In Reversal, Delaware Supreme Court Enforces “Forfeiture for Competition” Conditions in LPA

The Delaware Supreme Court recently reversed a Chancery Court decision involving important issues related to “forfeiture for competition” provisions in partnership agreements. Such provisions are often used by fund managers and others to structure deferred compensation arrangements and disincentivize senior personnel from departing and competing. In reversing and remanding the Chancery Court’s decision, the Supreme Court ruled that when sophisticated parties, in a contract governed by the Delaware Revised Uniform Limited Partnership Act, “agree that a departing partner will forfeit a specified benefit should he engage in competition with the partnership, [Delaware] courts should, absent unconscionability, bad faith, or other extraordinary circumstances, hold them to their agreements.” In doing so, the Supreme Court wrote favorably of the employee-choice doctrine but did not expressly adopt it as part of Delaware law. This guest article by Friedman Kaplan partners Lance J. Gotko and Asaf Reindel discusses the key holdings of the Supreme Court’s decision and offers updated practical considerations for fund managers in light of the reversal. For additional insights from Gotko, see “Answers to Key Questions Raised by the FTC’s Final Rule Banning Non‑Compete Provisions” (Jun. 13, 2024).

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