Reed Smith Client Alerts

Recently, the Delaware Chancery Court upheld a waiver of fiduciary duty under a stockholders’ agreement where the plaintiffs were sophisticated and were not compelled to agree. The decision adds to the case law on fiduciary duty waiver under Delaware corporate law, with the court affirming the enforceability of fiduciary duty waivers under the state’s limited partnership and limited liability company acts.

Authors: Edward H. Klees Bradley Myrthil

Recently, the Delaware Court of Chancery upheld a waiver of fiduciary duty by stockholders of a Delaware corporation. There, in New Enterprise Associates 14 v. Rich, the court found that a fiduciary waiver in a stockholders’ agreement will be upheld if sophisticated stockholders make an informed and unforced decision to do so.

The Rich plaintiffs, a group of investment funds managed by venture capital firms, invested in a private company called Fugue, Inc. The funds were seeking liquidity and did not want to increase their funding but could not find a buyer. Fugue management told its investors that a group led by defendant Rich could make an equity investment on the condition that all existing preferred stock became common stock, that the Rich Group received new preferred stock, and that the funds signed a voting agreement. The voting agreement included a drag-along provision by which all parties agreed to sell their shares in a transaction satisfying a list of conditions set out in the voting agreement. The drag-along provision included a covenant by the plaintiffs not to sue the Rich Group over a drag-along sale, including for a breach of fiduciary duty covenant.

Later, after Rich gained control of the Fugue board, the company agreed to be sold and the defendants circulated notice of the drag along. The plaintiffs asked the defendants to confirm that they had no communications with the buyer before the Rich investment, and they demurred. The plaintiffs then filed suit for breach of fiduciary duty.

The defendants argued that the plaintiffs’ covenant not to sue foreclosed the plaintiffs from bringing any claims for breach of fiduciary duty. The plaintiffs argued that the provision containing the covenant not to sue was invalid and should not be enforced.