On February 3, 2026, the Delaware Supreme Court reversed the Delaware Court of Chancery’s decision in North American Fire Ultimate Holdings LP v. Doorly, restoring a more traditional and predictable approach to evaluating consideration in equity-based restrictive covenant agreements.[1] The Supreme Court’s ruling overturns the Court of Chancery’s March 7, 2025 decision,[2] which had held that restrictive covenants tied to an equity award were unenforceable because the equity serving as consideration was forfeited upon the executive’s termination for cause. We previously analyzed the Chancery Court’s decision and its potential implications in a Law360 article.
In reversing the Court of Chancery, the Delaware Supreme Court reaffirmed the principles articulated in Newell Rubbermaid Inc. v. Storm, [3] where the Court of Chancery held that the sufficiency of consideration supporting a restrictive covenant must be evaluated at the time of contract formation, not at the time of enforcement. In Newell, the court concluded that restricted stock units subject to vesting and forfeiture constituted valid consideration because they provided the employee with a real, non-illusory opportunity for economic benefit, notwithstanding the inclusion of contingencies that could result in forfeiture.
In Doorly, the defendant sought to distinguish Newell by arguing that the employee there had received additional consideration, specifically dividend equivalents, beyond the equity award itself. The Delaware Supreme Court rejected that argument, explaining that the dividend equivalents were not material to the Newell holding. The relevant inquiry, the Court emphasized, is whether the equity award itself was illusory at the time of formation. Applying that framework, the Court concluded that although the inclusion of vesting conditions on Doorly’s units trigger somewhat of a contingency, “the inclusion of such a contingency does not convert the [award] into illusory consideration.”[4] Further, the Delaware Supreme Court held that the Court of Chancery erred by focusing on the sufficiency of consideration forfeiture at the time of enforcement rather than at the time of formation.
The decision reassures companies that they may continue to rely on equity awards as consideration for restrictive covenants, even where those awards are subject to forfeiture upon a for-cause termination or breach. Nonetheless, given ongoing scrutiny of restrictive covenants, companies should consider the following best practices, particularly where equity serves as part of the consideration:
The Supreme Court’s reversal in Doorly reaffirms a core principle, namely that equity providing a genuine opportunity for economic gain constitutes valid consideration when granted, even if that opportunity is later forfeited. While Delaware courts continue to scrutinize overbroad restrictive covenants, the decision removes the uncertainty created by the Court of Chancery’s earlier reasoning and restores stability to widely used equity-based incentive structures.
[1] No. 142, 2025, 2026 WL _______ (Del. Feb. 3, 2026).
[2] 2025 WL 736624 (Del. Ch. Mar. 7, 2025).
[3] 2014 WL 1266827 (Del. Ch. Mar. 27, 2014).
[4] Newell, 2014 WL 1266827, at *9.