Delaware Chancery Crafts Two-Step Test for Stockholder Anti-Suit Covenants
In NEA v. Rich, Vice Chancellor Laster set a specific-and-reasonable framework for enforcing NVCA-model anti-suit covenants while barring advance waivers for intentional fiduciary breaches.
In a significant ruling for the venture capital community, the Delaware Court of Chancery has established a framework for evaluating covenants not to sue for fiduciary duty breaches in stockholder agreements. In New Enterprise Associates 14, L.P. v. Rich, Vice Chancellor Laster held that such anti-suit provisions are facially valid but must satisfy a stringent two-part test to be enforceable: the covenant must be both specific in scope and reasonable in its application. This decision is particularly consequential as it interprets a provision from a National Venture Capital Association (NVCA) model agreement, which is widely used by startups and VC investors. The court affirmed that stockholders can tailor fiduciary duties by contract, but it also reinforced Delaware's public policy against the advance exculpation of intentional wrongdoing. Consequently, a covenant will not be enforced if it shields a fiduciary from liability for an intentional breach of duty. The ruling provides critical guidance for drafting these covenants and sets the pleading standards for stockholders seeking to challenge fiduciary conduct despite having signed such an agreement.