Delaware Law Alert: Another Reason to Consider a Forfeiture-for-Competition Provision in M&A Transactions

The Delaware Supreme Court has affirmed that unreasonable restrictive covenants remain invalid, even if the party seeking to enforce them asserts a claim only for monetary damages and not injunctive relief. Although the covenants at issue in the case arose from employee incentive agreements, buyers in M&A deals will find instructive the court’s comparison of traditional restrictive covenants (which may be invalid if determined to be “unreasonable”) against “forfeiture-for-competition” (FFC) provisions (which, when properly structured, are much more likely to be enforced by Delaware courts).

Background

Buyers in M&A transactions face a risk after closing that the selling parties, including individual employees, could harm the acquired business by engaging in or supporting a competing business. Traditionally, buyers mitigate these risks through a non-competition provision, which is enforceable through injunctive relief or damages. Delaware courts subject such provisions to “reasonableness” review because they are potentially onerous to former employees, deprive the public of the employee’s services, and impose supervisory burdens on courts. To be enforceable, non-competition provisions must, among other things, be reasonable in scope and effect and bear a reasonable relationship to the advancement of legitimate interests. For the sale of a business, courts perform a “less searching” reasonableness inquiry, recognizing that the protection of employer goodwill and confidential information are legitimate interests.

Under recent Delaware decisions, numerous non-competition provisions have failed to pass reasonableness muster. Given this uncertainty, we noted in a previous Legal Update (The Delaware Supreme Court Further Validates Forfeiture-for-Competition Provisions—What It Means for M&A Deals) that buyers should consider using FFC provisions alongside or in place of traditional non-competition provisions. Upheld only recently by the Delaware Supreme Court, FFC provisions provide that the buyer will deliver to a party a supplemental benefit (i.e., something distinct from the purchase price, such as the payment of an additional sum of cash), that can be revoked or clawed back if the party chooses to compete against the acquired company. Because FFC provisions provide an incentive not to compete and are not an absolute bar on competition enforced by an injunction, they generally are not subject to judicial reasonableness review.

Lessons from Fortiline, Inc. v. McCall

In Fortiline, Inc. v. McCall, the Delaware Chancery Court and, on appeal, the Delaware Supreme Court addressed the question of whether a traditional non-competition provision and other restrictive covenants could be treated like FFC provisions and escape reasonableness review if the enforcing party sought only damages, as opposed to injunctive relief.¹ The Chancery Court held that they could not, and the Supreme Court affirmed the judgment.

The case involved non-competition and other restrictive covenants that were included in incentive award agreements with employees. When the company sought to enforce the covenants with a preliminary injunction, the Delaware Chancery Court held that the restrictive covenants were unenforceable because they were unreasonably broad and lacked a legitimate business purpose. In response, the company amended its complaint to seek only damages instead of injunctive relief. The company argued that under its damages claim the restrictive covenants were not subject to reasonableness review because, like an FFC provision, the former employee would be deprived only of a financial benefit.

The Chancery Court disagreed, holding that whether restrictive covenants are subject to reasonableness review turns on what the provisions demand of the individual, not on the remedy the company seeks. In other words, reasonableness review is required any time a provision restrains an individual from competing, including by subjecting them to an unliquidated obligation to compensate the company for any harm suffered from the competition. In contrast, reasonableness review is not required when, for example under an FFC provision, the agreement allows the employer to retain a predetermined benefit the employee would have otherwise received from the employer. The Delaware Supreme Court affirmed the Chancery Court’s judgment without additional analysis.

This opinion confirms that claims for a breach of a non-competition provision or other restrictive covenant cannot be spared the uncertainty of reasonableness review by merely electing to pursue damages instead of injunctive relief. Buyers in M&A deals wishing to mitigate the uncertainty of reasonableness review should not only take care in drafting non-competition provisions but should also consider structuring the acquisition to include an FFC provision, which has the benefit of more certainty of enforceability and relative ease of enforcement (in its most basic form, the buyer would enforce the FFC provision by simply withholding payment of a specified amount of cash from the party in breach). For the FFC provision to be effective, it may be necessary to reserve a portion of the purchase price as deferred payment and/or include a mechanism for clawing back previous payments.

¹ 341 A.3d 1027, C.A. No. 2024-0211-MTZ (Del. Ch. June 27, 2025) (Zurn, V.C.), affirmed No. 300, 2025 (Del. February 10, 2026) (en banc).