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 In Cornerstone Brands, Inc. v. O’Steen, read opinion here , the Chancellor discussed, among other things,  the topic of  forum selection clauses, which are routinely upheld in Delaware. The most noteworthy aspect of this opinion, which I predict will be an often cited opinion for this reason, held that a claim for attorneys’ fees could proceed based on the breach of a forum selection clause, and an award of such damages would not contravene the American rule (which is that everyone pays their own attorneys’ fees, despite prevailing).  Thus, a motion to dismiss that claim was denied. The Chancery Court cited for support of this proposition the Delaware Supreme Court decision in El Paso Natural Gas Co. v. TransAmerican Natural Gas Corp., 669 A.2d 36, 40 (Del. 1995).  The Court also cited other decisions from other jurisdictions for support of the view that attorneys’ fees for breach of a forum selection clause may be awarded–and that is not deemed to be in contravention of the American rule.  This letter opinion also discussed the elements of promissory estoppel, as well as equitable estoppel. 

  In addition, especially notable about this case is a footnote indicating that an oral ruling in this matter was made from the bench on January 23, 2006, in which the Chancellor denied a motion to dismiss based on the following reasoning: the defendant here was a third-party beneficiary to the merger agreement in dispute, and therefore would be deemed to have consented to the forum selection clause in that agreement being litigated in the case.

 Also of  importance was the Court’s discussion of subject matter jurisdiction with reference to  DGCL  Section 111(a)(2) (granting jurisdiction for interpretation of the validity of any documents relating to the sale or creation of stock or options relating thereto); as well as 10 Del .C. Section 341 (granting the Chancery Court jurisdiction to hear and determine all matters and causes in equity);  and 10 Del. C. Section 342 (the Court of Chancery shall not have jurisdiction to determine any matter wherein sufficient remedy may be had by common law or statute before any other Court or jurisdiction of this state). 

 The Court noted three basic ways in which it can have subject matter jurisdiction: (1) One or more of the claims is equitable in character; (2) The plaintiff requests relief that is equitable in nature; or (3) If subject matter jurisdiction is conferred by statute.

UPDATE: Dan Tin, Esq. just brought to my attention the following article he wrote about forum selection clauses:   Tan, Daniel S., "Damages for Breach of Forum Selection Clauses, Principled Remedies, and Control of International Litigation" . Texas International Law Journal, Vol. 40, p. 623, 2005.  Available at SSRN: http://ssrn.com/abstract=628581

The Supreme Court reversed the Chancery Court and determined that despite the parties and the witnesses being based in Florida, and the application of Florida law, the Cryo-Maid factors did not justify dismissal of a claim based on forum non conveniens. The case of Berger v. Intelident Solutions, Inc., download file, dealt with minority claims relating to a cash-out merger. The trial court’s decision was summarized previously on my blog here.

In Berger v.Intelident Solutions, Inc., download file, the court determined this to be one of those “rare cases” where it would be a hardship for the defendant to litigate in Delaware, and granted a motion to dismiss on forum non conveniens grounds. The witnesses were said to be mostly from Florida and the case was alleged to involve novel issues of Florida law. The complaint was filed by a minority shareholder in a freeze-out merger.

Two recent Chancery Court decisions addressed the issues of forum non conveniens and determination of proper directors pursuant to Section 225 of the DGCL. As explained in prior posts, these will be short references to the main issues in the cases.
In Kurtin v. KRE, LLC, et al., Vice Chancellor Parsons stayed a Delaware case in favor of a first-filed suit in California involving similar parties and issues.
In Nevins v. Bryan, et al., the court engaged in an extensive analysis to determine that a challenge to the membership of the board of a non-profit corporation was not successful, based on the detailed factual analysis engaged in. Both decisions are available at the court’s website.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 40 years, prepared this article.

The Delaware Court of Chancery recently barred Credit Glory Inc.‘s president from bringing breach of fiduciary duty claims against an ex-officer/director of their credit aid company based on the same ‘” abhorrent” sexual harassment conduct that caused his termination and $1.8 million in judgments against him and the company in New York courts. Brola v. Lundgren, C.A. No. 2024-1108-LWW (Del. Ch.  Dec. 1, 2025). 

The court dismissed plaintiff Alex Brola’s derivative suit, finding it seeks to extract a second recovery “this time under the expansive theory of fiduciary duty”. Brola argued that ex-officer/director Christopher Lundgren’s actions were selfish, illegal, and thus a breach of the duty of loyalty. 

But “Delaware law does not reach so far. The defendant’s misconduct was interpersonal, not a matter of corporate internal affairs,” the vice chancellor ruled.  “After the New York court provided a remedy through the employment laws, this court cannot—and should not—supply a second one.”

Corporate law specialists will want to examine the court’s differentiation between the duty of officers and supervisors, the reasoning for its conclusion that plaintiff Brola cannot rely on Court of Chancery Rules 12(b)(2), 12(b)(6), and 23.1.12, and why  the complaint fails to plead demand futility or damages.

Background

According to the record, Lundgren misused his positions as director, Vice President and Secretary of a Delaware-chartered credit repair assistance company based in New York to victimize two female employees so intensely that they resigned and successfully brought actions before the Equal Employment Opportunity Commission and lawsuits in New York state court against both him and Credit Glory.

CGI founder Brola then brought a derivative action in Delaware to recover the economic damage that Lundgren’s allegedly disloyal conduct caused to the closely held company. Lundgren moved to dismiss on procedural and jurisdictional grounds.  The court found Brola failed to carry his burden on both requirements.

Jurisdiction’s two bedrock requirements:

  • statutory basis for service of process.

Because Brola claims that Lundgren breached the duty of loyalty he owed to Credit Glory as an “officer and director,” the second clause of Section 3114(a) is satisfied, the court said. 

  •  requisite ‘minimum contacts’ with the forum:

Whether the alleged abuse of power states a claim for breach of fiduciary duty, rather than a personal issue, is a merits question, like the issue of whether  Lundgren’s alleged use of his corporate seat to carry out the challenged acts satisfies due process, the court found.

Demand futility

The vice chancellor ruled that, “The core issue is whether corporate law can be broadened to encompass interpersonal workplace disputes. It cannot.” That’s because, “Delaware law governs internal affairs—the discretionary management of business assets, oversight of enterprise-level risks, and fulfillment of the fiduciary promise,” she wrote.

She explained that fiduciary duty, “guards against self-dealing, conflicted transactions,” and bad faith conduct comprises both “fiduciary conduct motivated by an actual intent to do harm” and “intentional dereliction of duty.”  She said that doctrine is “exacting, but narrow.”

This ruling distinguished the recent Chancery decision in McDonald’s, highlighted on these pages. That opinion found, under different facts, a breach of fiduciary duty related to a more pervasive sexual harassment set of circumstances–but one cannot ignore the obvious tension between the two cases.

In the instant decision, the court held that Brola distorts the meaning of bad faith beyond recognition, wrongly seeking to transform it into a “general morality code” that includes every instance when “an officer engages in unlawful harassment,” the court warned, concluding that Lundgren’s deplorable actions were taken as a supervisor—not a corporate officer.

“The legal system worked as intended,” the vice chancellor concluded.  “Equity must not sanction collateral litigation that exposes victims to unwanted scrutiny in the service of a corporate recovery and attorneys’ fees.“

Much commentary has been published about this important decision in the short time since it was issued. See, e.g., Professor Bainbridge’s extensive insights at this link.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 40 years, prepared this article.

 The Delaware Court of Chancery recently dismissed all claims against Elon Musk and his X Corp. acquisition entities brought by a Twitter Inc. investor who claimed to have lost $1.88 million because of Musk’s alleged on-and-off commitment to buy the social media platform in Khalid v. Musk, et. al., C.A. No. 2024-0443-KSJM (Del. Ch.(July 18, 2025).

Chancellor Kathaleen McCormick found insufficient support for a mix of a dozen tort, fiduciary, and contractual charges and a claim that Musk agreed to be subject to personal jurisdiction in Delaware when he chose to do the deal in Delaware.  “Despite the plaintiff’s many interesting arguments, compelling narrative, and clear economic loss, the plaintiff’s claims fail for a host of legal reasons,” the Court explained.

The opinion is worthwhile reading for its fresh look at the requirements to prove claims commonly made by disgruntled investors who bought into volatile merger deals in progress.

Background

According to the Court’s decision, in April 2022, Musk agreed to acquire Twitter for $54.20 a share and merge it into his X Holdings II, Inc. as part of parent X Holdings I, Inc. and the next day retail investor ATM Shafiqul Khalid acquired 149,500 shares of Twitter at an average price of $49.46, for a total purchase of $7,393,555.70.  But in the next month Musk appeared to sour on the deal and filed a notice of termination, prompting Khalid to sell all his shares at an average price of $36.90, for $5,517,113.14 –a loss of $1,876,442.56.

After Twitter sued Musk in Chancery for specific performance in July, the parties reached an agreement and voluntarily dismissed the action two months later–the deal was on again.  After unsuccessful attempts to intervene in that suit and another shareholder action, Khalid filed his complaint in April 2024, and the next month defendants moved to dismiss on a variety of grounds. 

Defendants were successful on all counts

Personal jurisdiction

Under Chancery Rule 12(b)(2), the plaintiff bears the burden of showing a basis for the court’s exercise of jurisdiction over the defendant.  “If, as here, no evidentiary hearing has been held, plaintiffs need only make a prima facia showing of personal jurisdiction, and ‘the record is construed in the light most favorable to the plaintiff,” the Chancellor said.

But even so, Delaware courts use a two-step analysis in which they first “determine that service of process is authorized by statute,” and then, the defendant must have certain minimum contacts with Delaware such that the exercise of personal jurisdiction “does not offend traditional notions of fair play and substantial justice.”

Plaintiff claimed personal jurisdiction over Musk via Delaware’s Long Arm Statute under 10 Del. C. § 3104(c)(1) because he committed to a forum selection clause to settle disputes that might arise in the merger negotiations. 

But the Court concluded that at most, Musk was only a limited third party to the merger contract and the plaintiff failed to plead that: “(i) the contracting parties . . . intended that the third party beneficiary benefit from the contract, (ii) the benefit [was] intended as a gift or in satisfaction of a pre-existing obligation to that person, and (iii) the intent to benefit the third party [was] a material part of the parties’ purpose in entering into the contract.”

The Court concluded that Musk was not subject to jurisdiction regarding plaintiff’s alleged stock losses because while all losses and damages suffered as a result of the failure of the merger transaction were covered, the transaction did not fail; it closed on the agreed terms.

Breach of Contract and Implied Covenant

These charges were dismissed because the Court determined that Plaintiff had no standing to assert them.

Promissory Estoppel 

Plaintiff claimed that Defendants (through Musk) made a promise to buy Twitter and later broke that promise by seeking to terminate the Merger, but the court said under Delaware law, “[p]romissory estoppel does not apply . . . where a fully integrated, enforceable contract governs the promise at issue.”

Breach of Fiduciary Duties 

Plaintiff alleged that Defendants drove Twitter’s stock price down so that Musk could renegotiate and mark down the merger consideration, but the Court ruled that “setting aside the issue of whether Defendants owed any fiduciary duties, Plaintiff forfeited his right to claim breach of fiduciary duties when he sold off his shares. “

Unjust Enrichment 

Plaintiff claimed that Defendants created a valuable option to negotiate a $13 billion discount by tweeting about Twitter users and were thereby unjustly enriched.  The court dismissed because Delaware law requires a direct relationship between the defendant’s alleged enrichment and the plaintiff’s alleged harm “to ensure that a court accurately can reverse the unjust retention of a benefit to the loss of another.”

Negligent Misrepresentation

The Court dismissed this charge, finding that ‘to state a claim for equitable fraud or negligent misrepresentation, a plaintiff must allege either “a special relationship between the parties over which equity takes jurisdiction (like a fiduciary relationship)” or “justification for a remedy that only equity can afford.”  However, the court added, “Plaintiff does neither here. He did not enjoy a fiduciary or other special relationship with Defendants. And he has not identified any remedy that only equity can afford.”  For similar reasons the court dismissed claims of common law fraud, consumer fraud and negligent performance.

Resuscitation unlikely

Finally, the Chancellor denied plaintiff’s motion for leave to amend his pleading, finding that, “This Court may relax Court of Chancery Rule 15(aaa) in the exceptional case, but this is not an exceptional case. Plus, given the legal defects in Plaintiff’s claims, it is unclear what Plaintiff might allege to resuscitate his claim.” 

A recent Delaware Court of Chancery transcript ruling provides guidance on best practices for how to craft answers to a complaint, in the matter styled: 26 Capital Acquisition Corp. v. Tiger Resort Asia Ltd., C.A. No. 2023-0128-JTL, Transcript (Del. Ch. Feb. 9, 2023). (N.B. In Delaware, transcript rulings can be cited in briefs.)

The court disapproved of the common tactic of denying most allegations in the complaint with a lack of careful attention to detail.  [The Delaware rules require that the allegations of the complaint be restated before the actual response.]  The applicable rule also requires an answer that fairly meets the allegations of the complaint.  The court expressed displeasure about “rampant denials.”

The court did not approve of those who may “have some epistemic doubt about the truth of an allegation that crosses multiple states of the universe . . . notwithstanding their confidence level about what the real state of the world is.”  Transcript at 46.

My additional comment is that an answer is not the correct forum for nuanced or pedantic ruminations about ontology or one’s own Weltanschauung.

The court discouraged denials of things that should be “really difficult to dispute” and instead expected parties to prepare answers that “fairly meet the allegations of the complaint . . . [in a way that] will help frame the issues in dispute.” The court further explained that denials should not be used “. . . even if they didn’t say it precisely like you would have if you had made the allegation.”  Id.

Supplement: Delaware’s favorite corporate law scholar (in my view), Prof. Bainbridge, kindly linked to this post on his eponymous blog.

Rolando Diaz of the Lewis Brisbois Delaware office prepared this post.

          The Court of Chancery refused to enforce a restrictive covenant in Sunder Energy, LLC v. Jackson, 2023 Del. Ch. LEXIS 580 (Del. Ch. Nov. 22, 2023). Chancery subsequently approved, with thorough reasoning, an interlocutory appeal to the Supreme Court–which makes its own determination whether to accept the interlocutory appeal.

BRIEF FACTUAL BACKGROUND

          Sunder Energy, LLC (“Sunder”), a Delaware LLC headquartered in the State of Utah, a purveyor of residential solar power systems, had an exclusive dealer agreement with Freedom Forever LLC (“Freedom”), one of the nation’s largest installers. In the summer of 2023, Freedom encouraged Tyler Jackson, the head of sales for Sunder, who lived and worked in the State of Texas, to join Solar Pros LLC (“Solar Pros”), another solar power system dealer that referred installations to Freedom.  This led to a mass exodus of Sunder’s workforce. Nine of the twelve regional managers that reported to Jackson, as well as over three hundred sales personnel, joined Solar Pros.  On September 25, 2023, Solar Pros announced that Jackson had joined as its new President.

          Sunder asserted that Jackson—as a holder of Incentive Units—was bound by certain restrictive covenants (the “Covenants”) provided for in Sunder’s 2019 and 2021 LLC operating agreements (the “OA”) that applied to any Incentive Unit holder (the “Holder”).  The co-founders formed Sunder by filing a certificate of formation with the Delaware Secretary of State but did not execute a written operating agreement. 

In the fall of 2019, the two co-founders that together owned 60% of the membership interest of Sunder engaged a law firm to draft an LLC agreement that dramatically changed the ownership structure of the LLC; it imposed the Covenants, emasculated the minority members rights as owners, and reduced them to purely economic beneficiaries with very little rights. Communications from the majority co-founders to the minority rights holders did not explain that the two co-founders received common units with full rights while the minority holders received incentive units with little to no ownership rights. 

In a concerted effort to obfuscate reality, the majority co-founders referred to the Holders as “partners,” implying that there was some semblance of equal footing aside from the difference in percentage of interests. For the subsequent adoption of the 2021 operating agreement, the majority co-founders did not even bother to circulate a copy of the new operating agreement.  Instead they only circulated the signature page and indicated to the Holders that there were no substantive changes to the operating agreement and that the only change was the addition of a member.  This was not true.  The geographical scope of the restrictive covenant was also expanded.

          In addition to broad restriction on the use of Sunder’s confidential information, the Covenants in the OA prohibited a Holder from: (i) engaging in any competitive activity (the “Non-Compete”); (ii) soliciting Sunder’s employees and independent contractors (the “Worker Non-Solicit”); (iii) soliciting, selling to, accepting any business from, or engaging in any business relationship with any of Sunder’s customers; and (iv) inducing, influencing, advising, or encouraging any Sunder stakeholder to terminate its relationship with Sunder. Furthermore, each Covenant bound not only the Holder, but also Holder’s affiliates, defined in the OA as a Holder’s spouse, parents, siblings, and descendants, both natural and adopted. The Covenants applied while a person held incentive units and for two years thereafter.  However, a Holder had no right to transfer or divest themselves of the Incentive Units. In contrast, Sunder had the option, but not the obligation, to repurchase the Incentive Units for zero dollars upon either Sunder’s termination of Holder’s employment or if the Holder left the company without good reason.

          On September 29, 2023, Sunder terminated the dealer-installation agreement with Freedom and filed an arbitration to enforce their rights against Freedom. Sunder also filed an action in the Court of Chancery against Jackson and its competitors. Sunder sought a preliminary injunction enjoining Jackson and any party acting in concert with Jackson from taking any action in breach of the Covenants. The Court denied the preliminary injunction because Sunder could not establish a reasonable likelihood of success on the merits.  The Court found (i) the restrictive covenants unenforceable under general principles of law and (ii) the competition and solicitation restrictive covenants unreasonable in their scope and effect.

KEY ANALYSIS

          First, the Court was faced with determining the Covenants’ governing law. The terms of the Covenants appeared in the OA, which governs the internal affairs of a Delaware LLC.  The OA expressly provided that Delaware law governed its terms.  Thus, a contractarian basis for the application of Delaware law existed. Under normal circumstances, the combination of the internal affairs doctrine and contract principles would require the application of Delaware law. However, for the Covenants, the drafters were not attempting to govern the internal affairs of a Delaware LLC.  Instead, the drafters were attempting to govern an employment relationship.  The Court opined:

Delaware follows the Restatement (Second) of Conflict of Laws, and Delaware courts consequently will not enforce choice of law provisions when doing so would circumvent the public policy of another state that has a greater interest in the subject matter. Consequently, when a different state’s law would govern in the absence of a choice of law provision, and if that state has established legal rules reflecting a different policy toward restrictive covenants, than Delaware’s then this court will defer to that state’s laws notwithstanding the presence of a Delaware choice of law provision.

Thus, either Utah, where Sunder is headquartered, or Texas, where Jackson worked and resided would apply in the absence of a choice of a law provision.  Under the Court’s analysis, both Texas and Utah approach the enforceability of restrictive covenants only slightly differently than Delaware. Under its conflict of laws analysis, due to the low degree of divergence between laws of the relevant forums, the Court applied Delaware law, finding that the conflict between Delaware and Utah law was a false conflict.

          Second, due to the circumstances for ratification of Sunder’s 2019 and 2021 LLC operating agreements, the Court determined that Sunder’s purported majority co-founders breached their fiduciary duty by failing to fully disclose all material information and making misleading partial disclosures to the minority.  The 2019 agreement materially and adversely impacted the rights of Sunder’s minority members; legal counsel only represented Sunder and the majority co-founders, but the co-founders made it seem as if counsel represented everyone. For the 2021 agreement, the co-founders told the minority members that the 2021 agreement contained no material changes and did not even bother to circulate a copy of the 2021 agreement to the minority members. Thus, the Court determined that due to the co-founders’ breach of fiduciary duties, the amended operating agreements themselves were invalid, and consequently, so were the restrictive covenants therein.

          Assuming, however, for the “sake of argument” that the amended LLC agreements were valid, the Court addressed the enforceability of two of the Covenants, namely, the Non-Compete and Worker Non-Solicit provisions. The Court found the Non-Compete provision extremely overbroad. The prohibited business activity covered a wide swath of the “door to door sales industry, without regard to whether Sunder markets or sells similar products.” The restriction on a Holder’s affiliates (as defined in the OA) was inane; it was not written in a manner that simply thwarts a straw man conferring the benefits to a Holder.  But, as written, a Holder’s “daughter cannot go door to door selling girl scout cookies.” Absurdly, the Covenants thus purported to bind a Holder’s wife and children. The geographic scope of the Non-Compete left only Alaska, Montana, North Dakota, and South Dakota available for a Holder as territory not restricted by the Covenants. Perhaps the most appalling factor of the Non-Compete was that since a Holder had no right to divest himself of the Incentive Units under the OA, the temporal component could continue in perpetuity. Similarly, the Court found the Worker Non-Solicit overbroad and unreasonable. It also applied to the same set of affiliates and for the same potentially “forever” time period. It extended not only to any current Sunder employee or independent contractor, but also applied to “any person employed in the past by Sunder for any period of time.” Individually, each overbroad provision was unreasonable.  And read together, the Court deemed the Covenants oppressive and refused to enforce them.

PRACTICAL TAKEAWAYS

          Delaware courts will not apply Delaware law under a theory of contract law if another state has a greater public policy interest in an issue when, absent a choice of law provision, another forum’s laws would apply. Circumstances may also dictate abandonment of the internal affairs doctrine when drafters embed employment provisions that have nothing to do with the governance of the entity into a governing agreement. Additionally, Delaware courts apply both general principles of law and a holistic analysis of restrictive covenants to determine reasonableness. This analysis can result in Delaware courts refusing to enforce restrictive covenants.

The Delaware Court of Chancery recently determined that regardless of the absence of a formal title or role, one can be found to be acting as a de facto manager of an LLC, and therefore, subject to personal jurisdiction of the court, as well as being bound by common law fiduciary duties, pursuant to Section 18-109(a) of the Delaware LLC Act.  See In re P3 Health Group Holdings, LLC, consol. C.A. No. 2021-0518-JTL (Del. Ch. Oct. 26, 2022).

Highlights

The court’s analysis, with application of supporting caselaw on pages 23 and 24, includes many basic principles of widespread applicability such as the following:

  • “It is the very nature of equity to look beyond form to the substance of an arrangement.”
  • There is no requirement that an acting manager have an official title or role with an LLC to be treated as an acting manager for purposes of service of process, or as a de facto manager for purposes of the merits.

Once a de facto manager status is determined, a due process analysis also must be performed.  In that regard, the court explained that:

  • “Delaware has a strong interest in providing a forum for disputes relating to the ability of managers of an LLC formed under its law to properly discharge their respective managerial functions.”

The court further reasoned that: 

  • “Due process is satisfied as long as (i) the allegations against the defendant-manager focus centrally on the defendant’s rights, duties an obligations as a manager of a Delaware LLC, and (ii) the resolution of the matter will be inextricably bound up in Delaware law.” 

Slip op. at 25.