On February 3, the Delaware Supreme Court issued a critical decision for private equity (PE) sponsors and institutional employers in North American Fire Ultimate Holdings LP v. Doorly. The court clarified that restrictive covenants—specifically non-competes tied to equity grants—remain enforceable even if the equity is later forfeited due to an employee’s misconduct.

The Background: A “Catch-22” for Sponsors

The case stemmed from a 2025 Court of Chancery ruling that sent ripples through the M&A and PE community. In the lower court proceedings, an executive was terminated for cause after secretly forming a competing business. Under the terms of his incentive unit grant agreement, his unvested equity units, which served as the consideration for his non-compete, were automatically forfeited upon his termination for cause. His vested units were forfeited as well.

The Court of Chancery held that because the equity units were the sole consideration for the non-compete, once they were forfeited, the non-compete was no longer enforceable due to lack of consideration. This created a paradoxical “Catch-22”: an employee could effectively “cancel” their own non-compete by engaging in the very misconduct that triggered the forfeiture of their equity.

The Court’s Holding: Timing is Everything

The Delaware Supreme Court reversed the Court of Chancery’s decision, reaffirming a foundational principle of contract law: consideration is measured at the time of contract formation, not at the time of enforcement. Therefore, a subsequent diminishment in value of the economic benefit conferred, or even a complete lack of value, does not result in a failure of consideration.

The court noted that the consideration was not illusory just because the value of the benefit conferred was contingent or based on certain factors, such as the unit vesting schedule and the former employee’s likelihood of future employment. In sum, the grant of equity units at the outset of the relationship constitutes valid, “non-illusory” consideration because it represents a real opportunity for financial gain, even if that gain is contingent on vesting or subject to forfeiture.

Key Takeaways for Dealmakers and PE Sponsors

This ruling restores a level of predictability for institutional investors who rely on equity-based non-competes to protect their portfolio companies. However, dealmakers should consider the following best practices:

• Explicit Consideration Clauses: Ensure grant agreements explicitly state that restrictive covenants are provided in exchange for multiple forms of value, such as the equity grant and access to trade secrets and confidential information.

• Reasonableness Still Governs: Even if there is sufficient consideration, non-competes remain subject to Delaware’s “reasonableness” test regarding duration, geography, and scope of activity. Overbroad covenants remain at risk of being struck down or reformed.

• Review Standard Documents: Sponsors should review their standard management equity incentive plans (MEIPs) to ensure that forfeiture provisions are clearly linked to cause-based terminations without inadvertently suggesting that the underlying restrictive covenants are also extinguished.

While non-compete rulings in Delaware courts have become a bit less predictable over the past few years, this decision is a significant victory for employers and PE sponsors. If you have questions regarding how this decision impacts your current deals or management incentive structures, please contact the authors.