Current Month (March 2026)
Breach of Fiduciary Duty and Aiding and Abetting Claims Survive Motion to Dismiss in Delaware Due to Undisclosed Liquidity and Investment Banker Conflicts and Alleged Process Missteps
By Lisa R. Stark, Hirschler Fleischer
In a recent decision in In re EngageSmart, Inc., S’holders Litig., C.A., No. 2023-1093-JTL (Del. Ch. Feb. 27, 2026), the Delaware Court of Chancery largely declined to dismiss claims alleging that the directors and controlling stockholder (“General Atlantic”) of a publicly traded software company (“EngageSmart”) breached their fiduciary duties in connection with the approval of a recapitalization that cashed out public minority stockholders at an allegedly unfair price because of General Atlantic’s alleged desire for near-term liquidity for some of its equity in EngageSmart.
EngageSmart conditioned the consummation of the recapitalization transaction on the dual protections of a fully informed majority-of-the minority stockholder vote and a special committee under In re MFW S’holders Litig., 67 A.3d 496, 500 (Del. Ch. 2013), aff’d sub nom. Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), which, if properly implemented, would have resulted in the application of the business judgement standard of review despite the controller’s role in the transaction. However, the Court of Chancery found that the proxy statement disseminated by EngageSmart in connection with the stockholder vote on the recapitalization to be materially misleading, which precluded a pleading stage dismissal of the complaint under MFW. Specifically, the Court of Chancery found that the proxy statement disseminated by EngageSmart in connection with a stockholder vote on the recapitalization was materially deficient because it failed to disclose: (1) the role played by General Atlantic’s desire for liquidity in the transaction process, (2) the full nature and extent of concurrent conflicts of interest of the investment banking firms that advised EngageSmart and a special committee of its board, and (3) a post-closing cash dividend paid to General Atlantic as part of the recapitalization. With respect to the alleged omissions regarding the investment banking firm’s conflicts, the proxy statement disclosed the amount of fees that the firms had received from counterparties from investment banking services provided during the prior two years but failed to disclose the existence and nature of extensive concurrent engagements. Due to the deficiencies in the proxy statement, the Court of Chancery determined that (1) the stockholder vote on the recapitalization was not fully informed as required by MFW, (2) entire fairness was the operative standard of review, and (3) it could not dismiss the complaint as to most of the director defendants and General Atlantic.
The Court of Chancery also declined to dismiss claims that EngageSmart’s financial advisor aided and abetted the EngageSmart directors’ and General Atlantic’s breaches of fiduciary duty in connection with the sales process by allegedly narrowing the sales process to serve General Atlantic’s interest, tipping the buyer with pricing information that undermined the sales process, and actively excluding the special committee’s financial advisor from the sales process. The Court of Chancery deferred judgment on whether certain of plaintiff’s other aiding and abetting claims with respect to the defendants’ disclosures about the banker’s conflicts of interest survived a motion to dismiss under recent Delaware Supreme Court precedent that narrowed what qualifies as “substantial assistance” of a breach of fiduciary duty. This case comes on the heels of the recent Court of Chancery decision in Electric Last Mile Sols., Inc. S’holder Litig., C.A. No. 2022-0630-KSJM, 2026 WL 207195 (Del. Ch. Jan. 27, 2026), which declined to dismiss aiding and abetting claims for breach of fiduciary duty asserted against a financial advisor on similar facts and serves as cautionary tale for investment bankers and their counsel.
Delaware Court of Chancery Refuses to Blue Pencil Unreasonable Restrictive Covenants
By Michael Lubben and Tanya Pahwa, FBT Gibbons
In a recent decision, BluSky Restoration Contractors, LLC v. Robbins and Popwell, delivered on March 4, 2026, the Delaware Court of Chancery declined to blue pencil restrictive covenants that it found to be geographically, temporally, and substantively overbroad. Blue penciling is a doctrine allowing courts to sever or narrow unenforceable contract terms while enforcing the balance of the terms or agreement. The Court reasoned that judicial reformation in such circumstances would undermine the goal of requiring parties to draft restrictive covenants specifically tailored to their circumstances and legitimate business interests and would incentivize future parties to compose restrictions without appropriate accuracy and precision.
BluSky Restoration Contractors, LLC (“BluSky”), a nationwide restoration firm, acquired a Tennessee‑based restoration business from its co‑founders, John David Robbins and Christopher J. Popwell (the “Defendants”). In connection with the transaction, the parties executed an equity purchase agreement and contemporaneous employment and incentive unit award agreements containing noncompetition, nonsolicitation, and confidentiality covenants. The Defendants resigned from BluSky almost five years after the acquisition and started a similar business in Tennessee.
The Court restated its previously established principles that enforceable restrictive covenants must satisfy three requirements: (a) they have reasonable temporal and geographic scope, (b) they advance the legitimate economic interests of the party seeking enforcement, and (c) they survive a balancing of the equities.
Applying this framework, the Court held that a five‑year, worldwide noncompetition covenant in the equity purchase agreement exceeded the legitimate business interests of the acquired business, which operated regionally, and was therefore unreasonable and inequitable. The Court declined to credit contractual acknowledgments of reasonableness, reaffirming that boilerplate provisions do not foreclose judicial scrutiny.
A five‑year, worldwide nonsolicitation covenant covering customers and employees was likewise unenforceable because it lacked geographic limitations, prohibited even attempted solicitation, and applied broadly to customers and employees of BluSky’s affiliates. The Court emphasized that, in a sale‑of‑business context, the buyer’s legitimate interests are defined by the acquired company’s competitive reach, not the purchase price.
The Court reached the same conclusions with respect to the two‑year, nationwide noncompetition and nonsolicitation covenants in the Defendants’ employment and incentive unit award agreements. Although shorter in duration, those covenants exceeded the Tennessee‑based scope of the acquired business. In addition, the nonsolicitation covenant contained similar overbroad modifiers as those cited above. The balance of the equities also favored the Defendants because their compensation reflected regional executive roles and did not justify nationwide restraints.
Finally, the Court held that the confidentiality provisions were overbroad and unenforceable because they lacked temporal limits, applied to all proprietary information without appropriate narrowing, and extended to broadly defined affiliates and a wide range of third‑party relationships.
The decision reinforces the Delaware Court of Chancery’s unwillingness to rescue overbroad restrictive covenants through blue penciling and underscores the need for acquirors to narrowly tailor such provisions to their legitimate business interests or risk wholesale invalidation.
