October 10, 2023
Chancery Court Clarifies Scope of Advanced Waiver of Right to Sue for Breach of Fiduciary Duty
In New Enterprise Associates 14, L.P. v. Rich, the Delaware Court of Chancery upheld a waiver of claims for breach of fiduciary duty by stockholders of a Delaware corporation. The plaintiffs, investment funds managed by venture capital firms, had invested in a private company called Fugue, Inc. Seeking liquidity, the plaintiffs agreed to a voting agreement that included a drag-along provision, which required all parties to sell their shares under certain conditions. The drag-along also included a covenant not to sue the defendants, including for breach of fiduciary duty. When the defendants gained control of Fugue’s board and agreed to a drag-along sale, the plaintiffs commenced an action for breach of fiduciary duty against the controlling stockholders and their affiliated directors. The court enforced the waiver, stating that it would enforce covenants not to sue if they are narrowly tailored and reasonable. The court held that the provision in this case was narrowly tailored and reasonable, given that it was made between sophisticated parties familiar with such provisions and that waivers of fiduciary duty are permitted in corporate charters.
This case highlights the uphill battle institutional investors face in invalidating a waiver of fiduciary duty in Delaware entities, including corporations. The court’s decision in Rich reaffirms that waivers of fiduciary duty are permitted and enforceable in limited partnerships, limited liability companies and corporations. The court emphasized Delaware’s emphasis on contractual freedom and the fact that the plaintiffs were sophisticated parties capable of negotiating the terms of the agreement. However, the court noted that different factors may lead to a different result, such as if the signatories were retail investors or if the agreement attempted to waive liability for intentional wrongdoing or bad faith. Overall, this case underscores the importance of carefully considering and negotiating the terms of fiduciary duty waivers in stockholders’ agreements and other corporate documents.
This case highlights the uphill battle institutional investors face in invalidating a waiver of fiduciary duty in Delaware entities, including corporations. The court’s decision in Rich reaffirms that waivers of fiduciary duty are permitted and enforceable in limited partnerships, limited liability companies and corporations. The court emphasized Delaware’s emphasis on contractual freedom and the fact that the plaintiffs were sophisticated parties capable of negotiating the terms of the agreement. However, the court noted that different factors may lead to a different result, such as if the signatories were retail investors or if the agreement attempted to waive liability for intentional wrongdoing or bad faith. Overall, this case underscores the importance of carefully considering and negotiating the terms of fiduciary duty waivers in stockholders’ agreements and other corporate documents.