A wrongful death lawsuit, Raine v. OpenAI, has put a once-obscure governance document at the center of artificial intelligence litigation strategy. System cards, the structured disclosures AI developers publish to describe how their systems perform, are now being used by both plaintiffs and defendants to establish what a company knew, when it knew it, and whether its safeguards were adequate. For lawyers advising companies that build or deploy AI tools, understanding how these documents create legal exposure is key in a thoughtful risk mitigation strategy.

The risks are similar, but not exactly the same, across AI developers, companies that build tools on AI platforms, and companies that use AI tools. Take this for an example: The system card for OpenAI’s GPT-5.5 model, released in April 2026, reports lower scores than the immediately preceding model for not producing disallowed outputs when the input includes an image across all four categories evaluated—hate, extremism, self-harm, and erotic harms—though OpenAI describes the differences as minor and not statistically significant. It could mean, however, that GPT-5.5 was worse at identifying content in those categories. If a deployer of AI that developed a companion app used this new ChatGPT model, there might be a valid argument that the deployer should have known the selected model was not appropriate for this use case because of the information in the system card.

System cards function primarily as evidence rather than as an independent cause of action. They can nonetheless give rise to liability where the disclosure itself is false or misleading because AI capability representations are subject to Section 5 of the Federal Trade Commission Act and, in California, to civil penalties under the Transparency in Frontier Artificial Intelligence Act enacted in 2025.

Why Companies That Integrate AI into Their Products Should Care About System Cards

System cards are published by AI providers and describe how a deployed AI system performs in real-world conditions, including intended use cases, known limitations, testing methodology, and risk mitigation measures. The term is sometimes contrasted with model cards, which address underlying models rather than deployed systems, but developers use the labels inconsistently, and a single document often blends both. Counsel should read the methodology closely rather than assume a card describes production behavior, since results are frequently generated offline and may capture only the model’s own conduct without accounting for other layers of the safety stack.

Companies that integrate third-party AI systems into their products may also face claims that they should have known about risks disclosed in a provider’s card. If those materials identify known limitations, foreseeable misuse, or safety concerns, a downstream company may be expected to account for those risks in its own product design, user disclosures, contractual controls, and usage restrictions.

System Cards in Litigation: Raine v. OpenAI

Raine v. OpenAI, No. CGC-25-628528 (Cal. Super. filed Aug. 26, 2025) arose from the suicide of a sixteen-year-old who had used ChatGPT extensively in the months before his death. His parents allege that OpenAI’s system was defective, that the risks were foreseeable, and that the company failed to implement safety measures to reduce the foreseeable harms. A subsequent amended complaint added the allegation that OpenAI deliberately removed a “suicide guardrail” from its platform, framing the claim not just as a failure to warn, but as a conscious choice to deprioritize safety. As of this writing, the case remains in pretrial proceedings.

Plaintiffs rely on OpenAI’s own system documentation to argue the company had actual knowledge of the risk. OpenAI relies on the same materials to show it conducted structured testing and implemented safeguards. Both sides treat system cards as probative of the company’s knowledge, the foreseeability of harms, and the adequacy of the company’s response. However, the question is not whether adequate disclosures were made, but whether the disclosures aligned with what the system actually did.

The FTC, SEC, and California Now Treat AI Disclosures as Enforceable Representations

The FTC has made clear, through staff guidance and enforcement, that AI capability claims are subject to the same deception standards as any other product representation.

The Securities and Exchange Commission has taken the same posture for public companies. Its Division of Examinations, in priorities released in November 2025, said it will assess whether registered companies’ AI-related disclosures, supervisory frameworks, and controls align with actual practices. Those priorities reach investment advisers, broker-dealers, and investment companies, among others, rather than issuers generally. For issuers, the analogous exposure runs through the federal securities antifraud provisions, principally Section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q(a)) and Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) and Rule 10b-5 (17 C.F.R. § 240.10b-5), where “AI washing” has already drawn enforcement attention.

California codified the same principle with penalties. The Transparency in Frontier Artificial Intelligence Act, effective January 1, 2026, requires frontier AI developers to publish safety frameworks, disclose catastrophic risk assessments, and report critical safety incidents within fifteen days to state regulators. Civil penalties of up to $1 million per violation, enforced by the California attorney general, attach to enumerated violations.

Practical Risks for Companies

As system cards are used in litigation and enforcement, the risks they create and the actions required to manage those risks are closely related.

• System card statements can function as admissions: Descriptions of known limitations or failure modes are often drafted to demonstrate responsible governance, but in litigation, those same statements become evidence that the company had actual knowledge of a specific risk before harm occurred. Every disclosure of a weakness should be accompanied by internal documentation showing how that weakness was evaluated and what was done about it.
• A documented risk with no documented response is a failure-to-warn claim waiting to be filed: If a system card identifies a limitation but the company does not translate that acknowledgment into user-facing warnings, usage restrictions, or design changes, plaintiffs will argue the company knew of the hazard and chose not to address it. The Raine amended complaint makes exactly this argument regarding the removed guardrail. A documented risk with no documented response is a failure-to-warn claim waiting to be filed.
• Outdated documentation creates independent exposure: AI systems change faster than the documents that describe them. A system card that no longer reflects current system behavior, particularly one that omits the removal of a previously disclosed safety feature, suggests the company stopped paying attention to its own disclosures. Companies should treat system card updates as a compliance obligation.
• Inconsistency between internal testing and external statements is discoverable: System cards will be reviewed alongside internal evaluations, safety logs, and communications. Where public summaries diverge from what engineers and safety teams actually found, that gap will be central to both litigation and regulatory inquiry. Internal records should be able to support every material statement in any external disclosure.

Final Takeaways

System cards are no longer just technical transparency documents; they are becoming evidence of what companies knew about AI risks and how they responded. Companies that develop or deploy AI tools should treat these disclosures as legal and compliance documents, ensuring that public statements align with internal testing, actual system behavior, and documented mitigation steps. The greatest exposure may arise not from identifying risks, but from failing to act on them, update disclosures, or explain why a particular safeguard was sufficient. As litigation and regulatory scrutiny increase, system cards should be reviewed with the same care as other material representations about product safety, performance, and risk.

Editor

Contributors

§ 1. Introduction

The term “business divorce” includes disputes that cause business partners/investors to end their partnership, situations that require owners to separate, or circumstances where a business partner/investor wishes to change the composition of management. This chapter provides summaries of developments related to such business divorce matters that arose from October 1, 2024, to September 30, 2025, from fourteen states.

Contributors to this chapter used their best judgment in selecting business divorce cases to summarize. We then organized the summaries, first, by subject matter, then by jurisdiction. This chapter, however, is not meant to be comprehensive.

The reader should be mindful of how any case in this chapter is cited. Some jurisdictions prohibit courts and parties from citing or relying on opinions not certified for publication. To the extent unpublished cases are summarized, the reader should always consult local rules and authority to ensure the unpublished cases can serve as relevant and permissible precedent. The reader should also be mindful that this chapter provides a “snapshot” of developments within a single year. Any development in a particular year covered by this chapter may be altered by legislation or cases in subsequent years.

We hope this chapter assists the reader in understanding recent developments in business divorces.

§ 2. Access to Books and Records

§ 2.1. Arizona

Svec v. Davis, et al., 2025 WL 2062694 (D. Ariz. July 23, 2025). This case underscored a common problem in business divorce cases that occurs when the parties form a business venture without adequate professional documentation. Here, the parties met at a pinball show and discussed forming a partnership to design, source and sell pinball products under Davis’s existing brand and company, XPin and 21 Electronics, LLC, respectively. Svec and Davis signed a “notice to serve as a letter of intent” (“LOI”) stating that for $30,000 Svec would acquire a 50% ownership interest in 21 Electronics but also contemplated the preparation of additional partnership agreements. Svec paid Davis $30,000 and the parties operated a business together for two years, but then the relationship deteriorated. The distributions to Svec decreased despite an increase in profits and, despite repeated requests, Svec was denied access to the bank accounts. Svec sued Davis under a variety of legal theories largely predicated upon Svec becoming a 50% owner of 21 Electronics via the $30,000 payment. In this context, the Court decided Svec’s motion for summary judgment on two of his causes of action: (1) the issue of his ownership of 21 Electronics under a breach of contract theory; and (2) his claim for accounting.

The primary evidence consisted of the LOI as well as a series of emails leading up to its execution. The LOI provided that it would serve as a “letter of intent” concerning the sale of “50% Member ownership of 21 Electronics” including all “inventory, assets, fixtures, intellectual property and equipment currently owned by Brett Davis, valued at $60,000, for the development of XPin-related products, for the sum total amount of $30,000” and specified that at the conclusion of the sale transaction each party would be a 50% “Member/Owner” of 21 Electronics. The LOI concluded by saying “[t]hese changes will be effective as of the date of the financial transaction on August 13, 2020 following which additional partnership agreements will be constructed and put into place.” The LOI did not say it was nonbinding or unenforceable absent the execution of subsequent documentation. Svec argued that his payment of $30,000 pursuant to the LOI was sufficient to convey to him a 50% ownership interest in 21 Electronics and that, at least for a time, Davis referred to him as a “50% partner” and granted Svec access to certain information for purposes of monitoring and assisting with product distribution and marketing. Davis argued that the LOI contemplated additional partnership agreements which were never created and that articles were never filed with the State of Arizona formalizing the partnership.

Applying Arizona’s contract interpretation standards to the dispute the Court attempted to determine the intent of the parties by looking first to the plain meaning of the words in the contract. Of importance was the principle of Arizona law that “the mere fact that an agreement contemplates the execution of another, related agreement in the future does not render the initial agreement unenforceable.” (citing T.D. Dennis Builder, Inc. v. Goff, 418 P.2d 367, 370 (Ariz. 1966)). Secondarily, the parol evidence rule in Arizona does not require contractual ambiguity but, rather, permits the Court to consider the proffered evidence and if the contract language is reasonably susceptible to an interpretation asserted by its proponent, the parol evidence may aid in determining the intent of the parties. Based on the foregoing, the Court granted summary judgment in favor of Svec on his breach of contract claim and held that both the plain language of the LOI and the ancillary email correspondence all supported the conclusion that Svec became a 50% owner of 21 Electronics at the time he conveyed the $30,000 payment.

As to the claim for an accounting, Svec argued that even if the LOI had been insufficient to convey a 50% ownership interest to him that he and Davis had formed a partnership under Arizona law sufficient to entitle him to an accounting. The Court held that pursuant to A.R.S. § 29-1012(A) “the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the parties intend to form a partnership.” As a result, both A.R.S. §§ 29-1035(B) and 29-1033(B) allowed a partner to maintain an action against the partnership or another partner, including for “access to [the partnership’s] books and records.” The Court held that the fact that Svec and Davis conducted business together for over two years and shared in the profits was sufficient to create a partnership and, as a result, Svec was granted summary judgment on his claim for access to books and records to perform a full accounting for 21 Electronics.

§ 2.2. California

Perry v. Stuart, 111 Cal. App. 5th 472, 333 Cal. Rptr. 3d 472 (2025). Member brought action against LLC and its manager seeking writ of mandate to compel production and inspection of LLC’s financial records and member information. The Superior Court, Santa Clara County, granted members’ petition in part, ordering disclosure of some corporate records but requiring redaction of member names and addresses from a member list after finding that list was a trade secret. An appeal and a cross-appeal followed.

The scope of the redactions was one of the issues challenged on appeal. LLC asserted that the trial court’s redaction order was too narrow. It argued that the member names and contact information are trade secrets, whether they appear in a member list or elsewhere; thus, such information should be redacted in all the records ordered produced. Member challenged the trial court’s redaction instruction as contravening both § 17704.10, subd. (h) (stating “Any waiver of the rights provided in this section shall be unenforceable”) and their right under the terms of the operating agreement to access “all” records.

A trade secret is information, including a formula, pattern, compilation, program, device, method, technique, or process that: (1) derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. The record supported the trial court’s finding that the LLC’s member list was a trade secret, and the operating agreement did not contradict or prevent this finding. The appellate court then decided, as a matter of statutory interpretation, that the protection of the member list as a trade secret under Cal. Civil Code, § 3426.1 takes precedence over a member’s right to obtain a copy of the member list under § 17704.10, subd. (a) and 17701.13, subd. (d)(1). The trial court did not err in declining to order LLC to provide an unredacted member list under § 17704.10.

But as to the trial court’s decision to decline ordering the redaction of individual member names and addresses from other documents, there was no error. Though the member list was properly redacted as a trade secret, there was no evidence or legal authority in support of LLC’s argument that the court should also require the redaction of individual member names, addresses, and other identifying information from all other records the court ordered disclosed. By issuing its judgment without the requested additional limitations on disclosure, the trial court impliedly determined that LLC had not met its burden of proof with respect to its argument that the court should expand its redaction order. The record did not support overturning this determination on appeal.

LLC failed to identify evidence indicating that the member list is duplicated in any of the other records the court ordered LLC to disclose. LLC had not presented any cogent argument that the names and addresses appearing in documents other than the member list are not publicly known, derive independent economic value from not being generally known to the public, and are the subject of efforts that are reasonable under the circumstances to maintain their secrecy. As such, there was no error in declining to require the redaction of member names and addresses for all records ordered produced.

§ 2.3. Delaware

Cornett v. Collectable Sports Assets, LLC, 2025 WL 1531160 (Del. Ch. May 29, 2025). The Delaware Court of Chancery held that plaintiff Justin Cornett (“Cornett”), a member of Collectable Sports Assets, LLC, (the “LLC”) is entitled to inspect most of the books and records he requested from the LLC, subject to a reasonable confidentiality agreement. Cornett sought inspection to evaluate his investment and investigate possible mismanagement after the LLC underwent significant ownership and operational changes, including missed SEC filings, halted trading, and asset relocations.

While the LLC acknowledged his valuation purpose, it resisted the investigation and argued voluntary production sufficed. The Court found that the operating agreement’s inspection rights generally mirrored those in the Delaware LLC Act, except for limiting access to series-specific information only to series in which the member invests. And although the operating agreement afforded the managing member discretion over the reasonableness of a demand, that power did not override the Court’s authority to adjudicate inspection rights. The Court concluded that Cornett had a credible basis to suspect wrongdoing and granted broad inspection rights, including access to business status, financial condition, membership lists, and formal materials about key decisions, but denied his request for a narrative explanation of a former officer’s termination. The LLC’s attempt to limit Cornett’s communication with other members was rejected, as long as confidential information was not disclosed. Cornett was awarded costs, but both sides bore their own attorneys’ fees. The parties were ordered to meet and confer on logistics and confidentiality for production, with unresolved disputes to be submitted to the Court.

Garner v. Authenticity.AI Investors, LLC, 334 A.3d 1108 (Del. Ch. 2025). The Delaware Court of Chancery held that Authenticity.AI Investors, LLC (the “LLC”)—an entity formed solely to aggregate investments for purchasing stock in Authenticity.AI Corporation (the “Company”)—must produce a limited subset of books and records to plaintiff Michael B. Garner (“Garner”). The Court also rejected the bulk of Garner’s extensive demands for inspection.

In this case, Garner was one of approximately ten investors in the LLC, which acted as a “feeder entity” whose only asset is stock in the Company. Garner sought thirty categories of corporate records under the auspices of valuation and to investigate mismanagement. The Court found his investigation purpose mostly unsupported except for one issue: a discrepancy in the number of Series A Preferred Stock shares held by the LLC.

Accordingly, the Court ordered the LLC to produce (1) documents regarding the financial performance and accounting of the LLC and the Company, including quarterly and annual reports and QuickBooks records, to the extent they exist and were not previously produced; and (2) documents reflecting grants of the LLC’s equity or options to board members, officers, executives, advisors, or other individuals in the relevant period.

Chuang Wei Pan LLC v. Hiwin Holding LLC, 2025 WL 2490263 (Del. Ch. Aug. 29, 2025). The Delaware Court of Chancery held that plaintiffs Chuang Wei Pan LLC (the “LLC”) and Yaning Li (“Li”) lack standing to inspect the books and records of Hiwin Holding LLC (the “Company”) under Section 18-305, because they voluntarily withdrew from the Company and were no longer members, who are entitled to inspection rights.

The Company is a Delaware LLC formed by the LLC and WXG Funding, Inc. to invest in real estate. Based on alleged rights in the operating agreement, the plaintiffs sought inspection to investigate suspected misconduct within the Company. The Court found that the plaintiffs, beginning in August 2024, engaged in a series of actions that constituted a voluntary withdrawal by the LLC. The operating agreement defined voluntary withdrawal as requiring only an attempted dissociation, followed by appraisal and return of capital contributions. The evidence showed Li, managing member of the LLC, initiated withdrawal discussions, negotiated terms for the return of capital, and referenced withdrawal in both written and in-person communications. While Li continued to use board titles and attempted to call meetings after these communications, the Court determined these acts did not override the prior, clear withdrawal.

Accordingly, the plaintiffs lacked standing to pursue books and records inspection. But the Court found that the plaintiffs could pursue information necessary to value their capital contribution for liquidation purposes under the operating agreement.

Centerview Partners Holdings LP v. Handler, 2025 WL 1720039 (Del. Ch. June 20, 2025). The Delaware Court of Chancery dismissed all counterclaims brought by David Handler (“Handler”) against Centerview Partners Holdings LP and related entities and individuals (“Topco,” and with its subsidiaries, “Centerview”) because collateral estoppel barred Handler from relitigating issues already decided in a prior books and records proceeding.

Centerview sued Handler, a former employee, over post-employment non-compete and non-solicitation provisions. Handler counterclaimed for breach of fiduciary duty, constructive fraud, breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment—all premised on the theory that Centerview unlawfully stripped him of certain contractual and common law rights that he was entitled to as a partner of Topco. Indeed, the relevant partnership agreement provided for certain payouts to departing partners, if they complied with restrictive covenants. But a prior books and records trial concluded that Handler was never made a partner, no partnership agreement was finalized with him, and his compensation after 2012 was a matter of annual negotiation and Founders’ discretion—not governed by partnership or fixed terms. As a result, the Court held that Handler’s counterclaims claims were precluded by the earlier factual finding that Handler was never a partner and never believed himself to be a partner of Topco.

Handler also challenged the scope and enforceability of the restrictive covenants that Centerview sought to enforce, arguing they were unreasonable, overbroad, and unlawful. The Court of Chancery disagreed, finding that Handler was a sophisticated party who had negotiated the agreement and benefitted from the employment. Thus, the restrictions were lawful and enforceable.

Gentile v. GPB Capital Holdings, LLC, 2024 WL 4941050 (Del. Ch. Nov. 27, 2024). The Delaware Court of Chancery ordered the indemnification of fees and expenses incurred in connection with a books and records action filed by a majority member of an LLC for purposes of obtaining books and records necessary to prepare and file tax returns on behalf of the LLC. The underlying books and records action had been successful, though the majority member never reviewed the produced documents nor prepared the tax returns. Nonetheless, the Court found that, under the LLC’s indemnification clause, which required indemnification for “any loss, damage or claim incurred” by a member “by reason of any act or omission performed or omitted by” such member “in good faith on behalf of the Company.” The Court held that, given that the books and records action had the proper purpose of preparing the company’s tax returns, the expenses incurred were properly indemnifiable under the company’s operating agreement.

§ 2.4 Texas

Collins v. Hetzler, No. 02-24-00078-CV, 2025 WL 937486 (Tex. App.—Fort Worth Mar. 27, 2025, no pet.). The court established that, beyond the duty to allow inspection of books and records for a proper purpose upon request, there is no statutory fiduciary duty for a director to send regular, formal reports to shareholders. Tex. Bus. Orgs. Code Ann. §§ 3.151–.153, 21.218.

The case arose from an appeal of a jury’s take-nothing decision in a derivative suit brought by Collins, a minority shareholder, for alleged breaches of corporate duty surrounding the corporate founder’s divorce. The court ultimately affirmed the jury’s verdict based on a finding of sufficient evidence. Collins was a former employee of the company he still maintained shares of. After his departure from the company, he requested financial information about the company six times from Hetzler, the founder, president, majority shareholder, and chairman of the company. Hetzler did not share any formal financial reports. Collins later also requested access to the company’s QuickBooks application, which Hetzler denied. Collins responded demanding profit and loss statements, income statements, cash flow statements, balance sheets, and tax filings for the previous five years. Hetzler ultimately agreed without requiring Collins to sign a nondisclosure agreement. Since its inception, the company had an informal approach to shareholder relations. Hetzler did not send regular financial statements or other communications to the shareholders. Hetzler did not distribute a formal financial overview to any shareholder for the first 25 years of operations until the company’s first shareholder meeting. However, Hetzler informally responded to requests for information, and shareholders other than Collins stated that they felt that they had sufficient access to information.

After learning the details of how the company functioned, Collins filed suit against Hetzler, the company, a subsidiary company, and a separate company that was providing consulting services. Collins specifically alleged that Hetzler had breached his fiduciary duties to the company. The court affirmed the jury’s finding that Hetzler did not fail to comply with his fiduciary duties. Specifically, as to Collin’s access to the company’s books and records, the court found that Hetzler declined Collins’s request to access the company’s financial software directly and offered general financial information instead. Four years later, when Collins responded to that email, requested specific financial information, and stated a purpose for the request, information was provided shortly thereafter at the first shareholder’s meeting. Further, multiple shareholders testified that financial reports and books and records were available upon request and that they had access to all the information they felt they needed.

Douglas Scott Sec., Inc. v. Wilkie, No. 05-23-00833-CV, 2025 WL 1270096 (Tex. App.—Dallas May 1, 2025, no pet.). The court of appeals affirmed the trial court’s straight-forward application of Tex. Bus. Orgs. Code § 152.002(b)(1), which states that a “partnership agreement or the partners may not: unreasonably restrict a partner’s or former partner’s right of access to books and records under Section 152.212.”

Wilkie, a partner in various partnerships, requested the names and contact information of his current partners from Hill Country Exploration Inc., the partnerships’ managing general partner, and from Douglas Scott Securities, Inc., which Wilkie described as a “placement agent” that facilitates investment in the energy industry. The two companies denied his request, so Wilkie filed suit seeking a judgment requiring defendants to allow him access to review, examine, and copy all books and records of the partnerships in which he was currently invested, including the names and addresses of partners in those partnerships. The trial court granted Wilkie’s motion for summary judgment.

On appeal, the Appellants/Defendants argued that (1) the motion did not address the unreasonableness standard of section 152.002(b)(1) or (2); (2) the motion did not provide evidence that the restrictions on providing partner information were unreasonable; and (3) the partnership agreement contained a provision that barred providing the requested information. The court found that (1) the motion did address the unreasonableness standard; (2) the motion contained affidavits evidencing denial of his requests that supported his motion; and (3) the aforementioned provision only restricted the transferability of partnership units and did not address accessibility of records, and, as a result, was not applicable. The court of appeals affirmed.

§ 3. Business Judgment Rule

§ 3.1. California

Tuli v. Specialty Surgical Cntr. of Thousand Oaks, LLC, 105 Cal. App. 5th 997, 326 Cal. Rptr. 3d 357 (2024). Randhir Tuli is not a medical doctor, but he was a founding member of a surgery business. Founder contributed to the enterprise, then lapsed into inactivity. He did nothing productive but took millions from LLC profits. The surgeon members sought to buy him out, but founder refused to surrender his interests. Then founder set a letter to a wide swath of recipients, including potential investors that speciously suggested the specter of criminal liability for all involved in the LLC. The LLC members warned founder they would eject him without compensation, as was their right under the operating agreement, unless he cured the situation within 30 days.

The operating agreement had a “terminating event” provision that was designed to ensure “bad actors” within the company did not damage it. A “terminating event” would occur if a member disrupts the affairs of the LLC or has acted adversely to the best interests of the LLC, as determined in the reasonable discretion of the LLC’s “Governing Board” and fails to cure such conduct within thirty (30) days after receiving written notice of a terminating event from the governing board. The consequence of an uncured terminating event was the loss of the offending member’s interests in the LLC for $0.

Here, founder took no action to cure his terminating event. The other members acquired founder’s membership interest for nothing. Founder launched a decade-long litigation campaign against his former business colleagues that resulted in a bench trial rejecting founder’s claims.

The business judgment rule was a significant issue on appeal. This rule is a presumption that the member of an LLC makes business decisions on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company. Courts defer to board judgments that can be attributed to any rational business purpose. The trial court ruled the business judgment rule insulated LLC and its decisionmakers from founder’s claim they breached their fiduciary duty to him. The court found LLC established this affirmative defense by proving its business purpose was rational. The evidence supported LLC’s rational fear that founder’s letter would scare off potential investors, that it was rational to notify founder his letter was a terminating event, and that it was rational to oust him when he refused to cure within 30 days. Founder contended the business judgment rule does not apply for three reasons: conflict of interest, bad faith, and improper investigation.

Founder’s logic is that each person on the governing board had an ownership interest in the LLC, and each would gain a personal advantage by voting founder out and redeeming founder’s interest for $0, because such action proportionally increased each remaining member’s ownership interests. The conflict-of-interest exception to the business judgment rule arises when the interests of the individual decisionmakers diverge from the interest of the enterprise. But the uncontested evidence was that LLC’s decisionmakers worked in the best interest of the company, so the conflict-of-interest exception did not apply.

Officers and directors are required to act in good faith to receive the protection of the business judgment rule. Founder argued that defendants exhibited animosity towards founder. They had been upset with founder for a long time, were frustrated that founder was earning high profits without bringing in business or providing services and had repeatedly and unsuccessfully tried to buy his units. But it is not bad faith to offer to buy out an unproductive member. Founder even admitted there was nothing wrong with offering to buy his shares. Nor is it bad faith to be frustrated with a member for earning profits while doing nothing.

Finally, the record showed that the LLC had adequately investigated the allegations in founder’s letter and there was no evidence provided that further investigation would have changed the results. Application of the business judgment rule was not barred due to any improper investigation. The trial court properly applied the business judgment rule and found defendants acted properly in LLC’s interests when it expelled founder pursuant to the terminating events provisions of its operating agreement.

§ 3.2. Michigan

Sparling v. Rumple, No. 369228, 2025 WL 2015946 (Mich. Ct. App. July 17, 2025). Port Builders, Inc., a family-owned corporation formed to own and manage commercial real estate, had been embroiled for years in internal disputes among the Sparling sibling shareholders over control and the disposition of its real estate assets. As part of a 2017 settlement placed on the record, Port Builders’ board was required either to complete a sale of the properties by a fixed deadline or, failing that, to install a third-party management company. After an initial sale to one buyer fell through, the trial court authorized the board to continue pursuing a sale to another third-party purchaser, Steven Ureel. The board entered into a purchase agreement representing that Port Builders held clear title and had obtained all necessary approvals. However, the transaction ultimately failed when the title company refused to issue a commitment due to ongoing litigation and lack of unanimous shareholder consent. As a result, the corporation paid damages to the prospective buyer. Plaintiffs then sued the defendant directors individually to recover those amounts, alleging breach of fiduciary duty under Mich. Comp. Laws § 450.1541a. They claimed the directors made misrepresentations in the purchase agreement concerning title, authority, and consents, which resulted in the corporation’s liability to pay the prospective buyer damages. The trial court granted summary disposition in favor of the directors, finding they had acted in good faith, with due care, and in the corporation’s best interests and their decisions were protected by the business judgment rule.

The Michigan Court of Appeals affirmed, holding that there was no genuine issue of material fact. The directors had reasonably relied on court orders, advice of counsel, and prior sale efforts when entering into the agreement with Ureel. Although the sale ultimately failed and the trial court’s sale order was later reversed on appeal, the appellate court emphasized that directors are not liable for reasonable decisions made in good faith under existing judicial authority. It stressed that the directors’ conduct must be evaluated based on the information available at the time, not in hindsight. The record demonstrated that the board entered into the purchase agreement only after years of court involvement, multiple court orders authorizing continued sale efforts, and consultation with counsel regarding how to proceed after the initial sale failed. These circumstances supported application of the business judgment rule and negated any inference of reckless or dishonest conduct.

The Michigan Court of Appeals also rejected plaintiffs’ argument that the directors’ representations regarding title, authority, and consents created a triable issue of breach of fiduciary duty. The evidence supported the conclusion that the directors reasonably believed they had authority to proceed with the sale based on the court orders and the corporation’s sale history. The failure to obtain title insurance or unanimous shareholder consent reflected legal uncertainty rather than bad faith or intentional misrepresentation. The appellate court further observed that plaintiffs presented no evidence showing that the directors ignored contrary legal advice, concealed material facts, or acted for personal gain. In the absence of such evidence, the directors’ reliance on court orders, counsel’s advice, and prior sale efforts shielded them from liability.

§ 3.3. Texas

Martin v. Hutchison, No. 06-24-00018-CV, 2025 WL 876812 (Tex. App.—Texarkana Mar. 21, 2025, pet. denied). The court of appeals affirmed the trial court’s denial of a motion to disregard the verdict after reviewing a director’s fiduciary duties under the business judgment rule. The business judgment rule is a presumption that, in making a business decision, the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company and its shareholders. Moody v. Nat’l W. Life Ins. Co., 634 S.W.3d 256, 274 (Tex. App.—Houston [1st Dist.] 2021, no pet.).

Plaintiffs, minority shareholders in Network Operator Services, Inc. (NOS), alleged that Defendants, corporate directors, violated their fiduciary duty to the corporation when they transferred corporate assets—ownership interest in a second corporation—to themselves, without approval from or notice to the corporation. The jury found that Defendants did not violate their fiduciary duty in this regard, and the trial court denied Plaintiffs’ motion to disregard the jury verdict. The court of appeals affirmed the denial based on a finding that the evidence was sufficient to support the jury’s verdict.

On appeal, Plaintiffs/Appellants specifically argued that there was no valid agreement that justified Defendants/Appellees transfer of a corporate asset to themselves. Defendants/Appellees contended that the majority directors of NOS agreed in 1998 to equalize ownership in future-formed companies amongst themselves and that this transfer was in line with that agreement. Each of the Defendants/Appellees testified that the principal shareholders in NOS orally agreed to equalize interests in new companies formed after NOS, and without the agreement to equalize, they would have gone on without including the initial investors, to the detriment of NOS. As a result, the court of appeals concluded that a reasonable jury could have determined that Defendants/Appellees did not breach their fiduciary duties to the corporation.

§ 4. Dissolution/Disassociation/Explusion

§ 4.1. Arizona

Furst v. Mayne, et al., 2025 WL 314371 (Ariz. Ct. App. Jan. 28, 2025) (unpublished). Mayne appealed the trial court’s judgment in favor of Frost on claims involving partnership dissolution, accounting and enforcement of negotiable instruments. The Court of Appeals affirmed the trial court’s judgment. The parties formed Investor Clout as a partnership to invest in commercial real estate mortgages through Mortgages Ltd. The partnership agreement specified that “cash flow from the partnership shall be distributed to the partners in proportion to their respective contributions” and profits and losses shall be allocated accordingly. Mortgages Ltd collapsed and a bankruptcy agent oversaw subsequent bankruptcy distributions. Investor Clout received distributions totaling approximately $1.5 million of its original $1.8 million investment. The parties disagreed, however, about how Investor Clout should receive and distribute the proceeds and, as a result, could not send joint instructions to the bankruptcy agent regarding the distributions. Furst filed the action alleging claims for declaratory and equitable relief, dissolution of Investor Clout and breach of fiduciary duty as against Mayne. After a four-day bench trial the trial court granted judicial dissolution and a winding up of Investor Clout because the action itself demonstrated that it was not reasonably practicable to carry on the partnership and Mayne’s conduct had frustrated its purpose. The trial court also held that the distributions must be divided based on ownership interest in Investor Clout. Mayne appealed and the Arizona Court of Appeals affirmed.

In doing so, the Court of Appeals held that “A partnership may be dissolved through judicial dissolution if ‘[t]he economic purpose of the partnership is frustrated,’ A.R.S. § 29-1071(5)(a), or ‘[i]t is not otherwise reasonably practicable to carry on the partnership business,’ A.R.S. § 29-1071(5)(c). . . . During the winding up of a partnership, ‘the assets of the partnership . . . shall be applied to discharge its obligations to creditors . . . Any surplus shall be applied to pay in cash the net amount distributable to partners in accordance with their right to distributions.’ A.R.S. § 29-1077(A).” Further, when granting a dissolution, the superior court may “make such orders as it deems advisable to effectuate the speedy winding up of the partnership affairs” (citing Wood v. Holiday Mobile Home Resorts, Inc., 128 Ariz. 274, 284 (App. 1980)). The Court rejected Mayne’s argument that her consent was required for a judicial resolution. The Court held that judicial dissolution without a partner’s consent is permissible and affirmed the trial court (citing Imperial Litho/Graphics v. M.J. Enters., 152 Ariz. 68, 76 (App. 1986) (finding partner “was entitled to seek judicial dissolution of the partnership for cause,” despite the partnership agreement only contemplating “voluntary dissolution upon agreement of all partners.”)).

§ 4.2. Colorado

Hogue v. Hogue, 565 P.3d 1123, 2025 COA 5 (2025). Plaintiff general partner in a family limited liability limited partnership that owned ranch property brought action seeking judicial dissolution of the partnership and a winding up of its assets. Following a bench trial, the court entered orders dissolving and liquidating the assets of the partnership. Defendant partner appealed.

Defendant partners argued that the trial court should have considered partitioning the ranch property instead of liquidating the assets. But everyone agreed that this was not a partition action. The partners had no property interests in the ranch property itself because it belonged entirely to the partnership. The partners only had interests in the partnership. As a result, none of the partners could have requested a partition of the property under C.R.S. § 38-28-101 because none of them was a “person having an interest in” the property at issue.

C.R.S. § 7-62-802 of the Colorado Uniform Limited Partnership Act of 1981 (“ULPA”) provides that the district court, “[o]n application by or for a partner, . . . may decree dissolution of a limited partnership whenever it is not reasonably practicable to carry on the business in conformity with the partnership agreement.” If the district court finds that dissolution is appropriate, it may wind up the limited partnership’s affairs upon application of any partner.

The ULPA does not define “reasonably practicable.” As such, the appellate court adopted principles and precedent applied to LLC dissolutions, including the factors detailed in Gagne v. Gagne, 2014 COA 127 (“Gagne I”) to determine whether it was reasonably practicable to carry on the partnership in this case. The factors include, but are not limited to:

(1) whether the management of the entity is unable or unwilling reasonably to permit or promote the purposes for which the company was formed; (2) whether a member or manager has engaged in misconduct; (3) whether the members have clearly reached an inability to work with one another to pursue the company’s goals; (4) whether there is deadlock between the members; (5) whether the operating agreement provides a means of navigating around any such deadlock; (6) whether, due to the company’s financial position, there is still a business to operate; and (7) whether continuing the company is financially feasible.

The trial court was deemed to have properly applied the Gagne I factors in support of its decision to dissolve the partnership and order the liquidation of its assets.

§ 4.3. Delaware

In re Coral Gables Luxury Holdings, 2025 WL 1356027 (Del. Ch. May 9, 2025). In In re Coral Gables Luxury Holdings, the Delaware Chancery Court granted summary judgment appointing a liquidating trustee for Coral Gables Luxury Holdings, LLC and resolving a deadlock between its two 50/50 members: Shoma Coral Gables LLC (“Shoma”) and Gables Investment Holdings (“GIH”).

In this case, the company’s only asset, a Florida property, was sold under court order and sale proceeds were held in escrow pending resolution of ongoing litigation between Shoma and GIH. The sale triggered the dissolution of the Company under the LLC Agreement, which required the appointment of a trustee to wind up affairs. GIH refused to cooperate in the process, prompting Shoma to file suit in Delaware seeking the appointment of a trustee and attorneys’ fees. GIH responded that Shoma’s claim (1) was barred by laches due to delay; (2) that appointing a trustee was futile because distributions needed mutual consent or a final court order; and (3) that Delaware proceedings should be stayed pending the related Florida litigation.

The Court rejected all defenses, noting that (1) GIH’s own actions perpetuated delay and could not be used to avoid judicial intervention; (2) the need for a liquidating trustee was based on the LLC Agreement and Section 18-803 of the Delaware LLC Act, not the Escrow Agreement; and (3) the Florida litigation did not eliminate the necessity for a trustee. Judicial intervention was warranted under Delaware law due to the members’ unresolvable deadlock. The Court ordered the appointment of a liquidating trustee to oversee the wind-up process and dismissed GIH’s other objections, emphasizing that the LLC Agreement’s dissolution provisions governed and that ongoing litigation elsewhere did not negate the need for proper dissolution procedures in Delaware.

PXP Producing Co. LLC v. MitEnergy Upstream LLC, 342 A.3d 402 (Del. Ch. 2025). The Delaware Court of Chancery denied PXP Producing Company LLC’s (“PXP”) request to appoint a receiver for the cancelled entity MitEnergy Upstream LLC (the “Company”), finding that PXP failed to show good cause or provide enough specific facts to justify such an appointment.

In this case, PXP sought indemnification for oil well decommissioning costs, arguing that the Company improperly failed to reserve funds for known obligations before cancellation in 2019, as required by Delaware law. PXP also requested a receiver to investigate undistributed assets and pursue veil-piercing claims. MEPUS Holdings LLC (“MEPUS”), an entity connected to former members, moved to dismiss the petition for a receiver, claiming the suit was untimely. The Court rejected the argument, stating only the canceled company or its legal successors could assert it. But the Court ultimately denied PXP’s petition for a receiver because its allegations were speculative and unsupported by concrete facts, especially regarding possible leftover assets or improper structure. Late arguments about cash on hand at cancellation were disregarded. The Court concluded that PXP failed to establish a sufficient factual basis for appointing a receiver.

PJT Holdings, LLC v. Costanzo, 339 A.3d 1231 (Del. Ch. 2025). The Delaware Court of Chancery upheld the expulsion of investor PJT Holdings, LLC (“PJT”), controlled by Peter Trematerra (“Trematerra”), from PBM Group Holdings, LLC (the “Company”), after finding that PJT’s principal willfully breached the LLC Agreement by refusing to fund the company and unilaterally terminating a key lease—actions that justified removal under the operating agreement’s expulsion provision. This decision affirmed the authority of the “sweat-equity” Founders (Daniel Costanzo, Benjamin Costanzo, and Brian Fitzpatrick), who contributed operational expertise and intellectual property to the member-managed Delaware LLC, to enforce governance protections designed to safeguard the business against a disruptive member.

The LLC Agreement provided (1) a 50% interest to Trematerra (through PJT); (2) certain deadlock-breaking rights; and (3) that a member could be removed for willful breach, gross negligence, fraud, or materially wrongful conduct by a unanimous vote of the other members. After a series of disputes—including Trematerra’s repeated refusals to make required capital contributions unless the Founders agreed to restructure the business in his favor and his unilateral cancellation of a key restaurant lease—the Founders invoked the expulsion provision and removed Trematerra from the Company.

Trematerra sued to invalidate his expulsion and claimed breach of the LLC Agreement. The Founders counterclaimed, arguing they had multiple valid grounds for expulsion under the Agreement. The Court found that the Founders proved at trial that Trematerra had willfully breached the LLC Agreement by repudiating his obligation to fund the Company and by unilaterally terminating the lease, both of which justified expulsion. As a result, the Founders were entitled to indemnification from Trematerra for their litigation expenses as provided by the LLC Agreement.

Holzbaur v. Trolley Square Hospitality, LLC, 343 A.3d 603 (Del. Ch. 2025). The Delaware Court of Chancery ruled in favor of the defendants, finding that the plaintiff was validly removed as a noncash contributing member of Trolley Square Hospitality, LLC and is owed no further distributions, clarifying the power of the manager to remove “sweat equity” members under the LLC agreement.

This dispute arose after the plaintiff, recruited as general manager and granted a 14% membership interest described as “sweat equity,” was removed by the managing member following his resignation. The LLC agreement distinguished between cash contributing members—who could not be removed by the manager and retained ongoing rights—and noncash contributing members, who could be removed and would lose their distributions. The plaintiff claimed he was a cash contributing member, citing conflicting provisions and an exhibit that appeared to list a cash contribution.

Finding the agreement ambiguous, the Court examined extrinsic evidence, including pre-formation negotiations and the parties’ conduct, to determine the parties’ intent. The evidence showed only certain members made actual cash contributions—not including the plaintiff, whose interest was based solely on his labor and management efforts. The LLC agreement’s reference to a symbolic cash amount did not reflect a real contribution. The Court declined to apply contra proferentem because the agreement resulted from mutual negotiation, not one-sided drafting.

Based on these findings, the Court held that the plaintiff was a noncash contributing member, making his removal and cessation of distributions proper under the agreement. Judgment was entered for the defendants, with costs shifted in accordance with Court of Chancery Rule 54(d).

Lundgren v. Brola, 2025 WL 2325499 (Del. Ch. Aug. 13, 2025). The Delaware Court of Chancery held that judicial dissolution under 8 Del. C. § 273 was unavailable because Plaintiff Christopher Lundgren (“Lundgren”) failed to prove that Credit Glory Inc. (the “Company”) was a joint venture between himself and Alex Brola (“Brola”) Brola—clarifying that Section 273 applies only when two equal shareholders are true co-venturers in a jointly controlled enterprise.

Credit Glory Inc. was founded in 2016 Brola and others, with Lundgren joining later as a marketing employee and receiving equity as compensation. Following another founder’s departure, Lundgren’s equity stake was increased to match Brola’s, and Lundgren took on expanded duties, the title of Chief Marketing Officer, and a board seat. In 2022, Brola terminated Lundgren for alleged misconduct, and Lundgren petitioned for dissolution and a receiver, arguing that he and Brola were deadlocked co-owners in a joint venture.

At trial, Lundgren argued that he and Brola were equal shareholders in a joint venture and deadlocked on the future of the corporation. Brola countered that Lundgren was never intended to be a co-venturer or partner, and that Lundgren’s equity grant was simply compensation for his role as an employee. In evaluating the parties’ arguments, the Court focused on Section 273’s statutory requirements, including that judicial dissolution is available only where a corporation has two 50% stockholders “engaged in the prosecution of a joint venture” and unable to agree on discontinuing the venture or disposing of its assets. Vice Chancellor Will noted that joint ventures require a voluntary agreement to pursue a common purpose with joint control, proprietary interest, and a duty to share profits and losses. The Court, however, found no evidence of a voluntary agreement between Lundgren and Brola to jointly pursue a business with shared control, risks, and profits. Instead, Lundgren’s equity was granted as employee compensation, not as a sign of partnership or co-venturer status. Equal ownership resulted from happenstance, not a joint venture arrangement, and Lundgren was never allowed an equal voice in major decisions.

Without proof of a joint venture relationship, the Court concluded that statutory dissolution was unavailable and entered judgment for Brola, leaving the company intact.

§ 4.4. Florida

Chimouni on behalf of E.E.R. Holdings, LLC v. Victory Avenir, LLC, 410 So.3d 593 (Fla. Dist. Ct. App. 2025). The Florida Fourth District Court of Appeal affirmed a final judgment dissolving E.E.R. Holdings, LLC, (“E.E.R.”) a real estate investment company jointly owned by Dan Chimouni (“Dan”) and Elodie Chimouni (“Elodie”). The parties’ dispute arose from a breakdown in the business relationship between Dan and Elodie, who formed E.E.R. to acquire and manage twenty rental properties. During their falling out, Dan withdrew all funds from E.E.R.’s account and cut off Elodie’s access, and Elodie responded by transferring twelve of E.E.R.’s properties to an entity she alone controlled. Dan, acting on behalf of E.E.R., sued Elodie and her company for breach of fiduciary duty and judicial dissolution of E.E.R.

At trial, a central issue was the admission of E.E.R.’s 2017–2020 tax returns, which contained information about the company’s ownership structure, capital accounts, and financial history—evidence critical for determining how to divide E.E.R’s assets. Dan objected, arguing that the returns were inadmissible hearsay and did not qualify as business records under Florida law (section 90.803(6)) because the necessary foundation for business records had not been laid. The appellate court agreed that the tax returns were not “records of a regularly conducted business activity” within the meaning of the statute, so the business records exception did not apply.

The Court of Appeal, however, found a valid alternative basis for admitting the tax returns: as party admissions under section 90.803(18). The Court reasoned that Dan—acting as E.E.R.’s tax representative—had reviewed and authorized the filing, thereby adopting their contents. Applying the “tipsy coachman doctrine,” the Court explained it could affirm a trial court’s decision if there was any valid legal basis in the record, even if the trial court relied on the wrong reason.

The appellate court concluded that the trial judge properly admitted the tax returns as party admissions and that the evidence supported dissolution and an equal division of E.E.R.’s assets.

§ 4.5. Pennsylvania

Hayes v. Goring, 2025 WL 2953794 (Pa. Super. Ct.). In Hayes v. Goring, the Pennsylvania Superior Court considered whether Hayes, the husband in a domestic divorce proceeding, had disassociated from a limited liability company owned with his ex-wife Goring. The Court noted there are a myriad of ways that a member can become disassociated from an LLC under the Uniform Limited Liability Company Act (“ULLCA”) as adopted in Pennsylvania. See 15 Pa.C.S.A. § 8861 of the ULLCA. Importantly, “[a] person is dissociated as a member when . . . [t]he [LLC] knows or has notice of the person’s express will to withdraw as a member, except that, if the person specified a withdrawal date later than the date the company knew or had notice, on that later date.” Id. at §8861(1). The Court further noted that “[a] person has the power to dissociate as a member [of an LLC] at any time, rightfully or wrongfully, by withdrawing as a member by express will under [sub]section 8861(1)[.]” Id. at § 8862(a) (emphasis added). The Court concluded that the “quality and quantum of evidence necessary to prove a member’s ‘express will’ to dissociate from a Pennsylvania LLC” was an issue of first impression in Pennsylvania. Ultimately, the Court found that the trial court did not abuse its discretion in finding no “magic words” were required to disassociate and that Hayes had expressed a desire to disassociate in various text messages with his ex-wife containing statements that he didn’t want anything, that she did not owe him anything, and that he would not accept anything. Based on the timing of the messages, the Court found that Hayes was due to share in member profits only through early 2017.

§ 5. Jurisdiction, Venue, and Standing

§ 5.1. California

Bigfoot Ventures Ltd. v. Knighton, 132 F.4th 1138 (9th Cir. 2025). Shareholder, Bigfoot Ventures Ltd. (“Bigfoot”), brought a derivative action on behalf of the corporation, NextEngine, Inc. (“NextEngine”), alleging breach of fiduciary duty, abuse of control, corporate waste, and unjust enrichment against: NextEngine’s CEO, founder and largest shareholder—Mark Knighton; his related entity, ShapeTools, LLC (“ShapeTools”); and NextEngine itself. The trial court granted defendants’ motion to dismiss for lack of subject matter jurisdiction based on Bigfoot’s inability to fairly or adequately represent the interest of NextEngine’s shareholders, which is required by Federal Rule of Civil Procedure 23.1 (“FRCP 23.1”). Shareholder appealed.

Since 2008, Bigfoot initiated and pursued a campaign of multiple cases against NextEngine. As such, Defendants argued that Bigfoot cannot fairly or adequately represent the interests of NextEngine’s shareholders. Several shareholders submitted declarations that objected to Bigfoot’s derivative action. These shareholders did not believe that Bigfoot could competently and fairly represent their interests as NextEngine shareholders because of Bigfoot’s litigation campaign against NextEngine. These shareholders asserted that Bigfoot’s misconduct damages their property rights. Using the multi-factor test in Larson v. Dumke, 900 F.2d 1363 (9th Cir. 1990), the trial court agreed and dismissed the derivative action.

Under Larson, an adequate FRCP 23.1 representative must have the capacity to vigorously and conscientiously prosecute a derivative suit and be free from economic interests that are antagonistic to the interests of the class. Larson set out eight factors to consider when determining adequacy of representation in shareholder derivative actions: (1) indications that the plaintiff is not the true party in interest; (2) the plaintiff’s unfamiliarity with the litigation and unwillingness to learn about the suit; (3) the degree of control exercised by the attorneys over the litigation; (4) the degree of support received by the plaintiff from other shareholders; (5) the lack of any personal commitment to the action on the part of the representative plaintiff; (6) the remedy sought by plaintiff in the derivative action; (7) the relative magnitude of plaintiff’s personal interests as compared to his interest in the derivative action itself; and (8) plaintiff’s vindictiveness toward the defendants. These factors are intertwined or interrelated, and it is frequently a combination of factors which leads a court to conclude that the plaintiff does not fulfill the requirements of FRCP 23.1. A court need not assess each one of the Larson factors when determining plaintiff adequacy. The Larson factor test is not exhaustive. Courts can consider whatever other factors help them to assess whether a plaintiff does not fairly and adequately represent the interests of shareholders or members who are similarly situated in enforcing the right of the corporation or association.

The Ninth Circuit ruled that the district court did not err in considering the ongoing litigation between Bigfoot and NextEngine as disqualifying outside entanglements. Such entanglements may make it likely that the interests of the other stockholders will be disregarded in the management of the suit. Bigfoot or its affiliates have been in multiple litigated disputes against NextEngine since 2008 concerning its investments in NextEngine. Because of its consistently contentious nature, Bigfoot and its affiliates’ lawsuits against NextEngine were properly deemed significant outside entanglements, making it probable that the interests of NextEngine’s stockholders will be disregarded in the management of the derivative action. The court noted that the derivative action appears to be leverage in Bigfoot’s other lawsuits against NextEngine, which weighs heavily against plaintiff’s adequacy to advance the corporation’s interests on behalf of shareholders in a derivative action. After also considering the declarations of other shareholders, the 9th Circuit held that this derivative action cannot be maintained because Bigfoot does not fairly and adequately represent the interests of NextEngine’s shareholders.

Bigfoot might have been the true party in interest but as a separate entity and not as a NextEngine shareholder. The lengthy history of litigation further supported the district court’s finding that Bigfoot was vindictive toward NextEngine and Knighton, which also weighs against finding that a plaintiff could adequately represent the interests of corporate shareholders in a derivative action. The plaintiff lacked standing. Dismissal was affirmed.

EpicentRxrix, Inc. v. Superior Court of San Diego County, 18 Cal. 5th 58, 334 Cal. Rptr. 3d 702 (2025). In this matter, a corporation, its controlling stockholder, and various associated individuals were sued by the corporation’s minority stockholder for breach of contract, fraudulent concealment, and other claims. Defendants moved to dismiss the lawsuit on the ground of forum non conveniens, relying on the corporation’s certificate of incorporation and bylaws, which contain mandatory forum selection clauses requiring most stockholder lawsuits against the corporation and related individuals to be brought in the Delaware Court of Chancery. The trial court denied defendants’ motion, and the Court of Appeal denied a petition for writ of mandate challenging the trial court’s order. Both courts held that the forum selection clauses were unenforceable. The lower courts reasoned that, if plaintiff’s claims were litigated in California, plaintiff would have a right to a jury trial, but the Delaware Court of Chancery does not recognize a similar right. In their view, because the forum selection clauses would effectively deprive plaintiff of its right to a jury trial, like a pre-dispute jury trial waiver, enforcement of the clauses would be contrary to California public policy. The California Supreme Court disagreed.

Although California has a strong public policy, based on the California Constitution, in favor of the right to trial by jury, this strong public policy protects the jury trial right in California courts, not elsewhere. California does not have a strong public policy against forum selection clauses or agreements to litigate in a jurisdiction that does not recognize the same civil jury trial right. When litigation proceeds in another forum, the jury trial right the parties enjoy in California courts does not travel with them. Instead, matters of procedure are governed by the law of the forum, including the right to trial by jury. The law of the forum determines whether an issue of fact shall be tried by the court or by a jury. The California Constitution and related statutory provisions do not reflect any public policy regarding the right to a civil jury trial in other forums. Consequently, a forum selection clause is not unenforceable simply because it requires the parties to litigate in a jurisdiction that does not afford civil litigants the same right to trial by jury as litigants in California courts enjoy.

Because the Court of Appeal found the lack of a right to a jury trial in the Delaware Court of Chancery dispositive, it did not consider plaintiff’s other arguments against enforcement of the forum selection clause, such as the manner of its adoption as part of the corporation’s certificate of incorporation and bylaws. The court therefore reversed the judgment of the Court of Appeal and remanded for further proceedings in that court.

§ 5.2. Delaware

Blue Pointer Gesture, LLC, 2112 Group LLC, and Rush Equipment II, LLC, v. Schrade, 2025 WL 3232620 (Del. Ch. Nov. 19, 2025). The Delaware Court of Chancery stayed a contract dispute between plaintiffs Blue Pointer Gesture, LLC (the “LLC”), 2112 Group LLC (“2112 Group”), Rush Equipment II, LLC (“Rush Equipment”), and defendant Samuel Schrade (“Schrade”), pending the outcome of a parallel, earlier-filed lawsuit in Texas. The plaintiffs brought this Delaware action to remove Samuel Schrade as a member of 2112 Group LLC for alleged breaches of the 2112 Group’s operating agreement. Plaintiffs also sought specific performance, compelling Schrade to transfer certain assets pursuant to a related Asset Purchase Agreement.

LLC owns 60% of 2112 Group, which wholly owns Rush Equipment. Schrade is a minority member of 2112 Group and contributed business equipment to the company as his capital investment. All parties are bound by an operating agreement (“Operating Agreement”), and Schrade and the plaintiffs are also parties to a related asset purchase agreement (“APA”) for the transfer of business assets.

Schrade moved to dismiss or stay the Delaware case, arguing that the forum selection clause in the Operating Agreement allowed litigation in Texas, and the Texas action involved the same parties and issues. Plaintiffs countered that Delaware had a unique interest in resolving governance disputes involving Delaware LLCs.

The Court found that the Operating Agreement’s forum selection clause was only partially exclusive, permitting suit in either Delaware or Texas. Applying the “first-filed” rule, the Court determined that the Texas action—filed months before the Delaware case—raised substantially the same claims and parties, and that the Texas court could grant complete relief, including issues of member removal. To avoid duplicative litigation and the risk of inconsistent rulings, the Delaware action was stayed. The Court instructed the parties to provide regular updates on the status of the Texas proceedings and allowed the Delaware case to resume only if the Texas court declines to address a member’s removal from the Delaware LLC.

§ 5.3. Minnesota

Warren v. ACOVA, Inc., 21 N.W.3d 218 (Minn. Ct. App. 2025), review granted (July 15, 2025). In this case, a beneficiary of several family trusts filed a lawsuit against her family members and the closely held family business asserting claims of unfairly prejudicial conduct and breach of fiduciary duty. The district court partially dismissed these claims on the grounds they were derivative following a special litigation committee investigation, and it found for plaintiff on her claims of unfairly prejudicial conduct on the basis of the defendants’ voluntary redemption of shareholders other than plaintiff. All parties appealed the decision.

On appeal, the court addressed whether a beneficiary of trusts owning shares of a closely held business satisfied the statutory standing requirements under Minn. Stat. § 302A.751 to assert a shareholder oppression claim since the beneficial owner is not the “shareholder” The statute requires that a “shareholder” bring the statutory oppression action, but the plaintiff in this case brought the action only in her capacity as a beneficial owner. “Shareholder” is defined by the statute as “a person registered on the books or records of a corporation or its transfer agent or registrar as owner of the whole or fractional shares of the corporation.” The parties to the suit disagreed over whether the definition of shareholder includes a beneficial owner. The court held that it does not, thus bringing suit as a beneficial owner is insufficient to establish shareholder standing. This legal issue is being reviewed by the Minnesota Supreme Court.

§ 5.4. Missouri

Delphi Mgmt. Solutions, Inc. v. Bearden, 717 S.W.3d 315 (Mo. Ct. App. May 27, 2025). Delphi, a minority owner and manager of several Missouri-licensed marijuana dispensaries, filed suit against Heya Retail, the majority owner, asserting claims including breach of operating and management agreements, fiduciary duty, and quantum meruit. While the lawsuit was pending, Delphi entered into an agreement granting AJO MO, LLC and Hi-Rise, LLC an option to purchase 95% of its interests in the dispensaries. Although these entities were later named third-party defendants in an interpleader action, they were not parties to the core claims between Delphi and Heya. Delphi and Heya ultimately settled their dispute and submitted a consent judgment to the trial court. AJO and Hi-Rise opposed the judgment and moved to intervene, claiming the settlement affected their rights under the option agreement. The trial court denied the motion to intervene and entered the consent judgment.

On appeal, the Missouri Court of Appeals dismissed the challenge to the consent judgment, holding that the option holders, AJO and Hi-Rise, lacked standing to appeal and were not “aggrieved” parties because the judgment only resolved issues between Delphi and Heya and did not involve or affect the option agreement, which had not been exercised. The Court of Appeals emphasized that under Missouri law, an unexercised option does not create a legally enforceable interest. Because AJO and Hi-Rise were not parties to the operative agreements or claims resolved in the judgment, they lacked standing to appeal. It also affirmed the trial court’s denial of the motion to intervene, noting that even if the court had jurisdiction, AJO and Hi-Rise failed to preserve a record for review. They did not provide affidavits or verified pleadings, nor did they ensure a transcript of the hearing was prepared. The Court of Appeals found the record insufficient to evaluate their claims and therefore upheld the trial court’s ruling.

§ 5.5. Pennsylvania

Linde v. Linde Enterprises, Inc., 339 A.3d 379 (Pa. Super. Ct. 2025). This case is the third lawsuit between two brothers Scott and Eric Linde over a construction company started by their father, Linde Enterprises, Inc. (“LEI”) and is ultimately a cautionary tale about using an inexperienced lawyer for a complex dispute between business owners. In 1999, Eric Linde sued Scott and a sister, derivatively on behalf of LEI, for starting their own company and funneling assets of LEI to their company. That case was settled in 2014 whereby Eric was to be bought out of LEI for $2,000,000, stock in another entity and land. For reasons that are not clear in the opinion, the settlement devolved into another dispute. In 2016, Eric commenced a lawsuit against Scott for breach of contract and specific performance. Judgment was entered in favor of Eric and affirmed on appeal. In 2019, Scott sued Eric in this action for unjust enrichment, breach of fiduciary duty, fraud, and conversion, alleging that Eric devalued LEI and misappropriated assets during his tenure as President of LEI. Scott repeatedly alleged that Eric breached the agreement but neglected to include a breach of contract claim. At trial, Eric moved for nonsuit, asserting that Scott was not a proper plaintiff but, rather, that Scott’s claims were derivative in nature, belonging to LEI. Scott countered by requesting leave to amend the Amended Complaint to add LEI as a plaintiff. Ultimately, the Court denied the amendment and entered judgment for Eric. Scott appealed. This Court affirmed holding (i) that Scott’s claims were derivative in nature because they alleged harm to LEI, not direct harm to Scott, (ii) adding a derivative claim would “go[] beyond simply editing the caption” and require adding LEI as a party and reopening the evidence, which would cause unfair prejudice to Eric, and (iii) the prejudice from the timing (post-trial) and potential statute of limitations issues justified denial of the requested Amendment. (Notably, the Court did not discuss the lack of a derivative demand. This would have been a separate basis to deny the amendment because Pennsylvania does not recognize the futility doctrine.

§ 5.6. Texas

Kassam v. Dosani, No. 24-BC11A-0021, 2025 WL 1826637 (Tex. Bus. Ct. June 30, 2025). The court established that the party challenging the court’s jurisdiction based on an insufficient amount-in-controversy bears the burden of presenting evidence that the plaintiff’s pleadings do not control the amount-in-controversy inquiry because the pleadings are fraudulent or because an amount outside the jurisdictional threshold is readily established. When reviewing the plaintiff’s allegations in the petition, the court construes them liberally in favor of jurisdiction and looks to the plaintiff’s intent.

Here, Plaintiffs alleged that Defendants usurped operational control of and mismanaged the nominal defendants by, among other acts: (1) unilaterally naming themselves to executive positions; (2) forbidding access to books and records; (3) loaning and transferring large sums of money without documentation; and (4) removing valuable inventory without explanation and possibly shifting it to other entities controlled by Defendants. Plaintiffs asserted that the amount in controversy exceeded $5 million and sought not only to recover damages but also to protect the value of the rights of control of the nominal defendants, implicating the entire values of the nominal defendants. Construing the allegations liberally in favor of jurisdiction and looking to the Plaintiffs’ intent led the court to conclude that the allegations were sufficient to invoke the court’s jurisdiction.

In re Hesseltine, No. 13-25-00256-CV, 2025 WL 1819777 (Tex. App.—Corpus Christi–Edinburg July 1, 2025, no pet.). This case concerns a dispute over venue. Relators filed a petition for the judicial dissolution of Texas Throne, a limited liability company. Relators asserted that they formed the company with the Reins, but the parties’ relationship deteriorated. The Reins filed suit against relators and former employees of Texas Throne alleging various improprieties and violations of a company agreement. Relators thus requested the trial court to compel the unwinding of Texas Throne.

Relators filed an original petition in San Patricio County. The real parties filed an answer and did not specifically deny relators’ venue allegations. The relators then filed a first amended petition and asserted that, based on Texas Business Organizations Code § 11.314, mandatory venue for the suit was in San Patricio County because Texas Throne’s principal offices were located there. Ultimately, the real parties filed a motion to transfer venue from San Patricio County to Nueces County because, contrary to the relators’ assertions, Texas Throne’s principal offices were in Nueces County, not San Patricio County, and the events material to the dispute occurred in Nueces County. Without holding a hearing on the real parties’ motion to transfer venue, the trial court granted the motion and transferred the case to Nueces County. The relators then filed a petition for writ of mandamus at the court of appeals.

Relators argued that (1) the real parties waived their venue challenge because they did not file their motion to transfer venue prior to or concurrently with their first appearance in the case; and (2) the trial court abused its discretion by transferring venue without holding a hearing on the motion to transfer. The court determined that the real parties did waive their venue challenge by filing their motion to transfer on April 5, 2025, over two months after they filed their answer to the lawsuit on January 31, 2025. The court further determined that the trial court did abuse its discretion by granting the motion to transfer without notice and a hearing, and that mandamus relief is the proper remedy for this deviation from required procedure. See Henderson v. O’Neill, 797 S.W.2d 905, 905 (Tex. 1990) (orig. proceeding) (per curiam).

§ 6. Claims and Issues in Business Divorce Cases

§ 6.1. Accounting

§ 6.1.1. Michigan

Pasionek v. Pasionek, 772 F. Supp. 3d 813 (E.D. Mich. 2024). Two brothers, James and Robert, formed a partnership in 1986 to purchase and hold hunting property. Decades later, after their relationship deteriorated and one brother allegedly attempted to sell the property without the other’s consent, the parties became embroiled in litigation involving claims for breach of fiduciary duty and counterclaims for failure to make required partnership contributions. Because neither party had maintained the capital accounts or partnership accounting required by their agreement, and the partnership was no longer viable, the district court appointed an independent CPA to reconstruct the partnership’s finances. The expert was tasked with determining each partner’s relative capital contributions, including whether certain expenditures qualified as capital contributions or were instead personal expenses. The expert concluded that James had contributed $80,788 (65.3%) and Robert $42,945 (34.7%) to the partnership. Robert subsequently moved for reconsideration.

Applying the Eastern District of Michigan’s reconsideration standard, the district court determined that Robert failed to identify a material error of fact or law warranting relief. The district court found that extrinsic evidence demonstrated the parties intended the legal work performed by Robert, a lawyer, to fall within his partnership obligations and not as separately compensable services. Any remaining ambiguity was construed against Robert as the drafter of the agreement. It also rejected Robert’s objections to the treatment of legal fees, finding that the agreement barred compensation for required services unless both partners provided written consent. The district court further upheld the expert’s classification of a movable log cabin placed on the property as a personal expense rather than a capital contribution. The cabin was not affixed to the land, had been installed without James’ consent, and remained under Robert’s personal control.

Additionally, the district court rejected Robert’s claim that the expert improperly credited James for maintenance costs, clarifying that its prior order had excluded vague or unsubstantiated maintenance billings but permitted credit for documented materials actually used for property repairs. With reconsideration denied, the expert’s accounting remained in effect, resulting in a substantially larger capital account for James than Robert. The district court then ordered the parties to proceed with winding up the partnership, including an auction sale of the partnership property, with bidding credits tied to each partner’s respective capital account.

§ 6.2. Anti-SLAPP Statute

§ 6.2.1. California

Meads v. Driggers, 114 Cal. App. 5th 28, 337 Cal. Rptr. 3d 7 (2025). The issue in this appeal is whether a cross-complaint was properly dismissed pursuant to California Code of Civil Procedure § 425.16, known as the anti-SLAPP statute. “SLAPP” stands for strategic litigation against public participation, and a SLAPP suit is one that contains claims arising from the defending party’s exercise of the constitutional right to free speech or to petition the government for the redress of grievances. A SLAPP suit is subject to dismissal unless the claiming party can demonstrate there is probability it will prevail on the challenged claims.

Steven Mead and Penny Lipking-Meads (collectively, the “Meadses”) and Driggers were members of Afterburner, LLC (the “LLC”). The Meadses initiated an action against Driggers and the LLC that included a request for dissolution. Driggers and the LLC (collectively, “Driggers”) filed a cross-complaint against the Meadses for breach of contract and breach of fiduciary duty based on a provision in the operating agreement that waived a member’s right to seek judicial dissolution. The operating agreement noted that the members agreed not to take any other voluntary action that would cause the LLC to dissolve, notwithstanding any provision of the Beverly-Killea Limited Liability Company Act (the “Beverly-Killea Act”) to the contrary. Driggers claimed the Meadses breached both the operating agreement and their fiduciary duties by filing a lawsuit seeking to dissolve the LLC in violation of their agreement.

The Meadses filed a motion to strike the cross-complaint pursuant to the anti-SLAPP statute, arguing it arose out of their right to petition the government for redress of grievances. The trial court found that the cross-complaint arose out of the Meadses filing their complaint, which is an act petitioning the government and Driggers failed to prove that they have probability of prevailing on the cross-complaint. The cross-complaint was stricken. Driggers appealed.

The filing of a complaint is a protected activity under the anti-SLAPP statute—the right to petition. The Meadses engaged in protected activity when they filed their complaint against Driggers. The question then became whether the cross-complaint arose from that protected activity. The Meadses were sued precisely because of they sought judicial dissolution. But for the Meadses’ claim for judicial dissolution, there would be no basis for the cross-complaint. The cross-complaint therefore arose from the Meadses’ protected activity. As such, Code Civ. Proc., § 425.16, subd. (b)(1), shifts the burden to Driggers to show there is a probability he will prevail on his claims.

Based on the Beverly-Killea Act, an operating agreement may not vary or waive a member’s right to seek judicial dissolution. A contract that is contrary to an expressed provision of law is void and unenforceable. Since operating agreement’s waiver provision eliminates the power of a court to decree dissolution in the circumstances specified within the Beverly-Killea Act, the waiver provision is contrary to an express provision of law and is void and unenforceable. As such, Driggers could not establish a probability of prevailing on the cross-complaint. The order striking the cross-complaint was affirmed.

§ 6.3. Breach of Contract

§ 6.3.1. Delaware

AG Mobile Holdings, L.P. v. H.I.G. Mobile, L.P., 2025 WL 501088 (Del. Ch. Feb 13, 2025). The Delaware Court of Chancery granted in part and denied in part the defendants’ motion to dismiss in a dispute arising from the management of Mobileum, Inc. (“Mobileum”). Plaintiff AG Mobile Holdings, L.P. (the “L.P.”), an affiliate of Audax Management Company, LLC (“Audax”), and defendant H.I.G. Mobile, L.P. (“H.I.G.”) jointly owned Mobileum through Matrix Topco, L.P. (the “Partnership”), governed by a partnership agreement. Defendant Matrix Topco GP, LLC (“Matrix”) serves as the Partnership’s general partner, while H.I.G. Technology Partners, LLC (“HIG LLC”) is a special limited partner. The Partnership is controlled by a Board, on include both Audax and H.I.G. representatives.

The Partnership’s Board created a Special Committee consisting only of H.I.G.-appointed directors to investigate alleged accounting irregularities at Mobileum. The Special Committee’s findings led H.I.G. to file a fraud suit against Audax in another court, which caused the L.P. to bring this suit. The L.P. alleged breaches of the Partnership Agreement and other claims, arguing that its designated manager (from Audax) was improperly excluded from the Special Committee and that material information was improperly withheld.

The Court held that the Partnership Agreement clearly required that the L.P. (as Audax’s subsidiary) have a manager on every Board committee, including the Special Committee. Therefore, the L.P. breach of contract allegations were sufficient to state a claim against the individual directors who served on the Board and Special Committee. The Court, however, dismissed all claims against the entity defendants—including H.I.G., the Partnership, H.I.G. LLC., and Matrix—because the Partnership Agreement limited their liability and delegated management authority solely to the Board.

Tatum v. Fairstead Affordable LLC, 2025 WL 3011957 (Del. Ch. Oct. 27, 2025). The Delaware Court of Chancery largely ruled in favor of John Tatum (“Tatum”) and JCT Capital LLC (“JCT”) in a business dispute with the principals and entities behind Fairstead’s affordable housing fund: Fairstead Capital Management LLC (“Fairstead”). Tatum was both a member (partner) in Fairstead Affordable LLC—holding a 5.25% equity stake through JCT—and an employee, who built and led Fairstead’s lucrative tax credit business. Tatum claimed he was wrongly stripped of his equity and denied fair compensation after resigning. Fairstead’s leadership accused him of breaching his duties and misusing confidential information.

The court found that Tatum had not breached his contractual or fiduciary duties by preparing to leave and considering a new venture because he continued to work diligently for Fairstead up to his resignation and did not misuse confidential information. The court further held that Fairstead breached its agreements by (1) failing to follow the promised process for valuing and purchasing Tatum’s equity; (2) taking his equity after he rejected a lowball offer; and (3) making his exit unnecessarily difficult. Tatum received a damages award reflecting the value of his equity interests, his promised share in a prior portfolio, and compensation for interests he transferred on promises never fulfilled.

On Fairstead’s counterclaims, the court ruled that Tatum did breach his contract by downloading and retaining company documents, but found no evidence of harm or improper use, awarding Fairstead only the cost of investigating that issue. All other claims brought by Fairstead—such as breach of fiduciary duty, aiding and abetting, and tortious interference—were rejected.

Schulz Group GmbH v. Jamestown Premier Property Fund, L.P., 2025 WL 1695819 (Del. Ch. June 17, 2025). The Delaware Court of Chancery dismissed, with prejudice, a lawsuit filed by Schulz Group GmbH (“Schulz”), a German family office investor, against Jamestown Premier Property Fund, L.P. (the “Fund”) and its general partner, Jamestown Premier GP, L.P (the “General Partner”). Schulz invested $10 million in a Delaware real estate investment fund, acquiring partnership units under a subscription and partnership agreement. When the General Partner made a capital call during adverse market conditions, Schulz’s units lost value. Schulz sued, claiming the General Partner breached contractual and fiduciary duties by making the capital call at a time unfavorable to Schulz, and by failing to act in Schulz’s best interests.

The Court dismissed all claims, holding that the partnership agreement granted the General Partner broad discretion to manage the fund and make capital calls in the best interests of the fund and all limited partners collectively, not any individual investor. Moreover, Delaware law does not require a general partner to prioritize one limited partner’s interests over those of the partnership. Furthermore, the claim for unjust enrichment was foreclosed by the existence of valid contracts governing the parties’ relationship.

§ 6.3.2. Illinois

Learco Hosp., LLC v. Comacchio, 2025 IL App (1st) 250258-U. Learco Hospitality, LLC (Learco), an Illinois LLC that operated an upscale Italian restaurant in Chicago, sued its minority member and executive chef, Federico Comacchio, asserting breach-of-contract theories and statutory claims under the Limited Liability Company Act. The circuit court dismissed Learco’s third amended complaint with prejudice under section 2-615, and the appellate court affirmed because Learco did not plead actionable contractual duties or facts supporting statutory violations.

Learco was formed in 2018 with two members: Comacchio and an Italian investor entity that controlled 85%. In 2018, the parties executed a lawyer-drafted Letter of Intent (LOI) describing Comacchio’s duties, including taking actions to open the restaurant, providing reports, hiring staff, obtaining permits, purchasing supplies, and ensuring economic results under an attached business plan, though no plan was attached. The LOI also contained a noncompetition clause that, if the restaurant did not open by June 30, 2019, extended the noncompete obligation only through December 31, 2019. Multiple operating agreements were drafted, and the operative operating agreement was signed on January 11, 2020. It defined “Letter of Intent” and incorporated the LOI into the parties’ relationship. The agreement contained an integration clause stating that the operating agreement and LOI reflected all agreements between the parties concerning the company and superseded prior agreements. In the final operating agreement, the LOI controlled in the event of any conflict. The restaurant opened on June 26, 2021. Comacchio resigned in October 2023, effective November 20, 2023.

Learco’s third amended complaint asserted four counts. Count I alleged breach of a separate oral promise made in 2017 to use “sound business practices” in managing the business. Count II alleged breach of the implied covenant of good faith and fair dealing based on Comacchio’s alleged inattention and poor performance. Count III alleged breach of an implied contract term that he would follow “sound business practices.” Count IV alleged LLC Act violations, including competing with the company, personal enrichment at Learco’s expense, and breach of a fiduciary duty of care. Learco’s pleading catalogued more than twenty performance complaints, including failure to monitor email inquiries and vendor payment requests, inconsistent reporting, failure to follow protocols, mishandling of vendor payments and accounting, inadequate scheduling and labor cost control, menu and inventory mismanagement, marketing delays, and strained vendor and PR relationships. Learco framed these as contract breaches and statutory violations.

The appellate court affirmed dismissal of Count I because any alleged 2017 oral agreement was superseded by the integrated written agreements. The integration clause broadly displaced prior agreements concerning the company, and Comacchio’s managerial obligations were tied to his executive chef role. The court rejected Learco’s argument that performance standards were outside the operating agreement’s scope, emphasizing that the operating agreement incorporated the LOI, which described duties, and the parties never executed the referenced separate employment agreement. Count II failed because Illinois law treats the implied covenant of good faith and fair dealing as a construction aid for ambiguous contractual provisions or discretionary performance, not an independent source of new duties. Learco did not identify an ambiguous contract term requiring interpretation and, instead, attempted to use the covenant to impose specific performance obligations not contained in the contract. Count III failed because Learco offered no basis to imply a new contract term requiring “sound business practices” when the written agreements defined the parties’ rights and obligations. The court declined to add implied terms, noting the presumption that parties include intended duties in their contracts. Count IV failed because the operating agreement and incorporated LOI displaced the statutory noncompete duty in a clear and unambiguous way by defining the parties’ agreed noncompete period, which expired on December 31, 2019, long before the alleged competitive conduct. Learco’s remaining statutory allegations were conclusory, including the claim that Comacchio personally benefitted at Learco’s expense, and did not satisfy Illinois fact pleading. The duty-of-care claim also failed because the LLC Act limits the duty of care to refraining from gross negligence, reckless conduct, intentional misconduct, or knowing legal violations, and Learco’s allegations described, at most, poor performance rather than conduct meeting that heightened standard. The appellate court therefore affirmed the dismissal in full.

§ 6.3.3. Michigan

Kircher v. Boyne USA, Inc., __N.W.3d__, 2025 WL 938147 (Mich. Mar. 27, 2025). Plaintiff sued Boyne USA, Inc., a ski business founded by her late father, along with her brother, Stephen, the company’s majority shareholder and CEO, and others, alleging breach of a 2014 settlement agreement entered after she was terminated from the family business in 2012. Under that agreement, plaintiff released her claims in exchange for the right to redeem her shares pursuant to a formula tied to company earnings and debt. The parties later executed a second settlement agreement in 2019 to resolve a separate lawsuit. That agreement fixed redemption prices for plaintiff’s shares for the years 2015 through 2018 based on the 2014 formula but listed the redemption price for 2019 as “to be determined” because it depended on the company’s 2018 financial statements, which were not yet finalized. The parties therefore agreed that the redemption value of plaintiff’s 2019 shares would again be calculated under the same formula set forth in the 2014 agreement that incorporated the company’s earnings and debt. In 2018, the company incurred approximately $300 million in new debt to acquire resort assets, which caused the formula to yield a negative redemption price for plaintiff’s 2019 shares.

After discovering the negative redemption price, plaintiff sued, alleging that defendants breached the 2014 settlement agreement and acted in bad faith by refusing to use an alternative method to calculate the redemption price. The trial court denied defendants’ motion for summary disposition under Mich. Ct. R. 2.116(C)(8) (i.e., motion to dismiss), and the Michigan Court of Appeals affirmed. Relying on the implied covenant of good faith and fair dealing, the Court of Appeals concluded that plaintiff had stated a cognizable breach of contract claim, reasoning that the 2014 agreement’s “unless otherwise agreed by the Parties” language permitted the parties to depart from the formula and supported plaintiff’s allegation that defendants acted in bad faith by declining to do so with respect to the 2019 redemption price.

The Michigan Supreme Court reversed, in part, denied leave to appeal, in part, and remanded for further proceedings, holding that the Court of Appeals erred by concluding that plaintiff stated a valid claim for breach of contract based on defendants’ refusal to negotiate an alternative redemption formula. The Michigan Supreme Court reaffirmed that under Michigan law the implied covenant of good faith and fair dealing is not an independent cause of action and cannot override or replace express contractual terms. Rather, the covenant applies only as an interpretive aid where a contract grants one party discretion in performance. Here, the agreement did not vest discretion in either party regarding calculating the redemption price of plaintiff’s shares. Instead, the parties expressly agreed to a specific formula that unambiguously tied the redemption price, including the “TBD” redemption price of plaintiff’s 2019 shares, to the corporation’s EBIDTA and debt. As such, defendants had no contractual duty to negotiate an alternative formula, and the Court of Appeals erred by holding that defendants were contractually obligated to use a different formula under the implied covenant of good faith and fair dealing. The Court also held that the phrase “unless otherwise agreed by the Parties” imposed no discretionary duty or obligation to depart from the agreed-upon redemption formula. Instead, the language simply recognized the parties’ ability to mutually amend the contract in the future, and absent such a modification, the existing contractual terms governed.

§ 6.3.4. Missouri

Niemeier v. Williams, 707 S.W.3d 779 (Mo. Ct. App. Dec. 24, 2024). Niemeier sued Williams and Green Peak Capital Partners, LLC, claiming Williams promised him a 50% ownership stake in Green Peak in exchange for helping acquire a target company. Niemeier assisted with the acquisition, but no formal ownership documents were executed, and Williams later offered only an employment agreement. At trial, a jury found in favor of Niemeier on both his breach of contract and fraudulent misrepresentation claims, awarding him damages and, additionally, the trial court granted specific performance, ordering that Niemeier receive a 50% ownership interest in Green Peak. Defendants moved for a directed verdict and judgment notwithstanding the verdict, which the trial court denied.

On appeal, the Missouri Court of Appeals reversed the breach of contract and specific performance rulings, holding that no enforceable agreement existed due to missing material terms and ongoing negotiations. However, the court affirmed the fraud verdict, finding sufficient evidence that Williams knowingly misrepresented his intent to grant ownership and that Niemeier reasonably relied on that promise. It also vacated the contract-based damages award to avoid duplicative recovery.

Oliver & Co. v. Zamber, No. 4:24-cv-00635, 2025 WL 1580288 (E.D. Mo. June 4, 2025). Oliver and Company sued its former employee Dr. Louis Zamber for breach of contract, tortious interference, and breach of fiduciary duty, alleging that he violated restrictive covenants after leaving the company by diverting business opportunities, disclosing confidential information, and competing with its veterinary services business. After a bench trial, the trial court entered judgment in favor of Zamber on all claims, finding that Oliver and Company failed to prove enforceable restrictive covenants because the agreements were either not properly executed or lacked consideration. The court also determined that there was insufficient evidence to support claims that Zamber disclosed confidential information or wrongfully solicited clients or employees. On the fiduciary duty claim, the court found no breach because Zamber’s actions occurred after his employment ended, and any pre-departure conduct was not shown to be disloyal or harmful to the company.

The Missouri Court of Appeals affirmed. The Court of Appeals agreed that the restrictive covenants were unenforceable, as the agreements either lacked signatures, were signed only by Zamber but not the company, or were executed after the employment relationship had already begun, thus lacking independent consideration. It also agreed that Oliver and Company failed to prove the elements of tortious interference or breach of fiduciary duty, particularly because Zamber had ceased employment by the time he engaged in the allegedly wrongful conduct. The Court of Appeals emphasized that the trial court’s credibility determinations and factual findings were supported by the record and declined to disturb them.

§ 6.3.5. Texas

S. Methodist Univ. v. S. Cent. Jurisdictional Conference of the United Methodist Church, 716 S.W.3d 475 (Tex. 2025). This case arises out of a dispute between the Southern Methodist University (SMU) and the South Central Jurisdictional Conference of the United Methodist Church (the “Conference”), a nonmember of SMU. Until recently, SMU’s articles of incorporation consistently reflected that the university was “owned” and “controlled” by the Conference and that the Conference’s approval was required to amend those articles. However, in 2019, SMU’s board of directors, without the Conference’s approval, amended SMU’s articles of incorporation to delete all references to the Conference as well as provisions detailing the board’s composition and election. After SMU filed the amended articles with the Texas Secretary of State, the Conference sued. The Conference sought a declaration that the 2019 amendments were void, and they asserted claims for breach of contract and filing a materially false instrument with the secretary of state.

The court held that the Conference had the authority to sue SMU to enforce its rights under the articles and the Texas Business Organizations Code and that the Conference may pursue, at least at this stage, its breach-of-contract claim as a third-party beneficiary of SMU’s articles of incorporation. However, the court found that SMU was entitled to summary judgment on the false-filing claim.

Specific to the Conference’s breach of contract claim, the court addressed what constituted the underlying contract. SMU’s articles of incorporation are not a contract between SMU and the Conference because a nonmember, nonprofit corporation is formed to benefit the public. However, a nonprofit corporation’s articles do constitute a contract between SMU and the State of Texas. A third-party beneficiary to a contract that expressly grants contractual rights to the beneficiary has the right to sue. Here, the Conference is a third-party beneficiary to the articles of incorporation because the articles repeatedly single out the Conference and expressly articulate precise powers the Conference may wield. The court concluded that the Conference could pursue a breach-of-contract claim in its capacity as a third-party beneficiary and affirmed the court of appeals remand to the trial court for further proceedings on this claim.

§ 6.4. Breach of Fiduciary Duty

§ 6.4.1. Arizona

Barsanti v. DeLoach et al., 2025 WL 563466 (D. Ariz. February 20, 2025). Plaintiffs are three individuals (Barsanti, Lawhorn and Vargas) who formed a solar panel installation business with two individual Defendants (Butterfield and DeLoach). Lawhorn accused Defendants of fraudulently securing solar panel financing and, in response, Defendants purportedly removed Lawhorn as a member and manager. Plaintiffs sought a temporary restraining order that would, in effect, reinstate Lawhorn as a member-manager, prohibit Defendants from unilaterally making operating decisions, and require all member-managers to unanimously agree to any proposed spending.

Plaintiffs argued that Defendants had breached their fiduciary duties by withdrawing and dissociating Lawhorn without first acquiring a judicial determination of wrongdoing or providing notice. The Court held that Plaintiffs were unlikely to succeed on the merits of this aspect of their fiduciary duty claim because the Operating Agreement contemplated an involuntary withdrawal of a member without a judicial determination of wrongdoing and, also, the Operating Agreement only required a valuation and payment for the disassociated members interest if one of the other remaining members elected to purchase it. This was not contrary to the Arizona Limited Liability Company Act. The Act contemplates that disassociation terminates the right to participate as a member in the management and conduct of the business but does not necessarily terminate ownership rights—and thus payment was not required.

Plaintiffs also argued that Defendants’ hiring of relatives for unnecessary positions and spending corporate funds for personal use breached fiduciary duties to Plaintiffs. Defendants did not dispute this alleged conduct. The Court, however, found that this undisputed conduct did not create a likelihood of irreparable harm sufficient to support the requested injunction. The Court held that Plaintiffs “have provided only minimal evidence” that the company might be driven out of business by this conduct such that the economic harm they feared could be deemed irreparable and, on this basis, denied Plaintiffs’ request for an injunction.

§ 6.4.2. Delaware

Leo Investments Hong Kong Ltd., 342 A.3d 1166 (Del. Ch. 2025). Here, the Court of Chancery held that the defendants acted reasonably and did not engage in any breaches of fiduciary duty that caused harm to the plaintiff. Plaintiff Leo Investments Hong Kong Limited (“Leo Group”), a Hong Kong-based, indirect subsidiary of a Chinese public company, invested $50 million, as a limited partner in Tomales Bay Capital Anduril III, L.P. (the “Fund”), a Delaware limited partnership formed to acquire SpaceX shares. Tomales Bay Capital Anduril III GP, LLC was the Fund’s General Partner, and Iqbaljit Kahlon (“Kahlon”) was that entity’s managing member.

As part of the deal, Leo Group negotiated a side letter allowing it to publicly disclose its investment in SpaceX, which was required under Chinese regulations. After Leo Group made its required disclosure, the news attracted significant Chinese media coverage. SpaceX objected to the publicity, fearing it could jeopardize its government contracts, and told Kahlon that the Fund would not be allowed to buy SpaceX shares if Leo Group remained an investor. In response, Kahlon invoked a “Forced Withdrawal” provision in the limited partnership agreement to remove Leo Group from the Fund and return its capital contribution.

Leo Group sued the Fund, the General Partner, and Kahlon, arguing that the forced withdrawal was a breach of contract and fiduciary duty. The Court held that, under the terms of the limited partnership agreement, the General Partner had the authority to remove Leo Group when its continued participation posed a material adverse effect or significant delay to the Fund’s activities. The Court found that Kahlon acted reasonably and in the best interests of the Fund and its partners when it removed Leo Group. The Court also clarified that the General Partner and Kahlon owed fiduciary duties to the Fund and its partners as a whole—not to individual limited partners like Leo Group—when exercising the withdrawal provision.

Vice Chancellor Laster, however, did find that Kahlon breached his duty of candor by not fully disclosing to Leo Group the real reasons for its removal during their communications. Because this breach did not cause Leo Group any meaningful harm, the Court awarded only nominal damages of $1 for this claim.

§ 6.4.3. Florida

Kajaine Capital, Inc. v. Abouzeid, 396 So.3d 582 (Fla. Dist. Ct. App. 2024). The Florida Fourth District Court of Appeal held that while Diana Abouzeid (the “Widow”) was entitled to damages for breach of contract in a failed real estate joint venture, she could not recover separate damages for breach of fiduciary duty based on the same conduct—a significant clarification preventing double recovery for a single injury.

This case arose from a joint venture between the Widow and companies controlled by Anand Patel (“Patel”)—Kajaine Capital, Inc. (“Kajaine”) and Worth Avenue Capital II, LLC (“Worth Avenue”), both controlled by (collectively with Kajaine and Worth Avenue, the “Defendants”). Widow and Kajaine each owned 50% of Worth Avenue, with Kajaine as managing member. Their agreement required Worth Avenue to secure a $4.3 million mortgage, pay off existing debts, pay the Widow $300,000, invest at least $500,000 in property renovations, and split any sale profits equally.

After the property sold for less than expected and the Widow did not receive the share she anticipated, she sued Kajaine, Worth Avenue, and Patel (collectively, “Defendants”), claiming breach of contract and breach of fiduciary duty based on allegations including the failure to spend the agreed-upon $500,000 on renovations. At trial, the jury found that Patel did not breach any fiduciary duty but held Kajaine and Worth Avenue liable for both breach of contract and breach of fiduciary duty, awarding the Widow $946,258.25 for breach of contract and $50,000 for breach of fiduciary duty.

On appeal, the Court of Appeal affirmed the breach of contract judgment but reversed the $50,000 fiduciary duty award, holding that the Widow did not present evidence of separate damages for breach of fiduciary duty apart from those for breach of contract. The Court explained that a plaintiff cannot recover twice for the same injury simply because the same conduct supports two legal theories.

Shah v. Patel, 419 So.3d 646 (Fla. Dist. Ct. App. 2025). Here, the Florida Fourth District Court of Appeal held that Sanjay Patel breached his fiduciary duty to two hotel-operating LLCs—Deerfield Hotel One, LLC (“Deerfield One”) and Deerfield Hotel Two, LLC (“Deerfield Two”) (collectively the “LLCs”)—by using a forged management agreement to convert company loans into unapproved management fees, and reversed the lower court’s failure to award damages.

The LLCs were jointly owned by Hiren Shah and Piyush Shah (the “Shahs”), Dr. Umesh Patel (“Umesh”), and Sanjay Patel (“Sanjay”) to renovate, operate, and manage two hotels. The Shahs, as minority members of the LLCs, brought derivative claims against both Sanjay and Umesh alleging that each, while serving as manager, breached fiduciary duties owed to the LLCs. They accuse Sanjay of causing the LLCs to loan company funds to his wife and related entities, including Freeport Marina Hotels (over $1.1 million) (the “Freeport Loan”). And Sanjay allegedly forged Umesh’s signature on a backdated management agreement, using that contract to reclassify the previously outstanding loans as management fees owed—at a rate the Shahs never approved—thereby reducing company assets and creating unapproved liabilities. These alleged actions depleted company assets and created improper liabilities.

The trial court dismissed all claims against Umesh, finding he had no substantive involvement in business operations or the disputed transactions. As for Sanjay, although the court determined he had forged the agreement and breached his fiduciary duty, it found no competent evidence of damages, noting the Shahs were aware of the loans and believing the balances had been eliminated.

On appeal, the Fourth District Court of Appeal affirmed the dismissal of claims against Umesh but found error in the judgment for Sanjay. The Appellate Court held that Sanjay’s actions resulted in financial harm to the LLCs. The Shahs had presented credible evidence of the damages, including the outstanding balance on the Freeport loan, and the trial court failed to compare the LLCs’ financial positions before and after Sanjay’s actions. The appellate court emphasized that managers cannot use forged documents to retroactively justify personal enrichment at the expense of the company.

§ 6.4.4. Illinois

Bosco v. Bosco, 2025 IL App (1st) 231181-U, appeal denied, No. 131701, 2025 WL 2720354 (Ill. Sep. 24, 2025). This case arose from a long-running dispute between two brothers, Robert and Joseph Bosco, who each owned 50% of Lombard Auto Exchange, Inc., a closely held used-car dealership. Robert served as president, while Joseph served as vice president, secretary, and treasurer. Their relationship was contentious for years, particularly over business operations, finances, and the possibility of one brother buying out the other.

In 2014, Robert sued Joseph and Lombard Auto, asserting claims for an accounting, breach of fiduciary duty, unjust enrichment, and shareholder oppression. Joseph and Lombard Auto counterclaimed for breach of fiduciary duty, shareholder oppression, breach of contract, and unjust enrichment. After a bench trial, the circuit court found that neither side proved any of their claims by a preponderance of the evidence and entered judgment for the defendants on Robert’s claims and for Robert on the counterclaims. The appellate court affirmed the judgment in full, concluding that the trial court’s findings were not against the manifest weight of the evidence and that no legal error occurred.

The evidence showed that the brothers divided responsibilities informally. Joseph focused on retail operations, property management, and banking relationships, while Robert handled wholesale vehicle sales and certain administrative tasks. There were no written bylaws or agreements governing work hours, expense reimbursements, or repayment of shareholder loans. Both brothers routinely used corporate credit cards for personal expenses with the understanding that matters would later be reconciled, though no reconciliation ever occurred. A central dispute concerned Joseph’s 2009 purchase of a warehouse with his own funds to address Lombard Auto’s parking and storage needs. Lombard Auto used the warehouse for years without a lease, while Joseph spent more than $100,000 of corporate funds to improve it. Robert knew of and acquiesced in the arrangement for years before objecting in 2014. Other disputes involved Robert’s temporary repayment of his shareholder loan, his refusal to renew a corporate line of credit, and his use of a separate Lombard Auto bank account for wholesale transactions.

On appeal, Joseph argued that the trial court’s rejection of his claims for breach of fiduciary duty, shareholder oppression, breach of contract, and unjust enrichment or quantum meruit was against the manifest weight of the evidence. The appellate court disagreed, holding that the evidence supported the trial court’s findings that Lombard Auto was not harmed, that the brothers’ conduct was consistent with their longstanding informal practices, and that Joseph failed to prove damages or inequitable conduct. The court emphasized that poor or debatable business decisions in a closely held corporation are borne by the corporation absent fraud, illegality, or conflicts of interest.

Robert cross-appealed, arguing that the trial court improperly applied the business judgment rule because Joseph had not pleaded it and that the denial of Robert’s fiduciary-duty claim was against the manifest weight of the evidence. The appellate court rejected both arguments. It held that the business judgment rule is not an affirmative or special defense that must be pleaded, but a rebuttable presumption arising as a matter of law. It further held that the evidence supported the trial court’s conclusion that Joseph’s conduct regarding the warehouse did not constitute a breach of fiduciary duty and, at most, reflected a bad business decision from which Lombard Auto benefitted.

Davis v. Scheck, 2025 IL App (3d) 240444-U, appeal denied, No. 131806, 2025 WL 2717957 (Ill. Sep. 24, 2025). Scheck Lumber Company (SLC) is a closely held family corporation. Plaintiff Anne Davis owns 49% of the shares through a trust, while her brothers, Tim and Kevin Scheck, collectively own 51% and control corporate decisions. Davis sued her brothers, alleging they breached fiduciary duties and engaged in minority shareholder oppression by paying themselves excessive compensation, limiting dividends to pass through tax distributions, and freezing her out of any meaningful economic return on her ownership interest. The dispute followed extensive prior litigation. In a Cook County action resolved after a bench trial in 2013, the trial court rejected similar claims by Davis and her predecessor, finding that Tim and Kevin’s compensation had been approved or ratified, was not excessive, complied with corporate formalities, and did not constitute a gross abuse of power or a freeze out. After that case, Tim and Kevin continued to vote their combined majority together on compensation and other governance matters, over Davis’s objections. In 2023, Davis filed a new action in Du Page County asserting individual and derivative claims for breach of fiduciary duty and shareholder oppression under section 12.56 of the Business Corporation Act. Her theory again centered on alleged excessive compensation that supposedly deprived her of any return on her minority interest. The trial court dismissed the original complaint and an amended complaint for failure to plead sufficient facts, granting leave to replead each time. Davis then filed a second amended complaint alleging that Tim and Kevin’s compensation was excessive, unreasonable, and disconnected from SLC’s profitability, and that they acted together to freeze her out by refusing to pay dividends beyond tax distributions. The trial court dismissed the second amended complaint with prejudice under section 2-615, noting that Davis had been given multiple opportunities to plead facts and acknowledged she could allege nothing further.

On appeal, the appellate court affirmed. Applying de novo review, the court held that Illinois is a fact pleading jurisdiction and that conclusory labels such as “excessive” or “unreasonable” compensation are insufficient. To plead excessive compensation, a plaintiff must allege facts addressing recognized factors such as the officers’ services, responsibilities, time devoted, company profitability, financial condition, and comparable market compensation. Davis pleaded none of those facts and did not allege revenues, profits, retained earnings, compensation benchmarks, or dishonesty in approving compensation. As to oppression, the court held that majority shareholders exercising their voting power, without more, does not constitute a freeze out. Davis did not allege denial of director rights, lack of meetings or notice, violations of bylaws, concealment of information, or other conduct typically associated with shareholder oppression. She alleged only that her objections were outvoted. Because Davis failed to plead nonconclusory facts supporting excessive compensation, waste, or oppressive conduct, she could not state claims for breach of fiduciary duty or relief under section 12.56. Given her repeated failure to cure the defects and her concession that no additional facts could be alleged, the appellate court affirmed the dismissal with prejudice.

Sianis v. Sayeed, 2024 IL App (1st) 231312-U. Plaintiffs George Sianis and Spyridon Theodorakis were minority shareholders of Vital Home & Healthcare, Inc. (Vital), an Illinois corporation providing home healthcare services. Defendant Asif Sayeed was Vital’s president and controlling shareholder. Plaintiffs sued Sayeed alleging multiple breaches of fiduciary duty, including dilution of their ownership interests, usurpation of corporate opportunities, and self-dealing through improper loans from Vital to entities owned by Sayeed, his wife, or his relatives. After plaintiffs sold 90% of Vital to a holding company owned by Sayeed in 1997, plaintiffs retained a combined 10% interest and ceased involvement in Vital’s operations. In 2000, Sayeed became Vital’s president and exercised full control. In 2003, Sayeed claimed he made a substantial capital contribution to Vital and demanded reimbursement from plaintiffs or, alternatively, issued himself over 235,000 additional shares, which drastically diluted plaintiffs’ ownership. At trial, Sayeed admitted Vital was profitable at the time and that he did not personally make the claimed capital contribution. Plaintiffs also alleged Sayeed usurped Vital’s corporate opportunities. First, after Vital ceased Indiana operations in 2012, Sayeed personally acquired an Indiana home healthcare company, Advanced Home Health Care, Inc., without offering the opportunity to Vital, even though it operated in the same line of business and used overlapping personnel. Second, Sayeed purchased office property in Tinley Park without informing Vital, relocated Vital there, charged above-market rent without an appraisal, and shared the space with other entities he or his family owned, generating substantial personal rental income. Additionally, plaintiffs alleged Sayeed caused Vital to make undocumented, interest-free loans to his affiliated entities without board authorization. A forensic accountant testified that Vital’s records were unreliable, the loans lacked documentation, collateral, or repayment, and at least $1.2 million remained outstanding, with additional unexplained discrepancies suggesting even greater losses.

The litigation followed a complex procedural history, including voluntary dismissals, a prior appeal, and remand. After remand, plaintiffs filed a fourth amended complaint reasserting previously dismissed claims. Following a bench trial, the court entered judgment for plaintiffs on claims for dilution of shares, two counts of usurpation of corporate opportunity, and breach of fiduciary duty based on self-interested loans. The court awarded damages reflecting unpaid loans, improper profits from real estate transactions, and other losses to Vital.

On appeal, Sayeed challenged appellate jurisdiction, the refiling of claims after voluntary dismissal, dismissal of his laches defense, and the trial court’s liability findings and damages calculations. The appellate court held it lacked jurisdiction to review dismissal of laches because it was not referenced in the notice of appeal and was waived. The court further held that the one-year refiling limitation in section 13-217 of the Code of Civil Procedure did not apply because the case was continued after remand, not refiled as a new action. On the merits, the appellate court affirmed. It held that the trial court’s findings of fiduciary breach, usurpation of corporate opportunities, and improper loans were not against the manifest weight of the evidence. The court emphasized that corporate fiduciaries must tender business opportunities to the corporation, even if they believe the corporation may be unable or unwilling to pursue them, and that a fiduciary who commingle corporate and personal transactions bears the burden of disentangling them. The trial court acted within its discretion in awarding monetary damages rather than imposing a constructive trust.

§ 6.4.5. Pennsylvania

In re Swarthmore Group, Inc., 667 B.R. 258 (Bankr. E.D. Pa. 2025). In In re Swarthmore Group, Inc., the United States Bankruptcy Court for the Eastern District of Pennsylvania ruled on a motion to dismiss an adversary action brought by the Chapter 7 Trustee against five defendants including Paula Mandle, a former director of Debtor The Swarthmore Group (“TSG”), alleging breach of fiduciary duty, aiding and abetting breach of fiduciary duty, avoidance of preferential and fraudulent transfers, conversion, unjust enrichment, and civil conspiracy. The claims were primarily related to TSG’s purchase of Mandle’s shares at a purchase price allegedly inflated to more than 100 times their fair market value while TSG was insolvent. The allegations were that Mandle coordinated a buyout of her shares with an alleged FMV of $9,205 for $963,941. The buyout was structured as 48 monthly payments with interest. The Court dismissed the claim for avoidance of preferential transfers under 11 U.S.C. § 547 because the payments were outside the 90-day preference period. However, the Court denied the motion in all other respects finding that, as a Director of TSG, Ms. Mandle finding that the payment of an inflated purchase price stated a claim for violation of a Director’s fiduciary duties of care and loyalty, that the transaction suggested several of the “badges of fraud” to support a voidable transaction, and that the remaining claims were adequately pled.

§ 6.4.6. Texas

Bertucci v. Watkins, 709 S.W.3d 534 (Tex. 2025). The court clarified the fiduciary duties owed by limited partners to each other. The general rule is that general partners owe each other a formal duty of loyalty and care, but limited partners generally do not owe each other fiduciary duties. The court concluded here that a minority partner’s control over the partnership’s funds did not create a fiduciary duty to the majority partner as an individual.

This case arose out of a dispute between two business partners, Bertucci, the majority partner, and Watkins, the minority partner. Watkins managed their funds (“B-W funds”) using a bank account owned by a separate partnership, Texas Community Builders, LP (TCBLP), that Watkins and his wife created for their own separate business. Watkins claimed that Bertucci knew that Watkins was comingling B-W funds, TCBLP funds, and Watkins’s personal funds. Watkins had sole authority to expend or distribute funds from that account.

When Bertucci’s health began declining, he gave his power of attorney to manage his finances to his son, Christopher. Christopher became concerned that Watkins had not properly managed or distributed B-W funds and instead had diverted substantial funds for his own personal use. Christopher asked Watkins to provide additional records regarding the TCBLP account, but Watkins refused on the ground that it was his private account. Christopher removed Watkins from his role and proceeded to sell the partnership’s projects.

An interpleader action was brought by parties holding the sale proceedings, and $4.5 million was tendered into the court’s registry. Watkins appeared and asserted claims requesting that funds be distributed to partners. Christopher also appeared and asserted individual and derivative claims against Watkins for violations of the Texas Theft Liability Act, breach of fiduciary duties, breach of the duty to account, equitable disgorgement and forfeiture, and breach of contract.

As to the breach of fiduciary duty claim, the issue on appeal was whether Watkins owed and breached his fiduciary duty to Bertucci as an individual because Watkins assumed control over the B-W funds and functioned as a general partner. Bertucci argued that Watkins’s control over the B-W funds imposed upon Watkins a fiduciary duty to use the funds in accordance with Bertucci’s authorization and created a principal-agent relationship. The court found that Bertucci delegating control over the funds to Watkins did not create an agency or fiduciary relationship, and Watkin’s role managing the funds was only in his capacity as a limited partner.

Davis v. Crawford, 700 S.W.3d 438 (Tex. App.—Eastland 2024, no pet.). Texas courts have not imposed broad-based fiduciary duties on members of a limited liability company (LLC), but, in this case, the court established that managing members of an LLC owe a fiduciary duty to non-managing members.

In 2015, Davis, Crawford, and Carson formed a business, Precision Frac, where VanMeter and Seburg worked as employees. Two years later, Davis, VanMeter, and Hillman pursued a new venture to build multiple water stations through separate entities under WLM Energy, LLC (controlled by VanMeter), with the first project near Barstow, Texas. Hillman, acting as a landman for the project, claimed his company, Dahlia Land Services, LLC, was promised a 5% interest. Litigation ensued. Relevant here, Davis and Hillman filed a suit against Defendants/Appellees Crawford, Carson, VanMeter, and Seburg, alleging that the promised 5% interest was not honored. The trial court granted Defendants/Appellees’ summary judgment motions.

In their motion for summary judgment, Appellees asserted that there was no evidence that VanMeter or any other person owed a fiduciary duty to Hillman. As such, it was incumbent on Hillman to raise a genuine issue of material fact on the existence of a fiduciary duty. Hillman argued that he, Davis, and VanMeter made plans to be partners in a company—he and VanMeter spoke on an almost daily basis, they texted frequently, and they placed confidence in each other. Hillman also attested that in exchange for his work on the project, his company, Dahlia Land, would receive 5% of all money from the business venture. The court determined that these facts supported a finding that VanMeter, the managing member of the LLC, owed a fiduciary obligation to non-managing members, Davis and Hillman, because the relationship between a managing member of an LLC and a non-managing member is similar to that of a general partner/limited partner relationship.

The court sustained Hillman’s cause of action against VanMeter but overruled it as against Crawford, Carson, and Seburg because Hillman did not submit evidence of the fiduciary duties of these parties.

§ 6.5. Declaratory/Equitable/Statutory Relief

§ 6.5.1. California

Angel Lynn Realty, Inc. v. George, 114 Cal. App. 5th 655, 337 Cal. Rptr. 3d 185 (2025). This case addresses the interplay between collateral estoppel and California Code of Civil Procedure § 187, which authorizes a trial court to amend a judgment to add additional judgment debtors on the ground that a person or entity is the alter ego of the original judgment debtor, within the context of a failed partnership between Angel Lynn Realty, Inc. (“ALR”) and Real Estate Portfolio Management, LLC (“REPM”). ALR, who became a judgment creditor against REPM for breaches of a partnership agreement and fiduciary duty, filed a motion to add one of REPM’s member, Steve George (“George”), as an additional judgment debtor to the $1 million judgment entered against REPM. The trial court denied the motion, finding it was barred by collateral estoppel because it had already decided George was not REPM’s alter ego.

ALR filed a lawsuit against REPM and George alleging causes of action for breach of a partnership agreement and breach of fiduciary duty, among others. The complaint also alleged George was the alter ego of REPM. After a bench trial, the court found REPM breached a partnership agreement and its fiduciary duties to ALR; ALR was entitled to $1 million in damages and prejudgment interest; and that ALR had not proven that George was the alter ego of REPM.

ALR’s 187 motion to add George to the judgment was based on George’s action post-judgement. After the judgment was entered, George was accused of fraudulently draining REPM of all of its assets to prevent ALR from satisfying its judgment. The trial court denied the 187 motion based on collateral estoppel, finding it had already determined George was not REPM’s alter ego and ALR was thus precluded from relitigating that issue. The appellate court disagreed.

Though collateral estoppel prevents the re-litigation of issues that have already been decided, the estoppel effect of a judgment extends only to the facts as they existed at the time of the judgment. Some issues are not static. They are not fixed and permanent in their nature. A prior ruling is, therefore, not conclusive as to such issues at some later time. This limitation, however, does not apply simply because a party claims to have discovered new evidence that would make an original claim more persuasive. Instead, the limitation is restricted to those situations in which the rights of the parties are not static but depend upon a current assessment of all the facts considering applicable law. The appellate ruled that alter ego liability is one of those issues that is not static and can change over time.

The court reversed the trial court’s ruling and remanded the matter to the trial court with instructions to decide whether ALR had proven that new, post-judgment facts and/or changed circumstances show that George is now REPM’s alter ego.

Koenig v. Centralia Ltd. Investors, 112 Cal. App. 5th 1174, 335 Cal. Rptr. 3d 112 (2025). Among other issues, this case addresses California’s partnership buyout code, Cal. Corp. Code § 15908.2. The heirs of a limited partner brought action against other partners, the partnership, and others, asserting claims for breach of partnership agreements, breach of fiduciary duty, conversion, declaratory relief, and dissolution, and asserting derivative claims on behalf of limited partnership. The complaint requested, among other relief, the appointment of a receiver and alternatively dissolution or an order compelling the partnership to purchase the heirs’ interests under § 15908.2. The Superior Court, Los Angeles County, granted the heirs’ motion to appoint receiver and denied a limited partner’s application to commence statutory buyout proceedings. Defendants appealed.

Under § 15908.02, subd. (c), “the court, upon application of the purchasing parties, . . . shall stay the . . . dissolution proceeding and shall proceed to ascertain and fix the fair market value of the partnership interests owned by the moving parties.” The word “shall” is mandatory. Nothing in the text of § 15908.02 suggests that its use of “shall” is permissive, just like the code governing the buyout proceedings for corporations. Since all of the conditions to activate § 15908.02 were satisfied the trial court should have stayed the case and initiated buyout proceedings.

Since the heirs challenged the existence of the partnership and sought dissolution, the heirs argued that the trial court was therefore permitted to allow them to litigate their expired partnership theory instead of granting the application to commence buyout proceedings. The court noted that a trial court has no discretion to deny the buyout remedy where the statutory requirements are met. The trial court therefore should have stayed the action, commenced buyout proceedings, but properly appointed a receiver.

§ 6.5.2. Delaware

Shassian v. Riverwalk Park, LLC, 2025 WL 3039285 (Fla. Dist. Ct. App. Oct. 31, 2025). The Florida Sixth District Court of Appeal reversed a summary judgment in a dispute among investors in Riverwalk Park, LLC (“Riverwalk”), a closely held company formed to acquire real estate in Tennessee. The central issue involved a $1 million “credit” claimed by Louis P. Shassian (“Shassian”), one of the company’s original investors. After Riverwalk’s formation, Shassian recruited Wayne Steidle (“Steidle”) and Mark Lass (“Lass”) to contribute $1 million each to help close the deal. The parties disagree about what Steidle and Lass received for their investment. Steidle and Lass contend their $2 million was a loan that also gave them a 25% interest in Riverwalk, while Shassian claims they each paid $500,000 for their shares, and the additional $1 million they invested was a loan to the company. In other words, Shassian believes he is entitled to a $1 million “credit” (i.e., repayment) from Riverwalk.

Riverwalk’s internal records and promissory notes were inconsistent about who was owed what, and eventually, the members voted to revoke Shassian’s $1 million credit and reallocate it to Steidle and Lass. Shassian sued for a declaration that Riverwalk still owed him the $1 million, while Steidle and Lass argued that any claim Shassian had was waived in a prior settlement agreement.

The trial court granted summary judgment against Shassian, but the appellate court found this was error. The District Court of Appeal held that genuine issues of material fact existed as to the parties’ original agreement—specifically, whether Steidle and Lass’s $2 million was structured as equity, loan, or both—and whether Shassian had knowingly and voluntarily waived his claim to the $1 million credit. Because these fact questions were crucial to the outcome and remained genuinely disputed, summary judgment was inappropriate.

Sunder Energy, LLC v. Jackson, 332 A.3d 472 (Del. 2024). The Delaware Supreme Court upheld the Court of Chancery’s refusal to enter a preliminary injunction against Sunder Energy, LLC’s (“Sunder”) co-founder and former head of sales, Tyler Jackson, enjoining him from breach the restrictive covenants contained in Sunder’s LLC Agreement, on the grounds that the covenants were overbroad, unduly restrictive and not reasonably tailored to Sunder’s needs. The Supreme Court additionally upheld the trial court’s refusal to blue-pencil the overbroad restrictive covenants despite the existence of a provision requiring a court to blue pencil the covenants if found to be unenforceable as written.

In Fall 2019, two of Sunder’s co-founders had a law firm draft an LLC agreement that included broad restrictive covenants without involving the other co-founders in the process. The operating agreement contained restrictive covenants prohibiting Jackson from: (1) engaging in competitive activities; (2) soliciting Sunder’s current and former employees and contractors; (3) engaging with Sunder’s customers; and (4) influencing Sunder stakeholders to terminate their relationship with Sunder (together, the “Restrictive Covenants”). The LLC agreement was presented to the minority members on New Year’s Eve without proper disclosures noting that the LLC agreement would alter their rights and internal governance dramatically. Nevertheless, Sunder sought to enjoin Jackson pursuant to the LLC agreement’s terms.

The Supreme Court upheld the Court of Chancery’s determination that it would be inequitable to blue pencil the restrictive covenants where the restricted party had no bargaining power, received minimal-to-no separate consideration in exchange for the restriction, and the provision was not negotiated in any substantive way. The existence of the “blue penciling” provision in the agreement further could not compel the court to rewrite the provision because doing so is an exercise of the court’s equitable powers. In this case, blue penciling would have required a wholesale reformation of the contract to which neither side agreed. Finally, the Supreme Court declined to elucidate a brightline rule delineating when it is proper for a court to blue pencil a provision, instead holding that balancing the well-known Delawarean contractarian principles against restraints on trade requires a nuance approach that does not lend itself to bright-line rules.

§ 6.5.3. Illinois

Barriga v. Ivanova, 2025 IL App (1st) 232209-U. This case arises from a business dispute between former spouses Andres Barriga and Dragana Ivanova, who continued to co-own three closely held companies after their 2022 divorce: Windy City Medical Specialists LLC, Windy City BillPro Inc., and Windy City Injury Care, Inc. Each party owned a 50% interest. The companies sold medical equipment and provided case management and related services to law firms and medical professionals. In June 2024, Barriga sued Ivanova, alleging she had started a competing business, diverted employees and customers, and fraudulently concealed her conduct. Ivanova answered and, in October 2024, filed an amended verified counterclaim alleging that Barriga had opened his own competing business, improperly closed the companies’ office, and engaged in a fraudulent scheme with an attorney to underpay customers. Ivanova sought dissolution of the jointly owned companies and monetary relief. Barriga moved to dismiss the counterclaim. In February 2025, Barriga filed a second amended complaint asserting numerous claims against Ivanova, including fraud, conspiracy, shareholder oppression, breach of fiduciary duty, breach of contract, and trade secret violations. Shortly thereafter, Barriga sent Ivanova a letter stating that he had removed her as a member of the companies, terminated her monthly distributions, removed her from the companies’ bank accounts, and denied her access to company records.

Ivanova responded by filing an emergency motion for a temporary restraining order, seeking to preserve the status quo pending further proceedings. She alleged that Barriga’s unilateral actions stripped her of her membership rights, access to financial information, and equitable distributions. After briefing and argument, the circuit court entered a temporary restraining order requiring Barriga to reinstate Ivanova as a member and to resume her monthly distributions, including payments withheld beginning in March 2025, until a preliminary injunction hearing could be held.

The trial court found that Ivanova had a clearly ascertainable right in need of protection, namely her membership interest in the companies, and that her removal posed a risk of irreparable harm without an adequate remedy at law, particularly given the difficulty of reconstructing prior revenue streams for damages. The court also found a likelihood of success on the merits based on Ivanova’s allegations of fraud and her request for dissolution. The court emphasized that it was not deciding the merits of the parties’ claims but relied heavily on the undisputed fact that Barriga had unilaterally removed Ivanova as a member while the litigation was pending. The court defined the status quo as the parties’ relationship before that removal and ordered a return to that condition.

On interlocutory appeal under Rule 307, Barriga argued that the temporary restraining order was improper because Ivanova’s counterclaim was legally deficient and because the order impermissibly remedied past conduct by requiring payment of withheld distributions. The appellate court rejected both arguments. Even assuming pleading deficiencies in the counterclaim, the trial court acted within its discretion because the order was justified by Barriga’s unilateral alteration of the parties’ ownership relationship and was aimed at preserving the last peaceable, uncontested status pending resolution of the merits. The court further held that the order was not compensatory in nature but properly restored the status quo, distinguishing cases in which injunctive relief merely addresses future conduct.

The appellate court affirmed, holding that Ivanova demonstrated a protectable right, irreparable injury, no adequate remedy at law, and a likelihood of success sufficient to support the temporary restraining order, and that the circuit court did not abuse its discretion in granting temporary injunctive relief.

O’Toole v. Gregory, 2024 IL App (5th) 231054-U. Joshua O’Toole and Raymond Gregory formed Legacy Cheer, LLC, a gymnastics facility, in June 2020 and executed an operating agreement giving each a 50% membership interest. The agreement designated O’Toole as the Operational Manager responsible for day-to-day gym operations and coaching oversight, and Gregory as the Financial Manager responsible for the company’s finances. Each member could independently make purchases up to $5,000. If they deadlocked, operational decisions defaulted to O’Toole and back-office decisions defaulted to Gregory. Their relationship deteriorated in September 2021. Buyout discussions failed, and O’Toole sued in October 2022, alleging Gregory withheld records, breached the operating agreement, made it impracticable to carry on the business, and breached duties owed to the company or members. O’Toole sought to expel Gregory. O’Toole then sought emergency injunctive relief, alleging Gregory slashed O’Toole’s compensation from an agreed $60,000 salary to $20,000, made deductions for expenses, moved the business checking account to a new bank without approval, denied O’Toole access to the new account, and restricted O’Toole’s ability to make purchases, all allegedly to pressure a forced sale of O’Toole’s interest. Gregory opposed O’Toole’s motion and sought his own temporary and preliminary injunctive relief to bar O’Toole from acting as Operational Manager. Gregory alleged O’Toole harmed the business, failed to work at the gym, and used company funds for personal expenses. Gregory also filed counterclaims and sought dissociation of O’Toole under the Limited Liability Company Act.

In August 2023, after the gym temporarily closed, Gregory filed a renewed motion for a preliminary injunction, claiming O’Toole diverted funds and interfered with operations. The dispute centered on access and control of the iClass system and other communication platforms used to schedule classes and contact families. After the office manager resigned, Gregory revoked or limited certain access permissions. O’Toole contended that the resulting inability to communicate with parents created a safety issue that required a temporary closure. The parties offered conflicting testimony about who caused the closure and who could promptly reopen the gym.

After a three-day evidentiary hearing, the circuit court granted Gregory’s requested preliminary injunction. It found Gregory showed a clear right as a 50% owner, irreparable harm from continued closure and loss of goodwill, no adequate remedy at law given ongoing expenses and obligations, and a likelihood of success. The court rejected O’Toole’s safety rationale for the closure and characterized O’Toole’s unilateral decision to shut down operations as egregious. It enjoined O’Toole from participating in the operational management of the business, allowed Gregory to run both operations and finances, and denied O’Toole’s request to appoint a trustee. The court later denied reconsideration, while clarifying that O’Toole could work at the gym only at Gregory’s discretion.

The appellate court reversed. It reiterated that the purpose of a preliminary injunction is to preserve the status quo and that courts should not decide contested facts or the merits at the preliminary stage. The status quo here was the operating agreement’s division of roles, with O’Toole running operations and Gregory running finances. By awarding Gregory full control and excluding O’Toole from management, the circuit court disrupted that status quo and effectively punished O’Toole based on disputed factual determinations. The appellate court emphasized that O’Toole proposed an alternative that would preserve the status quo while protecting the business, namely appointing a trustee to serve as an intermediary so the gym could remain open while the merits were litigated. Relying on the Limited Liability Company Act and the circuit court’s broad equitable authority in disputes where it is not reasonably practical to carry on the company’s business, the appellate court held that injunctive relief could be appropriate, but the form of relief entered was not. The circuit court abused its discretion by denying the trustee option and instead granting Gregory complete control contrary to the operating agreement. The appellate court reversed and remanded with directions to appoint a trustee to oversee operations and to reinstate the terms of the operating agreement, with reporting mechanisms to preserve the status quo pending a final decision on the merits.

§ 6.5.4. Michigan

Pero v. Edwards, No. 368897, 2025 WL 2147466 (Mich. Ct. App. July 29, 2025). The plaintiff and the individual defendants were corporate directors and shareholders of The Land Company (TLC), a corporation formed to hold real property used in operating Cedar Lodge. It operated largely informally and rarely produced a profit. Over several decades, ownership interests and shareholder loans shifted informally as shareholders died, sold their shares back to the corporation, or made internal transfers, often with minimal recordkeeping. Due to gaps in the records, several shareholder loans could not be attributed to specific shareholders. As a result, TLC’s accountant allocated shareholder debt proportionally based on ownership percentages, using financial information provided by TLC’s treasurer. Tensions escalated when disputes arose among the parties over share ownership, loan balances, and use of company property. The conflict culminated in a shareholders’ meeting held without the plaintiff, at which he was removed as president after nearly twenty years in that role and denied the opportunity to vote, including electing officers and directors. The defendants also approved a resolution to issue shares in exchange for sweat equity, a proposal the plaintiff previously opposed.

The plaintiff filed suit against the directors and other shareholders, alleging shareholder oppression under Mich. Comp. Laws § 450.1489(1). After a bench trial, the trial court found that the defendants engaged in oppression by excluding the plaintiff from the governance process, removing him from management, and reducing his ownership interest without proper participation or consent but found no cause of action on the plaintiff’s other allegations of oppression. On appeal, the plaintiff argued that the trial court misapplied the shareholder oppression standard, erred by failing to find oppression based on defendants’ failure to generate profits or make distributions, and failed to address whether the manipulation of shareholder debt owed to him constituted oppression.

The Michigan Court of Appeals held that the trial court applied the correct statutory oppression standard under Mich. Comp. Laws § 450.1489 and properly rejected the plaintiff’s oppression claim based on lack of profits or distributions, explaining that corporate directors’ duties to generate returns and issue distributions arise under fiduciary duty principles rather than the shareholder oppression statute. However, the appellate court determined that the trial court erred by failing to address whether post-litigation manipulation of shareholder debt by TLC’s treasurer constituted shareholder oppression and remanded for further proceedings. The record below showed that, although changes to loan balances between the 2020 and 2021 tax years resulted from rounding methodology rather than misconduct, TLC’s treasurer later undertook a post-suit forensic reallocation of shares and shareholder loans in the 2022 tax return based on unclear records, leaving unresolved disputes over the accuracy and fairness of those reallocations.

§ 6.5.5. Missouri

Blaylock v. Blaylock, 715 S.W.3d 206 (Mo. Ct. App. May 20, 2025). Four siblings, Thomas, Steven, Charles, and Nancy, jointly inherited a 265-acre family farm following their mother’s death. The siblings formed an informal, unwritten partnership to continue farming the property, which included crop land, pasture, timber, and the family homestead. From 2013 to 2016, Thomas was paid for his labor on the farm, while the other siblings took draws from the estate checking account without informing him. In 2016, after a breakdown in family relations, Thomas stopped receiving payments and later attempted to purchase the entire farm. When the other siblings declined, Thomas and his wife filed suit seeking partition by sale, alleging the property could not be fairly divided. Defendants counterclaimed, seeking partition in kind, dissolution of the partnership, and an accounting.

After a bench trial, the trial court ordered partition in kind, awarding Thomas the “horseshoe” tract, valued at $250,074, and granting him a $16,295 owelty to equalize value. The remaining land was awarded to the other siblings as tenants in common. The court dissolved the partnership effective June 2016, ordered an accounting, and allocated proceeds from crop sales to cover attorney fees and individual distributions. It found that both sides had unclean hands, Thomas for attempting to depress land value by restricting access to the horseshoe, and defendants for taking unauthorized draws. The trial court awarded $18,808 in attorney fees to Thomas’s counsel, to be paid from the partnership’s crop revenue, and rejected defendants’ claims of fraud, negligence, and breach of fiduciary duty. It also found that payments made to Thomas prior to 2016 were compensation, not draws.

The Missouri Court of Appeals affirmed the trial court’s judgment in full. It held that partition in kind was supported by substantial evidence, emphasizing that the horseshoe contained 40% of the farm’s most valuable crop land and that Thomas was granted an easement to access the landlocked parcel. It rejected the argument that the owelty award proved great prejudice, noting that owelty is a traditional tool in equity to balance partition values. It also upheld the attorney fee award, finding that the legal work benefited all parties and that the trial court did not abuse its discretion. The Court of Appeals further rejected claims that fees should not have been paid from partnership funds, finding no prejudice since both sides requested accounting and distribution from those proceeds. Finally, it agreed with the trial court’s determination that pre-2016 payments to Thomas constituted compensation for services rendered rather than partnership draws.

§ 6.5.6. New Jersey

Rappaport v. Pasternak, 260 N.J. 230, 332 A.3d 713, reconsideration denied, 260 N.J. 356, 333 A.3d 1211 (2025). This case involves a dispute among members of several limited liability companies (“LLCs”) known as the KBR entities. Laurence J. Rappaport, a former managing member, filed a complaint against other members after being removed from his position asserting claims for declaratory relief and seeking a remedy “other than dissolution.” The parties agreed to dismiss the complaint without prejudice according to the companies’ operating agreements and submitted the same claims to arbitration. Following hearings over fourteen days, the arbitrator found that the defendants lacked cause for terminating Rappaport as a manager and had breached the implied covenant of good faith and fair dealing. However, the arbitrator declined to reinstate Rappaport as a manager because of the “toxic” atmosphere in the KABR entities while he remained there. The arbitrator also denied Rappaport’s claims for declaratory relief, which included a claim that Rappaport was entitled to future compensation under the operating agreements. In his discretion, the arbitrator also denied “the requested $25M in carried interest.”

Rappaport then filed a second complaint in the Chancery Division, claiming he was entitled to future distributions of “carried interest,” arguing the arbitrator did not hold that he was “not a member or was dissociated as a member” of the LLCs. Defendants moved to confirm the arbitration award. The Chancery Court confirmed the arbitration awards and dismissed Rappaport’s complaint. On appeal, the Appellate Division modified the award and reversed the decision, reinstating Rappaport’s complaint and ruling that Rappaport was entitled to carried interest going forward under the operating agreements.

The Supreme Court of New Jersey granted defendants’ petition for certification, reversed the Appellate Division’s judgment, and reinstated the Chancery Division’s decision. The defendants argued that the Appellate Division misapplied the standard of deference to arbitration awards and argued that the question of carried interest was within the scope of the arbitration agreement. Further, defendants asserted that the Appellate Division’s modification of the awards affected the merits of the decision and misapplied the statute providing grounds for modification of an arbitration award.

The court held that the issue of carried interest was indeed submitted to the arbitrator, and the arbitrator did not exceed his authority in ruling on it. The court emphasized the limited scope of judicial review of arbitration awards, noting that they cannot be vacated or modified absent meeting specific statutory requirements, such as fraud or corruption by arbitrators. Furthermore, the Appellate Division’s decision remedy fundamentally affected the merits of the arbitration decision by requiring the parties to maintain a business relationship that the arbitrator called “toxic.” The Supreme Court found that the arbitration decision clearly intended to grant a business divorce so that Rappaport could not participate in the KABR entities, and the arbitrator was within his discretion to deny carried interest.

Parke Bank v. Voorhees Diner Corp., 480 N.J. Super. 254, 328 A.3d 440 (App. Div. 2024). This case clarified the obligations of a court-appointed receiver to manage the assets of an insolvent company under New Jersey law. This case involves the discharge of Alan I. Gould, Esq., a court appointed statutory receiver in a post-judgment action related to a commercial loan default by Vorhees Diner Corporation (“VDC”). The Appellant Division reversed the discharge of the receiver, noting that not every deficiency under receivership statutes would preclude discharge, but at minimum, court rules and the statute require notice to creditors, inventory, and a final accounting. The court also noted that in limited situations where the dissolving corporation lacks sufficient funds to pay for the costs and fees incurred by the receiver, the party that requests the receiver may be ordered to incur the liability for such payments. In this case, Gould was reinstated as a receiver to fulfill unmet obligations, and the court found that the Law Division had the authority to order the creditor to incur the costs if VDC lacked the funds.

§ 6.6. Derivative Action Issues

§ 6.6.1. California

Norman v. Strateman, 112 Cal. App. 5th 92, 333 Cal. Rptr. 3d 706 (2025). CEO of cryptocurrency exchange company filed derivative complaint on behalf of company against members of company for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, conversion, aiding and abetting conversion, unjust enrichment, accounting, and concealment. One of the members filed derivative cross-complaint against CEO for breach of fiduciary duty, conversion, unjust enrichment/restitution, and accounting. The parties entered into a settlement agreement, which was read into the record but never memorialized into a separate written agreement. Over a year after agreeing to settle, the CEO filed a motion to set aside the settlement. The members filed a motion to enforce the settlement, which the trial court granted. The CEO appealed, claiming the settlement was not enforceable because the trial court had not approved the settlement terms and was required to do so because the action was a derivative one.

Courts may consider shareholder derivative plaintiffs as trustees or guardians ad litem to the corporation’s right of action. Thus, such plaintiffs have no power to settle or compromise the corporation’s action absent court approval. Courts must ensure that derivative settlements are fair and reasonable to the corporation and its shareholders, and the settlements are not a product of fraud, overreaching, or collusion by the settling parties. Simply requiring the parties to enter the terms of the settlement into the record does not satisfy this obligation.

The court remanded the case for the trial court to consider whether the settlement is fair and reasonable and not the product of fraud, overreaching or collusion. The court also instructed that all shareholders should be provided notice of such hearing to the extent practicable.

§ 6.7. Statute of Limitations

§ 6.7.1. Delaware

Tilton v. Stila Styles, LLC, 2025 WL 2355090 (Del. Super. July 22, 2025). Lynn Tilton (“Tilton”) and Octaluna III, LLC (“Octaluna”) sued Stila Styles, LLC (the “Company”), alleging breach of the LLC Agreement for failure to pay $21.8 million in deferred tax distributions for the years 2009–2015. Tilton, as manager of both Octaluna and Stila, claimed to have entered into a series of unwritten “Deferral Agreements” to postpone payment until Stila had sufficient working capital. The parties moved for summary judgment and the Court of Chancery denied the motions, holding that Tilton and Octaluna’s claims were not time-barred or extinguished by bankruptcy, but there were factual disputes that precluded summary judgment in the plaintiffs’ favor.

Tilton controlled the Company through her entity Octaluna and a fund called Zohar III Limited (“Zohar”), which owned all of the Company’s membership interests during the relevant period. As the Company’s sole manager, Tilton arranged for Octaluna to pay the Company’s income taxes from 2009–2015 because the Company was a disregarded entity for tax purposes. In return, the Company had to reimburse Octaluna for those tax payments. Tilton claimed that the parties had an oral agreement to defer repayment until the Company had enough cash.

In response to the plaintiffs’ lawsuit, the Company argued that the tax claim was untimely and, critically, that it had been wiped out by Zohar’s bankruptcy plan during its Chapter 11 bankruptcy. The Court disagreed, noting that the Company’s financial records consistently acknowledged the tax debt, which tolled the statute of limitations and kept the claim alive. Importantly, the Court found that Zohar’s bankruptcy plan did not release the Company from its contractual obligation to repay the tax reimbursements to Octaluna; rather, the plan specifically preserved claims like Octaluna’s against the Company.

Moreover, because of unresolved questions regarding the existence of an enforceable deferral agreement and the precise amount the Company owes, the Court denied summary judgment for the plaintiffs.

§ 6.7.2. Texas

Bertucci v. Watkins, 709 S.W.3d 534 (Tex. 2025). In addition to the issues discussed in the Breach of Fiduciary Duty section above, the court also addressed a statute of limitations issue. Watkins argued that Bertucci’s claims were barred by limitations because Bertucci knew or should have known of Watkins’s actions long before he filed his claims. According to Watkins, this fact was conclusively established by the evidence that Bertucci was the sole investor and an officer, director, member, or partner in the partnership (and thus, like Watkins, owed fiduciary duties to the partnership), and always had access to Watkins’s accounting records.

The court concluded that other evidence created a fact issue on this point, such as the fact that Watkins agreed that he would manage the B-W funds and handle the accounting in accordance with the partners’ agreements, that Watkins owed fiduciary duties to the partnership, that he alone had signature authority over the bank account, that he consistently assured Bertucci that he was properly managing the funds and was only taking amounts Bertucci had agreed he could take, that he, in fact, used B-W funds for his personal benefit, and that, when requested by Christopher, he refused to provide financial information regarding the bank account and made inconsistent statements about the amounts he was entitled to take for his personal use and the amounts he actually took. Thus, the court affirmed the appellate court’s holding that fact issues precluded summary judgment in favor of Watkins on the statute of limitations issue.

§ 7. Valuation and Damages

§ 7.1. Delaware

Ban v. Manheim, No. 2022-0768-JTL, 2025 Del. Ch. LEXIS 118 (Del. Ch. May 19, 2025). In this post-trial ruling, the Court of Chancery held that the controlling owner in an LLC, who unilaterally adopted a by-law providing a call right which allowed the majority owner to compel the minority owners to sell at a “fair price” that the majority sets, is self-interested and procedurally and substantively unfair, and that the defendant ultimately failed to prove the fairness of the transactions. The LLC managed investment funds. Ultimately, the call right was found statutorily invalid under Delaware law because the subject minority owner had not consented to the by-law.

Regarding valuation: as a remedy, the Court awarded monetary damages measured as the fair market value of the subject minority owner’s interests less any cash distributions received from the challenged transactions, instead of recission, considering monetary damages more practical and efficient. Expert witness testimony on valuation was preferred. The Court accepted the use of the Discounted Cash Flow valuation methodology but rejected the later use of new projections by the expert to come up with a higher valuation in a supplemental report, which it deemed less unrealistic. The Court commented “That was improper. An expert cannot come up with completely new inputs in a supplemental expert report. An expert can make adjustments to his opinions to reflect late-breaking discovery, account for the evidence stated at trial, or respond to criticisms from the other side. Here . . . went too far.”

Enhabit, Inc. v. Nautic Partners IX, L.P., 2024 WL 4929729 (Del. Ch. Dec. 2, 2024). In a post-trial Memorandum Opinion, the Delaware Court of Chancery awarded an equitable payment stream, together with mitigation damages and attorneys’ fees due to the egregious breaches of fiduciary duty by Encompass’ officers. April Anthony was the successful founder of Encompass Home Health & Hospice. After becoming disillusioned by the management of her company following its acquisition, she formed a competing business together with two fellow officers. In the course of competing directly with Encompass, they took opportunities, resources and information belonging to Encompass and also induced Encompass employees to join the new, competing company. All of the foregoing was carefully concealed.

Encompass sought rescissory damages in the amount of $462 million or, in the alternative, $157 million in compensatory damages. However, the damages amounts were based solely on projections while the competing company remained profitless. Due to the egregious nature of the breaches of duty, the Court imposed a constructive trust against a fixed portion of the future payment streams in the amount of 43%, together with mitigation damages and attorneys’ fees and costs.

§ 7.2. Illinois

Wolfson v. Dugout Northbrook, LLC, 2025 IL App (1st) 232257. In 2014, Ross Wolfson, Matt Mahay, and Kent Knebelkamp formed Play Ball USA–Northbrook/Glenview, LLC, a member-managed LLC providing youth baseball and training services. Wolfson and Mahay (together, plaintiffs) collectively owned 50% of Play Ball, while Knebelkamp owned the other 50%. The business operated out of a facility leased from GK Holste, LLC, an entity partly owned and managed by Knebelkamp. By 2016, management disputes arose and Knebelkamp took control of Play Ball’s accounting and finances. The owners discussed a separation and wind-up arrangement under which plaintiffs would step back from management, Knebelkamp would run the business under a different name (“The Dugout”), plaintiffs would retain rights to the “Play Ball” name, and the parties would divide Play Ball’s assets. Plaintiffs stopped managing day-to-day operations in late 2016, but Knebelkamp allegedly refused to divide assets and instead attempted to reduce Wolfson’s ownership interest.

In early 2017, plaintiffs demanded formal dissolution. Knebelkamp ignored the demand and continued operating. He then formed Dugout Northbrook, LLC, ran an essentially identical business, and, according to plaintiffs, transferred Play Ball’s assets and operations to Dugout. Plaintiffs also alleged that Knebelkamp used Holste to lease Dugout the entire property (rather than the smaller portion Play Ball had leased), dramatically increased the rent and utilities paid to Holste, and thereby funneled money to himself through related-party transactions. Plaintiffs also alleged that Play Ball’s 2017 tax return showed distributable income to Wolfson that was never paid.

Plaintiffs filed suit seeking (among other relief) dissolution and asserting claims for conversion (count II), breach of fiduciary duty (count III), and unjust enrichment (count IV). Plaintiffs moved for summary judgment and supported the motion with extensive documentary evidence, including bank records, deposition testimony, leases, correspondence, and an expert valuation of Dugout. Knebelkamp largely responded with denials unsupported by counteraffidavits or documentary evidence. The circuit court granted summary judgment for plaintiffs on counts II–IV. It found undisputed evidence that Knebelkamp transferred funds from Play Ball to Dugout, retained or used Play Ball property (including at least a computer and customer lists), and refused repeated demands to divide assets, establishing conversion. On fiduciary duty, the court held Knebelkamp’s duties extended through dissolution and wind up, and that his conduct diverted Play Ball assets for his and Dugout’s benefit. The court also found unjust enrichment based on Knebelkamp’s wrongful retention of Play Ball’s assets and benefits to plaintiffs’ detriment. After summary judgment, the circuit court awarded plaintiffs $513,010.31 in compensatory damages, calculated primarily as 50% of (1) the increased rent paid by Dugout to Holste compared to Play Ball’s rent, (2) utilities paid under Dugout’s lease that Play Ball had not paid, (3) cash distributions Dugout made to Knebelkamp, and (4) 50% of Dugout’s fair market value as of September 30, 2020, based on plaintiffs’ unrebutted expert report. The circuit court also awarded $187,119.67 in attorney fees as punitive damages (50% of the requested fees), finding Knebelkamp’s fiduciary breaches willful and egregious and concluding fees could be imposed as punitive damages.

On appeal, Knebelkamp challenged the summary judgment rulings and the compensatory and punitive awards. The appellate court affirmed. It held Knebelkamp failed to create genuine issues of material fact because he did not support his denials with counteraffidavits or record citations, waived certain arguments by not raising them below, and could not rely on new evidence first presented on reconsideration without a reasonable explanation. The court also rejected Knebelkamp’s dissociation/valuation theory, noting plaintiffs withdrew from management, not membership, and that tax filings continued to treat them as members. Finally, the court held punitive damages (including attorney fees as an element of punitive damages) are available for breach of fiduciary duty and conversion, and it found no abuse of discretion in the punitive award. The appellate court affirmed the circuit court’s summary judgment order and both the compensatory and punitive damages awards.

§ 7.3. Maryland

Maxisiq, Inc. v. Hurysh, No. 22-0314 PJM, 2024 U.S. Dist. LEXIS 201767 *; 2024 WL 4680325 (D. Md. Nov. 5, 2024). This case arose as a buy/sell agreement contract dispute between a corporation in the communications and computer services business and a former member-employee with a 10% ownership interest. The company filed a declaratory judgment action seeking termination of the employee, removal as a member, and valuation and repurchase of his shares. A dispute arose regarding whether the proffered valuation for the company was done in good faith, and the former employee claimed rights to examine the company’s books and records. The US District Court determined that the member-employee had a right to examine books as a litigant, but not as a member.

Regarding the valuation of the membership interest, the court determined that a genuine dispute of material fact existed regarding whether it was conducted in good faith. Although the appraiser retained by the company followed the procedures in the company’s operating agreement, the court found that material issues of fact needed to be determined at trial about the appraiser’s methodology and reliability.

Nevertheless, the court also determined that the 10% member was properly removed from the company and no longer had accounting and inspection rights as a member. But, the court determined, as a litigant, the member would be granted access and discovery to assess the value of the shares and to investigate potential mismanagement and waste of corporate funds.

§ 7.4. Michigan

Atto v. Shammami, No. 367147, 2025 WL 1948908 (Mich. Ct. App. July 15, 2025). After the Comfort Inn in Sault Ste. Marie lost its Choice Hotels franchise flag, plaintiff and defendant formed Soo Hotels, Inc. to operate the hotel while attempting to regain authorization to operate under the Comfort Inn brand. Plaintiff later filed suit on behalf of himself and Soo Hotels, asserting claims of embezzlement, conversion, breach of fiduciary duty, breach of contract, and shareholder oppression. He alleged that defendant froze him out of corporate governance, diverted company funds for personal use, paid himself excessive management fees, and withheld financial information.

Following a bench trial, the trial court rendered a verdict in favor of plaintiffs, finding that defendant treated Soo Hotels as if he were the sole shareholder, excluded plaintiff from governance, converted corporate funds for his own use, and falsely told the corporation’s bank, accountant, and hotel manager that plaintiff no longer held an interest in Soo Hotels and should not be given information. Judgment was entered in favor of Soo Hotels in the amount of $2,029,237.35 for embezzlement and statutory and common law conversion after calculation of treble damages under Mich. Comp. Laws § 600.2919a. The trial court awarded $338,206.23 in damages to the individual plaintiff on the shareholder oppression claim but declined to dissolve the corporation, instead leaving a management company in place to operate the hotel.

On appeal, the sole issue was whether the trial court erred in its calculation of damages and improperly awarded a double recovery for a single injury. Defendant argued that the damages awarded were unsupported by the evidence, relied on flawed accounting, failed to credit his claimed contributions, and impermissibly duplicated recovery. The Michigan Court of Appeals rejected those arguments and affirmed the trial court’s decision, finding that the damages award was not clearly erroneous because it fell within the range of the evidence and was based on a correct application of the governing law and that defendant had failed to preserve the issue of double recovery for appellate review by not raising it in the trial court. Specifically, it found that the trial court’s damages award was supported by both documentary evidence and testimony, including defendant’s own admissions that he had taken substantial sums from Soo Hotels beyond his agreed-upon management fee. It also found that the trial court properly deducted authorized fees and unsupported amounts before imposing treble damages for conversion. Additionally, it noted that damages need not be calculated with mathematical precision, so long as there is a reasonable basis for the computation.

Ideal Holdings of Michigan, LLC v. High Consultants, LLC, 2024 WL 4851400 (E.D. Mich. Nov. 21, 2024). Ideal Holdings of Michigan, LLC and Done Right Properties, LLC sued The High Consultants, LLC and its principal, Marc Steimer, arising out of a failed LLC venture governed by an operating agreement. The complaint asserted claims for breach of contract, breach of fiduciary duty, and member and company oppression under Mich. Comp. Laws § 450.4515. Plaintiffs alleged that High Consultants diverted company opportunities, withdrew from the venture in bad faith, interfered with member relationships, engaged in undisclosed conflicts of interest, refused to execute agreements necessary to carry out the company’s purpose, and ultimately caused the venture to fail. High Consultants failed to appear or answer, and the clerk entered default. The district court then held an evidentiary hearing on damages before ruling on plaintiffs’ motion for default judgment as to High Consultants.

Applying Federal Rule of Civil Procedure 55, the district court first analyzed whether the well-pleaded allegations established liability as to the defendant entity. It declined to enter default judgment on the breach of contract claim, finding that plaintiffs failed to connect the alleged misconduct to specific provisions of the operating agreement. It also noted that Michigan law does not recognize a freestanding claim for breach of the implied covenant of good faith and fair dealing unless the contract grants discretionary authority. However, the district court found that the same factual allegations were sufficient to establish liability for breach of fiduciary duty and LLC member oppression under Mich. Comp. Laws §§ 450.4404 (fiduciary duty) and 450.4515(1)(e) (oppression). It noted that Michigan law imposes fiduciary duties on members and managers in control of the limited liability company to act in good faith, with due care, and in a manner the manager or managing member reasonably believes to be in the best interests of the company. The admitted allegations, including improperly diverting company opportunity, interfering with relationships among the members, and engaging in impermissible conflicts of interest, satisfied these standards and sufficiently established causation of damages.

With respect to damages, the district court emphasized that under Rule 54(c), default judgment relief is limited to the amount demanded in the pleadings, and plaintiffs may not recover more than once for overlapping claims. Based on expert testimony presented at the evidentiary hearing regarding past and future lost profits, the district court found that plaintiffs had established that High Consultants’ conduct caused plaintiffs to incur damages of $5 million, which fell within the range pleaded. Accordingly, the district court entered default judgment against High Consultants on the breach of fiduciary duty and oppression claims in the amount of $5,000,000, denying recovery on the breach of contract claim and declining to award duplicative damages.

Ideal Holdings of Michigan, LLC v. High Consultants, LLC, 2025 WL 786613 (E.D. Mich. Mar. 12, 2025). After obtaining a default judgment against The High Consultants, LLC, plaintiffs sought a default judgment against its principal, Marc Steimer, after he failed to answer the complaint following the district court’s denial of his motion to dismiss. In ruling on the default judgment against High Consultants, the district court had previously held that plaintiffs’ recoverable damages were capped at $5 million, the amount pleaded in the complaint. In their motion for default judgment against Steimer, plaintiffs asked the court to rule differently and award damages exceeding $5 million.

The district court granted default judgment against Steimer under Rule 55, finding that the well-pleaded allegations established his liability for breach of the operating agreement, breach of fiduciary duty, and member oppression under Mich. Comp. Laws § 450.4515. However, the court rejected plaintiffs’ request for damages exceeding $5 million and declined to amend the prior default judgment against High Consultants. The district court determined that all three claims arose from the same underlying conduct and held that plaintiffs were entitled to a single recovery capped at the amount disclosed in the complaint, precluding any double or triple recovery.

§ 7.5. New York

LeVine v. Platzer, Index No. 652616/2021, 2025 N.Y. Misc. LEXIS 8520, 2025 NY Slip Op 34050(U), 2025 LX 487106 (Oct. 17, 2025). In this case, the value of the plaintiff’s ownership interest in an LLP law firm as of the date of judicial dissolution was at issue. The experts agreed to some extent on the selection of the general valuation approach but had divergent opinions regarding the value of accounts receivable, work-in-progress, contingency/flat-fee cases, and its lease.

Regarding valuation of accounts receivable, the court rejected both sides’ expert opinions stating that plaintiff’s expert used arbitrary collectability percentages and the defendant’s expert’s views were unpersuasive. Instead, the court developed its own valuation for accounts receivable by cross-checking it against actual historical collections. Regarding work-in-progress, the court rejected the defendant’s attempt to avoid using a previous stipulation.

Regarding valuation of contingency fees, the court rejected the defendant’s assertion that the contingency and flat-fee cases were impossible to value. Instead, the court adopted and applied an approximation based upon five years of historical revenues. For the lease, the parties disputed whether or not the lease was a liability of the LLP which reduced value. Nevertheless, the court found that the evidence showed that all of the partners planned to continue practicing in the new space under a new firm, with the same employees, and clients. The court also found that the new firm intended to take over the lease and pay it and that there was no evidence that the lease terms were above or below market. The court concluded that lease was not an economic liability of the LLP for valuation purposes.

Segal v. Rethink Capital Partners, Index No. 74512/2024, 2025 N.Y. Misc. LEXIS 2517, 2025 NY Slip Op 50566(U) (Apr. 10, 2025). This case involved a limited liability company and a mandatory buyout of a minority owner pursuant to an operating agreement. The company operated as an investment manager. The plaintiff minority owner asserted that the majority owners engaged in a “scheme” to “artificially depress” value to spur an artificially low buyout price. In addition, the minority owner asserted that the valuation firm engaged by the company participated in the scheme and sued the valuation firm, asserting aiding and abetting of fiduciary duty breaches, civil conspiracy, and breach of contract, plus asking for a declaratory judgment that the valuation is invalid.

Regarding the claims against the valuation firm: the trial court ruled that the valuation firm could not be sued because of a procedural failure. Nevertheless, the court also ruled that the valuation firm was hired unilaterally by the company and, therefore, the valuation was invalid because the operating agreement required mutual agreement by both parties on the selection of an independent valuation firm. Furthermore, the procedural failure is because the defendant valuation firm is not the valuation firm “retained” under the operating agreement, because the defendant valuation firm was not properly retained. Therefore, the court also dismissed the part of the plaintiff’s action against the appraisal firm.

§ 7.6. Virginia

Kirdassi v. White, 913 S.E.2d 311 (Va. Ct. App. 2025). The owners of a Delaware corporation were in business divorce litigation involving multiple claims and the related valuation implications. Claims of breach of fiduciary duty, breach of contract, conversion, and statutory business conspiracy under multiple states’ laws were asserted. The corporation is in the business of medical provider and wellness therapy services. At trial, the court rejected expert opinion regarding valuation because of what the court deemed to be unreliable financial information.

On appeal, regarding valuation and damages, the Appellate Court found that the trial court misconstrued the shareholders’ agreement regarding the required valuation terms, that the trial court’s valuation finding lacked support, and that led to incorrect quantification of damages. The Appellate Court remanded the case to the trial court to redetermine liability and damages to quantify contractual damages consistent with the shareholders’ agreement’s language and the plaintiff’s documented investment.

Directors’ and officers’ liability insurance only protects boards, executives, and other individuals for claims challenging conduct undertaken in an official capacity on behalf of the insured company. Given the importance of the specific role, status, or official function held when the alleged wrongdoing occurred, so-called “capacity” issues are a recurring source of coverage disputes and denials.

The sources of capacity limitations range from conspicuous—like outside-capacity exclusions—to more nuanced—like embedded requirements in definitions or allocation methodologies. In all instances, small wording differences can determine whether an insurer must defend or advance costs for a claim involving overlapping corporate, personal, or outside-entity roles.

Policyholders should therefore resist treating “capacity” as a single exclusion to check at renewal. The better approach is to assess the issue across the entire policy and compare the wording against the company’s actual organization, governance, and business practices. Here are four places where capacity problems can arise.

1. Who Qualifies as an “Insured Person”?

Almost all D&O policies define insured persons to include past, present, and future “duly appointed or elected” directors and officers, which can create coverage hurdles for nonelected and nonappointed officers, including chief information security officers (“CISOs”) who may find themselves under intense scrutiny following security incidents. Qualifying as an insured persons can also negate coverage if, for example, an individual’s status as a duly elected or appointed member of the board brings a claim within a D&O policy’s insured-versus-insured exclusion.^[1]

Insured person coverage also extends to individuals only when they are acting in capacities on behalf of insured entities. While a superficial assessment of coverage for all appointed officers and directors may seem broad, securing coverage for individuals on boards of the company’s subsidiaries, affiliates, or joint ventures can lead to surprise denials if those entities are not also insured under the company’s D&O policy. Tracking coverage up and down the organizational chart, especially for executives wearing multiple hats across affiliated entities, can avoid uninsured entities leading to material gaps in coverage.

Broader coverage in private company D&O forms can extend to employees and, in some cases, even independent contractors. Specialized private equity policies can also include partners, managers, and other parties at different affiliated entities. While such broad definitions of insured persons may be comforting, that doesn’t necessarily mean coverage is always preserved. For example, expanded coverage may be dependent on additional requirements being met, like having proper indemnification agreements in place that are at least as broad as those in place with regularly appointed officers or directors. Where no such agreements exist, coverage may be denied.

2. Understand Capacity Limitations in the Definition of “Wrongful Act”

The policy’s definition of “wrongful act” can also serve as another barrier to coverage. Some policies define wrongful act to include any error, misstatement, misleading statement, act, omission, neglect, or breach of duty actually or allegedly committed or attempted by an insured person “solely in their capacity as such.”

When a policy limits coverage to only acts committed “solely” in an insured capacity, that limitation can be used to bar coverage for so-called “mixed” claims alleging acts committed in both covered and uncovered capacities. To demonstrate the problematic nature of such a policy requirement, consider the following claim examples.

• A company is sued by a current employee’s former employer in a suit alleging breach of employment agreements (at the prior company) and theft of trade secrets in a course of conduct that allegedly occurred before, during, and after the employee was hired.
• Minority shareholders allege that a founder CEO structured a transaction to increase the value of the CEO’s personal holdings at the expense of other shareholders, challenging his conduct in managing the company, as well as in personally enriching himself as a key shareholder.
• A portfolio company board member who was appointed by a private equity sponsor is sued by creditors in a suit alleging that the outside director favored the sponsor’s interests over those of the company.

These scenarios are not hypothetical. In Liberty Insurance Underwriters, Inc. v. Cocrystal Pharma, Inc., No. 22-2242, 2023 WL 3067498 (3d Cir. Apr. 25, 2023), for example, the parties disputed whether a Securities and Exchange Commission investigation concerned wrongful acts committed by the insured company’s directors and officers, which required acts by insured persons “in their capacities as such,” or whether the investigation involved acts of the predecessor company that fell outside of coverage. The Third Circuit concluded the SEC’s subpoena reasonably indicated that the investigation involved wrongdoing by the insured company, which created fact issues for trial.

If wrongful-act definitions insure only conduct taken “solely” in covered capacities, or if the policy is not structured in a way to account for dual- or multi-capacities (e.g., allocation, outside directorships), the D&O policy may not respond as intended.

3. Beware of Capacity Exclusions

Perhaps most problematic of all are capacity exclusions, which often explicitly bar coverage for claims arising in whole or in part out of acts allegedly done in an uninsured capacity. One version of that exclusionary language bars coverage for

payment for Loss in connection with any Claim made against an Insured Person based upon, arising out of, directly or indirectly resulting from, or in any way involving any wrongful act while serving in the capacity as a director, officer, trustee, employee, or member of any other entity other than the Insured Company.

Entities implicating capacity exclusions include affiliated companies, joint ventures, subsidiaries, and venture capital or private equity portfolio companies, to name a few. In Mist Pharmaceuticals, LLC v. Berkley Insurance Co., 355 A.3d 253 (N.J. 2026), the New Jersey Supreme Court applied a capacity exclusion for claims “in any way involving” service for an uninsured entity to bar coverage for self-dealing claims implicating the insured person’s overlapping roles with insured and uninsured entities. Other courts have taken similar views when interpreting broadly worded capacity exclusions.^[2]

Broad lead-in language like “based upon,” “arising out of,” or “in any way involving” can make express capacity exclusions even more consequential, reaching entire claims that combine insured and uninsured roles, rather than only the portion attributable to outside service.

4. Consider Capacity Issues in Business Transactions

Contracts themselves can also serve as a barrier to coverage. Certain loans, such as those found in real estate “bad boy” carve-outs, can often involve personal guarantees, requiring the corporate officers to sign as a guarantor. Directors and officers may operate under the assumption that such guarantees were entered into as part of their duties on behalf of the company, given that the loans in question are pursued for business interests.

Insurers, and sometimes courts, may not view them as favorably when assessing D&O coverage for claims arising from contracts executed in personal capacities. The manner in which contracts are signed may also be brought into question. Contracts that directors and officers sign in their individual names (without mention of an executive role) are even more likely to be viewed as personal contracts and uninsurable by a D&O policy. In Hanover Insurance Co. v. Larson, No. 25-2543, 2026 WL 2295457 (8th Cir. Aug. 10, 2026), for example, executives signed loan documents associated with the company, but they also signed separate guaranty agreements identifying themselves as guarantors without referencing their executive titles in the signature blocks.

When lenders later sought payment from the executives individually, the D&O insurer denied coverage. The policy covered former executives only while acting solely in their insured capacities, and the court concluded that the guarantees reflected an intent to assume personal liability. The restrictive definition of insured person removed the guaranty claims from the scope of coverage under the company’s D&O policy.

Takeaways

Capacity questions abound in D&O policies. Coverage may turn not only on nuanced policy wording but also on the specifics of corporate appointments, the entities involved in the alleged conduct, the underlying transaction, and the facts alleged in each claim.

Policyholders should evaluate capacity risk against how executives actually operate, particularly where individuals serve multiple affiliated entities. At renewal, policyholders should seek wording that accommodates mixed capacities, limits capacity exclusions to loss attributable to uninsured roles, and avoids “solely” requirements that can convert an otherwise covered role into a complete bar to coverage.

1. See, e.g., Divinia Water, Inc. v. Clear Blue Specialty Ins. Co., No. 4:23-mc-00095-AKB, 2024 WL 1131291 (D. Idaho Mar. 15, 2024) (holding under Idaho law that the company’s ratification of procedurally deficient board appointments rendered the individuals “duly elected or appointed” directors, making them “insureds” that triggered the D&O policy’s insured-versus-insured exclusion). ↑

2. See, e.g., Sec. Nat’l Ins. Co. v. Hendrik Uiterwyk, P.A., 725 F. Supp. 3d 1308, 1321–23 (M.D. Fla. 2024) (barring coverage under capacity exclusion in professional liability policy where underlying claims involved joint venture that was a separate business enterprise from the insured law firm); Goggin v. Nat’l Union Fire Ins. Co. of Pittsburgh, No. N17C-10-083 PRW CCLD, 2018 WL 6266195, at *4–5 (Del. Super. Ct. Nov. 30, 2018) (affirming insurer denial for claims against directors where alleged wrongdoing was not “solely by reason of their status” as executives of the insured). ↑

Alternative Dispute Resolution (“ADR”) processes such as arbitration and mediation have emerged as the preferred framework for resolving financial disputes across industries: from complex banking litigation and securities controversies to commercial lending conflicts and insurance coverage battles. For business attorneys advising clients with financial stakes, ADR offers a compelling array of procedural advantages that might not be available in litigation.

Nowhere are the advantages of ADR more apparent than in financial disputes. Cost efficiency, one of ADR’s most touted advantages, is one of the main reasons. Financial disputes routinely involve voluminous document discovery, expert witnesses, and extended pretrial proceedings, each adding costs. Using ADR compresses this timeline, often resolving disputes in months rather than years, delivering proportionate outcomes without disproportionate legal spend. Beyond cost, the confidentiality offered by ADR is also a key consideration: Unlike public court proceedings, ADR outcomes and proceedings remain private, protecting sensitive financial data, proprietary methodologies, and reputational standing, all concerns of paramount importance for institutional clients, investment firms, and high net worth individuals. ADR also provides litigants with the ability to select neutrals with financial expertise from a deep well of experts who have often practiced in the very area at issue in the dispute. By doing so, parties retain greater control over the process; selection of arbitrators and mediators, coupled with the ability to choose procedural rules and provide substantial input on scheduling, offers a degree of autonomy that litigants do not enjoy in court. Finally, ADR agreements are broadly enforceable under domestic and international frameworks, including the Federal Arbitration Act and the New York Convention, giving awards a reliability that often rivals, and in cross-border matters, surpasses, court judgments.

Understanding these benefits is key for parties wishing to effectively use ADR for financial disputes.

Key Considerations Before Choosing ADR

While the benefits of ADR for financial disputes are numerous, not every financial dispute is equally well suited to every ADR mechanism. Business attorneys must evaluate several threshold considerations before recommending a path.

• Nature and Complexity of the Dispute: High-stakes securities fraud or complex derivatives disputes may benefit from arbitration panels with specialized financial credentials, while commercial disagreements may be better served by mediation’s relationship-preserving aspect.
• Discovery Needs: ADR typically allows limited discovery. If a party’s case depends on extensive document production or depositions, ADR’s streamlined process may prove a constraint rather than a benefit. Careful consideration of exactly how much discovery you want in the dispute is warranted.
• Enforceability and Appeals: Arbitral awards are final with very narrow grounds for appeal. Parties seeking appellate review of legal errors should weigh this carefully. Arbitration provides options for appeals, but these must be agreed to at the outset of the proceeding or in the ADR clause, and even then, grounds for appeal are often narrower than those provided in court. Additionally, mediation is only as binding as the parties’ commitment to comply with the settlement agreement, unless the parties appoint an arbitrator to execute the agreement as a consent award.
• Contractual Obligations: Review all underlying agreements for existing ADR clauses—including their scope, chosen rules, seat, and governing law—as these provisions are generally binding and shape available options. Parties can always agree to submit their disputes to arbitration or mediation, modify the ADR clause by agreement, or provide tiered or step-by-step escalating ADR options; the customization is limited only by the parties’ imagination. Still, ensuring these dispute resolution clauses are drafted to both parties’ satisfaction up front is necessary, as once a dispute arises, further agreement (especially modifying existing ADR provisions) between the parties may be difficult.

What Business Attorneys Need to Know

Drafting robust and thoughtfully considered ADR clauses at the contract stage is the most underutilized form of dispute risk management available to business attorneys. Every financial services agreement should include a carefully tailored ADR provision specifying the mechanism, administering institution, seat, applicable rules, number and qualifications of neutrals, and the governing law. Use discretion when drafting a custom ADR provision: Beyond the basic requirements, more detail is not always useful or needed. When in doubt, all major ADR providers have standard model ADR clauses that will address many of these issues.

In financial disputes—loan syndications, hedge fund management disputes, purchase price adjustments, M&A earnouts, insurance coverage battles—the neutral’s industry knowledge is essential for a streamlined process, allowing the parties to focus on presenting their case rather than educating the neutral on the subject matter. For example, CPR Dispute Resolution Services maintains a vetted panel specifically for banking, accounting, and financial services disputes, comprising attorneys and professionals with deep subject matter experience in exactly these areas. The American Arbitration Association’s Commercial Panel includes experienced arbitrators and mediators with extensive backgrounds in the financial sector. And the neutrals of the JAMS Financial Markets Group are experienced in resolving complex securities and financial markets disputes. Using a provider with a dedicated financial services panel removes the substantial risk of educating a generalist neutral at the parties’ time and expense.

Attorneys must also remain current on institutional rule changes. The AAA Commercial Rules, JAMS Financial Industry Arbitration Rules, Financial Industry Regulatory Authority Arbitration Code, and CPR Administered Arbitration Rules are periodically updated and materially affect procedural rights, discovery scope, and costs.^[1] Understanding FINRA’s mandatory arbitration requirements is essential for broker-dealer and investment adviser disputes, where it displaces court jurisdiction almost entirely.

Privacy and privilege considerations also deserve careful attention. The confidentiality protections of mediation communications vary by jurisdiction under applicable mediation privilege statutes. In arbitration, ex parte communication with arbitrators is generally prohibited; in mediation, ex parte communication with mediators is common, such as in the form of mediation statements. And arbitration rules treat confidentiality differently depending on the ADR provider selected. Attorneys should advise clients on the limits of confidentiality and the importance of preserving privilege throughout the process, especially when the use of artificial intelligence is involved.

Modern ADR Strategies

The ADR landscape has evolved considerably, and sophisticated practitioners are deploying a new generation of strategies particularly well-suited to financial disputes. There are many options available to the parties to a dispute beyond just mediation or arbitration.

Med-Arb and Other Hybrid Models: These hybrid models combine the flexibility of mediation with the finality of arbitration. In a med-arb structure, parties first attempt mediation; if unsuccessful, the same or a different neutral then holds a hearing and issues a binding arbitration award, preserving settlement opportunity while guaranteeing resolution. With CPR’s Concurrent Arbitration-Mediation Protocol, for example, parties agree they will attempt to settle any dispute that is the subject of arbitration by participating in a confidential mediation conducted during the pendency of the arbitration. This process was developed to encourage the availability of mediation to parties in a more flexible manner than is provided under standard multistep dispute resolution provisions and creates an opportunity for parties to continue to explore settlement options based on what they learn during the arbitration proceeding and without delaying those proceedings.

Early Neutral Evaluation (“ENE”): An experienced financial professional provides a nonbinding assessment of the merits and likely damages range early in the dispute. ENE dramatically accelerates settlement by aligning expectations and surfacing weaknesses before positions harden. Parties can use this information to steer settlement discussions or have a more realistic view of potential outcomes in an arbitration or litigation process.

Expedited and Emergency Arbitration: Most major arbitral institutions now offer expedited rules with even more expeditious timelines and emergency arbitration procedures, enabling parties to obtain interim relief to freeze assets or to be granted injunctions in urgent financial scenarios.

Dispute Prevention: Parties entering into joint financial ventures may wish to incorporate dispute prevention mechanisms to assist in resolving minor conflicts before they become full-blown disputes. This can be achieved by enlisting a standing neutral or a dispute resolution board (“DRB”) to check in with the key stakeholders throughout the venture. Some institutions have created formalized procedures for this process to help parties set up and manage a DRB.

Conclusion

Ultimately, mastery of ADR in financial disputes is no longer optional for business attorneys—it is a core competency that directly determines the quality and cost-effectiveness of outcomes for clients navigating today’s complex financial landscape. The most effective practitioners approach ADR as a strategic process that can be tailored to the commercial realities, procedural needs, and risk tolerance of the parties involved.

By drafting thoughtful dispute resolution clauses, selecting neutrals with genuine financial expertise, and using tools such as mediation, expedited arbitration, emergency relief, and dispute prevention mechanisms, attorneys can help clients avoid and resolve conflicts with greater precision and predictability. In an environment where financial disputes often involve sensitive information, ongoing business relationships, and significant reputational concerns, ADR offers a practical framework for achieving durable resolutions while preserving confidentiality and control. For clients and counsel alike, the future of financial dispute resolution will belong to those who use ADR deliberately, creatively, and with a clear understanding of its evolving possibilities.

1. CPR Dispute Resolution Services provides a comparison of the domestic commercial rules mentioned. ↑

Introduction: A Landmark Decision, Still Unfolding

The intersection of artificial intelligence and copyright law continues to be a legal gray area, and it has only grown more layered since courts first began weighing in. On February 11, 2025, Judge Stephanos Bibas of the U.S. Court of Appeals for the Third Circuit (sitting by designation in the U.S. District Court for the District of Delaware) issued the first U.S. federal court decision addressing fair use in the context of AI training data. In Thomson Reuters Enter. Ctr. GmbH v. Ross Intel. Inc., 765 F. Supp. 3d 382 (D. Del. 2025), the court ruled that Ross Intelligence’s use of Thomson Reuters’s Westlaw headnotes to train a nongenerative AI tool was not protected by fair use.

That ruling is not the end of the story. The Third Circuit granted Ross permission to pursue an interlocutory appeal, heard oral argument on June 11, 2026, and has not yet issued a decision as of this writing. District court proceedings remain stayed pending that appeal. Any assessment of Thomson Reuters v. Ross today has to account for the fact that its final scope is still being decided, and reporting from the argument suggests at least some appellate skepticism toward Ross’s transformative-use theory, though the outcome remains genuinely open.

At the time of the district court’s ruling, the decision sparked widespread media coverage, with many commentators suggesting it set a precedent for the flood of AI-related copyright lawsuits then pending. However, despite its significance, the Thomson Reuters v. Ross ruling has had a narrower applicability than some headlines suggested, and rulings issued in other cases just months later reinforced that point directly. Key differences, such as the nature of Ross’s product, access to the copyrighted works, and the type of AI involved, limited the breadth of the case’s influence even before the appeal was granted.

This article revisits those distinctions, examines how they have already played out in other courts, and offers practical takeaways for creators and companies navigating the evolving legal landscape of AI and copyright.

1. Competing Products Make All the Difference

Why Ross’s AI Tool Was Seen as a Direct Market Substitute

A central reason Ross lost on fair use’s fourth factor, effect on the market, was that its AI tool directly competed with Thomson Reuters’s Westlaw platform. Ross used Westlaw’s copyrighted headnotes to develop a similar legal research product, creating a clear market substitute. Even if Ross’s AI didn’t replicate Westlaw’s user interface, the underlying use harmed Thomson Reuters’s potential market, including the market for licensing training data.

By contrast, many AI copyright cases involve generative AI systems trained on publicly available online articles, where the content owners aren’t developing competing AI tools. Without direct market competition, courts may reach different conclusions on fair use’s market-effect factor—and as discussed below, they already have.

2. Paywalls Matter: Access Restrictions Shaped the Court’s View

Why Westlaw’s Paywall Strengthened Thomson Reuters’s Case

Westlaw’s headnotes aren’t publicly accessible; they’re behind a paywall available only to subscribers. Although copyright protection doesn’t require restricted access, Thomson Reuters’s paywall and user agreements signaled its intent to control how the headnotes were used. Ross’s unauthorized access and use of this content, possibly in violation of Westlaw’s terms of service, further undermined its fair use argument.

This contrasts with other AI lawsuits that involve freely accessible online materials. When content is publicly available, especially without paywalls or usage restrictions, courts might weigh fair use factors differently, particularly if the AI tool’s use is more transformative. As a later section of this article shows, access alone is not the whole picture. How the underlying copies were obtained matters just as much.

3. Generative vs. Nongenerative AI: Why That Distinction Matters

Ross’s Tool Didn’t “Transform” the Original Work

One of the most critical factors in the court’s decision was the type of AI at issue. Fair use’s first factor looks to the purpose and character of the use of the copyrighted material, particularly whether the use was “transformative.” Ross’s technology was nongenerative. It used the headnotes to enhance a legal research tool that performed the same basic function as Westlaw: providing legal information. Because the use was not transformative, the court found against Ross on fair use’s first factor.

Many AI copyright cases, however, involve generative AI models that synthesize training data into entirely new outputs (such as original text, images, or code) that differ from the purposes of the original works. When the authors first began to draft this article, courts had yet to address how these transformative uses fit into the fair use framework. That has since changed.

4. The Generative AI Test Has Already Arrived: Bartz and Kadrey

This article’s central prediction, that generative AI training might fare differently than Ross’s nongenerative tool, did not stay hypothetical for long. Within weeks of the Thomson Reuters decision, two Northern District of California judges ruled on closely related questions involving large language models trained on copyrighted books.

In Bartz v. Anthropic, 787 F. Supp. 3d 1007 (N.D. Cal. 2025), the court held that training Anthropic’s models on lawfully acquired copyrighted books was fair use, finding the training process highly transformative. The same court reached the opposite conclusion for a different category of inputs: books Anthropic had obtained from pirate libraries and retained in a general-purpose corpus, which the court found infringing regardless of how the resulting models were later trained. Just days later, in Kadrey v. Meta (788 F. Supp. 3d 1026 (N.D. Cal. 2025), a different judge reached a broadly similar split on comparable facts involving Meta’s Llama models.

Bartz went on to settle for $1.5 billion, the largest copyright class action settlement on record, with final court approval entered in July 2026. Kadrey remains active on the claims the court did not resolve on summary judgment, including issues tied to how the underlying training copies were acquired.

Together, these rulings sharpen, rather than simply confirm, the distinction this article draws. The line that matters most is not only generative versus nongenerative AI. It is also lawful acquisition versus unlawful acquisition of the underlying training data. A company that trains a generative model on copyrighted works it never had the right to possess in the first place may find fair use unavailable regardless of how transformative the resulting model is. That has direct, practical implications for how companies vet the provenance of training data, and the tools built on it, not just how they classify the type of AI involved.

5. Protecting Your Creative Work While Legal Uncertainty Persists

What Content Owners Can Do Now, Without Waiting for Courts to Decide

While the legal landscape evolves, creators and businesses don’t have to stand still. There are proactive steps that can be taken to protect intellectual property in the face of AI-related challenges.

• Use strong contracts: Clear licensing terms and usage restrictions can prevent unauthorized use of your content, even for AI training purposes.
• Diversify your IP protections: Patents, trademarks, and trade secrets can complement copyright protection, covering aspects that copyright doesn’t.
• Develop licensing strategies: Creating licensing models for AI training data can turn potential risks into revenue opportunities while maintaining control over how your content is used.
• Scrutinize provenance, not just purpose: As Bartz and Kadrey show, courts are drawing a sharp line between lawfully acquired and pirated training data. Companies licensing or deploying AI tools should ask how the underlying training data was sourced, not only what the AI does with it.

Conclusion: One Decision, Fewer Open Questions Than a Year Ago

The Thomson Reuters v. Ross ruling marked a pivotal moment in the evolving relationship between copyright law and artificial intelligence, but it was never a catchall precedent, and the year since has proven that out. Bartz v. Anthropic and Kadrey v. Meta already show that generative AI cases can and do come out differently, particularly where training data was lawfully acquired. At the same time, Thomson Reuters v. Ross itself remains unresolved on appeal, and the Third Circuit’s ruling, whenever it is issued, will be the first federal appellate word on fair use and AI training of any kind.

For content creators, technology companies, and legal professionals, the key takeaway is unchanged in substance but sharper in focus: Don’t assume any single decision, including this one, answers every question about AI and copyright. Stay informed, be proactive about how training data is sourced and licensed, and prepare for a legal landscape that is still being actively written, one appellate ruling at a time.

The views expressed here are the authors’ own and do not necessarily reflect the positions of their respective employers or firms.

Reflecting on Father’s Day and the 250th anniversary of our nation this summer, my thoughts were drawn to one of its greatest unsung patriots, my father Fred. As a Jewish child liberated from the ashes of Europe by General George S. Patton’s army, and inspired by the “shining city on a hill,” he chose America over a promising soccer career.

Although not a lawyer, he easily could have been under different circumstances. His views were usually calibrated and nuanced, traits that have grown increasingly rare in public life since he passed away sixteen years ago. I always wonder what he would think about our current state of affairs, and the status of the rule of law.

As someone who earned his citizenship, including by serving in the army that rescued him, he expected others to do likewise. He had compassion for those who arrived under challenging circumstances and wanted a pathway for them, but a swift exit for those who did not uphold our laws.

He cared deeply for those less fortunate, having been helped by the American government and its people. But he strongly insisted on equality of opportunity rather than outcome and believed that we should not fight discrimination with more discrimination.

As a serious lifelong learner and strict disciplinarian, he believed that teachers should focus on core principles (“reading, writing, and arithmetic,” as he would say), and that students should be held accountable for their behavior.

He knew that when leaders speak, their words matter. He would be shocked at how our politicians now describe each other and their fellow Americans. He might not have known about the concept of “stochastic terrorism,” but he understood from experience the downstream dangers of dehumanizing rhetoric. Although a believer in free speech, he supported meaningful guardrails against incitement and violence, a view that was challenged when neo-Nazis tried to demonstrate near our Skokie home in the 1970s.

He saw firsthand the consequences when institutional checks and balances collapsed under Gleichschaltung, the process through which the Nazis consolidated German government and society to conform to Hitler’s will. He shared James Madison’s view that “ambition must be made to counteract ambition,” and that no branch of our government should ignore its constitutional responsibilities.

Having been hunted by security officials simply for his faith, he would have been outraged by excessive force from our law enforcement officers. At the same time, he recognized that societal breakdown occurs when people commit crimes with impunity.

He believed in America’s inherent right to self-defense against all enemies, foreign and domestic. But he would be appalled by any application of Nazi jurist Carl Schmitt’s “state of exception” to constrain civil liberties and treat others inhumanely.

In short, he was a radical moderate who wanted an America that rewarded those who played by the rules, firmly addressed those who did not, and balanced our various competing interests. He would have agreed with Thomas Sowell that there are no solutions, only trade-offs, and that we are all in this together to create a more perfect union for everyone. I miss him every day, and I hope that all of us can learn from him, to make our next 250 years better than the first.

This article is part of a series on the rule of law and its importance for business lawyers created by the American Bar Association Business Law Section’s Rule of Law Working Group. Read more articles in the series.

Editor

Emily A. Letcher

Heyman Enerio Gattuso & Hirzel LLP
222 Delaware Avenue, Suite 900
Wilmington, DE 19801
302.472.7314
[email protected]

Contributors

§ 1. Introduction

The passage of Senate Bill 21 (“SB 21”) caused 2025 to be a year of significant change in Delaware corporate law. SB 21 was signed into law by Governor Matt Meyer on March 25, 2025, and serves to amend Sections 144 and 220 of the Delaware General Corporation Law (“DGCL”). SB 21 took effect on its enactment date and applies to all acts and transactions, whether occurring before, on, or after its enactment date, except that it does not apply to or affect any action or proceeding commenced in a court of competent jurisdiction that is completed or pending, or any demand to inspect books and records made, on or before February 17, 2025.

The case law discussed in this chapter is intended to be a “snapshot” of recent decisions and does not address the effects of SB 21, but it is noted here that the Delaware Supreme Court accepted two questions certified by the Delaware Court of Chancery^[1] concerning constitutional challenges to SB 21:

1. Does Section 1 of Senate Bill 21, codified at 8 Del. C. § 144—eliminating the Court of Chancery’s ability to award “equitable relief” or “damages” where the Safe Harbor Provisions are satisfied—violate the Delaware Constitution of 1897 by purporting to divest the Court of Chancery of its equitable jurisdiction?
2. Does Section 3 of Senate Bill 21—applying the Safe Harbor Provisions to plenary breach of fiduciary claims arising from acts or transactions that occurred before the date that Senate Bill 21 was enacted—violate the Delaware Constitution of 1897 by purporting to eliminate causes of action that had already accrued or vested?

On February 27, 2026, the Supreme Court, sitting en banc, issued its opinion answering both certified questions in the negative, finding that the safe harbor provisions do not violate the Delaware Constitution.^[2] The enactment of SB 21 and its recent clarification by the Supreme Court opinion will likely have significant implications on future versions of this chapter.

§ 2. Corporate Governance

In re TransUnion Deriv. S’holder Litig., 324 A.3d 869 (Del. Ch. 2024). In TransUnion, the Court of Chancery dismissed a derivative claim brought against TransUnion’s board alleging breach of the fiduciary duty of oversight for its failure to implement certain changes in compliance with a Consent Order that TransUnion had entered into with the Consumer Financial Protection Bureau (CFPB). After an investigation by the CFPB into TransUnion’s advertising and marketing practices, the Consent Order detailed TransUnion’s violations and the remediation efforts that TransUnion would be required to take to bring it into compliance.^[3] There was a dispute, however, between the CFPB and TransUnion as to whether TransUnion needed to wait on a non-objection notice from the CFPB before it was required to take certain actions, and as to whether certain changes to its marketing practices would bring it in compliance.^[4] TransUnion obtained and relied on outside legal advice in asserting its interpretation of the Consent Order, including that it could wait on a non-objection notice before being required to implement the changes.^[5] That non-objection notice never came, however, and the CFPB initiated a federal action against TransUnion based on its alleged violations of the Consent Order.^[6]

The plaintiffs alleged that the TransUnion board knew that the Consent Order was being violated but chose to prioritize profits over compliance and, thus, acted in bad faith.^[7] The Court rejected the plaintiffs attempts to distinguish Caremark claims from Massey claims and held that such claims “[a]ll flow from the most basic obligation of directors and officers: to ensure that, in seeking profit, a corporation conducts lawful business by lawful means.”^[8] It held that “[d]irectors who try to fulfill their oversight duties in good faith are not liable under either formulation advanced by the plaintiffs.”^[9] Even if the actions of directors turn out poorly in hindsight, under Delaware law, they are presumed to have discharged their responsibility to monitor their corporation’s compliance with legal standards in good faith and reasonable care.^[10] As long as directors try to implement and attend to a “reasonable board-level system of monitoring and reporting,” then the Court will find that they have met their baseline duty.^[11] Indeed, the Court held that “[i]mperfect compliance is not bad faith.”^[12] Therefore, the Court held that the plaintiffs failed to state a claim and granted TransUnion’s motion to dismiss. The Court also held that demand was not futile because there were no facts alleged to support a reasonable inference that a majority of the Board had acted in bad faith.

Maffei v. Palkon, 339 A.3d 705 (Del. 2025). The Delaware Supreme Court reversed a Court of Chancery decision and held that the business judgment rule (not entire fairness) applies to a corporation’s decision to change its state of incorporation. The Court of Chancery decision held that entire fairness applied to a corporation’s reincorporation from Delaware to Nevada because the controller received a non-ratable benefit in the form of liability reduction.

In 2023, Tripadvisor, Inc. controlled by Liberty TripAdvisor Holdings, Inc. (together “Tripadvisor”) which is controlled by Greg Maffei, reincorporated from Delaware to Nevada.^[13] Starting November 2022, management presentations included purported advantages of a conversion, including a “higher level of protection from personal liability” for directors and officers and a reduction in litigation expenses.^[14] The Tripadvisor boards approved the conversions and sought approval from its stockholders, which would not be approved without Maffei voting in favor of the conversions.^[15]

Stockholder plaintiffs challenged the conversions, contending that the conversions were self-interested transactions and the defendants breached their fiduciary duty by entering into them.^[16] The plaintiffs sought to enjoin the closing of the conversions.^[17] But the Court of Chancery declined to grant the injunction. Applying the entire fairness standing the Court of Chancery held that the reincorporation conceivably conferred a material benefit on the defendants (reduced litigation risk) that was not shared with all Tripadvisor stockholders.^[18] The Delaware Supreme Court granted interlocutory review of this decision.

The Supreme Court emphasized the importance of temporality in determining materiality of alleged non-ratable benefits.^[19] The Supreme Court distinguished between existing potential liabilities from hypothetical future benefits, stating that “the absence of any allegations that any particular litigation claims will be impaired or that any particular transaction will be consummated post-conversion, weighs heavily against finding that the alleged reduction in liability exposure under Nevada’s corporate law regime is material.”^[20]

The Supreme Court also found that unlike cases applying entire fairness review, this case involved only “the hypothetical and contingent impact of Nevada law on unspecified corporate actions that may or may not occur in the future,” which is to too speculative to constitute a material, non-ratable benefit triggering entire fairness review.^[21] The Supreme Court also stated Delaware policy has long recognized the values of flexibility and private ordering and that allowing directors flexibility in determining an entity’s state of incorporation is consistent with Delaware policy.^[22]

The Supreme Court’s unanimous en banc decision permitting indicates that the Court is prepared to prioritize the values of flexibility and private ordering, even for entities that chose to leave the state.

Ban v. Manheim, 339 A.3d 41 (Del. Ch. 2025). In a post-trial decision, the Court awarded damages for multiple breaches of fiduciary duties by defendant Joseph A. Manheim, who controlled a closely held corporation (“WestCo”) that, in turn, controlled the operative limited liability company (“DVRC”). At issue were the creation and exercise of a call right affecting the corporation’s stock (the “WestCo Call Right”), as well as the corporation’s exercise of a redemption right affecting the LLC’s membership interests (the “DVRC Redemption Right”). The Court held that the adoption of the WestCo Call Right was both statutorily invalid and a breach of Defendant’s fiduciary duties. The Court also held defendant’s exercise of the WestCo Call Right and the DVRC Redemption Right breached the defendant’s fiduciary duties.

Defendant held the majority of WestCo’s stock, and plaintiff Young Min Ban was a minority owner.^[23] WestCo held 10% of DVRC’s membership interests but was DVRC’s manager, giving WestCo—and by extension defendant—control over DVRC.^[24] The remaining 90% of DVRC’s membership interests were held by a limited partnership (“Penfold”), in which defendant, plaintiff, and a non-party each held a one-third partnership interest and which defendant controlled through a separate entity that served as general partner.^[25]

Anticipating disputes regarding his management of DVRC, defendant used his control of WestCo to cause DVRC to adopt the DVRC Redemption Right in February 2018.^[26] The DVRC Redemption Right effectively permitted defendant, through WestCo, to cause DVRC to redeem any member’s interest for the lesser of its appraised value or the amount of the member’s capital account.^[27] Then, in May 2022, defendant used his control of WestCo to add the WestCo Call Right to its bylaws, which permitted a majority stockholder—i.e., defendant—to purchase another stockholder’s shares at fair market value.^[28]

In June 2022, defendant exercised the WestCo Call Right and purchased plaintiff’s shares in WestCo for $100 per share, which defendant baselessly asserted represented fair market value.^[29] Then, in December 2022, defendant caused DVRC to exercise the DVRC Redemption Right to redeem Penfold’s 90% interest in DVRC for approximately $3.6 million based on an unsupported estimate of Penfold’s capital account.^[30] Through those maneuvers, defendant eliminated plaintiff’s indirect 31.5% interest in DVRC in exchange for compensation defendant set arbitrarily.

The Court first held that the adoption of the WestCo Call Right was statutorily invalid.^[31] The Court explained that the broad power to adopt bylaws conferred by DGCL § 109(b) is constrained by the more specific language in DGCL § 202(b), which prohibits imposing transfer restrictions on previously issued shares without the affected stockholders’ consent.^[32] The Court continued that the WestCo Call Right was a transfer restriction notwithstanding the fact that it was not triggered by an attempted transfer, so its adoption required plaintiff’s consent.^[33] Because plaintiff had not consented, the adoption and exercise of the WestCo Call Right were statutorily invalid.^[34]

The Court separately analyzed the WestCo Call Right through the lens of defendant’s fiduciary duties.^[35] The Court held that entire fairness review applied because defendant controlled WestCo and acted in his own self-interest by giving himself, and exercising, “novel and expansive power” that “conferred no reciprocal right on minority stockholders.”^[36] The Court noted that the “imminence inquiry” the Delaware Supreme Court applied in Maffei v. Palkon^[37] was satisfied because defendant exercised the WestCo Call Right immediately after its adoption.^[38] Applying entire fairness, the Court found defendant’s adoption of the WestCo Call Right “bore none of the hallmarks of procedural fairness” and was not substantively fair because plaintiff received nothing in return for the new restriction on his shares.^[39] Similarly, the Court found defendant’s unilateral exercise of the WestCo Call Right for an arbitrary price was not “in any way fair.”^[40]

Turning to the DVRC Redemption Right, the Court first held that plaintiff’s fiduciary duty claim was not contractually preempted by the fact that the right arose from DVRC’s operating agreement.^[41] The Court opined, “[t]here are good reasons to question whether contractual preemption applies when a fiduciary has discretion about whether to exercise a contract right and how to apply it.”^[42] The Court therefore held defendant’s discretionary actions in causing WestCo to exercise and set an arbitrary price for the DVRC Redemption Right were subject to equitable review notwithstanding their contractual footing.^[43]

That equitable review of defendant’s exercise of the DVRC Redemption Right proceeded under the entire fairness standard because defendant indirectly controlled DVRC and received a non-ratable benefit from the elimination of Penfold’s 90% interest in DVRC.^[44] The Court held the procedure was not fair because defendant and two WestCo board members loyal to him exercised the DVRC Redemption Right against Penfold without the involvement of Penfold’s other partners.^[45] Moreover, the Court found the price was arbitrarily set by defendant without supporting evidence.^[46] The Court concluded the exercise of the DVRC Redemption Right was not substantively fair because the price defendant set constituted 42% of the value of Penfold’s interest according to a valuation DVRC had commissioned, and DVRC later took actions that suggested DVRC’s value was “far in excess” of what Penfold received.^[47]

With respect to the remedy, the Court evaluated whether plaintiff should receive “fair value” or “fair market value” for his extinguished 31.5% stake in DVRC.^[48] Defendant pressed for fair market value, arguing plaintiff could not have easily sold his interest in DVRC to a third party given defendant’s control over WestCo and Penfold and his “history of fiduciary wrongdoing.”^[49] In response, the Court emphasized its equitable authority and opined that discounting plaintiff’s remedy to account for the lack of marketability “would reward [defendant] for his breaches of the duty of loyalty.”^[50] After evaluating plaintiff’s expert’s opinion on the fair value of plaintiff’s lost equity, the Court awarded approximately $6.9 million plus interest.^[51]

Vejseli v. Duffy, 2025 WL 1452842 (Del. Ch. May 21, 2025).

I. Factual Background

A. Ionic’s Formation and Governance Structure

Ionic Digital, Inc. (“Ionic”) is a Delaware corporation formed in January 2024 as part of the Celsius Network bankruptcy, to hold digital asset mining operations.^[52] Many Celsius creditors became Ionic stockholders.^[53] Ionic adopted a classified board with three classes of directors serving staggered terms.^[54] By late 2024, following significant turnover and the termination of a management services agreement with Hut 8, Ionic’s board had been reduced from eight directors to four, with two Class I seats scheduled to be up for election at Ionic’s first annual meeting.^[55]

Ionic’s bylaws included a detailed advance-notice bylaw requiring stockholders seeking to nominate directors to disclose and attach all agreements and arrangements required to be disclosed under Items 4, 6, and 7 of Schedule 13D, including agreements with third parties relating to proxy contests or changes in corporate control.^[56]

B. Stockholder Activism and Third-Party Involvement

Plaintiffs—large Ionic stockholders and former Celsius creditors—became increasingly dissatisfied with Ionic’s governance, lack of liquidity, and failure to publicly list its shares.^[57] They partnered with Figure Markets Inc. and GXD Labs, LLC, non-stockholders that proposed alternative business strategies (including listing Ionic shares and replacing management).^[58] Over several months, the plaintiffs and these third parties entered into multiple cooperation, funding, and common-interest agreements, some of which contained provisions that survived termination.^[59]

The plaintiffs pursued a books-and-records demand under Section 220, publicly advocated for board change, and prepared to run a proxy contest at Ionic’s first annual meeting.^[60]

C. Board Response: Annual Meeting, Board Reduction, and Nomination Rejection

On February 6, 2025, the board acted by unanimous written consent to:

1. Schedule the annual meeting, triggering a ten-day nomination window under the advance-notice bylaw; and
2. Reduce the size of the board from six to five directors, eliminating one of the two Class I seats that otherwise would have been up for election.^[61]

The board did not disclose the board-reduction resolution at the time it announced the annual meeting, even though it was adopted the same evening.^[62] Internal communications showed directors anticipated stockholder backlash once the reduction became known.^[63]

The plaintiffs submitted a nomination notice identifying two nominees, but failed to attach or disclose several agreements with Figure Markets and GXD, including agreements with surviving obligations related to governance changes and strategic transactions.^[64] After receiving advice from counsel, the board rejected the nomination notice as non-compliant with the advance-notice bylaw.^[65]

II. Claims and Procedural Posture

Plaintiffs asserted four principal claims:

1. Breach of fiduciary duty in adopting the board-reduction resolution;^[66]
2. Invalidity under the bylaws of the board-reduction resolution (not reached);^[67]
3. Breach of fiduciary duty in rejecting the nomination notice;^[68] and
4. Disclosure violations related to the annual meeting and proxy contest.^[69]

After expedition, a two-day trial, and post-trial briefing, the Court issued a post-trial memorandum opinion.

III. Holdings

A. Board Reduction Resolution

The directors breached their fiduciary duties by adopting the board-size reduction as an inequitable defensive measure that interfered with the stockholder franchise.^[70]

B. Rejection of Nomination Notice

The board did not breach its fiduciary duties in rejecting the plaintiffs’ nomination notice, which failed to comply with the advance-notice bylaw’s disclosure requirements.^[71]

C. Remedy

The Court invalidated the board-reduction resolution, restored the eliminated Class I seat, reopened the nomination window, and ordered corrective disclosures regarding the annual meeting.^[72]

IV. Court’s Analysis

A. Standard of Review: Enhanced Scrutiny Applies

The Court held that enhanced scrutiny applied under Unocal and Blasius to the board-reduction resolution because it was adopted in the face of an anticipated proxy contest and directly affected a director election.^[73]

The Court rejected defendants’ argument for business-judgment review under Openwave,^[74] emphasizing that the board did not act on a “clear day.”^[75] The record showed months of escalating stockholder activism, Section 220 demands, discussions of dissident slates, and internal recognition of a proxy threat.^[76]

B. Board Reduction Resolution Failed Unocal/Blasius

1. No Valid, Non-Pretextual Corporate Purpose

The board asserted post-hoc justifications—cost savings, efficiency, and avoiding deadlock—but the Court found no contemporaneous evidence that the board actually considered these reasons. Minutes were silent, and explanations shifted over time.^[77]

Critically, the reduction in board size:

• Did not actually eliminate deadlock (the board still had an even number of voting directors), and
• Functioned to prevent stockholders from electing two directors at the first annual meeting, instead preserving incumbent control.^[78]

The Court credited testimony suggesting the real motive was to avoid recruiting a new director in a contested environment, which Delaware law squarely rejects as a justification for interfering with the stockholder vote.

2. Preclusive and Disproportionate Response

The board-reduction resolution was preclusive, as it rendered success for two dissident nominees realistically unattainable by eliminating the seat entirely. Under Pell^[79] and Versata,^[80] this was impermissible interference with the franchise.^[81]

C. Rejection of the Nomination Notice Was Proper

By contrast, the Court upheld the board’s rejection of the nomination notice.

• Advance-notice bylaws are contractual and serve an important disclosure function.^[82]
• Plaintiffs failed to disclose material agreements, including a group agreement containing surviving obligations related to governance changes, CEO selection, and strategic transactions.^[83]
• Stockholders were entitled to know whether nominees were part of a broader plan involving non-stockholder commercial actors.^[84]

Applying enhanced scrutiny, the Court found:

• The board acted to protect a legitimate corporate interest—an informed stockholder vote;^[85]
• The rejection was reasonable and non-preclusive, as plaintiffs could have complied but did not.^[86]

The Court declined to find inequitable conduct under Schnell,^[87] notwithstanding the board’s earlier misconduct regarding the board-reduction resolution.^[88]

D. Remedy and Equitable Relief

Given the centrality of the stockholder franchise and the irreparable harm from vote impairment, the Court ordered:

• Invalidation of the board-reduction resolution;
• Restoration of two Class I seats for election;
• Reopening of the nomination window for ten days, allowing all stockholders—including plaintiffs—to submit nominations; and
• Corrective disclosures explaining the Court’s ruling and the revised annual-meeting process.^[89]

Notably, the Court rejected arguments that plaintiffs should be barred from renominating candidates, emphasizing that the need for a “do-over” was caused by the board’s fiduciary breach, not intentional concealment by plaintiffs.^[90]

V. Takeaways for Practitioners

This decision reinforces several core principles of Delaware law:

• Board actions affecting director elections in contested settings will face rigorous scrutiny, especially where adopted by written consent without deliberation.
• Post-hoc rationalizations cannot salvage defensive measures that interfere with the stockholder franchise.
• Advance-notice bylaws remain enforceable, and boards may reject non-compliant notices even while losing on separate fiduciary-duty claims.

Witmer v. Armistice Cap., LLC, 344 A.3d 632 (Del. Ch. Aug. 14, 2025). A stockholder of the nominal defendant company brought derivative claims against the company’s largest investor for breach of fiduciary duty, insider trading, aiding and abetting, and unjust enrichment.^[91] The investor moved to dismiss, and the Court granted the motion with prejudice.^[92]

First, the Court considered whether a company’s decision to permit a stockholder to pursue derivative claims against an investor should be set aside because the company granted that permission in a settlement agreement.^[93] The Court held that because the company took a position of neutrality on the claims against the investor, demand was excused.^[94] The Court relied on the holding in Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d 727, 731 (Del. 1988) that “a corporation’s failure to object to a suit brought on its behalf must be viewed as an approval for the shareholders’ capacity to sue derivatively.”^[95] The Court held that the mere fact that the company’s position appeared in a settlement agreement did not support the Court substituting its judgment for the company’s.^[96] “When a board pronounces its neutrality as to a derivative action in a settlement agreement, these precepts favor respecting that neutrality, not overriding it.”^[97]

Second, the Court held that the investor did not owe any fiduciary duties to the company because it was not a controlling stockholder.^[98] The court held that the investor’s less than fifty percent stake in the company alone did not demonstrate control.^[99] Plaintiff also failed to plead that the investor’s board designee’s presence, while the seven-member board discussed the challenged transactions, slanted discussion or cowed directors, thereby failing to make any process-based arguments to support an inference of control.^[100] Plaintiff also failed to show that any other board members lacked independence where the only allegations brought by plaintiff was that the investor designee was a “confidante and advisor” to another board member, assisted that that board member in arranging financing for the company, and the two also set on a previous board together.^[101] Finally, the Court held that the company’s disclosure that the investor “could be able to exert significant control” over the company was not enough to plead control over the challenged transactions.^[102] While a company’s public acknowledgment of control can be an indicator of control, “Delaware law requires actual control, not merely the potential to control.”^[103]

Third, the Court considered whether the stockholder pled the investor owed fiduciary duties for purposes of an insider trading claim based solely on its board designee’s access to confidential company information.^[104] The Court reinforced Delaware courts’ “reluctan[ce] to extend too broadly the applicability of fiduciary duties,” and rejected plaintiff’s argument that the investor could have fiduciary duties simply because it had access to material non-public information through its board designee and it “occupied a position of trust and confidence.”^[105] The Court warned that accepting plaintiff’s theory would turn every stockholder with a director-designee to a fiduciary.^[106]

Fourth, the Court dismissed the stockholder’s aiding and abetting claim against the investor for failing to plead knowing participation.^[107] While plaintiff alleged that the investor knew information that the board did not and that it withheld that information, the Court held that the investor “did not actively participate; it only had passive awareness.”^[108] The investor’s “silence was not affirmative assistance” and it did not “actively further” the directors’ failure to inform themselves.^[109] Plaintiff failed to plead that the investor created an informational vacuum or misled the company’s board in any way.^[110]

Finally, the Court dismissed the stockholder’s unjust enrichment claim because it was duplicative of other dismissed claims.^[111] Because the unjust enrichment claim was based on the wrongdoing underlying the breach of fiduciary duty and the aiding and abetting claims, the Court dismissed this claim as well.^[112]

Carroll v. Burstein, 2025 WL 2446891 (Del. Ch. Aug. 25, 2025). Ryan Carroll, a stockholder of Stoke Therapeutics, Inc. (“Stoke”), brought a putative class action challenging the facial validity of Stoke’s advance notice bylaw. Carroll alleged that the bylaw, which governs the process for nominating directors, unlawfully deters stockholders from exercising their franchise rights. The Court of Chancery dismissed the complaint, applying the high bar for facial challenges articulated in Kellner v. AIM ImmunoTech Inc., 320 A.3d 239 (Del. 2024) (“Kellner II”).

Stoke, a Delaware corporation headquartered in Massachusetts, adopted Restated Bylaws in May 2019 in anticipation of its IPO.^[113] Those bylaws included an advance notice provision requiring stockholders to provide detailed disclosures when nominating directors.^[114] Among other things, the provision defined “Acting in Concert” broadly to include persons knowingly acting toward a common goal relating to corporate governance, even absent an express agreement.^[115] The definition also incorporated “Wolf Pack” and “Daisy Chain” concepts, which could deem stockholders acting in parallel or through a shared third party as Acting in Concert.^[116]

In February 2023, Stoke amended and restated its bylaws following SEC adoption of universal proxy rules, which impose heightened notice and solicitation requirements in contested elections.^[117] The advance notice provision remained unchanged.^[118] Since Stoke’s IPO, no stockholder had attempted to nominate a director, and the bylaw had never been applied.^[119]

Carroll filed suit in March 2024, asserting two claims: (1) a declaratory judgment that the advance notice bylaw is invalid because it cannot be complied with and chills stockholder rights to nominate candidates for election to director, and (2) breach of fiduciary duty for adopting and maintaining the bylaw. Carroll later abandoned the fiduciary duty claim.^[120] His challenge was purely facial—no proxy contest or nomination was pending.^[121]

The case arose amid a wave of similar suits following Kellner v. AIM ImmunoTech Inc., 307 A.3d 998 (Del. Ch. 2023) (“Kellner I”), a January 2024 decision striking down certain bylaws adopted during a proxy contest.^[122] In July 2024, the Delaware Supreme Court in Kellner II clarified that facial challenges are subject to a “formidable standard”: a bylaw must be upheld if it can operate lawfully under any circumstance.^[123] Hypotheticals or speculation about potential invalid applications cannot overcome the presumption of validity.^[124]

Carroll argued that Stoke’s advance notice bylaw was impossible to comply with because its Acting in Concert definition could require nominating stockholders to disclose individuals who they do not realize they are acting in concert with, particularly under the Wolf Pack and Daisy Chain provisions.^[125] He also contended that the bylaw was “unintelligible,” citing Kellner II, where the Supreme Court invalidated a 1,099-word ownership provision as indecipherable.^[126]

Vice Chancellor Will dismissed both of Carroll’s claims. Applying Kellner II, the Court held that the plaintiff failed to plead a reasonably conceivable claim for facial invalidity because Stoke’s bylaw could function in at least some scenarios.^[127] For example, a lone stockholder nominating a director without coordination could easily comply, as there would be no Acting in Concert disclosures to make.^[128] Similarly, a stockholder coordinating with one known person could comply by disclosing that individual.^[129] The Court found that Carroll’s reliance on hypothetical situations where compliance might be difficult was insufficient under Kellner II.^[130]

The Court also rejected the unintelligibility argument. Unlike the “monstrous” ownership provision in Kellner, Stoke’s bylaw—though dense and suboptimal—could be understood with effort.^[131] The Court found that the Acting in Concert definition was broad and complex, but not indecipherable like the provision at issue in Kellner.^[132] The Court emphasized that the advance notice bylaw was poorly drafted and good corporate governance favors clarity, but found that poor drafting does not equate to invalidity: “Being suboptimal does not, however, mean it is invalid.”^[133]

Rainbow Mountain, Inc. v. Begeman, 2025 WL 2436837 (Del. Ch. Aug 25, 2025). This action involved a dispute among five siblings and their extended families over the management and membership of a Delaware nonstock corporation, governed by the DGCL, formed to hold and manage rural property in Virginia.^[134] One faction of the family sought a declaration that the corporation’s governing body validly terminated one sibling’s membership and that he had no right to occupy a dwelling on the property.^[135] The allegedly terminated sibling counterclaimed, claiming that his removal was ineffective because most of the members of the governing body who sought to oust him had already been removed and replaced by a written member consent.^[136]

The case turned on the validity of the written consent that purported to remove and replace certain directors, and that validity in turn depended on whether the persons signing the consent constituted Class A members of the corporation.^[137] The corporation’s bylaws provided that to qualify as a Class A member, an individual had to be (i) at least 35 years of age and (ii) either a descendant of the Founders or “lawfully wedded” to and “not legally separated from” a descendant of the Founders.^[138] According to the bylaws, nothing more is required.^[139] Here, none of the parties argued that any of the signatories of the consent lacked qualifications for Class A membership, but rather, challenged supposed defects in the notices of membership.^[140] However, none of those deficiencies (absence of sworn affidavits attesting to age and notarization) were grounded in the corporation’s certificate, bylaws, or the DCGL.^[141] Accordingly, the Court held that all of the signatories were Class A members of the corporation.

The Court next analyzed the validity of the written consent, which sought to remove various board members and replace them with new directors.^[142] Section 141(k) of the DGCL allows for the removal of the members of the governing body, which states, in pertinent part, “Any [member of the governing body of the corporation] may be removed, with or without cause, by the holders of a majority of the [memberships] then entitled to vote at an election of the [members of the governing body of the corporation] . . . [u]nless the certificate of incorporation otherwise provides [for a classified governing body, in which case, the members of the corporation] may effect such removal only for cause.”^[143] The corporation’s bylaws similarly allowed for removal with or without cause by a majority vote.^[144] Because all of the signatories to the written consent were Class A members entitled to vote and constituted a majority of the members entitled to vote, the written consent satisfied the voting threshold for the removal and election of the board members.^[145] Finally, because the written consent became effective within 60 days of execution, pursuant to 8 Del. C. 228(c), the written consent satisfied all procedural requirements under Section 228 of the DGCL.^[146] Accordingly, because the original members of the board were removed and replaced by the written consent, the removal of the disfavored sibling was ineffective.^[147]

However, the Court limited the reach of the written consent, which had also sought to amend the certificate of incorporation to transform the corporation to a for-profit entity.^[148] For nonstock corporations, Section 242(b)(3) of the DGCL requires that “the governing body” “shall adopt a resolution setting forth the amendment proposed and declaring its advisability” and that only “[i]f a majority of all the members of the governing body shall vote in favor of such amendment, a certificate thereof shall be executed, acknowledged and filed and shall become effective . . . .”^[149] Here, the written consent was an act of a majority of the corporation’s members, not its Board. The Court held that the written consent attempted to sidestep the structure of Section 242(b)(3) which reserves the right to amend the certificate exclusively to the governing body.^[150] Accordingly, because there was no evidence that the board considered or approved the amendment at any duly noticed board meeting, the amendment was ineffective.^[151]

Dalby v. Kastner, 2025 WL 2491158 (Del. Ch. Aug. 29, 2025). A husband and wife brought an action under 8 Del. C. § 225 challenging the husband Stephen Dalby’s “for cause” removal from the Board of Directors of the technology company he founded, Gabb Wireless, Inc. (“Gabb” or the “Company”).^[152] In the same action, AIM (and related entities), early investors in Gabb, intervened to seek an order of specific performance requiring Gabb to issue the necessary shares to effectuate their note conversion.^[153]

The Court held that Dalby’s removal was invalid because the stockholders, in voting for his removal, were unaware that the removal effort was spearheaded by one faction of the Board and management.^[154] The Confidential Information Statement (“CIS”) sent to the stockholders presented the removal effort as being led by one of the Company’s stockholders, Blue Diamond.^[155] But, in reality, Blue Diamond was merely the “nominal sender,” and the CIS was developed, prepared, and carried out by one faction of the Board and their management allies using Company resources.^[156] The Court held that a reasonable Gabb stockholder “would certainly have regarded the omitted information as material in deciding how to vote,” especially given past litigation between Dalby and the other board members and management.^[157] That would be true, the Court held, even if Blue Diamond truly believed that Dalby should be removed for cause.^[158] Based on the totality of the evidence presented through trial, the Court was convinced that the “primary goal” behind management asking Blue Diamond to be the face of the CIS was to make the removal effort more palatable to stockholders.^[159] Moreover, references to others’ involvement in the removal effort “were not omitted accidentally, but by deliberate choice.”^[160]

The removal was invalid also because the CIS failed to disclose that Blue Diamond had recently offered Dalby a proposal allowing him to remain on the Board.^[161] The CIS provided that Blue Diamond “believe[d] that the actions of Dalby have been so egregious, so offensive and so damaging to the Company’s business that it will suffer imminent irreparable harm if Dalby is not removed.”^[162] Yet, just a few weeks before the CIS was sent to stockholders, Blue Diamond had suggested that Dalby could in fact stay on the Board if he agreed to substitute his wife’s position on the Board with a Blue Diamond designee.^[163] The Court held that this information “would support a conclusion that Dalby’s presence on the Board was not as imminently and irreparably harmful as the CIS claimed. Certainly, that is a fact that a reasonable stockholder would consider in deciding to vote.”^[164]

While the Court held that the Company breached the terms of AIM’s note by failing to satisfy its mandatory obligation to convert, it refused to grant AIM’s request for specific performance.^[165] The AIM Note provided that upon AIM’s election, “the Company shall convert the outstanding principal amount of the [AIM Note] . . . .”^[166] The Court explained that Delaware courts construe the term “shall” as creating a mandatory obligation.^[167] Because the Company did not satisfy this mandatory obligation to convert the outstanding principal and interest on the AIM Note, it had breached the terms of the AIM Note.^[168] However, the Court refused to grant AIM’s request for specific performance requiring Gabb to issue shares to AIM because AIM failed to show that “the balance of the equities clearly and convincingly tips in AIM’s favor.”^[169] The Court’s explained that the note conversion reflected “the culmination of a long-running effort by non-neutral management, working with AIM, to vitiate Dalby’s [rights under a settlement agreement] and thereby ‘get rid’ of the Company’s founder and controller.”^[170] The Court rejected AIM’s argument that the note conversion’s primary purpose was raising capital, and instead found that the conversion’s “primary purpose” was to extinguish rights that impose the primary purpose test.^[171]

In re Straight Path Commc’ns Inc. Consol. S’holder Litig., 2023 WL 6399095 (Del. Ch. Oct. 3, 2023), aff’d, 2025 WL 3467090 (Del. Dec. 3, 2025). The Delaware Court of Chancery, in a post-trial opinion, found that a controlling stockholder breached his fiduciary duties by driving an unfair transaction, however no damages were incurred in the process. The plaintiffs alleged that the controller breached his duty of loyalty to the minority stockholders by coercing the independent directors into an unfair settlement of a potentially valuable indemnification claim, resulting in a non-ratable benefit to the controller.

In 1990, defendant Howard Jonas (the “Controller”) founded IDT Corporation (“IDT”) and took it public in 1996.^[172] In 2013, IDT spun off Straight Path Communications Inc. (“Straight Path”) as a vehicle to pursue intellectual property claims.^[173] In the spin-off, stock in Straight Path was distributed pro rata to IDT stockholders, making the Controller a majority stockholder in Straight Path.^[174] IDT and Straight Path also entered a separation and distribution agreement (the “SDA”), that included indemnification rights, requiring IDT to indemnify Straight Path for certain losses.^[175] At this time, IDT, in conjunction with its intellectual property assets, transferred its portfolio of broadcast spectrum licenses, (the “Spectrum Licenses”) which were initially considered of minimal value, to Straight Path.^[176] But, after a bidding war from 2017-2018, Verizon acquired Straight Path for its Spectrum Licenses for approximately $3.1 billion, or roughly $184 per share.^[177]

Prior to the sale, IDT, Straight Path and its Spectrum Licenses had become subject of a Federal Communications Commission (“FCC”) investigation.^[178] Ultimately, Straight Path and FCC entered a settlement agreement under which Straight Path paid a $15 million fine, forfeited 196 Spectrum Licenses and was required to either give away or sell the remaining Spectrum Licenses or incur an additional $85 million fine.^[179] If Straight Path chose to sell the remaining Spectrum Licenses, it would be required to pay a 20%-of-sale-proceeds penalty to the FCC.^[180] Straight Path sold its remaining Spectrum Assets.^[181] The independent directors of Straight Path believed the company could seek indemnification from IDT under the SDA for the penalties it incurred under the settlement with the FCC (the “Indemnification Claim”). Therefore, the independent directors, believing the Indemnification Claim was unlikely to be valued by a purchaser, explored ways to preserve the claim as a stockholder asset, including creating a trust to hold the claim.^[182] The Controller “got wind of this plan.”^[183] And used his position as controller to cause the independent directors to release the Indemnification Claim for $10 million.^[184]

Applying the entire fairness standard, the Court found that the Controller used his control to seize the corporate machinery in an unfair process, however the price for the release of the Indemnification Claims was a fair price.^[185] In finding an unfair process, the Court detailed how the Controller bombarded the independent directors with phone calls, threatened them, verbally abused them during negotiations by calling them “bullshit directors,” and made them believe he would torpedo the lucrative Straight Path sale if they did not quickly settle the claim on his terms.^[186] The Controller’s campaign of abuse and coercion led the independent directors to conclude that they had to settle the Indemnification Claim on the Controller’s terms or risk a less favorable outcome for Straight Path.^[187]

To determine whether the Indemnification Claim was settled was a fair price, the Court explained it must decide whether defendants proved that the Indemnification Claim was worthless or of so little value that $10 million falls within a range of fairness.^[188] The Court found that Straight Path’s failure to comply with notice and consent requirements under Section 6.07 of the SDA was dispositive in determining the indemnification claim was economically worthless.^[189] When seeking indemnification pursuant to the SDA, Straight Path was required to promptly notify IDT, “in writing, upon receiving notice that a third party (a) has commenced an Action against or involving Straight Path or (b) has alleged the existence of such claim.”^[190] Failure to provide notice releases IDT of its obligations under the SDA when such failure materially prejudices IDT.^[191] The Court found that Straight Path failed to provide IDT with notice, stripping IDT from the opportunity to exercise its contractual right to take over the defense of the FCC investigation and IDT was excluded from meaningful participation in settlement negotiations.^[192]

Finally, the Court calculated a baseline value of $263.4 million for a viable Indemnification Claim, then applied necessary adjustments for various claim-dispositive hurdles including notice and consent fulfillment issues.^[193] After applying the adjustments, yielding an overall 3.2% probability of success, the Court found an adjusted value of approximately $8.4 million, concluding that the $10 million settlement was not unfair in price.^[194]

§ 3. Appraisal

Jacobs v. Akademos, Inc., 326 A.3d 711 (Del. Ch.), judgment entered, (Del. Ch. 2024), aff’d, 342 A.3d 1165 (Del. 2025). In this appraisal case, the Court of Chancery held after a trial that the defendants carried their burden of proving that financing transactions and a merger were entirely fair, despite the common shareholders receiving no value in the merger. The case involved a virtual bookstore that had not turned a profit in over 20 years.^[195] The company stayed in business by relying on funding from others, including an investor.^[196] The investor held preferred stock with liquidation preferences and provided loans to the company with repayment premiums.^[197] Eventually, the investor offered to acquire the company and the deal closed in 2020.^[198] The plaintiffs sought appraisal and asserted plenary claims challenging the merger and two of the preceding debt financings in which the investor had supplied the company with capital.^[199]

The Court noted that each side of an appraisal proceeding has the burden to prove its valuation position.^[200] Here, the Court held that the plaintiffs’ valuation was not credible and agreed with the defendants’ position that the fair value of plaintiffs’ shares at the time of the merger was zero.^[201] The Court also found that the defendants proved that the merger was entirely fair because the company did not have a reasonable prospect of generating value for the common stockholders by operating as a going concern.^[202] Indeed, the Court found that the common stock had no value before the merger, so the common stockholders received the substantial equivalent in value of what they had before it.^[203] Although the fund did not condition its offer on the twin requirements under MFW (approval from both an independent special committee and a majority of the unaffiliated stockholders), the Court found that the directors had persuasively argued at trial that the company simply lacked the funds to do so.^[204]

§ 4. Demand

In re Kraft Heinz Co. Deriv. Litig., 2021 WL 6012632 (Del. Ch. Dec. 15, 2021), aff’d, 282 A.3d 1054 (Del. 2022). The Delaware Court of Chancery dismissed stockholder derivative claims for breaches of fiduciary duty asserted on behalf of The Kraft Heinz Company (“Kraft Heinz”) against 3G Capital Inc. (“3G”)—a global investment firm, and certain dual fiduciaries of 3G and Kraft Heinz. Plaintiffs alleged that defendants sold 7% of its then-24% stake in Kraft Heinz for over $1.2 billion based on “adverse material nonpublic information or allowed 3G to effectuate the sale to the detriment of Kraft Heinz and its non-3G stockholders.”^[205] Plaintiffs did not make a make a demand on the board of directors pursuant to Court of Chancery Rule 23.1, nor did plaintiffs demonstrate that a demand would have been futile. Therefore, the Court dismissed the complaint for failing to establish demand futility.

In 2015, Kraft Heinz was formed when Kraft Food Groups, Inc. (“Kraft”) merged with The H.J. Heinz Company (“Heinz”).^[206] Two years earlier, Heinz was jointly purchased by 3G and Berkshire Hathaway Inc.^[207] After the Kraft Heinz merger, 3G owned 24.2% of Kraft Heinz and Berkshire owned 26.8%; the remaining 49% was owned by legacy Kraft stockholders.^[208] Pursuant to a shareholders’ agreement between 3G and Berkshire, they were obligated to vote their shares in favor and prohibited from taking any action to facilitate the removal of each other’s board designees.

The Kraft Heinz board of directors was composed of eleven members (the “Board”), including five former Kraft directors, three 3G designees, and three Berkshire designees.^[209] Defendants conceded that the three directors affiliated with 3G could not exercise impartial judgment regarding the demand.^[210] And plaintiffs conceded that two of the former Kraft directors were independent and disinterested for purposes of the demand futility analysis.^[211] Leaving the Court to determine whether at least four of the remaining six directors could exercise their independence and disinterested judgment.

With respect to the remaining directors, the Court applied the three-part test for demand futility established by United Food & Commercial Workers Union v. Zuckerberg, 2021 WL 4344361 (Del. Sept. 23, 2021). Focusing only on the third prong of Zuckerberg—independence from someone who received a material benefit, because none of the six directors obtained a material personal benefit (prong one) or faced a substantial likelihood of liability (prong two)—the Court found that the complaint failed to plead demand futility as to at least four directors, therefore a majority of the board was independent.

The Court rejected plaintiffs’ contention that 3G, on its own or together with Berkshire, was a controlling stockholder in a manner that the director was “dominated by or beholden to the allegedly controlling entity.”^[212] Plaintiffs alleged that one director’s private foundation had invested 12% of its investment portfolio in a 3G fund and that he chaired a non-profit that receives donations from organizations controlled by 3G.^[213] But the Court found the allegations were insufficient to infer lack of independence from 3G.^[214] Similarly, the Court rejected plaintiffs’ “transitive theory of independence” alleging that two directors had close personal relationships with Berkshire’s CEO (nonparty) who, in turn, are beholden to 3G.^[215] As to the fourth director, the Court held that neither his compensation from the Kraft Heinz as a director, his previous consultant relationship with Kraft Heinz, or his son’s employment in a company affiliated with 3G created a reasonable basis to doubt his impartiality.^[216] With that, the Court concluded that demand is not excused.

In re Kraft Heinz Demand Refused Deriv. S’holder Litig., 2024 WL 3493957 (Del. Ch. July 19, 2024). Vice Chancellor Lori W. Will of the Delaware Court of Chancery dismissed with prejudice a derivative stockholder lawsuit challenging the Kraft Heinz Company’s (“Kraft Heinz”) board’s refusal to pursue litigation demands. In their complaint, plaintiffs alleged breach of fiduciary duties, arguing the stock sale was based on nonpublic information and Kraft Heinz’s board concealed the upcoming impairment from the market. The Court held that Plaintiffs failed to plead particularized facts showing that the board acted in bad faith or with gross negligence when investigating and rejecting their claims.

This action is a demand-made iteration of the case dismissed by the Court for failure to plead demand futility.^[217] As discussed supra, six months after 3G Capital, Inc.’s sale of 7% of its then-24% stake in the Kraft Heinz, Kraft Heinz announced a $15.4 billion impairment charge.^[218] After the impairment disclosure, a federal securities class action complaint was filed against Kraft Heinz’s directors and officers, which survived a motion to dismiss and later settled for $450 million.^[219]

Plaintiffs here sent litigation demands to the board asking it to investigate potential wrongdoing by 3G Capital Inc. and its affiliates, and current and former directors and officers of Kraft Heinz.^[220] In response, the board created an administrative working group (the “Working Group”) which consisted of two outside directors to investigate the litigation demands.^[221] The Working Group retained legal advisors and a forensic accounting advisor to assist with evaluating the allegations in the litigation demand and recommending an appropriate response to the board.^[222] After a two-year investigation process, the Working Group’s findings were memorialized in a 110-page report concluding that litigation based on the issues alleged in the litigation demand was not in Kraft Heinz’s best interest.^[223] With that, the Board rejected the litigation demands.^[224]

Following the rejection of the litigation demands, the stockholders filed suit alleging their litigation demands were wrongfully refused.^[225] By default, the board’s rejection of a litigation demand is entitled to the business judgment rule.^[226] Therefore, to overcome dismissal under Rule 23.1, the stockholders must plead particularized facts to raise a reasonable doubt that the refusal was a valid exercise of business judgment.^[227] Because Plaintiffs made a litigation demand, they tacitly conceded the board, as a whole, could impartially consider its litigation demands; and Plaintiffs waived any claim that the board cannot act independently on the litigation demand.^[228]

With that concession, the only issues for the Court to consider were the good faith and reasonableness of the board’s investigation.^[229] Plaintiffs argued that there were “structural flaws” in the Working Group which undermined the board’s independence and good faith.^[230] Plaintiffs also argued that the Working Group’s rejection of the litigation demands was based on “a grossly negligent and bad faith flawed process.”^[231] The Court found that plaintiffs chose to make litigation demands on the board that formed the Working Group, so now plaintiffs cannot argue that the board was incapable of proceeding impartially.^[232] The Court also found that the Working Group’s investigation was adequate.^[233] The investigation spanned two years, involved reviewing over 150,000 Kraft Heinz documents plus SEC filings and other materials, conducted interviews with twelve current and former directors and officers, and reviewed analysis by legal counsel who spent 5,000 hours and forensic accountants who devoted 1,500 hours to the work.^[234] Rejecting plaintiff’s allegations, the Court stated that the Working Group’s “choice of people to interview or documents to review is one on which reasonable minds may differ.”^[235] The critical inquiry was whether directors neglected to consider material facts reasonably available.^[236] The Court found the board acted within its bounds of business judgment by refusing a litigation demand after concluding that “a lawsuit, even if legitimate, would be excessively costly to the corporation or harm its long-term strategic interests.”^[237]

In re Fox Corp. Deriv. Litig., 2024 WL 5233229 (Del. Ch. Dec. 27, 2024). In this derivative action arising out of defamation claims against Fox Corporation (the “Company”), plaintiffs filed suit without issuing a litigation demand to the Company’s Board and, therefore, had to establish a demand would have been futile. The Court explained that if there was a reasonable doubt as to the disinterestedness or independence of at least four members of the Company’s eight-member Board, demand would be considered futile for purposes of the pleading stage.^[238] The Court found a reasonable doubt that Rupert Murdoch (“Rupert”), Lachlan Murdoch (“Lachlan”), Chase Carey (“Carey”), and Jacques Nasser (“Nasser”) were disinterested and independent, so the case was not dismissed.^[239]

Focusing on Count I, which contended the “officer defendants” acted in bad faith by enabling defamation, the Court began by finding that Rupert faced a substantial likelihood of liability and was thus interested in the litigation.^[240] Noting that “[t]rial judges do not possess telepathic powers,” the Court described the allegations that supported a reasonable inference that Rupert knowingly permitted Fox News to publish unfounded stories in order to preserve its viewership.^[241] Unconvinced by defendants’ proffered defenses at the “plaintiff-friendly” pleading stage, the Court found a substantial likelihood that Rupert would be liable for causing or permitting Fox News to publish defamatory content and, thus, could not impartially consider a litigation demand.^[242]

Lachlan, Rupert’s son, was “doubly disqualified” for purposes of the demand futility analysis.^[243] First, he was not independent of his father given the familial relationship, so he inferably could not make an impartial decision about bringing Count I.^[244] Second, Lachlan, too, faced a substantial likelihood of liability for “act[ing] in bad faith by prioritizing profits over legal compliance.”^[245]

Turning to the non-Murdoch directors, the Court found Carey inferably lacked independence from Rupert and, therefore, could not consider a litigation demand impartially.^[246] The Court focused on Carey and Rupert’s decades-long business and social relationship.^[247] Based on the complaint’s allegations about that relationship, the Court held “[t]he plaintiffs have sufficiently pled that Carey owes a debt of gratitude to [Rupert].”^[248] That was enough, at the pleading stage, to support an inference that Carey could not impartially consider a demand to bring claims on which Rupert faced a substantial likelihood of liability.^[249]

The analysis with respect to Nasser was similar but focused on Nasser and Rupert’s professional and social relationship—particularly through a networking association for Australian elites.^[250] The Court rejected defendants’ attempt to “attack[] each allegation individually” and, instead, “view[ed] the allegations holistically.”^[251] That holistic view of “a constellation of facts” about Nasser and Rupert’s relationship paired with the plaintiff-friendly pleading standards were enough to infer Nasser lacked independence from Rupert and could not impartially consider a litigation demand.^[252]

Because Rupert, Lachlan, Carey, and Nasser could not impartially consider a demand to bring Count I, pertaining to the officers’ wrongdoing, demand was excused as to Count I.^[253] The Court briefly addressed Count II by explaining it “ar[ose] out of the same nucleus of operative facts as the claims against [Rupert],” so the interestedness and independence analysis would be the same.^[254] Therefore, the Court maintained the derivative suit past the pleading stage.^[255]

Following reassignment of this action to a new judicial officer, plaintiffs’ success on the demand futility inquiry was put back into question. Specifically, on April 28, 2025—approximately four months after the motion to dismiss decision—the Court granted defendants’ motion for leave to move for summary judgment.^[256] Defendants argued targeted discovery on the issue of Nasser’s independence would undermine the plaintiff-friendly inferences appropriate at the pleading stage, lead to a finding that Nasser was independent, and “save the parties millions of dollars in litigation expenses.”^[257] Noting the Court’s broad discretion to manage its dockets—including briefing and discovery—the Court was “convinced that granting the motion is the most efficient path forward here.”^[258] Rejecting plaintiffs’ efforts to preserve the motion to dismiss decision until after plenary discovery, the Court explained, “[a]llegations are not evidence, and the law of the case doctrine does not foreclose a potential offramp if the theories pled in the complaint do not hold up.”^[259] Thus, the parties will revisit Nasser’s independence at an early stage of the case.^[260]

Shafi v. Chien, 2025 WL 671854 (Del. Ch. Mar. 3, 2025).

I. Factual Background

Plaintiffs alleged in their complaint that Get Together, Inc. (“IRL”) was a Delaware corporation founded in 2016 to develop a social-media platform designed to facilitate real-world interactions.^[261] Founders Abraham Shafi (CEO), Krutal Desai (President), and Genrikh Khachatryan held common stock along with employees and early investors.^[262]

Between 2018 and 2021, IRL raised substantial venture financing, culminating in a $170 million Series C round led by SoftBank at a $1.17 billion post-money valuation.^[263] Three venture funds—Goodwater, Floodgate, and SoftBank—held preferred stock with liquidation preferences, and each designated one director pursuant to a voting agreement (the “Voting Agreement”).^[264] The board thus consisted of three investor-designated directors and three common stockholder-elected directors, though only five seats were filled at the relevant time.^[265]

Beginning in 2022, allegations emerged that IRL’s reported user numbers were inflated by bots.^[266] In August 2022, the SEC subpoenaed IRL regarding its user metrics.^[267] Outside counsel (Faegre) initially concluded that bot concerns were unfounded.^[268]

In January 2023, the board formed a Special Committee consisting solely of the three investor-designated directors to oversee the SEC response.^[269] Shortly after these three directors were deposed by the SEC, the Special Committee confronted Shafi and demanded his resignation as CEO.^[270] When he refused, the committee suspended him and appointed Scott Kauffman, an outsider with ties to Goodwater, as CEO.^[271]

Following Shafi’s suspension, IRL experienced repeated service outages and a dramatic decline in active users.^[272] Meanwhile, the Special Committee retained Keystone Strategy, which issued a June 2023 report concluding that 95% of IRL’s users were bots, contradicting earlier analyses.^[273]

Days before the Keystone report was presented to the full board, the investor-designated directors formed an entity called IRL Liquidation, LLC.^[274] At a June 23, 2023, board meeting—after Kauffman purported to vote common stockholder shares by proxy to remove Shafi from the board and install himself—the board voted unanimously to dissolve IRL.^[275] Approximately $40 million in cash was distributed to preferred stockholders under their liquidation preferences; common stockholders received nothing.^[276]

Shafi, Desai, Khachatryan, and several optionholders sued, asserting direct and derivative claims under Delaware law.^[277]

II. Procedural Posture

Plaintiffs asserted eight claims, including:

• Derivative fiduciary-duty claims against the investor-designated directors and Kauffman (Counts I & III);
• Direct fiduciary-duty claims for bylaw violations (Count II);
• Breach of the Voting Agreement (Count IV);
• Vicarious liability against the venture capital investors (Count V);
• Tortious interference (Count VI); and
• Defamation (Counts VII & VIII).^[278]

Defendants moved to dismiss under Rules 23.1 (demand futility) and 12(b)(6) (failure to state a claim), or alternatively to stay the action in favor of a first-filed related California fraud case brought by SoftBank.^[279]

III. Holdings

The Court held:^[280]

1. Demand futility was adequately pleaded as to derivative fiduciary-duty claims against the investor-designated directors and Kauffman (Counts I and III).
2. The vicarious-liability claim against the investor funds (Count V) was dismissed as a matter of Delaware law.
3. Direct claims for breach of fiduciary duty based on bylaw violations (Count II) survived.
4. The breach-of-Voting-Agreement claim (Count IV) survived.
5. The tortious-interference claim (Count VI) was dismissed for failure to plead a cognizable expectancy or intent.
6. Defamation and false-light claims were transferred to Superior Court for lack of jurisdiction in the Court of Chancery.
7. The motion to stay the action in favor of the California action was denied.

IV. Court’s Analysis

A. Demand Futility (Rule 23.1)

Applying the universal test from United Food v. Zuckerberg,^[281] the Court examined whether a majority of the board could impartially consider a demand.^[282]

1. The Investor-designated Directors

The Court rejected plaintiffs’ reliance on industry-wide stereotypes about venture capital incentives (e.g., “unicorn hunting” or reputation protection) as insufficiently particularized.^[283] However, it found demand excused based on conflicts arising from the investors’ preferred stock.^[284]

Relying heavily on Trados,^[285] the Court emphasized that when preferred and common stockholder interests diverge, directors must faithfully pursue the best interests of the corporation for the benefit of its residual claimants (the common stockholders), consistent with contractual obligations to preferred holders.^[286]

Accepting the plaintiffs’ allegations as true under the motion-to-dismiss standard of review, the Court found a reasonable inference that:

• The investor-designated directors prioritized liquidation preferences over any consideration of alternatives that might preserve or enhance value for common stockholders.
• The decision to dissolve was hasty, pre-ordained, and procedurally thin, including the formation of a liquidation entity before board deliberations and before receipt of the Keystone report.

These allegations supported a substantial likelihood of liability for loyalty-based claims, excusing demand.

2. Kauffman

Although conclusory allegations of personal loyalty to the investor-designated directors were insufficient standing alone, demand was excused as to Kauffman because:

• Claims against Kauffman were factually intertwined with those against the investor-designated directors.
• Kauffman allegedly benefitted personally by installing himself as a director through an improper proxy vote.
• As an officer, Kauffman was not exculpated from duty-of-care claims and was plausibly alleged to have acted with reckless indifference to IRL’s operations.^[287]

B. Vicarious Liability of Investor Funds

The Court dismissed Count V, reaffirming long-standing Delaware precedent, including Khanna v. McMinn,^[288] rejecting respondeat superior liability for non-fiduciary stockholders based solely on their designees’ board conduct.^[289] Plaintiffs had not pleaded aiding and abetting or knowing participation, and agency principles could not be used to circumvent those requirements.^[290]

C. Direct Claims

1. Bylaw Violations (Count II)

The Court found it reasonably conceivable that the investor-designated directors violated IRL’s bylaws by:

• Appointing Kauffman as CEO through a Special Committee, rather than the full board; and
• Failing to allow Desai, as President, to assume the CEO role as required by the bylaws upon a vacancy.^[291]

The scope of the Special Committee’s authority did not clearly encompass officer appointment, precluding dismissal at the pleading stage.

2. Voting Agreement (Count IV)

The breach-of-contract claim survived because it was unclear whether:

• Kauffman was validly appointed President (a prerequisite to proxy authority); and
• Common stockholders had “failed to vote” within the meaning of the agreement.^[292]

The Court noted that these issues require factual development.

3. Tortious Interference (Count VI)

Dismissal was warranted because plaintiffs failed to plead:

• A specific, actionable expectancy (mere ownership of options was insufficient); or
• Intentional interference, as defendants were not alleged to have known of any specific plans to exercise or sell the options.^[293]

D. Motion to Stay

Applying McWane,^[294] the Court declined to stay the action.^[295] The California case involved different parties, different legal theories (fraud vs. fiduciary duty), and different timeframes (Series C investment vs. 2023 dissolution).^[296] The Court of Chancery concluded that the California court could not provide “prompt and complete justice” for the Delaware claims.^[297]

V. Takeaways for Practitioners

• The decision reinforces Trados-based scrutiny where investor-designated directors approve liquidation outcomes that exclusively benefit preferred holders.
• Process and timing matter: pre-ordained outcomes and thin deliberation can support loyalty-based claims even absent proof that liquidation was substantively wrong.
• Delaware courts remain hostile to respondeat superior theories against investor funds.
• Special committee authority will be closely parsed against bylaw text—particularly in officer appointments.
• The opinion is a significant post-Zuckerberg application of demand futility in the venture-backed startup context.

Cent. Laborers’ Pension Fund v. Karp, 2025 WL 1213104 (Del. Ch. Apr. 25, 2025).

I. Factual Background

Palantir Technologies Inc. (“Palantir”) is a Delaware corporation founded in 2003 that provides data analytics software primarily to government and commercial customers.^[298] After operating as a private company for seventeen years, Palantir became public on September 30, 2020, through a direct listing rather than a traditional underwritten IPO.^[299]

In a direct listing, no new shares are issued; instead, existing stockholders sell shares directly into the public market to create liquidity.^[300] For Palantir, the direct listing marked its first liquidity event.^[301] Founders, officers, and directors—including Alexander Karp, Peter Thiel, and Stephen Cohen—sold significant amounts of stock in the days following the listing, generating hundreds of millions of dollars in proceeds.^[302] Palantir voluntarily imposed a partial lockup limiting insiders to selling no more than 20% of their holdings until February 2021, and many subsequent trades were made pursuant to Rule 10b5-1 trading plans or to satisfy tax-withholding obligations.^[303]

Nine days before the direct listing, Palantir filed a Registration Statement that disclosed accelerated growth in 2020—particularly in its government segment—while also warning investors that COVID-related revenue might be unsustainable, customer concentration posed risks, sales cycles were long and unpredictable, and future growth was uncertain.^[304]

In early 2021, Palantir’s board received internal presentations describing its revenue “visibility” and a “gap-to-goal” amount representing revenue expected to be generated during the year to meet guidance.^[305] Throughout 2021, Palantir closed this gap and ultimately exceeded its revenue target.^[306]

Beginning in March 2021, Palantir launched a SPAC investment program, investing approximately $500 million across 27 SPACs in exchange for equity stakes and long-term commercial licensing agreements.^[307] Palantir publicly disclosed the program, the projected contract values, the revenue recognized, and the attendant risks.^[308] By 2022, as the SPAC market deteriorated, Palantir incurred substantial unrealized losses and wound down the program.^[309]

Several Palantir stockholders brought this derivative action after receiving books and records under Section 220, alleging that Palantir insiders orchestrated the direct listing and SPAC investments to inflate Palantir’s stock price and enable insider trading before adverse business trends were disclosed.^[310]

II. Procedural Posture

Plaintiffs asserted four derivative claims:

1. Breach of fiduciary duty against directors for approving the SPAC investment program and issuing misleading disclosures;
2. Breach of fiduciary duty against officers for misleading disclosures;
3. Insider trading under Brophy v. Cities Service Co. against directors and officers who sold Palantir stock; and
4. Unjust enrichment based on alleged insider trading profits.^[311]

Defendants moved to dismiss under Court of Chancery Rule 23.1 for failure to plead demand futility and under Rule 12(b)(6) for failure to state a claim. The Rule 23.1 motion was dispositive.

III. Holdings

The Court held that:

1. Plaintiffs failed to plead demand futility under the United Food v. Zuckerberg framework.
2. Plaintiffs did not adequately plead a substantial likelihood of liability for a majority of the demand board on a non-exculpated claim.
3. Plaintiffs failed to plead that any director received a material personal benefit from alleged misconduct, as required by Zuckerberg.
4. Because demand was not excused, the complaint was dismissed in its entirety under Rule 23.1.

IV. Court’s Analysis

A. Demand Futility Standard

Applying the universal demand futility test from United Food & Commercial Workers Union v. Zuckerberg,^[312] the Court analyzed—on a claim-by-claim basis—whether a majority of the seven-member demand board:

1. Received a material personal benefit from the alleged misconduct;
2. Faced a substantial likelihood of liability; or
3. Lacked independence from someone who did.^[313]

Failure to satisfy at least one prong for each of a majority of the board required dismissal.^[314]

B. Brophy (Insider Trading) Claim

The plaintiffs’ principal theory was that Palantir insiders traded on material nonpublic information (“MNPI”) relating to unsustainable COVID-driven growth and the alleged artificial inflation of revenue through SPAC investments.^[315]

1. Failure to Plead MNPI

The Court emphasized that Delaware law sets a high bar for Brophy^[316] claims.^[317] Plaintiffs must plead particularized facts showing that defendants possessed material, nonpublic information at the time of each challenged trade.^[318]

The purported MNPI failed as a matter of law:

• Alleged risks concerning customer concentration, reliance on government contracts, COVID-related growth, and sales-cycle uncertainty were fully disclosed in the Registration Statement and subsequent public filings.^[319]
• The “gap-to-goal” figures were mischaracterized by plaintiffs; the board materials showed expected in-year revenue generation, not a hidden shortfall.^[320]
• Information about SPAC investments—including their structure, risks, projected value, and revenue recognition—was publicly disclosed contemporaneously.^[321]
• Plaintiffs’ allegations relied heavily on hindsight, which Delaware courts consistently reject.^[322]

2. Scienter

Even if MNPI had been pleaded, plaintiffs failed to allege that defendants’ trades were motivated by the MNPI. The Court found scienter implausible where:

• Most trades occurred under 10b5-1 plans or automatically for tax withholding;
• Many sales occurred immediately following the direct listing, the very purpose of which is to permit liquidity;
• Plaintiffs engaged in impermissible group pleading rather than alleging trade-specific facts; and
• Defendants retained substantial portions of their holdings (often 70–80% or more).^[323]

The Court concluded that, taken together, these facts negated any reasonable inference of intentional misuse of MNPI.

C. Fiduciary-Duty Claims Based on SPAC Investments

Plaintiffs also alleged that the board acted in bad faith by approving the SPAC investment program and issuing misleading disclosures.^[324]

1. Disclosure Claims

The Court held that plaintiffs failed to plead:

• Which disclosures were misleading;
• Which directors were responsible for them; or
• Facts showing bad-faith misconduct.^[325]

The Court held that group pleading and mere signatures on SEC filings were insufficient under Rule 23.1.^[326]

2. Approval of the SPAC Program

The Court treated the SPAC investments as core capital-allocation decisions protected by the business judgment rule absent bad faith.^[327] Allegations that the board failed to conduct ideal diligence or that investments later performed poorly amounted, at most, to negligence—not non-exculpated disloyalty.^[328]

The Court rejected plaintiffs’ attempt to aggregate alleged process flaws into a “mulligan stew” of bad faith. ^[329] Even viewed holistically, the allegations did not support an inference that directors consciously disregarded their duties.^[330]

D. Material Personal Benefit

Plaintiffs argued that the sheer magnitude of insider stock sales rendered demand futile under Zuckerberg’s first prong.^[331] The Court rejected this argument, emphasizing that profits alone are not disqualifying unless derived from wrongdoing.^[332]

Distinguishing Grabski v. Andreessen,^[333] the Court found no allegations that defendants sold stock while knowingly exploiting MNPI.^[334] Sales made in a direct listing or under 10b5-1 plans, without well-pleaded misconduct, do not constitute material personal benefits for demand-futility purposes.^[335]

E. Independence

Because plaintiffs failed to plead either substantial liability or material personal benefit for any director, the Court did not reach the independence prong.^[336]

V. Takeaways for Practitioners

• Brophy claims remain exceptionally difficult to plead, particularly in the context of direct listings and 10b5-1 trading plans.
• Context matters: liquidity events, automated trades, and significant retained ownership weigh heavily against scienter.
• Courts will not infer bad faith from failed business strategies or market downturns, including SPAC investments.
• Zuckerberg does not create a mechanical checklist—courts will assess demand futility contextually, especially for insider-trading allegations.
• Section 220 books-and-records productions do not lower Rule 23.1’s stringent particularity standard.

§ 5. Books and Records

Myers v. Acad. Sec., Inc., 2023 WL 4782948 (Del. Ch. July 27, 2023), report and recommendation adopted, (Del. Ch. 2023). David Myers, a combat-wounded Marine veteran, filed a Section 220 action against Academy Securities, Inc. (“Academy”), a veteran owned and operated investment bank, demanding inspection of Academy’s books and records. Myers sought to value his shares and determine whether Academy held stockholder meetings for which Myers did not receive notice.

Myers joined Academy in 2014 as Director of Business Development and purchased 17,621 shares of common stock—about 5% of the company—from Shane Osborn, a former executive.^[337] Academy originally issued the shares to Osborn in 2012 allegedly subject to a “subscription receivable,” though no written agreement existed to support this claim.^[338] The sale agreement, which was facilitated by Academy, warranted that Osborn was the sole owner of the shares, free of liens or encumbrances, and made no mention of any subscription receivable.^[339]

Two years later, Academy’s board of directors adopted a resolution authorizing officers to demand payment of delinquent subscription receivables or cancel shares.^[340] Notably, the resolution did not identify specific shares or stockholders, reference Sections 163 or 164 (which govern assessments and collection of unpaid stock subscriptions), or trigger any formal collection process.^[341] Academy never demanded payment from Myers.^[342]

Myers resigned in March 2020 and executed a separation agreement releasing employment-related claims.^[343] Academy continued to acknowledge Myers as a stockholder after his departure.^[344] Throughout late 2020 and 2021, Myers sought to sell his shares through redemption or a third-party sale.^[345] In January 2021, Myers requested valuation information from Academy to assess fair market value; Academy provided limited materials but refused further disclosures.^[346]

In April 2021, Academy accused the plaintiff of breaching a non-disparagement clause after anonymous emails criticized the company, which Myers denied authoring.^[347] Nearly a year later, in March 2022, Academy sent a letter purporting to cancel the plaintiff’s shares, citing alleged fiduciary breaches and violations of the separation agreement.^[348] The letter did not mention a subscription receivable.^[349] Seven months later, Academy recorded the cancellation on its books, wrote off the receivable, and removed Myers from its stock ledger.^[350] During this period, Academy also conducted two partial redemptions of common stock without notifying Myers.^[351]

On February 1, 2023, Myers served a Section 220 demand seeking eleven categories of documents, including financial statements, capitalization tables, board materials, redemption results, and meeting notices.^[352] Academy rejected the demand, arguing Myers had released his shares or that they were canceled.^[353] Myers then filed his verified complaint and a one-day trial was held on July 24, 2023.^[354] At trial, Academy asserted for the first time that Myers’s shares were cancelled due to nonpayment of a subscription receivable.^[355] Academy claimed that Myers lacked standing because he was no longer a shareholder, and that Myers failed to demonstrate a proper purpose for his demand.^[356]

With respect to the standing argument, the Court found that Myers remained a stockholder with standing because the subscription receivable was not memorialized in a written agreement, as required by Delaware law, and the only other evidence Academy could point to were emails in which Osborn, the former holder of the shares, rejected Academy’s attempts to assert the existence of an unwritten subscription receivable on his shares.^[357] The Court further found that, even if the shares were subject to a subscription receivable, Academy failed to comply with the requirements of DGCL §§ 163 and 164, which require notice and formal collection procedures before forfeiture.^[358] The Court criticized Academy’s “post hoc litigation tactic” and shifting positions, noting that Myers was never informed of any subscription receivable obligation and his certificate did not indicate partly paid shares.^[359]

The Court also found Myers proffered purposes—valuing his shares and investigating whether he received notice of stockholder meetings—were proper under well-settled Delaware law.^[360] The Court rejected Academy’s argument that Myers was motivated by animus or competitive motives, finding that the record showed his primary purpose was valuation, consistent with years-long efforts to sell his shares.^[361]

The Court ordered production of most requested categories, including financial statements, board materials, capitalization tables, redemption results, bylaws, and meeting rules.^[362] Requests for capital distributions and stock ledgers were denied as not essential to Myers’s stated purposes.^[363]

The Court also granted Myers’s request for fee-shifting due to defendant’s bad faith conduct, finding that “fee shifting may be appropriate here” where the company “has taken shifting, mutually inconsistent positions as to when it purportedly canceled plaintiff’s shares and engaged in misrepresentations in its books and records to paper a purported cancellation of plaintiff’s shares.”^[364]

Barkan v. Exabeam, Inc., 2025 WL 1088821 (Del. Ch. Apr. 11, 2025).

I. Factual Background

Exabeam, Inc. (“Exabeam”) was a privately held Delaware corporation providing AI-driven cybersecurity services.^[365] Its capital structure consisted of common and preferred stock.^[366] In May 2024, Exabeam entered into a stock-for-stock merger pursuant to which an affiliate of LogRhythm Parent, LP—owned by private-equity firm Thoma Bravo—acquired Exabeam.^[367]

The merger was approved by written consent of a majority of Exabeam’s common and preferred stockholders voting together on an as-converted basis.^[368] Under the transaction, common stockholders received no consideration, while preferred stockholders allegedly received unique benefits and retained interests in the post-merger entity.^[369]

On June 18, 2024, Exabeam issued an Information Statement notifying stockholders of the transaction and advising them of their appraisal rights under Section 262 of the DGCL, including instructions for perfecting appraisal demands.^[370] The Information Statement did not specify a closing date, stating only that the merger was expected to close in the third quarter of 2024.^[371] In fact, the merger closed on July 2, 2024, less than two weeks later.^[372]

Ten days after dissemination of the Information Statement, a different Exabeam stockholder—represented by the same counsel as petitioner Asaf Barkan—served a Section 220 demand seeking books and records related to the merger.^[373] Exabeam responded that the merger was expected to close imminently and later declined production.^[374] That stockholder briefly filed, then dismissed, a Section 220 action.^[375]

Barkan, a former Exabeam common stockholder, never served a Section 220 demand.^[376] Instead, he emailed the company purporting to demand appraisal under Section 262, but did not otherwise comply with the statutory appraisal process.^[377] After the merger closed and his shares were cancelled, Barkan filed a petition under Section 262, expressly disclaiming any intent to pursue appraisal and instead seeking books and records “as a substitute” for Section 220 to facilitate a pre-suit investigation into potential fiduciary-duty claims.^[378]

Separately, other former common stockholders filed a plenary fiduciary-duty action challenging the merger as a conflicted, insider-driven transaction.^[379] Barkan moved to intervene in that action for the limited purpose of staying proceedings while he pursued document production through his Section 262 petition.^[380]

II. Procedural Posture

Exabeam moved to dismiss Barkan’s Section 262 petition under Rule 12(b)(6), arguing that:

1. Barkan lacked standing to seek inspection because he never served a Section 220 demand and was no longer a stockholder;^[381] and
2. Section 262 does not authorize inspection rights or pre-suit discovery.

Barkan opposed, relying principally on Wei v. Zoox, Inc.,^[382] and contending that appraisal proceedings can function as a fallback mechanism when a merger closes too quickly to allow Section 220 enforcement.^[383]

Barkan also moved to intervene in the plenary fiduciary-duty action under Rule 24(b) to stay that case pending his purported pre-suit investigation.^[384]

The Court considered both motions together.

III. Holdings

The Court held that:

1. Barkan lacked standing to obtain books and records because he failed to serve a Section 220 demand and could not satisfy Section 220’s mandatory form-and-manner requirements.^[385]
2. Section 262 does not provide an alternative path to obtain Section 220-type inspection materials or conduct a pre-suit investigation.^[386]
3. Wei v. Zoox, Inc. does not excuse noncompliance with Section 220 and does not support using appraisal as a freestanding inspection mechanism.^[387]
4. Exabeam’s motion to dismiss was granted in full.^[388]
5. Barkan’s motion to intervene and stay the plenary action was denied, because he had no standing to pursue inspection and no cognizable interest warranting intervention.^[389]

IV. Court’s Analysis

A. Section 220 Standing and “Form and Manner” Requirements

The Court began with first principles: Section 220 provides the exclusive statutory mechanism for stockholders to obtain corporate books and records for investigatory purposes.^[390] That right is qualified and strictly conditioned on compliance with the statute’s mandatory form-and-manner requirements, including a written demand under oath stating stockholder status, purpose, and documentary proof of ownership.^[391]

Failure to comply with these requirements is “statutorily fatal” to both inspection rights and any subsequent enforcement action.^[392] There is no equitable carve-out permitting courts to excuse noncompliance.

Here, it was undisputed that Barkan:

• Never served a Section 220 demand;
• Attempted inspection only after his shares were cancelled; and
• Filed suit without satisfying any of Section 220’s procedural prerequisites.

As a result, Barkan lacked standing ab initio to seek inspection. The Court rejected the argument that the merger’s rapid closing excused compliance, emphasizing that Section 220’s statutory scheme contains no exception for hastily consummated transactions.

B. Section 262 Is Not a Substitute for Section 220

The core of the opinion addresses—and firmly rejects—the notion that Section 262 appraisal proceedings can be repurposed as a pre-suit discovery tool.

The Court’s analysis traced the historical purpose of appraisal as a narrow, legislatively created remedy compensating dissenting stockholders for the loss of their common-law veto right over mergers. Appraisal is strictly limited to determining fair value and provides no equitable or ancillary relief.^[393]

The Court stressed that:

• Section 262’s text authorizes only one remedy: a judicial determination of fair value.
• Delaware courts have repeatedly refused to expand appraisal beyond valuation.
• Allowing inspection through appraisal would render Section 220’s carefully calibrated standing and procedural requirements superfluous.

The Court also emphasized statutory harmony: Sections 220 and 262 were enacted to perform distinct functions, and interpreting appraisal rights to encompass inspection rights would improperly collapse that distinction.^[394]

C. Misreading of Wei v. Zoox, Inc.

Barkan relied heavily on Wei v. Zoox, Inc., arguing that it permits Section 220-type discovery through appraisal when a merger closes before inspection rights can be enforced.

The Court rejected that interpretation as fundamentally flawed. Zoox involved stockholders who:

• Properly served Section 220 demands;
• Were foreclosed from enforcing them solely because the merger closed during the statutory response period; and
• Brought bona fide appraisal actions seeking valuation.

In Zoox, the Court merely exercised its discretion to limit discovery in an appraisal proceeding to what stockholders would have received under Section 220—not to create inspection rights under Section 262, and not to excuse failure to comply with Section 220’s form-and-manner requirements.^[395]

The Court characterized Zoox as a fact-specific application of proportionality of discovery in the appraisal context, not a doctrinal expansion of appraisal into an inspection substitute.

D. Modern “Tools at Hand” Doctrine and Policy Considerations

The Court placed its holding within the broader evolution of Delaware law encouraging stockholders to use Section 220 as the “tools at hand” before filing plenary litigation. The widespread availability and use of Section 220 have eliminated any policy justification for repurposing appraisal rights into an information-gathering mechanism.

Moreover, recent legislative amendments and Supreme Court decisions have restricted, not expanded, appraisal’s attractiveness, reinforcing the conclusion that courts should not enlarge its scope.

According to the Court, allowing Barkan’s approach would undermine:

• Section 220’s credible-basis requirement;
• Limitations on the scope of inspection; and
• The General Assembly’s deliberate calibration of stockholder rights.

E. Motion to Intervene

Because Barkan lacked standing to obtain inspection and asserted no independent claim distinct from the plenary plaintiffs, the Court denied permissive intervention under Rule 24(b).^[396] Granting intervention would serve only to delay proceedings without advancing any cognizable legal interest.^[397]

V. Takeaways for Delaware Practitioners

• Strict compliance with Section 220 remains mandatory; there is no equitable workaround for failure to serve a demand.
• Section 262 cannot be used as a substitute inspection statute, even in private-company mergers that close quickly.
• Zoox is narrow and procedural, not a license to bypass Section 220.
• Practitioners representing stockholders in private-company M&A should serve Section 220 demands immediately upon transaction announcement, even if closing appears imminent.
• The decision reinforces Delaware’s broader project of channeling pre-suit investigation through Section 220 and keeping appraisal confined to valuation.

§ 6. Mergers and Acquisitions

Delman v. GigAcquisitions3, LLC, 288 A.3d 692 (Del. Ch. Jan. 4, 2023). Richard Delman, a public stockholder of GigCapital3, Inc. (“Gig3”), brought a putative class action against Gig3’s directors, its sponsor GigAcquisitions3, LLC, and the sponsor’s managing member, Avi Katz. The case arose from Gig3’s merger with Lightning eMotors, Inc. (“Lightning”), a transaction Delman alleged was value-destructive and tainted by conflicts. The Court of Chancery denied defendants’ motion to dismiss, holding that the plaintiff stated reasonably conceivable claims for breach of fiduciary duty and unjust enrichment under the entire fairness standard.

Gig3 was formed as a Delaware SPAC in February 2020.^[398] Like most SPACs, Gig3 raised capital through an IPO, selling 20 million units at $10 per unit and placing $200 million in trust for public stockholders.^[399] Gig3 issued founder shares to GigAcquisitions3, LLC (the “Sponsor”)—roughly 20% of post-IPO equity—for $25,000.^[400] These shares lacked redemption and liquidation rights and were locked up, unlike public shares, which carried redemption rights and warrants.^[401] If Gig3 failed to merge within 18 months, public stockholders would receive $10 plus interest; if a merger occurred, they could redeem for the same amount.^[402] In either scenario, they could retain the warrants.^[403]

Gig3 completed its IPO in May 2020.^[404] At the same time, the Sponsor purchased private placement units to fund underwriting fees and operating expenses for $10 per unit.^[405] These shares also lacked liquidation or redemption rights and were subject to a lock-up.^[406] In December 2020, Gig3 announced a merger with Lightning, an electric vehicle manufacturer.^[407] Its March 2021 proxy solicited votes on the merger and related financings, emphasizing that stockholders could redeem for $10.10 even if voting for the deal.^[408] The proxy valued Gig3 shares at $10 and included Lightning’s aggressive projections—revenues rising from $9 million in 2020 to over $2 billion by 2025—while disclosing general dilution risks and conflicts.^[409] Stockholders approved the merger by a wide margin, though 29% redeemed their shares.^[410]

Gig3 closed the transaction on May 6, 2021.^[411] Before the vote, Gig3’s share price traded around $10—the redemption price for common stock.^[412] By the closing date, however, the stock price fell below $8 and later to $0.41 per share, while the Sponsor’s founder shares—purchased for $25,000—were worth more than $39 million at closing.^[413]

Delman, who held Gig3 stock since August 2020, sued in August 2021, alleging fiduciary breaches for impairing informed redemption decisions and unjust enrichment.^[414] Defendants moved to dismiss, argued the claims were derivative, constituted impermissible “holder” claims, and were cleansed under Corwin v. KKR Financial Holdings, LLC, 125 A.3d 304 (Del. 2015).^[415]

Vice Chancellor Will rejected these arguments. First, applying the two-pronged test from Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), the Court held the claims were direct because the harm alleged was to public stockholders’ redemption rights, not to Gig3 itself.^[416] The Court also found the claims were not improper “holder” claims because stockholders could redeem their shares even if they voted on the merger, and thus faced an affirmative choice to redeem or invest their shares as part of the merger.^[417]

On the merits, the Court held that SPAC fiduciaries owe duties of care and loyalty, including a duty of disclosure, in connection with the redemption right—the “bespoke check” on sponsor self-interest.^[418] The Court applied entire fairness review due to the “inherent conflicts between the SPAC’s fiduciaries and public shareholders in the context of a value-decreasing transaction.”^[419] The Court rejected defendants’ argument that disclosure of conflicts in the IPO prospectus or proxy waived fiduciary duties, emphasizing that Delaware law does not permit waiver of the duty of loyalty.^[420] The Court also held that the business judgment rule did not apply under Corwin because (1) the Court found the proxy materially false and misleading; and (2) the stockholders’ voting interests were “decoupled” from their economic interests because they retained warrants in the IPO even if they redeemed their shares.^[421]

Under the entire fairness standard, the Court found it reasonably conceivable that the proxy was materially misleading.^[422] By stating Gig3 shares were worth $10 while omitting that net cash per share was far lower, and by touting Lightning’s projections without disclosing known scalability issues, defendants deprived stockholders of information essential to deciding whether to redeem.^[423] Additional allegations—such as the absence of a fairness opinion and advisors’ contingent interests—supported an inference of unfair dealing.^[424] The Court also held that Gig3’s exculpatory charter provision did not bar the claims because they implicated the duty of loyalty, not care.^[425] Finally, the unjust enrichment claim survived, as the Court found plaintiffs adequately alleged that defendants enriched themselves by discouraging redemptions and securing deal certainty.^[426]

In re Mindbody, Inc., S’holder Litig., 332 A.3d 349 (Del. 2024). In Mindbody, the plaintiffs alleged that the CEO and founder of Mindbody had disabling conflicts of interest in connection with a take-private acquisition and asserted claims against him for breach of fiduciary duty. The plaintiffs also asserted claims against the acquiror for aiding and abetting the breach of fiduciary duty for its failure to disclose material omissions in a proxy statement. The Court of Chancery held that the CEO breached his fiduciary duty of loyalty under Revlon by tilting the sales process in the acquiror’s favor in support of his own interests, and breached his fiduciary duty of disclosure by omitting material information from the company’s proxy statement.^[427] The Court of Chancery also held that the acquiror, Vista, was liable for aiding and abetting the CEO’s breach because it failed to correct the material omissions in the proxy statement.^[428]

The Delaware Supreme Court affirmed the Court of Chancery’s finding that the CEO had breached his fiduciary duties. As a matter of first impression, the Supreme Court considered whether the acquiror’s failure to correct the material omissions in the proxy statement satisfied the “knowing participation” element of an aiding-and-abetting claim and whether it could be liable under a contractual duty to notify the company of those material omissions.^[429] The Supreme Court reversed the Court of Chancery’s decision that the acquiror could be held liable for those omissions because Vista took no action to facilitate or assist the CEO in his breach, but instead stood by passively while he breached his disclosure duty.^[430] Thus, the Supreme Court held that Vista did not aid and abet the CEO’s disclosure breach because its conduct did not rise to the level of “substantial assistance” or “participation.”^[431] Merely having passive awareness of a fiduciary’s disclosure breach is insufficient to establish “knowing participation” under Delaware law.^[432] Rather, a plaintiff must prove that the secondary actor provided substantial assistance to the primary actor.^[433] The Supreme Court held that this was not the case here where Vista did not suggest any changes to the proxy statement or otherwise actively contribute to its drafting or editing in any way.^[434]

In re Sears Hometown & Outlet Stores, Inc. S’holder Litig., 332 A.3d 1088 (Del. 2025). Following a finding of breached fiduciary duties in connection with a squeeze-out merger, the Court was asked whether a stockholder who initially opted for appraisal—and thus did not receive the merger consideration—but later joined the plenary class action (the “Fund”) could recover the merger consideration as part of its remedy in the class action suit. Defendant Edward Lampert contended the Fund was limited to the same incremental award as the stockholders who had received the merger consideration before joining the class action—i.e., the fair values of the shares minus the merger consideration. The Court disagreed, holding the Fund’s damages entitlement constituted the fair value of its shares and no offset for the unreceived merger consideration was appropriate.

The Court had previously found defendant breached his fiduciary duties in connection with a squeeze-out merger, and that the fair value of the shares was $4.06.^[435] Because most of the class members already received $3.21 per share as merger consideration, the Court awarded $0.85 per share in incremental damages to the class members.^[436] The Fund, however, was a late addition to the class action and, because it had exercised its appraisal rights, had not received the $3.21 per share.^[437] Thus, the Fund moved to intervene to seek the full $4.06 rather than only the $0.85.^[438]

The Court began by discussing Cede & Co. v. Technicolor, Inc.,^[439] which held stockholders need not elect either seeking appraisal or challenging the merger because those two actions “do not involve the assertion of inconsistent rights.”^[440] The Technicolor court “concluded that the law should provide ‘equal recourse for a former shareholder who accepts a cash-out offer in ignorance of a later-discovered claim against management for breach of fiduciary duty and a shareholder who discovers such a claim after electing appraisal rights.’”^[441] Highlighted by the Sears decision, the Supreme Court in Technicolor suggested plenary actions for wrongful conduct should precede appraisal actions because the plenary action may moot the appraisal action.^[442] The Court then explained that decisions since Technicolor—specifically, In re Mindbody Inc. Stockholder Litigation,^[443] In re Dole Food Co., Inc. Stockholder Litigation,^[444] and In re Emerging Communications Inc. Stockholder Litigation^[445]—each suggested stockholders who sought appraisal before joining the class action could receive the full fair value of their shares through an award in a plenary action.

The Court therefore held the Fund could “opt for the plenary recovery and receive both the merger consideration and the incremental damages award. Because the Fund has not received any amounts previously, there is no offset. The Fund can recover $4.06 per share.”^[446] The Court then addressed each of defendant’s arguments to the contrary.

First, the Court concluded the Fund was not “seeking something extra” by requesting both the merger consideration and incremental damages.^[447] The Court explained that the standard damages for a wrongful squeeze-out merger consist of the fair value of the shares.^[448] That measure is then typically reduced by the merger consideration to avoid double recovery.^[449] Noting the double recovery concern, the Court explained that if a stockholder recovered in an appraisal action before the plenary action was resolved, the appraisal recovery would be offset from the award in the plenary action.^[450] The Court opined that the contrary result would conflict with Technicolor’s holding that a plenary action can moot an appraisal action and would risk disloyal fiduciaries retaining ill-gotten gains.^[451]

Turning to defendant’s argument that, under the appraisal statute,^[452] the Fund forfeited the merger consideration, the Court found this “repeat[ed] arguments that the Delaware Supreme Court rejected in Technicolor.”^[453] The Court continued, “[w]hat the Fund seeks in the Plenary Action is damages, not the Merger Consideration.”^[454] The Court also noted Mindbody held that the statutory sixty-day period to unilaterally withdraw an appraisal action did not prevent stockholders who pursued appraisal from opting into the class wide remedy.^[455]

The Court similarly rejected defendant’s defenses based on Technicolor’s text, which defendant asserted limited Technicolor’s holding to circumstances of wrongdoing “that precluded Petitioner from accepting the merger consideration” or where the plenary action sought recission.^[456] Examining Technicolor, the Court found that the decision was not so limited, notwithstanding the select phrases defendant relied upon.^[457]

Finally, the Court dismissed defendant’s waiver and statute of limitations defenses.^[458] Regarding waiver, the Court stated, “the Fund has not sought additional damages, so there was nothing to waive.”^[459] The Court also noted that the plaintiffs had previously raised the issue and defendant even responded in its post-trial briefing.^[460] Regarding timeliness, the Court explained, “[b]ecause a pending class action tolls the statute of limitations for all putative members of the class, this last argument fails as well.”^[461]

In re Columbia Pipeline Grp. Inc. Merger Litig., 342 A.3d 324 (Del. 2025). This Delaware Supreme Court decision adds clarity to the aiding-and-abetting standard announced in In re Mindbody, Inc., Stockholder Litigation.^[462] On a “mountainous trial record,” the Court of Chancery had found the acquirer (“TransCanada”) of a Delaware corporation (“Columbia”) aided and abetted breaches of fiduciary duties by Columbia’s officers and Board.^[463] Focused on the knowing participation standard for aiding-and-abetting claims against an acquirer established in Mindbody—which requires “actual knowledge of both the target’s breach and the wrongfulness of [the acquirer’s] own conduct”—the Supreme Court reversed the Court of Chancery.^[464]

The outset of Columbia’s discussion “beg[s] the reader’s indulgence” in light of the “lengthy” factual recitation.^[465] The central issues were breaches of duties in connection with Columbia’s sale process and related disclosures to Columbia’s stockholders.^[466] In essence, two Columbia officers—who were enticed to achieve a quick sale by the prospect of retirement—put their self-interests above those of Columbia’s stockholders in breach of the duty of loyalty, and Columbia’s Board did not sufficiently oversee the sale process in breach of its duty of care.^[467] Relatedly, a proxy statement issued by Columbia did not disclose certain details about the negotiation process or the negotiating officers’ retirement plans, which the Court of Chancery found misleading.^[468] TransCanada did not challenge those findings on appeal.^[469] TransCanada did, however, challenge the Court of Chancery’s findings that TransCanada knowingly aided those sell-side breaches, as well as the Court of Chancery’s damages analysis.^[470] The Supreme Court reversed on liability, rendering the damages issues moot.^[471]

The Court noted that the Mindbody decision—published after the Court of Chancery’s decision in Columbia—“clarified that under the first prong of the ‘knowing participation’ element of a claim that a buyer aided and abetted a sell-side fiduciary breach—the putative aider-and-abettor’s knowledge—the plaintiff must prove ‘two types of knowledge’”: (1) “the buyer knew of the sell-side breach” and (2) “the buyer knew that ‘its own conduct regarding the breach was improper.’”^[472]

Beginning with the sale-process claims, the Supreme Court found the facts that the Court of Chancery held established TransCanada’s constructive knowledge of the sell-side breaches did not suffice to establish actual knowledge of those breaches.^[473] Specifically, the Court of Chancery had relied on certain “signals” from Columbia’s officers that TransCanada’s experienced representative should have known meant the Columbia officers did not have the stockholders’ best interest in mind.^[474] The Supreme Court found “questionable” whether those signals—which primarily evinced an eagerness to sell on Columbia’s part—amounted to constructive knowledge of sell-side fiduciary breaches, so they fell short of demonstrating actual knowledge.^[475] With respect to the Board’s insufficient oversight, the Court of Chancery found the breach of care was “inadvertent” and the Supreme Court found such a breach “would have been even less clear to TransCanada.”^[476] As for substantial assistance, the Supreme Court held TransCanada’s aggressive negotiating tactics did not amount to culpable assistance of a sell-side breach because “under Delaware law, ‘both the bidder’s board and the target’s board have a duty to seek the best deal terms for their own corporations.’”^[477] Rather, “a bidder who has not colluded or conspired with its negotiating counterpart, who does not create the condition giving rise to a conflict of interest, who does not encourage his counterpart to disregard his fiduciary duties or substantially assist him in committing the breach, does not aid and abet the breach.”^[478]

Turning to the misleading disclosures, the Court analyzed separately each of the four Mindbody factors that guide an aiding and abetting analysis.^[479] Those factors are: (1) the nature of the underlying tortious act, (2) the “amount, kind, and duration of assistance given,” (3) the nature of the secondary and primary actors’ relationship, and (4) the secondary actor’s state of mind.^[480] The Court found the first factor weighed in favor of liability because “at least some” of the sell-side breaches of the duty of disclosure were clear enough to be known to TransCanada.^[481] The second factor weighed against liability because, while TransCanada reviewed and commented on the misleading proxy statement, “it did not propose any of the statements that the Court of Chancery found to be misleading.”^[482] On the third factor, the Court referenced its earlier statement that “the secondary actor’s status as a third-party bidder affords it ‘some protection in its negotiations with potential target companies[.]’”^[483] Finally, the Court evaluated TransCanada’s “actual knowledge that its own conduct was legally improper” and found no facts in the record demonstrated TransCanada knew its failure to correct the proxy statement “affirmatively aided [sell-side] breaches of . . . fiduciary duties.”^[484] The Court ultimately concluded after “[c]onsidering these factors in a holistic fashion” that the record did not support a finding that TransCanada “knowingly participated” in the sell-side breaches of the duty of disclosure under the Mindbody framework.^[485] Accordingly, the Court of Chancery’s finding of aiding-and-abetting liability was reversed.^[486]

1. Rutledge v. Clearway Energy Grp. LLC, 2025 WL 1604186, at *1 (Del. Ch. June 6, 2025), certified question answered, 2026 WL 548504 (Del. Feb. 27, 2026). ↑

2. Rutledge v. Clearway Energy Grp. LLC, __ A. 3d __, 2026 WL 548504, at *14 (Del. Feb. 27, 2026). ↑

3. Id. at 874-75. ↑

4. Id. at 877-881. ↑

5. Id. at 877, 881. ↑

6. Id. ↑

7. Id. at 883. ↑

8. Id. at 885. ↑

9. Id. at 884. ↑

10. Id. ↑

11. Id. (citation omitted). ↑

12. Id. at 873. ↑

13. Id. at 710. ↑

14. Id. at 712. ↑

15. Id. at 715. ↑

16. Id. at 716. ↑

17. Id. ↑

18. Id. at 719. ↑

19. Id. at 733. ↑

20. Id. ↑

21. Id. at 739. ↑

22. Id. at 744. ↑

23. Id. at 50. ↑

24. Id. ↑

25. Id. ↑

26. Id. at 54. ↑

27. Id. at 51. ↑

28. Id. at 56. ↑

29. Id. at 57. ↑

30. Id. at 59. ↑

31. Id. at 59–61. ↑

32. Id. at 60. ↑

33. Id. at 60–61. ↑

34. Id. at 61. ↑

35. Id. at 61–69. ↑

36. Id. at 64–66. ↑

37. 339 A.3d 705 (Del. 2025). ↑

38. Ban, 339 A.3d at 64 n.62. ↑

39. Id. at 69. ↑

40. Id. ↑

41. Id. at 70–72. ↑

42. Id. at 71. ↑

43. Id. at 72. ↑

44. Id. at 72–73. Defendant held 70% of WestCo but only 33% of Penfold, so leaving WestCo as DVRC’s sole member nearly doubled defendant’s interest in DVRC. Id. at 73. ↑

45. Id. at 74. ↑

46. Id. ↑

47. Id. at 75. ↑

48. Id. at 76–79. ↑

49. Id. at 76–77. ↑

50. Id. at 79. ↑

51. Id. at 82. ↑

52. Id. at *1. ↑

53. Id. ↑

54. Id. at *2. ↑

55. See id. ↑

56. Id. at *3. ↑

57. Id. at *1. ↑

58. Id. ↑

59. See id. at *4. ↑

60. Id. at *1, *5. ↑

61. Id. at *6. ↑

62. Id. at *7. ↑

63. Id. ↑

64. Id. ↑

65. Id. at *8. ↑

66. Id. at *9. ↑

67. Id. ↑

68. Id. ↑

69. Id. ↑

70. Id. at *1. ↑

71. Id. ↑

72. Id. at *18-19. ↑

73. Id. at *11 (citing Coster v. UIP Companies, Inc., 300 A.3d 656, 672-73 (Del. 2023)). ↑

74. Openwave Sys. Inc. v. Harbinger Capital Partners Master Fund I, Ltd., 924 A.2d 228 (Del. Ch.), judgment entered, (Del. Ch. 2007). ↑

75. Vejseli, 2025 WL 1452842 at *9-11. ↑

76. Id. ↑

77. Id. at *12. ↑

78. Id. at *13. ↑

79. Pell v. Kill, 135 A.3d 764, 788 (Del. Ch. 2016). ↑

80. Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586, 603 (Del. 2010). ↑

81. Vejseli, 2025 WL 1452842 at *13. ↑

82. Id. at *14-15. ↑

83. Id. at *15. ↑

84. Id. ↑

85. Id. at *16. ↑

86. Id. at *17. ↑

87. Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del. 1971). ↑

88. Vejseli, 2025 WL 1452842 at *15-16. ↑

89. Id. at *18-19. ↑

90. Id. at *18. ↑

91. Id. at 639. ↑

92. Id. ↑

93. Id. at 646. ↑

94. Id. ↑

95. Id. at 647. ↑

96. Id. at 648. ↑

97. Id. ↑

98. Id. at 649. ↑

99. Id. at 651. ↑

100. Id. at 651-52. ↑

101. Id. at 652. ↑

102. Id. at 653. ↑

103. Id. (citation omitted). ↑

104. Id. at 654. ↑

105. Id. at 656-57. ↑

106. Id. at 658. ↑

107. Id. ↑

108. Id. at 661. ↑

109. Id. ↑

110. Id. ↑

111. Id. at 662. ↑

112. Id. ↑

113. Carroll, 2025 WL 2446891, at *1. ↑

114. Id. ↑

115. Id. at *1, *5–6. ↑

116. Id. at *5–6. ↑

117. Id. at *2. ↑

118. Id. ↑

119. Id. ↑

120. Id. at *3. ↑

121. Id. at *3–4. ↑

122. Id. at *2. ↑

123. Id. at *3, *5, *8. ↑

124. Id. at *7. ↑

125. Id. at *6. ↑

126. Id. at *7–8. ↑

127. Id. at *6–8. ↑

128. Id. at *7. ↑

129. Id. ↑

130. Id. at *8. ↑

131. Id. ↑

132. Id. ↑

133. Id. at *8 n.81. ↑

134. Id. at *1. ↑

135. Id. ↑

136. Id. ↑

137. Id. at *9. ↑

138. Id. ↑

139. Id. ↑

140. Id. at *10. ↑

141. Id. ↑

142. Id. at *11. ↑

143. Id. ↑

144. Id. ↑

145. Id. at *12. ↑

146. Id. ↑

147. Id. at *14. ↑

148. Id. at *13. ↑

149. Id. (emphasis in original). ↑

150. Id. ↑

151. Id. ↑

152. Id. at *30. ↑

153. Id. at *31. ↑

154. Id. ↑

155. Id. at *32. ↑

156. Id. ↑

157. Id. ↑

158. Id. ↑

159. Id. ↑

160. Id. ↑

161. Id. at * 33. ↑

162. Id. ↑

163. Id. ↑

164. Id. ↑

165. Id. at *33-35. ↑

166. Id. at *33. ↑

167. Id. ↑

168. Id. at *34. ↑

169. Id. at *35. ↑

170. Id. ↑

171. Id. ↑

172. Id. at *1. ↑

173. Id. ↑

174. Id. ↑

175. Id. ↑

176. Id. ↑

177. Id. at *2. ↑

178. Id. ↑

179. Id. ↑

180. Id. ↑

181. Id. ↑

182. Id. ↑

183. Id. ↑

184. Id. ↑

185. Id. at *17-19. ↑

186. Id. at *18. ↑

187. Id. ↑

188. Id. at *19. ↑

189. Id. ↑

190. Id. at *23. ↑

191. Id. ↑

192. Id. at *27. ↑

193. Id. at *29-30. ↑

194. Id. at *31. ↑

195. Id. at 720, 760. ↑

196. Id. at 741. ↑

197. Id. at 719. ↑

198. Id. at 720. ↑

199. Id. ↑

200. Id. ↑

201. Id. ↑

202. Id. at 760. ↑

203. Id. ↑

204. Id. at 720. ↑

205. Id. at *1. ↑

206. Id. ↑

207. Id. ↑

208. Id. at *2. ↑

209. Id. ↑

210. Id. at *5. ↑

211. Id. ↑

212. In re Kraft Heinz Co. Deriv. Litig., 2021 WL 6012632, at *6 (citation omitted). ↑

213. Id. at *8. ↑

214. Id. ↑

215. Id. at *10. ↑

216. Id. at *11. ↑

217. Id. at *1; see generally In re Kraft Heinz Co. Deriv. Litig., 2021 WL 6012632 (Del. Ch. Dec. 15, 2021), aff’d, 282 A.3d 1054 (Del. 2022) (discussed supra). ↑

218. Id. ↑

219. Id. at *4. ↑

220. Id. ↑

221. Id. ↑

222. Id. at *5. ↑

223. Id. ↑

224. Id. ↑

225. Id. ↑

226. Id. ↑

227. Id. at *6. ↑

228. Id. ↑

229. Id. at *7. ↑

230. Id. ↑

231. Id. ↑

232. Id. at *9. ↑

233. Id. at *12. ↑

234. Id. ↑

235. Id. ↑

236. Id. ↑

237. Id. at *16. ↑

238. Id. at *2. ↑

239. Id. ↑

240. Id. at *9. ↑

241. Id. at *10–13. ↑

242. Id. at *13–14. ↑

243. Id. at *15. ↑

244. Id. at *14. ↑

245. Id. at *15. ↑

246. Id. at *15–17. ↑

247. Id. ↑

248. Id. at *17. ↑

249. Id. at *18. ↑

250. Id. at *18–20. ↑

251. Id. at *19. ↑

252. Id. at *20. ↑

253. Id. at *20–21. ↑

254. Id. at *21–22. ↑

255. Id. at *22. ↑

256. In re Fox Corp. Deriv. Litig., 2025 WL 1220269, at *1 (Apr. 28, 2025). ↑

257. Id. at *2. ↑

258. Id. ↑

259. Id. ↑

260. Id. ↑

261. Id. at *2. ↑

262. See id. ↑

263. Id. ↑

264. Id. at *2, *10. ↑

265. Id. at *2. ↑

266. Id. at *3. ↑

267. Id. ↑

268. Id. ↑

269. Id. ↑

270. Id. ↑

271. Id. ↑

272. Id. at *4. ↑

273. Id. ↑

274. Id. ↑

275. Id. at *5. ↑

276. Id. ↑

277. Id. at *6. ↑

278. Id. ↑

279. Id. at *7. ↑

280. See id. ↑

281. United Food & Commercial Workers Union & Participating Food Indus. Employers Tri-State Pension Fund v. Zuckerberg, 262 A.3d 1034 (Del. 2021). ↑

282. Shafi, 2025 WL 671854 at *8. ↑

283. Id. at *10-11. ↑

284. Id. at *12-14. ↑

285. In re Trados Inc. S’holder Litig., 73 A.3d 17 (Del. Ch. 2013). ↑

286. Shafi, 2025 WL 671854 at *12-14. ↑

287. Id. at *14-16. ↑

288. 2006 WL 1388744, at *28 (Del. Ch. May 9, 2006). ↑

289. Shafi, 2025 WL 671854 at *16. ↑

290. Id. at *17. ↑

291. Id. at *17-19. ↑

292. Id. at *19-20. ↑

293. Id. at *20-21. ↑

294. McWane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Co., 263 A.2d 281, 283 (Del. 1970). ↑

295. Shafi, 2025 WL 671854 at *21. ↑

296. Id. at *22. ↑

297. Id. ↑

298. Id. at *2. ↑

299. Id. ↑

300. Id. ↑

301. Id. ↑

302. Id. at *3. ↑

303. Id. at *3-4. ↑

304. Id. at *3. ↑

305. Id. at *4. ↑

306. Id. ↑

307. Id. at *5. ↑

308. Id. at *5-6. ↑

309. Id. at *6. ↑

310. Id. at *7. ↑

311. Id. ↑

312. 262 A.3d 1034, 1058 (Del. 2021). ↑

313. Cent. Laborers’ Pension Fund, 2025 WL 1213104, at *8. ↑

314. Id. ↑

315. Id. at *9-16. ↑

316. Brophy v. Cities Servs. Co., 70 A.2d 5 (Del. Ch. 1949). ↑

317. Cent. Laborers’ Pension Fund, 2025 WL 1213104, at *9. ↑

318. Id. ↑

319. Id. at *10. ↑

320. Id. at *10-12. ↑

321. Id. at *12-13. ↑

322. Id. at *12. ↑

323. Id. at *14-16. ↑

324. Id. at *16. ↑

325. Id. at *17. ↑

326. Id. ↑

327. Id. ↑

328. Id. at *18. ↑

329. Id. at *19. ↑

330. Id. ↑

331. Id. at *20. ↑

332. Id. at *21. ↑

333. 2024 WL 390890 (Del. Ch. Feb. 1, 2024). ↑

334. Cent. Laborers’ Pension Fund, 2025 WL 1213104, at *21. ↑

335. Id. ↑

336. Id. ↑

337. Id. at *1–3. ↑

338. Id. at *2. ↑

339. Id. at *3. ↑

340. Id. at *4. ↑

341. Id. ↑

342. Id. ↑

343. Id. ↑

344. Id. ↑

345. Id. ↑

346. Id. at *5. ↑

347. Id. ↑

348. Id. ↑

349. Id. ↑

350. Id. at *6. ↑

351. Id. ↑

352. Id. at *6–7. ↑

353. Id. at *7. ↑

354. Id. ↑

355. Id. ↑

356. Id. ↑

357. Id. at *8. ↑

358. Id. at *9–10. ↑

359. Id. at *11. ↑

360. Id. at *11–12. ↑

361. Id. at *12–14. ↑

362. Id. at *14-15. ↑

363. Id. ↑

364. Id. at *16. ↑

365. Id. at *1. ↑

366. Id. ↑

367. Id. ↑

368. Id. ↑

369. Id. ↑

370. Id. at *1-2. ↑

371. Id. at *1. ↑

372. Id. at *2. ↑

373. Id. ↑

374. Id. ↑

375. Id. ↑

376. Id. at *3. ↑

377. Id. ↑

378. Id. ↑

379. Id. ↑

380. Id. at *4. ↑

381. Id. ↑

382. 268 A.3d 1207 (Del. Ch. 2022). ↑

383. Barkan, 2025 WL 1088821, at *7. ↑

384. Id. at *4. ↑

385. Id. at *4-14. ↑

386. Id. at *12. ↑

387. Id. at *10. ↑

388. Id. at *15. ↑

389. Id. at *14. ↑

390. Id. at *9. ↑

391. Id. at *4-7. ↑

392. Id. at *6. ↑

393. Id. at *8. ↑

394. Id. at *9. ↑

395. Id. at *10-14. ↑

396. Id. at *14. ↑

397. Id. ↑

398. Id. at 700. ↑

399. Id. at 702. ↑

400. Id. at 701–02. ↑

401. Id. at 702. ↑

402. Id. ↑

403. Id. ↑

404. Id. ↑

405. Id. at 703. ↑

406. Id. ↑

407. Id. at 704. ↑

408. Id. at 705. ↑

409. Id. at 705–06. ↑

410. Id. ↑

411. Id. at 707. ↑

412. Id. ↑

413. Id. ↑

414. Id. at 707–08. ↑

415. Id. at 708–09, 721. ↑

416. Id. at 709–10. ↑

417. Id. at 711. ↑

418. Id. at 712–13. ↑

419. Id. at 713–20. ↑

420. Id. at 714–15. ↑

421. Id. at 721. ↑

422. Id. at 727. ↑

423. Id. at 723–27. ↑

424. Id. at 727. ↑

425. Id. at 728. ↑

426. Id. at 728–29. ↑

427. In re Mindbody, Inc., Stockholder Litig., 2023 WL 2518149, at *33-34 (Del. Ch. Mar. 15, 2023), judgment entered, (Del. Ch. 2023), aff’d in part, rev’d in part, 332 A.3d 349 (Del. 2024), and amended in part, vacated in part, (Del. Ch. 2024), and aff’d in part, rev’d in part, 332 A.3d 349 (Del. 2024). ↑

428. Id. at *3. ↑

429. In re Mindbody, Inc., 332 A.3d 389-96. ↑

430. Id. at 396-406. ↑

431. Id. ↑

432. Id. at 401. ↑

433. Id. (citation omitted). ↑

434. Id. ↑

435. Id. at 1094–95. ↑

436. Id. ↑

437. Id. at 1094. ↑

438. Id. at 1095. ↑

439. 542 A.2d 1182 (Del. 1988). ↑

440. Sears, 332 A.3d at 1098 (quoting Technicolor, 542 A.2d at 1191). ↑

441. Id. at 1097 (quoting Technicolor, 542 A.2d at 1188). ↑

442. Id. ↑

443. 2023 WL 7704774 (Del. Ch. Nov. 15, 2023). ↑

444. 2015 WL 5052214 (Del. Ch. Aug. 27, 2015). ↑

445. 2004 WL 1305745 (Del. Ch. May 3, 2004). ↑

446. Sears, 332 A.3d at 1100. ↑

447. Id. at 1100–03. ↑

448. Id. at 1100-01. ↑

449. Id. at 1101. ↑

450. Id. ↑

451. Id. at 1102–03. ↑

452. 8 Del. C. § 262(k). ↑

453. Sears, 332 A.3d at 1103. ↑

454. Id. at 1104. ↑

455. Id. (citing Mindbody, 2023 WL 7704774, at *8). ↑

456. Id. at 1104–06. ↑

457. Id. ↑

458. Id. at 1106–08. ↑

459. Id. at 1106. ↑

460. Id. at 1108. ↑

461. Id. at 1108 (citing Crown, Cork & Seal Co. v. Parker, 462 U.S. 345, 349 (1983)). ↑

462. 332 A.3d 349 (Del. 2024). ↑

463. Columbia, 342 A.3d at 328–29. ↑

464. Id. at 329. ↑

465. Id. ↑

466. Id. at 328. ↑

467. Id. at 352. ↑

468. Id. ↑

469. Id. at 355. ↑

470. Id. at 353. ↑

471. Id. ↑

472. Id. at 355 (quoting Mindbody, 332 A.3d at 390, 392). ↑

473. Id. at 357. ↑

474. Id. ↑

475. Id. ↑

476. Id. at 359. ↑

477. Id. at 365 (quoting Morgan v. Cash, 2010 WL 2803746, at *8 (Del. Ch. July 16, 2010)). ↑

478. Id. at 365. ↑

479. Id. at 368–372. ↑

480. Id. at 358 (citing Mindbody, 332 A.3d at 395–96). ↑

481. Id. at 370. ↑

482. Id. at 371. ↑

483. Id. at 360, 371 (quoting Mindbody, 332 A.3d at 402). ↑

484. Id. at 371-72. ↑

485. Id. at 372. ↑

486. Id. ↑

Maritza T. Adonis speaking in a post-program discussion following the ABA Business Law Section’s 2022 Annual Meeting CLE “On the Sidelines or Taking Sides: Corporations, Elections, Social Responsibility, and Long-Term Impacts on Corporate Governance.” Video still via ABA Business Law Section.

It is 8:17 a.m. The board book is complete. The agenda looks routine. Directors are scheduled to discuss a pending acquisition, executive compensation, a cybersecurity update, and several litigation matters. Corporate counsel expects another meeting focused on strategy, compliance, and risk management.

Then the phone buzzes.

Overnight, the company’s chief executive officer has come under criticism for remaining silent on a controversial state law. Employees are asking the company to issue a public statement. Shareholders want to know whether political contributions will continue. Customers have organized a boycott. Public officials in one state threaten legislative action if the company speaks. Officials in another state criticize companies that remain silent.

The board meeting has changed before it begins.

Questions that once belonged to public affairs or government relations now arrive in the boardroom. Corporate counsel is no longer asked only whether a proposed action complies with the law. Counsel is increasingly asked whether the corporation should speak, remain silent, alter a business relationship, suspend political giving, or respond to rapidly changing public expectations. Every option carries legal, financial, reputational, and governance consequences.

This scenario is no longer unusual. In 2022, while participating in an American Bar Association Business Law Section CLE examining whether corporations should take public positions on social and political issues, much of the discussion centered on defining concepts such as corporate social responsibility; environmental, social, and governance (“ESG”); stakeholder governance; and corporate political activity.^[1] Looking back, that discussion identified the right problem. Experience since then suggests that the more important question is no longer whether corporations should take sides. Increasingly, they cannot avoid politically consequential decisions. The question now is how boards should govern them. For purposes of this article, a politically consequential board decision is a corporate decision that, because of its subject matter or surrounding circumstances, carries political or public-policy significance beyond the corporation’s ordinary business operations.

The public dispute between The Walt Disney Company and the State of Florida shows how quickly a corporate decision on a politically contested issue can spill far beyond the decision itself.^[2] What began with Disney taking a public position ultimately drew the company into a dispute with the state over the governing structure of the district in which Walt Disney World operates.

Disney is hardly alone in confronting this problem. Boards are now being asked to respond to issues ranging from consumer boycotts and diversity initiatives to artificial intelligence and changing state regulation. Shareholder demands can also bring political questions into corporate decision-making. Empirical work on political-disclosure proposals shows that investors can press companies to reconsider their political activity and disclosure practices, even though the economic significance of greater political transparency remains unsettled.^[3] These matters may begin outside the boardroom, but they do not always stay there.^[4]

Recent corporate law scholarship helps explain why these decisions have become more difficult for boards. Companies operate in an increasingly polarized environment in which stakeholder demands and regulatory approaches may pull in different directions.^[5] Corporate commitments can also become harder to maintain as circumstances change, particularly after shifts in governmental power.^[6] Analysis of corporate DEI risk further illustrates how political pressure can distort board decision-making when corporations confront matters extending beyond ordinary business operations.^[7] At the same time, corporations increasingly enter public affairs through political advocacy and other activities that can place them in roles traditionally associated with government.^[8] Together, these developments have changed the environment in which boards make politically consequential decisions.

Corporate law scholarship and governance practice have approached these problems in several ways. Some scholars have questioned whether corporate political speech should be governed like an ordinary business decision at all.^[9] Others have emphasized disclosure and accountability surrounding corporate political spending.^[10] Governance practitioners have also developed private-ordering approaches that rely on internal controls and board oversight.^[11] These approaches provide important institutional guardrails, but they leave the antecedent fiduciary question unresolved.

Before the first public statement is drafted, before a political contribution is approved, and before any disclosure obligation arises, corporate counsel must help the board determine whether the corporation should act at all and, if so, how. That is the gap this article addresses.

Maritza T. Adonis in conversation with Bruce F. Freed and Jason D. Kaune in a post-program discussion following the ABA Business Law Section’s 2022 Annual Meeting CLE “On the Sidelines or Taking Sides: Corporations, Elections, Social Responsibility, and Long-Term Impacts on Corporate Governance.” Video still via ABA Business Law Section.

From Debate to Decision

Four years ago, while participating in an American Bar Association Business Law Section CLE entitled “On the Sidelines or Taking Sides: Corporations, Elections, Social Responsibility, and Long-Term Impacts on Corporate Governance,” our discussion centered on a different question.^[12] We asked whether corporations should engage in politically consequential issues at all. Much of the conversation focused on defining corporate social responsibility, distinguishing it from ESG initiatives, and considering the lawyer’s role in helping corporations navigate increasingly complex stakeholder expectations.

Looking back, I believe we were asking the right question, but an incomplete one.

Since that discussion, boards have confronted Disney’s dispute with the State of Florida, consumer boycotts affecting Bud Light and Target, increased scrutiny of corporate political activity, and backlash surrounding corporate positions on ESG and other contested issues.^[13] The facts differ, but each placed corporate leadership in the middle of a controversy that could not be resolved by public messaging alone.

I had seen signs of this shift even before our 2022 discussion. In 2019, I noted that companies were developing ESG reporting capabilities in response to investor demand, while consumer demand and regulatory developments abroad were adding pressure of their own.^[14] The debate has changed considerably since then, but the pressure on companies to respond has not disappeared.

One exchange from that discussion has stayed with me. Bruce Freed, president and cofounder of the Center for Political Accountability, observed that corporate leaders increasingly faced expectations from employees, investors, and consumers to speak on issues extending beyond traditional business operations.^[15] As our conversation continued, however, the discussion evolved beyond whether the chief executive officer should respond. It became a broader conversation about senior leadership, institutional responsibility, and the governance process supporting those decisions. That shift reinforced something I had not fully appreciated at the time. The most important question is not who speaks for the corporation. It is who decides, and according to what process.

Returning to Governance

The conversation also reinforced another lesson. Lawyers have a unique role in these debates, not because they determine what position a corporation should take, but because corporate law provides the framework through which those decisions should be evaluated. As our discussion turned to how corporations define and carry out their responsibilities, I drew a distinction between corporate social responsibility (“CSR”) and ESG. CSR supplied the broader framework, while I described ESG as a tool for measuring how effectively a company was carrying out those commitments.^[16] Over time, the political debate increasingly centered on the “E” and the “S.” The enduring contribution of corporate law has always been the “G.” Governance is what enables boards to navigate difficult questions regardless of whether the controversy arises from regulatory change, corporate political activity, emerging technology, stakeholder commitments, or corporate speech.

Politics will continue to evolve. Stakeholder expectations will continue to shift. New technologies will emerge. Headlines will change. Fiduciary duties, however, will not. For the corporation, political controversy becomes a governance question when it implicates the business and affairs of the enterprise.

A Fiduciary Decision Framework for Politically Consequential Board Decisions

Boards cannot predict how a political controversy will unfold, nor can they satisfy every constituency affected by it. They can, however, control how they make the decision. When one of these issues reaches the boardroom, corporate counsel can begin with the same fiduciary principles directors use in making other business decisions. The framework below shows how those principles can guide the board without creating new fiduciary duties for politically consequential decisions.

That framework rests on three familiar principles of Delaware corporate law. First, Section 141(a) of the Delaware General Corporation Law vests boards with authority to manage the business and affairs of the corporation.^[17] Second, the duty of care requires directors to inform themselves of material information reasonably available before making a business decision.^[18] Third, the business judgment rule affords directors a rebuttable presumption that, in making a business decision, they acted on an informed basis, in good faith, and in the honest belief that the action taken was in the corporation’s best interest.^[19] That deference, however, does not itself supply a decision-making process. The business judgment rule largely keeps courts from second-guessing nonconflicted business decisions; it does not tell directors how to work through a politically consequential one.^[20] Together, these principles provide the legal foundation for the framework that follows.

Step One: Establish the Corporate Basis for Action

Counsel should begin by asking why the matter is one for the corporation. Stakeholder demands, public pressure, and changes in the political environment may bring an issue to its attention, but they should not automatically lead to a public statement, a change in internal policy, or other action by the corporation. The board should first identify what the matter means for the corporation and why it warrants action.

That inquiry may also reveal that the response need not come from the corporation itself. Depending on the issue, counsel may consider whether another part of the organization’s existing structure, such as its government affairs function, political action committee, or corporate foundation, provides a more suitable avenue for addressing it than a CEO statement or change in internal policy.

In the opening scenario, employee concerns, a customer boycott, threatened government action, and questions about political contributions may all matter. The first task is not to decide what the company should say, but to determine why the matter calls for action by the corporation in the first place.

Step Two: Identify the Fiduciary Question

Once the board decides that the matter requires its attention, counsel should identify the corporate decision the board is actually being asked to make. The fact that a proposed action carries political consequences does not make the corporation’s political position the fiduciary question. Counsel should instead identify the corporate interests at stake, the material risks associated with the available choices, and the decision directors must make on behalf of the corporation.

In the opening scenario, the board is not deciding what the corporation believes about the state law. It is deciding whether the corporation should speak, remain silent, alter its political giving, or take some other action, and what those choices could mean for the corporation.

Step Three: Develop an Informed Record

Once counsel has identified the fiduciary question, the next task is to determine what the board needs to know before answering it. If the corporation is facing threatened state action, employee pressure, a customer boycott, and questions about its political contributions, directors may need information about each before deciding whether the corporation should speak or remain silent. Counsel’s role is to make sure the board has what it needs to evaluate those choices rather than allowing the loudest source of pressure to define the record.

The board need not know how the controversy will ultimately unfold. It does need enough information to make the decision before it.

Step Four: Deliberate and Document

With the relevant information before it, the board should have a meaningful opportunity to consider the decision, discuss the material risks, weigh alternatives, and question the advice it has received. The record should reflect that process and the basis for the board’s decision. Documentation is not a substitute for deliberation. It should capture the deliberation that actually occurred.

A decision about whether to speak on the state law, for example, might follow a discussion about whether silence would intensify the employee response or whether a public statement could affect the company’s relationship with state officials. The board’s reasons for choosing between those courses belong in the record. How the board reached its decision matters if that decision is later challenged.

Step Five: Revisit and Monitor

After the board decides to remain silent on the state law, counsel should continue to follow the matter. A threatened government response may become proposed legislation, or a customer boycott may begin affecting sales. Those developments may change the circumstances surrounding the board’s decision.

When that change is material to the basis for the board’s decision, counsel should consider whether to bring the matter back before the board.

Conclusion

At the conclusion of our 2022 ABA Business Law Section discussion, I suggested that the legal profession should move beyond debating these issues and begin building the practical resources lawyers need to navigate them. That work includes teaching, publishing, and developing governance frameworks that help boards apply familiar legal principles to unfamiliar problems.^[21] This Article is offered in that spirit.

The next time corporate counsel’s phone buzzes, counsel has a place to start: establish, identify, develop, deliberate, revisit. Starting there gives counsel an opportunity to bring the board’s fiduciary responsibilities into the conversation early, before the response is shaped by communications, government affairs, or public pressure. It also puts corporate counsel where it belongs in the process, helping the board make an informed and deliberate decision before a controversy becomes a crisis.

1. Maritza T. Adonis, Bruce F. Freed & Jason D. Kaune, A Deeper Dive—On the Sidelines or Taking Sides: Corporations, Elections, Social Responsibility, and Long-Term Impacts on Corporate Governance, ABA Bus. L. Section (Dec. 15, 2022). ↑

2. See Walt Disney Parks & Resorts U.S., Inc. v. DeSantis, 716 F. Supp. 3d 1216 (N.D. Fla. 2024). ↑

3. Jill E. Fisch & Adriana Z. Robertson, Proxies for Politics 1 (Univ. Pa. Inst. for L. & Econ. Rsch. Paper No. 25-21 & Eur. Corp. Governance Inst. L. Working Paper No. 889/2025, 2025). ↑

4. Hillary A. Sale, The Corporate Purpose of Social License, 94 S. Cal. L. Rev. 785, 789–90 (2021). ↑

5. Poonam Puri, Corporations in the Crosshairs: Stakeholder Activism and the Role of Corporations in Society, 70 McGill L.J. 587 (2025). ↑

6. Caley Petrucci, Corporate Goodwill, 67 B.C. L. Rev. 585 (2026). ↑

7. Veronica Root Martinez & Lisa M. Fairfax, The Miscalculation of Corporate DEI Risk, NYU Program on Compliance & Enf’t (Mar. 4, 2026). ↑

8. Matteo Gatti, Corporate Governing: Understanding Corporations as Agents of Socioeconomic Change, 50 J. Corp. L. 149 (2024). ↑

9. Lucian A. Bebchuk & Robert J. Jackson, Jr., Corporate Political Speech: Who Decides?, 124 Harv. L. Rev. 83, 83–84 (2010). ↑

10. Lucian A. Bebchuk & Robert J. Jackson, Jr., Shining Light on Corporate Political Spending, 101 Geo. L.J. 923, 941–45 (2013). ↑

11. Jeanne Hanna, Bruce F. Freed, Karl Sandstrom & William S. Laufer, Public Failure, Private Ordering: Successful Self-Regulation of Corporate Political Spending, 27 U. Pa. J. Bus. L. 1149, 1206, 1212–15 (2025). ↑

12. Adonis, Freed & Kaune, supra note 1. ↑

13. Jill E. Fisch & Jeff Schwartz, How Did Corporations Get Stuck in Politics and Can They Escape?, 3 U. Chi. Bus. L. Rev. 325, 344–45 (2024). ↑

14. Hazel Bradford, Investors Continue Urging Regulators for Risk Disclosure, Pensions & Invs. (Apr. 15, 2019) (quoting Maritza T. Adonis). ↑

15. Adonis, Freed & Kaune, supra note 1. ↑

16. Adonis, Freed & Kaune, supra note 1. ↑

17. Del. Code Ann. tit. 8, § 141(a) (2026). ↑

18. Smith v. Van Gorkom, 488 A.2d 858, 872–73 (Del. 1985). ↑

19. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). ↑

20. Mark J. Roe, Corporate Law’s Limits, 31 J. Legal Stud. 233, 271 (2002). ↑

21. Adonis, Freed & Kaune, supra note 1. ↑

For online streamers, copyright enforcement is no longer an abstract, back-end compliance issue. As illustrated by music educator Rick Beato’s recent disputes over copyright claims involving short clips used in commentary and teaching videos on YouTube^[1] and the Twitch music takedown waves of 2020 and 2021,^[2] copyright enforcement can quickly become a business-interruption problem. The streaming business model makes platform and rights-holder enforcement an immediate business risk. Streamers may use music or other copyrighted material in good faith, believing that the use is licensed, approved, or fair under copyright law, but nevertheless face muting, demonetization, removal, channel strikes, or suspension via internal platform processes.

The Digital Millennium Copyright Act (“DMCA”) provides the statutory basis and framework for removing suspected copyright-infringing content online.^[3] However, the DMCA provides a baseline that protects platforms, not streamers on the platforms. In practice, platform-level enforcement policies are often more critical to streamer business models. Algorithmic recognition tools, repeat-infringer policies, publisher guidelines, and platform appeal processes can effectively decide whether created content is made publicly available, is archived, receives advertising revenue, or otherwise affects the streamer’s account or channel. These platform-level consequences may occur even when the underlying legal questions of copyright infringement, authorization, license, or fair use remain subject to debate. It is critical that streamers and their counsel understand the substantive and procedural distinctions before going live.

Why Streamers Should Care

Due to the risk of channel demonetization, counsel should be prepared to help clients treat copyright risk as an operational issue and not merely a litigation risk. A stream can be more than just a live broadcast. Advertising, subscriptions, sponsorships, donations, affiliate links, channel-affiliated merchandise stores—and even arrangements with the platforms themselves—can create diversified revenue streams. The combination of video gameplay, music, commentary, audience interaction, sponsorship, and merchandizing can turn a stream into a monetized audiovisual product that can later be recycled as clips and video-on-demand (“VOD”), extending the commercialized life of a stream for years.

So-called channel strikes can severely impact streamers’ revenue models. A channel strike is a platform penalty applied to a user’s account or channel after copyright-enforcement action, typically following a valid copyright removal request or DMCA notice. Because these actions happen within platform processes, a copyright claim, takedown notice, or platform action that mutes, disables, demonetizes created content, or contributes to a channel strike can affect revenue and audience growth without court evaluation of the substantive copyright claim. That is, platform responses are implemented without judicial input or oversight.

The DMCA operates to give qualifying platforms conditional safe harbors^[4] that protect qualifying platforms and not platform users.^[5] Although DMCA § 512(m) does not impose a general duty on platforms to monitor user activity, platforms may use automated tools for business, licensing, or risk-management reasons.^[6] That is, a platform may enforce its own rules in order to improve DMCA compliance.^[7] The streamer may choose to submit a counter-notice if there is a good-faith basis to assert mistake or misidentification.^[8] However, counsel should explain to clients that a counter-notice is not a routine platform appeal, possibly escalating the dispute and prompting the rights holder to file suit.

On YouTube, a copyright strike occurs when content is removed because of a copyright removal request. Strikes expire after ninety days if the user completes a remedial copyright education program. Strikes can be removed if the user convinces the complainant to retract or if the user submits sufficient evidence of proper use through the counter-notification process. Three active copyright strikes can result in channel termination.^[9]

On Twitch, a copyright strike is applied when Twitch receives a complete DMCA notification regarding allegedly infringing content if no counter-notification by the user is received in response. Users may have a copyright strike removed upon completion of Twitch’s Copyright School, once per year. Twitch generally treats a user as a repeat infringer after three copyright strikes, which can lead to account termination. Interestingly, Twitch’s guidelines advise users of possible adverse legal consequences if the user pursues a counter-notification.^[10]

The surge in music-related DMCA notices at Twitch in 2020 is illustrative, as the platform publicly explained that music-related DMCA notices had jumped from fewer than fifty per year to thousands per week.^[11] Older clips and archives were the primary targets. For streamers, the lesson was not simply “do not infringe”—it was that archived content can become a liability long after the live broadcast ends.

Platform Enforcement Beyond the DMCA

The DMCA is only one part of the copyright-enforcement picture. Platforms use internal enforcement systems to identify and recognize problematic content, triggering demonetization rules, repeat-infringer policies, and internal appeals. These mechanisms can operate faster and more broadly than statutory notice-and-takedown, helping platforms manage infringement at scale.

However, algorithmic identification technology is not equivalent to legal analysis and rights determination.^[12] A system may recognize a musical composition, sound recording, or gameplay clip and apply preloaded licensing rules. But the system generally cannot answer the context-dependent questions that drive legal analysis. Questions such as license scope, authorization, fair use (including de minimis use, commentary, criticism, and transformative purpose), and market effect drive copyright litigation resolution,^[13] but algorithmic processes are not built to address these questions. Hence, streamers may face takedowns or claims even when they have credible arguments that their uses are legally defensible.

Moreover, copyright defenses (such as fair use) do not trump a platform’s user agreement or proprietary takedown policies. Counsel should make clear to clients that having a strong legal argument is not the same as avoiding platform consequences. A use may be legitimate under copyright law, or a takedown notice contestable, but the platform may still enforce its own policies under its contractual terms and conditions with the user. Practitioners should therefore address copyright merits and platform-enforcement strategy together.

Video Containing Music: The Highest-Risk Use Combo

Video that contains music remains the most common trap. Recorded music involves separate rights in the musical composition and the sound recording, typically owned or controlled by different parties. A public-performance license for the musical composition does not include other uses. As a result, a streamer may have permission for one aspect of using a composition while still lacking the rights needed to synchronize it with video, retain it in archived content, or distribute it through clips or reposts. Likewise, the streamer may have obtained a master use license from the owner of the sound recording for one or more—but not all—intended uses. Moreover, platform licenses apply only to defined uses within the platform’s ecosystem and may vary by content type, monetization, geography, or other limitations.

Streamers should not assume that music and recordings are licensed for use in a stream simply because they are available through a platform feature or plays during gameplay. Platform music libraries, in-game music settings, and streamer modes can reduce risk, but only within defined limits. The safer approach is to use recorded music only when the streamer can document the permissions necessary for the intended uses. Streamers can also build more direct licensing paths by partnering with emerging or independent composers and artists who control their music publishing and recordings.

Furthermore, publicly available “DMCA-free” playlists may serve streamers’ music needs.^[14] However, streamers should be advised that there is a risk that the curators of the playlists may not actually have secured the applicable rights—despite representations otherwise—or may have secured only some of the rights necessary for streamers’ intended uses. Regardless, platforms still exercise discretion in whether to permit such “DMCA-free” music within streams.^[15]

In-Game Content: Not Always Cleared for Every Use

Music is not the only third-party content that can create rights issues in a game stream. Gameplay may also display or incorporate logos, signage, background video, tattoos, artwork, architecture, and other protected material. Courts have treated these issues as context-specific. For example, one court found the use of NBA players’ tattoos in a basketball video game defensible on de minimis use, implied license, and fair-use grounds, but the decision was fact-dependent.^[16] Under a different set of circumstances, a different outcome could result.

Many game publishers permit or tolerate gameplay streaming through fan-content or streaming policies. However, such limited permissions are not equivalent to a broad license for other uses.^[17] Thus, practitioners should advise clients to preserve publisher policies, platform rules, and any written permissions relied upon at the time of streaming. Unfortunately, when no express license exists, streamers often assume that fair use will provide protection. That assumption deserves careful examination.

Fair Use: A Defense, Not a Production Plan

Fair use, as a legal determination, depends on statutory factors such as the purpose and character of the use, the nature of the work, the amount used, and the effect on actual or potential licensing revenues.^[18] Rebroadcasting another’s content with little or no original analysis is unlikely to qualify for fair-use protection. Fair-use arguments are strongest when the copied material is limited to what is necessary for the fair use—explaining, critiquing, teaching, or commenting on the source material.^[19]

Likewise, a “transformative” purpose does not resolve the fair-use inquiry, as courts must still evaluate the statutory factors as a whole.^[20] In doing so, courts are tasked with comparing the purpose and character of the challenged use with that of the original work, including the commercial licensing context.^[21] That commercial context is particularly important for monetized streams, clips, and VOD. The U.S. Court of Appeals for the Ninth Circuit requires copyright owners to consider fair use before sending a DMCA takedown notice, but streamers should not mistake that requirement for approved use or immunity from platform enforcement.^[22]

Practical Steps for Streamers and Counsel

Rights clearance and licensing should start before the stream, not after a claim appears. Counsel can help clients:

• review platform and game-publisher streaming policies;
• identify music, sound recordings, and other third-party assets;
• determine which permissions are needed; and
• preserve licenses, policies, and correspondence on which the streamer relies.

After a streamer receives a takedown notice, platform claim, or other enforcement action, a counter-notice should follow only if the streamer has a good-faith basis to dispute the removal and understands that doing so may trigger statutory deadlines or litigation.

Conclusion

Disputes among streamers, claimed rights holders, and platforms illustrate that streamers need a copyright strategy that considers the practical enforcement reality. Blanket avoidance of copyrighted material is probably too conservative, but discretion and careful consideration of enforcement dynamics are critical. The goal should be to bring copyright review into production planning. Before clients go live, counsel should help them develop strategies for secure monetization of the stream after-the-fact—as an archived clip, VOD, sponsored use, or off-platform repost. Secure licenses for musical compositions, sound recordings, and other high-risk rights where possible. Fair use, although important, is a fact-specific defense that does not protect against platform-specific enforcement mechanisms. In short, streamers and their counsel should engage in proactive production planning rather than brace for reactive postproduction damage control.

1. See Skye Jacobs, YouTube Copyright Fight: Rick Beato Warns UMG Claims over Short Music Clips Could End His Channel, TechSpot (Sept. 1, 2025); see also Rick Beato, Written Responses of Mr. Rick Beato, U.S. Senate Comm. on the Judiciary (last visited July 22, 2026) (responses to questions for the record). ↑

2. See Music-Related Copyright Claims and Twitch, Twitch (Nov. 11, 2020); Jon Brodkin, Twitch Explains Confusing Copyright Crackdown, Urges Users to Delete Videos, Ars Technica (Nov. 11, 2020); see also Nathan Grayson, Twitch Makes Deal with NMPA, but Streamers Still Can’t Play Licensed Music, Wash. Post (Sept. 21, 2021). ↑

3. See 17 U.S.C. § 512(c)(1), (c)(3). ↑

4. See id. § 512(c), (i), (k); see also id. § 512(c)(2) (designated agent), § 512(c)(3) (notice requirements), § 512(i)(1)(A) (repeat-infringer policy), § 512(i)(1)(B), (i)(2) (standard technical measures). ↑

5. See id. § 512(c)(1) (limiting liability for qualifying service providers for infringement “by reason of the storage at the direction of a user of material”); see also Viacom Int’l, Inc. v. YouTube, Inc., 676 F.3d 19, 27–28 (2d Cir. 2012) (explaining that § 512(c) provides a safe harbor from certain liability for service providers but does not itself resolve the underlying infringement question). ↑

6. 17 U.S.C. § 512(m)(1); UMG Recordings, Inc. v. Shelter Cap. Partners LLC, 718 F.3d 1006, 1022–23 (9th Cir. 2013); Viacom Int’l, 676 F.3d at 35. ↑

7. See 17 U.S.C. § 512(c), (m) (establishing conditional DMCA safe harbors while not conditioning safe-harbor eligibility on general monitoring); About Copyright Removal Requests, YouTube Help (last visited July 22, 2026); DMCA & Copyright FAQs, Twitch (last visited July 22, 2026). ↑

8. See 17 U.S.C. § 512(g)(3)(C). ↑

9. Understand Copyright Strikes, YouTube Help (last visited July 22, 2026). ↑

10. DMCA Guidelines: Digital Millennium Copyright Act Notification Guidelines, Twitch (last modified Oct. 11, 2023). ↑

11. See Music-Related Copyright Claims and Twitch, supra note 2; Brodkin, supra note 2. ↑

12. See Annemarie Bridy, Copyright’s Digital Deputies: DMCA-Plus Enforcement by Internet Intermediaries, in Research Handbook on Electronic Commerce Law (John A. Rothchild ed., 2016). ↑

13. See, e.g., How Content ID Works, YouTube Help (last visited July 22, 2026); Julie A. Ahrens et al., Comments in Response to the Department of Commerce’s Green Paper, Copyright Policy, Creativity, and Innovation in the Digital Economy 8–9 (Nov. 13, 2013); Dan L. Burk, Algorithmic Fair Use, 86 U. Chi. L. Rev. 217 (rev. 2019). ↑

14. See, e.g., StreamBeats (last visited July 22, 2026). ↑

15. FAQ: Platform Safety, StreamBeats (last visited July 22, 2026). ↑

16. Solid Oak Sketches, LLC v. 2K Games, Inc., 449 F. Supp. 3d 333, 344–50 (S.D.N.Y. 2020). ↑

17. See, e.g., Amy Thomas, Merit and Monetisation of Video Game User-Generated Content Policies, 12 Internet Pol’y Rev. (2023); EA’s Content Policy, EA (last visited July 22, 2026); Streaming Guidelines, SEGA (updated Mar. 12, 2026). ↑

18. See 17 U.S.C. § 107; Andy Warhol Found. for the Visual Arts, Inc. v. Goldsmith, 598 U.S. 508, 527–39 (2023). ↑

19. See Rick Beato, This Record Label Is Trying to SILENCE Me, YouTube (Aug. 19, 2025). ↑

20. 17 U.S.C. § 107; Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 577–79 (1994). ↑

21. Andy Warhol Found. for the Visual Arts, 598 U.S. at 527–39. ↑

22. Lenz v. Universal Music Corp., 815 F.3d 1145, 1151–54 (9th Cir. 2016) (amended opinion superseding 801 F.3d 1126 (9th Cir. 2015)). ↑

This article is Part XIV of the Musings on Contracts series by Glenn D. West, which explores the unique contract law issues the author has been contemplating, some focused on the specifics of M&A practice, and some just random.

In a single sentence of a recent Delaware Court of Chancery decision, Meteora Capital Partners, LP v. Roadzen Inc.,^[1] Vice Chancellor Laster invokes the frog-and-scorpion fable: “A frog must account for a scorpion’s character, particularly when the frog has sophisticated lawyers, and the scorpion lays out what it can do in detailed agreements.”^[2] Although the fable is widely known, the case suggests a different moral than the traditional one.

The Case in Brief

Meteora Capital Partners involved a typical de-SPAC transaction.^[3] The merger agreement required that, “after giving effect to any redemptions,” “the SPAC have at least $50 million available at closing.”^[4] Based on the redemption requests submitted, that condition would apparently not be met.^[5]

To meet the minimum cash condition, the SPAC entered into a transaction with a hedge fund comprising a forward contract and a subscription agreement.^[6] The transaction effectively “operat[ed] like a synthetic long put option.”^[7] It was extremely complicated, and I am not sure I fully understand all its ins and outs. But the bottom line was that the transaction enabled the company to meet the minimum cash condition—at least for closing purposes.^[8]

The transaction agreements created many opportunities for the hedge fund to benefit. The most important of those opportunities appeared to involve the hedge fund exercising discretionary rights.^[9] The transaction agreements, in short, represented a “crazy-good deal for [the hedge fund] and a terrible deal for the Company.”^[10]

But the company had been advised by “two major law firms” and “[a]ll of the risks of [the transaction] were plain from the Transaction Documents.”^[11] Vice Chancellor Laster’s decision in this case arose from a summary judgment motion by the hedge fund seeking a “decree of specific performance enforcing the surviving company’s obligation to remove the transfer restrictions from shares that [the hedge fund] holds.”^[12]

Under Delaware law, “[i]f a writing is plain and clear on its face, i.e., its language conveys an unmistakable meaning, the writing itself is the sole source for gaining an understanding of intent.”^[13] And “[p]arties have the right to enter into both good and bad contracts, and the law enforces both.”^[14]

Despite these well-established principles in most major jurisdictions, the company attempted to recast the purpose of the transaction agreements as more akin to a long-term capital investment and asserted that the hedge fund’s interpretation of those agreements was “absurd.” According to the company, the hedge fund’s interpretation of the benefits it derived from the transaction agreements was absurd because “it cannot be true that [the hedge fund] could sell shares and drive down the market price to benefit from a low Settlement Price at the end of a Valuation Period[;] [d]riving the market price down would inhibit the Company’s ability to raise capital.”^[15]

Vice Chancellor Laster, however, suggested that “it is the Company’s position, not [the hedge fund’s], that could be viewed as absurd.”^[16] Indeed, “[t]he Company’s understanding is so at odds with the Forward Agreement as to suggest that the Company executed the transaction without reading the documents or understanding their implications.”^[17] “The Transaction Agreements are complex, and they take time to read and explain, but their meaning is clear.”^[18] “All the Company had to do was map it out.”^[19] And there was no suggestion of a “mutual mistake.”^[20]

According to Vice Chancellor Laster:

[The hedge fund] is not a supportive supplier of patient capital, and [it] was never [making] a long-term or strategic investment. [The hedge fund] bridged the Minimum Cash Condition in exchange for rights that would turn Gordon Gekko green with envy. [The hedge fund] wielded its rights in its own interest to maximize its return. . . .

Through the Transaction Agreements, the Company entered into a zero-sum relationship with [the hedge fund]. A frog must account for a scorpion’s character, particularly when the frog has sophisticated lawyers, and the scorpion lays out what it can do in detailed agreements.

The Company cannot escape the Forward Agreement’s clear and unambiguous terms by claiming that the outcome is absurd. Impressively one-sided, yes. Absurd, no.^[21]

Retelling the Frog-and-Scorpion Fable

A common version of the frog-and-scorpion fable goes something like this: The scorpion asks the frog if he can ride on the frog’s back across the pond. The frog is reluctant at first, fearing the scorpion would sting him. But the scorpion tells the frog that scorpions do not swim. The frog therefore agrees to carry the scorpion across the pond. After all, if the scorpion stings him, both will drown. Midway across, however, the scorpion stings the frog. As the now-paralyzed frog sinks in the pond with the scorpion on its back, the frog asks why the scorpion would sting him and doom them both to a watery grave. The scorpion answers, “Sorry, but you knew I was a scorpion, and that’s what we do.”^[22]

The traditional moral of this story is that some people tend to hurt others and follow that instinct even when it’s not in their own self-interest. I am not a psychologist or a sociologist, so I have no comment on whether that traditional moral translates into real-life examples of self-destructive people hurting others they may depend on, when cooperative behavior would be better for everyone.^[23] What I am, however, is a contract nerd, and this is part of my Contract Musings series, which means I am rejecting that traditional moral in favor of one more in keeping with a contract theme.

And, as it turns out, everyone may have gotten the traditional moral of the story wrong, assuming the scorpion drowned with the frog. While it is apparently true that a scorpion cannot swim, it can survive for at least forty-eight hours underwater (it has tremendous lung capacity)—and, without swimming, it could presumably crawl along the bottom of the pond to the shore after sinking with the frog. That’s why you are cautioned never to flush a scorpion down the toilet.^[24]

With that additional information, the moral of the story changes when applied to contracts. Now the moral becomes this: Understand who your counterparty is and what they do (i.e., their business model), and make sure your contract protects you from the kinds of opportunistic conduct that counterparty is known for and has expressly retained the right to engage in (if you decide to contract with that counterparty at all)—that is, wear a protective cover on your back (or borrow a turtle’s shell) if you intend to allow the scorpion to hitch a ride.^[25]

Where Is “Good Faith” in All of This?

Some of the company’s claims against the hedge fund in related litigation in other jurisdictions (and asserted as affirmative defenses to the hedge fund’s claims in the Delaware case) appeared to be premised, at least in part, on allegations that the hedge fund violated the implied covenant of good faith and fair dealing.^[26] But the claims in the related litigation were apparently dismissed.^[27] And Vice Chancellor Laster made clear that “the implied covenant is not at issue in this motion.”^[28] Presumably, there could be no implied covenant claim if everything the hedge fund did was permitted by the express terms of the contract and, in exercising its discretionary rights, the hedge fund acted in its own legitimate self-interest, not solely to harm the company.^[29]

Nonetheless, Vice Chancellor Laster took this opportunity to place the hedge fund’s exercise of its express rights within the framework of classic contract theory. First, he invoked the concept that “[t]he act of contracting is presumptively a cooperative endeavor intended to create and allocate joint surplus.”^[30] He then noted that “[a] legal regime reduces that surplus when it forces parties to be perpetually on their guard against opportunistic actions by their counterparties.”^[31]

This classic contract theory is the basis for Judge Richard Posner’s famous interpretation of the implied covenant:

[C]ontracts do not just allocate risk. They also (or some of them) set in motion a cooperative enterprise, which may to some extent place one party at the other’s mercy. . . . The office of the doctrine of good faith is to forbid the kinds of opportunistic behavior that a mutually dependent, cooperative relationship might enable in the absence of [the] rule. “Good faith” is a compact reference to an implied undertaking not to take opportunistic advantage in a way that could not have been contemplated at the time of drafting, and which therefore was not resolved explicitly by the parties.^[32]

But Judge Posner’s interpretation of the implied covenant is far more utopian than the pedestrian way Delaware courts have traditionally applied it^[33]—that is, implying terms to fill gaps consistent with the contract’s express terms and policing the exercise of discretion so that the party wielding that discretion advances its legitimate business objectives rather than solely harms its counterparty.^[34]

But even if we accepted Judge Posner’s more utopian view of the implied covenant, not all contracts “set in motion a cooperative enterprise.”^[35] And, according to Vice Chancellor Laster, not all contracts necessarily create a surplus. “Some contracts,” according to Vice Chancellor Laster, “are zero sum.”^[36] In a zero-sum contract, “what is good for one [party] will necessarily be bad for the other.”^[37]

Vice Chancellor Laster characterized the forward contract and subscription agreement as a zero-sum contract.^[38] While “[t]he implied covenant still applies to those contracts[,] . . . the nature of the contract matters for purposes of a party’s reasonable expectations.”^[39] Perhaps so. But I would argue that even if the forward contract and subscription agreement did not constitute a zero-sum contract (i.e., even if some economic theory holds that those transaction agreements created a surplus),^[40] the more important point is that the transaction did not “set in motion a cooperative enterprise.”^[41] Moreover, how could there be “an implied undertaking not to take opportunistic advantage in a way that could not have been contemplated at the time of drafting”^[42] if those “opportunistic advantages” were expressly set forth in the contract?^[43]

Even if anti-opportunism is the goal of the implied covenant, it is not necessarily opportunistic for a party to exercise rights expressly bargained for in the parties’ written agreement, which were therefore part of the counterparty’s “reasonable expectations.”^[44] “Indeed, the uncertainty inherent in any [good-faith] doctrine to regulate opportunistic behavior may itself be opportunistically invoked.”^[45]

Conclusion

When I was practicing, I sometimes cautioned clients to walk away if they had not previously engaged in certain types of transactions where more experienced “scorpions” plied their trade. Whatever the scorpion promises to pay for that ride on your back may simply not be worth the risk that they will do what they have expressly retained the right to do. That advice still looks pretty good. And in the contractarian retelling of the frog-and-scorpion fable, referring to someone as a scorpion is just a recognition of the nature of their business model; and the benefits that they bargain for as part of that business model are simply the price of obtaining the benefit you are seeking from contracting with them in the first place.

The objective theory of contract holds thus:

The words parties use to bind themselves together in a contractual relationship matter. This is especially so when sophisticated parties have engaged in extensive negotiations that produce a bespoke contract. And it is so even when one of those parties later swears that all involved in the relationship intended the contract to say something other than what is captured in its clear and unambiguous terms.^[46]

One justification for the objective theory of contract is that “[t]he promisee’s affairs can be planned based on what is spoken or written, communications that can also be subsequently referenced when questions regarding performance and obligation arise[,] [and] [s]ubjective, internal equivocations or doubts . . . cannot create havoc in the parties’ reasonable expectations.”^[47] This means that the objective meaning of what is said in a contract is what creates the parties’ reasonable expectations, not any subjective, unexpressed meaning they may have intended.

When contracting, words matter, whether you are the scorpion or the frog. And lest we think only the frog needs to be cautious when making a contract with a scorpion, the scorpion also needs to consider the frog’s business model; some frogs include scorpions in their diet.^[48]

So perhaps my not-uncommon invocation of Sergeant Phil Esterhaus’s admonition is appropriate for both the frog and the scorpion as contracting parties: “Let’s be careful out there!”^[49]

1. Meteora Capital Partners, LP v. Roadzen Inc., No. CV 2025-0421-JTL, 2026 WL 2530118 (Del. Ch. Aug. 27, 2026). ↑

2. Id. at *29. ↑

3. Id. at *2. ↑

4. Id. ↑

5. Id. ↑

6. Id. ↑

7. Id. at *10. ↑

8. See id. at *3. ↑

9. See, e.g., id. at *5 (“The Forward Agreement gave [the hedge fund] the right to accelerate the Valuation Date, either after specified acceleration events or unilaterally in its ‘sole discretion.’”). ↑

10. Id. at *27. ↑

11. Id. at *11. ↑

12. Id. at *1. ↑

13. Id. at *20 (quoting City Inv. Co. Liquidating Tr. v. Cont’l Cas. Co., 624 A.2d 1191, 1198 (Del. 1993)). ↑

14. Id. at *27 (quoting Nemec v. Shrader, 991 A.2d 1120, 1126 (Del. 2010)). ↑

15. Id. at *28. ↑

16. Id. ↑

17. Id. ↑

18. Id. at *16. ↑

19. Id. at *11. ↑

20. Id. at *19. ↑

21. Id. at *28–29 (emphasis added). ↑

22. See The Scorpion and the Frog, Wikipedia (last visited Sept. 4, 2026). ↑

23. Id. ↑

24. Katarina Betterton, Can Scorpions Swim? 10 Facts About How They Handle Water, A-Z Animals (Dec. 5, 2023). ↑

25. In earlier Persian versions of the story, the frog was a turtle and the attempted sting by the scorpion failed. But in at least one of the Persian versions, the turtle dove underwater following the scorpion’s attempted sting and shook the scorpion off its back. See The Scorpion and the Frog, supra note 22. ↑

26. See Meteora Cap. Partners, 2026 WL 2530118, at *15, *19. ↑

27. See Roadzen, Inc. v. Meteora Cap. Partners, L.P., No. 25-CV-7867 (JPO), 2026 WL 1983435, at *1 (S.D.N.Y. July 9, 2026), appeal filed. ↑

28. Meteora Cap. Partners, 2026 WL 2530118, at *29. ↑

29. See Glenn D. West, The ‘Officious Bystander’ and the Implied Covenant of Good Faith and Fair Dealing, Bus. L. Today (May 20, 2026). ↑

30. Meteora Cap. Partners, 2026 WL 2530118, at *28. ↑

31. Id. ↑

32. Mkt. St. Assocs. Ltd. P’ship v. Frey, 941 F.2d 588, 595 (7th Cir. 1991) (emphasis added) (internal quotations and citations omitted). ↑

33. See Daniel Markovits, Good Faith as Contract’s Core Value, 2021 Mich. St. L. Rev. 1, 19 (2021) (distinguishing between the pedestrian and utopian versions of the implied covenant). ↑

34. See West, supra note 29. ↑

35. Mkt. St. Assocs., 941 F.2d at 595. ↑

36. Meteora Cap. Partners, 2026 WL 2530118, at *29. ↑

37. Paul S. Davies, The Basis of Contractual Duties of Good Faith, 1 J. Commonwealth L. 1, 22 (2019) (“Some contracts represent a zero-sum game, what is good for one will necessarily be bad for the other.”). ↑

38. Meteora Cap. Partners, 2026 WL 2530118, at *29. ↑

39. Id. ↑

40. See John Enman-Beech, The Good Faith Challenge, 1 J. Commonwealth L. 35, 59 (2019) (“All contracts involve parties co-operating to make a pie and then competing over how to divide it. In the simplest transaction, say I pay a dollar for a chocolate bar, the pie can be seen as the net utility gain of the parties. Presumably I value the chocolate bar at over a dollar (say $1.10) and the shop values it at less (say ¢90). By making this trade we’ve made a (twenty cent) pie and divided it (equally).”). But I am not so sure this idealized pie-making formula is always present in every contract. ↑

41. Mkt. St. Assocs. Ltd. P’ship v. Frey, 941 F.2d 588, 595 (7th Cir. 1991). ↑

42. Id. ↑

43. See MERA USA, LLC v. MCS Burbank, LLC, No. CV 2024-0188-MTZ, 2026 WL 2547077, at *22 (Del. Ch. Aug. 28, 2026) (“Where the contract reflects that the parties contemplated whether one party might take a particular action with particular consequences, the implied covenant should not be deployed.”); McKenzie v. BDO USA, P.C., No. 2025-0264-LWW, 2026 WL 191010, at *5 (Del. Ch. Jan. 26, 2026) (citations omitted) (“[I]f the scope of discretion is specified, there is no gap in the contract as to the scope of the discretion, and there is no reason for the Court to look to the implied covenant to determine how discretion should be exercised.”). ↑

44. Meteora Cap. Partners, 2026 WL 2530118, at *29. But see LanzaTech Glob., Inc. v. Vellar Opportunity Fund SPV LLC, No. 24-CV-6362 (JPO), 2025 WL 2323834, at *6 (S.D.N.Y. Aug. 12, 2025) (a case involving a similar forward contract in which the court refused to dismiss an implied covenant claim because “based upon facts alleged by LanzaTech, the intentional use of price depreciation alongside the threat of using the Seller VWAP Trigger Event to gain an advantage in negotiations surrounding the continued [forward purchase agreement] could be legally sufficient to constitute an attempt to ‘destroy[ ] or injur[e] the right of [LanzaTech] to receive the fruits of the contract’ by changing the terms of the original agreement under pressure that Vellar created” (internal citation omitted)). ↑

45. Davies, supra note 37, at 22. ↑

46. Zohar II 2005-1, Ltd. v. FSAR Holdings, Inc., No. CV 12946-VCS, 2017 WL 5956877, at *1 (Del. Ch. Nov. 30, 2017). ↑

47. Wayne Barnes, The Objective Theory of Contracts, 76 U. Cin. L. Rev. 1119, 1130 (2008). ↑

48. See American Bullfrog, Wikipedia (last visited Sept. 4, 2026) (“Bullfrog stomachs have been found to contain rodents, small lizards and snakes, other frogs and toads, . . . scorpions, tarantulas and bats. . . .” (emphasis added)). ↑

49. Hill Street Blues (MTM Enterprises 1981–1987) (statement of Sgt. Phil Esterhaus, played by Michael Conrad (recurring catchphrase across multiple episodes until Michael Conrad’s death in 1983)); see Glenn D. West, Contract Drafting 101—It Doesn’t Matter What You Actually Meant by What You Said; It Only Matters What Is Determined to Be Meant by What You Actually Said, Weil Glob. Priv. Equity Watch (Sept. 19, 2016) (one of my early invocations of Sgt. Esterhaus’s admonition as applied to deal lawyers). ↑