duty comparable to the Sale Counts. He rejected the plaintiffs’ contention that the covenant was invalid. Altor Bioscience was a privately held company that was sold to an acquirer. Two stockholders and former directors (Gray and Waldman) asserted claims for breach of fiduciary duty against the fiduciaries who approved the deal. The defendants relied on letter agreements that Gray and Waldman had signed “ to broker a ‘peace in the valley,’ in the midst of great tension between two factions of the Altor board.” 286 Under the letter

285 In re Altor Bioscience Corp. , C.A. No. 2017

- 0466

- JRS (Del. Ch. May 15, 2019) (TRANSCRIPT); see Juris. Subcomm. Ann. Surv. Working Gp. , Priv. Equity & Venture Cap. Comm. , ABA Bus. L

. Section, Annual Survey of Judicial Developments Pertaining to Private Equity and Venture Capital , 76 B us. Law. 237, 247

– 49 (2021) (discussing Altor Bioscience ). The parties also did not cite two decisions applying New York law

— a similarly contractarian jurisdiction

— that relied on covenants not to sue to bar claims for breach of fiduciary duty. E.g. , In re Empire State Bldg. Assocs. L.L.C. Participant Litig. , 133 A.D.3d 538, 538 (N.Y. App. Div. 2015); Hugar v. Damon & Morey LLP , 51 A.D.3d 1387, 1388 (N.Y. App. Div. 2008). Although the legal principle is the same, the facts are not analogous.

286 Altor Bioscien ce , tr. at 9.118

agreements, Gray and Waldman resigned from the board and received options and other consideration. In Section 7 of the agreements , Gray and Waldman covenanted that for a period of five years, they would not “directly or indirectly commence, prosecute or cause to be commenced or prosecuted against any Company Releasee any action or other proceeding of any nature before any court, trib unal, Governmental Authority or other body, except for the Company’s breach of this letter agreement.” 287 Vice Chancellor Slights held that this provision was “tantamount to a covenant not to sue” that had been “offered in exchange for valuable consideratio n” and was enforceable in accordance with its plain and unambiguous terms. 288 Gray and Waldman argued that the covenant not to sue was invalid as a matter of public policy because it extinguished claims for breach of the duty of loyalty. In rejecting
that a rgument, Vice Chancellor Slights distinguished between a covenant not to sue that only binds the signatories and a charter provision that purports to limit or eliminate fiduciary duties generally or that seeks to limit or eliminate liability for the duty o f loyalty. He explained that a covenant not to sue does not modify either the underlying duty or the availability of a remedy; it only constitutes a commitment by the signatories not to assert the claim.

287 Id. at 10.

288 Id. at 13

– 14.119

Vice Chancellor Slights next considered when a cove nant might nevertheless operate constructively to limit or eliminate fiduciary duties or the ability to recover damages for a loyalty breach. Relying on Yucaipa American Alliance Fund I, L.P. v. SBDRE, LLC , 289 he distinguished between a case where all stock holders are signatories, such that no one can sue, and a situation where “others not bound by the contract could bring suit.” 290 He concluded that as long as other parties could assert the claim and provide accountability, then the covenant did not construc tively limit or eliminate fiduciary duties or the ability to recover damages for a loyalty breach. In Altor Bioscience , there were other stockholders who could sue, so Vice Chancellor Slights held that the provision “does not violate public policy, nor is it otherwise offensive to law or equity.” 291 Vice Chancellor Slights therefore entered judgment as a matter of law dismissing the claims for breach of fiduciary duty that Gray and Waldman had tried to assert. The ruling in Altor Bioscience anticipates the majority opinion in Manti by declining to hold the covenant facially invalid and instead carefully analyzing whether it was reasonable to enforce the provision. For purposes of a facial challenge, Vice Chancellor Slights noted that the provision did not li mit or eliminate the defendants’ fiduciary duties or their liability for breach. The provision only bound the signatories and prevented them

289 2014 WL 5509787, at *15 (Del. Ch. Oct. 31, 2014).

290 Altor Bioscience , tr. at 16.

291 Id. at 15.120

from filing suit. For purposes of the as - applied challenge, Vice Chancellor Slights noted that Gray and Waldman had agreed to the provision to secure a result they desired

— peace in the valley

— and they accepted consideration in exchange for the agreement that contained the covenant. By filing suit, they were doing precisely what they had agreed in writing not to do.
T he discussion of whether other stockholders could sue should be viewed as part of the overarching reasonableness analysis. A criti c might interpret the Altor Bioscience ruling as establishing a “Rule of One,” under which if at least one other stockholder cou ld sue, then a covenant would be valid. That would be a caricature. Vice Chancellor Slights considered the extent to which other stockholders could sue. The existence of a single stockholder who could assert a claim would not render a provision reasonable. The Altor
Bioscience ruling supports evaluating a provision like the Covenant for its reasonableness. G. The Case
- By
- Case Analysis Contemplated By Manti And Altor Bioscience The decisions in Manti and Altor Bioscience point to a two

- step analysis for a provision like the Covenant. First, the provision must be narrowly tailored to address a specific transaction that otherwise would constitute a breach of fiduciary duty. The level of specificity must compare favorably wit h what would pass muster for advance authorization in a trust or agency agreement, advance renunciation of a corporate opportunity under Section 122(17), or advance ratification of an interested transaction like self

- interested director compensation. If th e provision is not sufficiently specific, then it is facially invalid.121

As this decision has explained, the Covenant meets that standard. It only applies to one of three types of transactions that qualify as a Sale of the Company. The terms of the
transact ion must then meet the eight specific criteria necessary to qualify as a Drag

- Along Sale. 292 The provision is sufficiently specific to avoid facial invalidity. Next, the provision must survive close scrutiny for reasonableness. In this case, many of the non - exclusive factors suggested in Manti point to the provision being

reasona ble . Those factors include (i) a written contract formed through actual consent , (ii) a clear provision, (iii) knowledgeable stockholders who understood the provision’s implications, ( i v) the Funds’ ability to reject the provision , and (v) the presence of bargained

- for consideration. First, the Covenant is an express provision that appears in the Voting Agreement. The Funds executed that contract and agreed to its terms. The Covenant did not appear as a take

- it

- or - leave

- it provision in a pre

- IPO charter . N or was the Covenant imposed through

a midstream charter amendment that the Funds voted against. The Funds freely promised in a written agreement that they would not sue over the Drag

- Along Sale. For the Funds to disclaim their written promise makes them “ l iar [s] in the most inexcusable of commercial circumstances: in a freely negotiated written contract .” 293

292 See Part II.B, supra . 293 Abry , 891 A.2d at 1058.122

Second, the Covenant is clearly written. No one argues that it does not cover the Sale Counts or the defendants. Third, the Funds are sophisticated r epeat players. They necessarily understood the implications of the Covenant, which tracks language in the NVCA’s model voting agreement. Discovery might well show that the Funds or their sponsors have deployed comparable provisions to their benefit in othe r transactions. Fourth, the Funds could have rejected the Covenant. As the Company’s largest incumbent investors and holders of preferred stock , the Funds could have blocked the Recapitalization and forced the Company to seek a different deal. Or they coul d have proposed a deal of their own. They could have declined to sign the Voting Agreement. And
if they thought that Rich had extracted favorable terms , they could have participated in the Recapitalization as investor s . Instead, they declined to invest with Rich and his group , signed the Voting Agreement, and let Rich and his group take the risk

. Fifth , the Funds agreed to the Covenant to induce Rich and his fellow investors to fund the Recapitalization. The Covenant affects Rich’s ability to exit , and without it, he might not have led the Recapitalization or could have demanded different terms. Invalidating the Covenant changes the bargained

- for exchange and shifts value to the Funds by permitting them to pursue rights that they gave up . After the Recapitalization, Rich, Rutchik, and Stella served on the Board and approved the Drag

- Along Sale. Invalidating the Covenant changes their litigation exposure as well

.123

The facts of this case provide an example of sophisticated parties using a provision
li ke the Covenant to allocate risk and order their affairs. This is a case where a provision like the Covenant can be enforced. Although this decision upholds the Covenant against both facial and as

- applied challenges, that does not mean that provisions of this sort will be upheld on different facts. 294 A nother powerful provision that Delaware courts review for reasonableness is a covenant not to compete . Parties can use covenants not to compete and other restrictive covenants to create value an d facilitate commercial relationships. Yet sophisticated parties can also use restrictive covenants to take advantage of the less privileged. Humans are vulnerable to recurring psychological blind spots, including excessively discounting the future. Unless the party bargaining over a restrictive covenant is a repeat player, it is easy
to underestimate the future impact of the provision, particularly compared to a concrete job offer. Restrictive covenants frequently appear in situations where meaningful barg aining is absent, such as standardized employment agreements. Restrictive covenants can also appear in unexpected places, like equity grants. A restrictive covenant affects an important economic right: the ability to work. A covenant not to sue affects a foundational civil right: the ability to access the courts. That

294 The Coven ant might not even be upheld against Signatories other than the Funds

. The record does not reveal much about them , but j udging from their names and hints elsewhere in the record, some might be s ophisticated investors, some could be Company executives, some look like line employees, and some look like friends and family. Whether the Covenant could bind them is a different question that could require discovery to answer.124

right is foundational because it is necessary to protect all others. Without the ability to obtain a judgment from a court, backed by the power of the state, other rights become meaningless. Unless the holder of the right has some other source of leverage, like influence, economic power , or a willingness to deploy extra

- legal force, then the counterparty can ignore the right. Without courts to enforce them, even voting rights can become nullit ies. In a civil society, what renders a right meaningful is access to the courts and, with a judgment in hand , the power of the state. A forward

- looking covenant not to sue warrants greater scrutiny for reasonableness than a covenant not to compete precisely because it limits access to the courts.
A court only decides the case at hand. 295 Nevertheless, it is easy to envision scenarios the proponent of a provision like the Covenant would face deep skepticism and a steep uphill slog . They could include :

• An agreement binding a retail stockholder.

• An employee stock grant.

• A dividend reinvestment plan.

• An employee stock compensation plan.

• A stock transmittal letter.

295 Loudon v. Archer

- Daniels

- Midland Co. , 700 A.2d 135, 142 n.28 (Del. 1997) (“ Those issues are not before us, and we decide only the case before us. ”); Paramount Commc ’ ns Inc. v. QVC Network Inc. , 637 A.2d 34, 51 (Del. 1994) (“ It is the nature of the judicial process that we decide o nly the case before us . . . .”); Stroud v. Milliken Enters., Inc. , 552 A.2d 476, 480 (Del. 1989) ( “ The law is well settled that our courts will not .

. . render advisory opinions. ” ) (internal quotation omitted).125

• A transaction that offered an election between base consideration and incremental consider ation plus a covenant not to sue. 296 There may well be other use cases for a provision like the Covenant, but they are likely to be few and limited to agreements between uber

- sophisticated parties like the Rich Entities and the Funds.
H. A Public Policy Limitation From Contract Law Although the Covenant is not invalid as a form of impermissible fiduciary tailoring, there is one remaining limitation on what the Covenant can accomplish . As a general matter, “ [a ] term exempting a party from tort liability fo r harm caused intentionally or recklessly is unenforceable on grounds of public policy. ” 297 Thus, “[a] n attempted exemption from liability for a future intentional tort .

. . is generally held void .

. . .” 298 Delaware decisions addressing exculpatory provis ions in commercial agreements have applied this rule, stating: “ A party may not protect itself against liability for its own fraudulent act or bad faith. Even if a contract purports to give a general exoneration from

296 The Court of Chancery has refused to enforce a release in a transmittal letter for lack of consideration. Cigna Health & Life Ins. Co. v. Audax Health Sols., Inc. , 107 A.3d 1082, 1091 (Del. Ch. 2014). Incremental consideration for a covenant not to sue wo uld solve the consideration problem. The public policy problem would remain.

297 Restatement (Second) of Contracts § 195 (Am. L. Inst. 1981), Westlaw (database updated Oct. 2022).

298 Richard A. Lord, 8 Williston on Contracts § 19:2 4 (4th ed. 2007) , Westlaw (d atabase updated May 2022).126

‘ damages, ’ it will not protect a party from a claim involving its own fraud or bad faith. ” 299 A commercial agreement among sophisticated parties can only exonerate a party for liability for its own negligence. 300 But as with many things in the law, the public policy line is blurred. There is o ne area where Delaware law has reached beyond the traditional limitations on contracting by providing a path for sophisticated parties to cabin liability for an intentional tort

. In Abry
Partners , Chief Justice Strine held while serving as a member of this c ourt that sophisticated parties, bargaining at arm’s length and with the ability to walk away freely, could enter into an acquisition agreement that expressly disclaim ed reliance on any representations made outside of the agreement , thereby preventing thos e representations from supporting a fraud claim. 301 The Chief Justice acknowledged that this outcome departed from the rule in the Restatement (Second) of Contracts and t he law of other states, but he emphasized the importance that Delaware law places on the freedom of contract and

“ the ability of sophisticated businesses, such as the Buyer and Seller, to make their own

299 J. A. Jones Const. Co. v. City of Dover , 372 A.2d 540, 545 (Del. Super. Ct. 1977) (citation omitted); accord Fort Howard Cup Corp. v. Quality Kitchen Corp. , 1992 WL 207276, at *5 (Del. Super. Ct. Aug. 17, 1992)

.

300 Data Mgmt. Internationale, Inc. v. Saraga , 2007 WL 2142848, at *5 (Del. Super. Ct. July 25, 2007).

301 See Abry , 891 A.2d at 1062.127

judgments about the risk they should bear and the due diligence they undertake,

r ecognizing that such parties are able to price factors such as limits on liability. ” 302 Technically, the Abry Partners decision does not limit liability for fraud, but rather specif ies the information on which a fraud claim can be based , which indirectly c onstrains liability for fraud. In substance, the party providing the anti

- reliance representation
covenants not to sue over any statements outside of the agreement. So viewed, Abry
Partners authorizes a covenant not to sue that addresses an intent ional tort. To date, Delaware decisions have declined to expand the Abry Partners principle beyond anti

reliance provisions , holding that other attempts to limit liability for fraud violate public policy. 303 That trend suggests that Abry Partners should not be used to validate other provisions that seek to eliminate tort liability for intentional harm. Recklessness is a different matter. As discussed previously, Section 102(b)(7) of the DGCL authorizes exculpation for monetary liability for the duty of care, and Delaware decisions interpreting Section 102(b)(7) hold that the reckless conduct falls within the

302 Id. at 1061.

303 See Fortis Advisors LLC v. Johnson & Johnson , 2021 WL 5893997, at *11 (Del. Ch. Dec. 13, 2021) (exclusive remedy provision); Online HealthNow, Inc. v. CIP OCL Invs., LLC , 2021 WL 3557857, at *1 6

– 18 (Del. Ch. Aug. 12, 2021) (provision limiting survival of representations); id. at *19

– 20 (non

- recourse provision); FdG Logistics LLC v. A&R Logistics H

l d gs . , Inc. , 131 A.3d 842, 860 (Del. Ch. 2016 ) (representation by seller that no extracontractual statements were made in lieu of agreement by buyer disclaiming reliance on extracontractual statements) , aff ’ d 148 A.3d 1171 (Del. 2016) ; Abry , 891 A.2d at 106 4 (damages cap).128

ambit of the duty of care. 304 Making recklessness subject to exculpation also tracks the scope of indemnifiable conduct under Section 145(a) and insurable conduct under Section 145 (g). Section 145(a) authorizes indemnification as long as the fiduciary acted in subjective good faith and reasonably believed that the decision was not opposed to the interests of the corporation. Section 145(g) authorizes a corporation to use a captive insurer to protect against fiduciary liability for any claim except (i) personal profit or other financial advantage to which such person was not legally entitled or (ii) deliberate criminal or deliberate fraudulent act of such person, or a knowing violation of law by such person

. 305
Both standards encompass recklessness

. A claim for breach of fiduciary duty is an equitable tort

. 306 To the extent the Covenant seeks to prevent the Funds from asserting a claim for an intentional breach of fiduciary duty, then the Covenant is invalid

— not as an impermissible form of fiduciary tailoring, but because of policy limitations on contracting.
O therwise, the Covenant bars challenges to the Drag

- Along Sale. Thus, if the defendants engaged in self

- interested transactions but believed in good faith that the

304 See Part II.D.2, supra . 305 See Part II.D.2.a.v, supra . 306 Hampshire Gp., Ltd. v. Kuttner , 2010 WL 2739995, at *54 (Del. Ch. July 12, 2010) (“ A breach of fiduciary duty is easy to conceive of as an equitable tort. ”); see also Restatement (Second) of Torts § 874 cmt. b (Am. L. Inst. 1979), Westlaw (database updated Mar. 2023) (“ A fiduciary who commits a breach of his duty as a fiduciary is guilty of tortious conduct

. . . . ”). See generally J. Travis Laster & Michelle D. Morris, Breaches of Fiduciary Duty and the Delaware Uniform Contribution Act , 11 D el. L. Rev. 71 (2010).129

transactions were not contrary to the best interests of the Company, then the Covenant forecl oses those claims. The Covenant also forecloses claims that the defendants engaged in the self

- interested transactions with reckless disregard for the best interests of the Company. As discussed in the Pleading Decision, the Sale Counts could support liab ility for a bad faith breach of duty

. 307 Damages for that c laim would result from an intentional tor t

. T he Covenant therefore cannot bar the Sale Counts in their entire ty

. III. CONCLUSION The Covenant is not facially invalid as a prohibited form of fiduciary tailoring. The Covenant operates permissibly within the space for fiduciary tailoring that Delaware corporate law provides, particularly in a stockholder

- level agreement that only addresses stockholder

- level rights. The Covenant is not unreasonable on th e facts of this case

. Sophisticated repeat players consented explicitly to a clear provision in a stockholder

- level agreement that applies only to a specific transaction. Nevertheless, the Covenant cannot relieve the defendants of tort liability for inten tional harm. The Sale Counts could support that form of liability . The Covenant therefore does not foreclose the Sale Counts, and the defendants ’ motion to dismiss those
counts based on the Covenant is denied.

307 2023 WL 2417271, at * 45.