New Enter. Associates 14, LP v. Rich

Court of Chancery of the State of Delaware · 2023 · Corporations

295 A.3d 520 (Del. Ch. 2023)

Updated August 22, 2026

Corporationsfiduciary dutystockholder agreementscovenant not to sueprivate orderingdrag-along rightvoting agreementbreach of fiduciary duty

Facts

After a failed sale process and need for capital, Fugue completed a recapitalization led by George Rich, on terms requiring key stockholders, including the plaintiff funds, to sign a voting agreement. That agreement contained a drag-along right that applied only if a sale met eight specified criteria, and it included a covenant that signatories would not sue over such a sale, including for breach of fiduciary duty. Later, after Rich became a controlling stockholder and Rich-affiliated directors joined the board, the company completed a drag-along sale. The funds then sued, alleging the sale was unfair in part because it extinguished claims relating to allegedly self-dealing transactions that occurred in the lead-up to the sale.

Issue

Can sophisticated stockholders in a Delaware corporation validly covenant in a stockholder-level agreement not to sue over a specifically defined drag-along sale, including by waiving breach-of-fiduciary-duty claims? If so, does that covenant require dismissal at the pleading stage when the complaint supports an inference of intentional misconduct or bad faith?

Rule

A stockholder-level covenant not to sue over breach-of-fiduciary-duty claims is not facially invalid under Delaware law when it is narrowly tailored to a specific transaction with defined characteristics and operates on stockholder-level rights through a negotiated agreement. To be enforceable as applied, the provision must survive close scrutiny for reasonableness, with relevant factors including a written bargained-for contract, clarity and specificity, the stockholder's knowledge and sophistication, ability to foresee consequences, ability to reject the provision, counsel involvement, and consideration. But such a covenant cannot insulate defendants from tort liability for intentional wrongdoing or bad-faith fiduciary breaches, though it may bar lesser claims such as care-based or reckless claims.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

A Delaware software company in Austin raises emergency financing from a new investor group. As part of a written stockholders agreement, existing preferred holders agree that if the board and a supermajority of a newly issued series approve a sale meeting seven detailed conditions about consideration, escrow, and equal treatment, the signers will not sue over that sale for breach of fiduciary duty.

If one of the signers later argues the covenant is facially invalid solely because Delaware corporations cannot permit any pre-suit waiver of fiduciary-duty claims, how should a court most likely rule?

Explanation. The majority held that a stockholder-level covenant not to sue is not facially invalid when it is narrowly tailored to a specific transaction with defined characteristics and binds only signatories in their exercise of stockholder-level rights. The court rejected an absolutist rule that any pre-suit waiver involving fiduciary-duty claims is automatically void.