On February 3, 2026, the Delaware Supreme Court issued a significant decision in North American Fire Ultimate Holdings LP v. Doorly, holding that equity units subject to forfeiture are valid consideration for restrictive covenants.
The court’s decision reversed the Delaware Chancery Court’s ruling and held that the chancery court improperly treated the later forfeiture of the grantee’s incentive units as if it retroactively erased the consideration exchanged when the agreement was executed.
The state supreme court reasoned that the validity of consideration is determined at the time of contract formation, not at the time of enforcement, so the later forfeiture of equity units does not eliminate the consideration exchanged when the parties entered into the contract.
Case Background
North American Fire Ultimate Holdings LP acquired Cross Fire & Security Inc., a company co-founded by Alan Doorly. As part of the acquisition, Doorly continued his employment and received 700,000 common units of stock in North American Fire. Following a corporate restructuring, Doorly exchanged these units for 300,000 Class B units subject to time and performance vesting, governed by an incentive unit grant agreement that included confidentiality, nonsolicitation, and noncompetition covenants.
When Doorly began planning a competing business in 2023, North American Fire terminated his employment for cause, which triggered the automatic forfeiture of his units under the agreement. North American Fire then sued Doorly for breach of contract and related claims, seeking to enforce the restrictive covenants in the grant agreement.
In March 2025, the Delaware Chancery Court dismissed North American Fire’s amended complaint, holding that the covenants were unenforceable because the equity units subject to forfeiture were the sole consideration for the restrictive covenants in the agreement, and once the company declared that the grantee had forfeited the units, the contract became unenforceable for lack of consideration.
The Delaware Supreme Court’s Decision
The Delaware Supreme Court reversed, holding that equity units subject to forfeiture are valid consideration for restrictive covenants. The court reasoned that “consideration is measured at the time of contracting and not at the time of enforcement,” and “the diminished value of the economic benefit conferred, or even a complete lack of value, does not result in a failure of consideration.” In other words, the relevant question is whether the employee received a benefit at the time the agreement was executed, not whether the benefit remained at the time of enforcement. Because Doorly received a valuable contingent equity interest when he signed the agreement, the restrictive covenants were supported by consideration. The Delaware Supreme Court concluded that the chancery court improperly treated the later forfeiture of the grantee’s incentive units as if it retroactively erased the consideration exchanged when the agreement was executed. The court reversed the dismissal and remanded the case for further proceedings.
Key Takeaways for Employers
- Employers may continue to use equity units subject to forfeiture as valid consideration for restrictive covenants in agreements governed by Delaware law.
- Agreements should be carefully drafted to clarify that all promises made at the outset of the agreement—including the equity grant—constitute consideration for restrictive covenants.
- Despite this favorable ruling for employers, Delaware courts continue to heavily scrutinize restrictive covenants for reasonableness in scope, duration, and geography, and Delaware courts are now very limited in their ability to blue pencil or reform overly broad covenants. As a result, employers should ensure that their covenants governed by Delaware law are narrowly tailored and defensible within the scope of recent Delaware covenant case law.
If you have any questions, or would like additional information, please contact one of the attorneys on our Labor & Employment team.
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