Amy L. Simmerman, David J. Berger, and Ryan J. Greecher are Partners at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR memorandum by Ms. Simmerman, Mr. Berger, Mr. Greecher, James G. Griffin-Stanco, and Jason B. Schoenberg, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? (discussed on the Forum here) by John C. Coates, IV, Darius Palia, and Ge Wu; Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here) by John C. Coates, IV; The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo, and Guhan Subramanian; and Deals in the Time of Pandemic (discussed on the Forum here) by Guhan Subramanian and Caley Petrucci.
Vice Chancellor J. Travis Laster of the Delaware Court of Chancery recently issued a decision addressing whether a covenant not to sue set forth in a stockholders’ agreement is enforceable under Delaware law, with the result that a stockholder would be precluded from challenging a sale of the corporation. [1] Such covenants have become increasingly common among private companies, and the covenant in this case was based on a National Venture Capital Association form.
The court concluded that as a general matter, such covenants not to sue are enforceable under Delaware law, but that the circumstances in an individual case will matter and such covenants cannot protect boards of directors and other defendants from liability for intentionally harmful conduct. In this case, the court determined that because the underlying allegations could support claims for intentional misconduct by the board and a controlling stockholder, the covenant not to sue could not serve as a basis to dismiss the claims.
