Delaware Affirms Adequacy of Equity Awards as Non-Compete Contract Consideration Despite Forfeiture

In early February 2026, the Supreme Court of Delaware issued a very important and potentially far-reaching decision, finding equity awards that are later forfeited or clawed back can constitute adequate consideration for restrictive covenants.¹ The court relied upon fundamental contract law principles relating to when consideration is measured, a key issue in enforcing restrictive covenants in long-term incentive plans and other types of contingent equity awards. The decision is important on a national level. Award programs frequently rely on Delaware law, and the decision is based on principles of hornbook contract law, making the holding potentially applicable in all states that follow common-law based contract rules of formation. 

Defendant, Doorly, sold his alarm and fire safety systems company to North American Fire. Doorly continued his employment with the acquired company and, under the acquisition agreement, received common units of North American Fire. Doorly then exchanged his common units for Class B units as part of a corporate reorganization. In the Class B Units Incentive Unit Grant Agreement (the “Award Agreement”), Doorly agreed to a set of restrictive covenants, including non-compete, nonsolicit, and confidentiality obligations. When Doorly started a competing business, North American Fire terminated his employment for cause, resulting in forfeiture of Doorly’s units under the Award Agreement. 

North American Fire then pursued enforcement of the restrictive covenants against Doorly. In response, Doorly moved to dismiss, asserting the restrictions were unenforceable due to lack of consideration because the sole consideration provided—the equity units—had been forfeited. The Delaware Chancery Court agreed and dismissed the lawsuit, reasoning that because North American Fire had exercised its right to trigger forfeiture, the sole consideration for the restrictive covenants had been eliminated. The Delaware Supreme Court disagreed, reversed the decision and remanded it back to the trial court for further proceedings. 

The court ultimately articulated the controlling principle: “consideration is measured at the time of formation and is not reevaluated at the time of enforcement.” Irrespective of any change in circumstances after the contract was formed, adequacy of consideration needed for the formation of a binding contract is not going to be an issue if the consideration was adequate at the time the contract was formed. Citing a wide range of authorities outside of Delaware law, including the Restatement (Second) of Contracts, Williston on Contracts, and decisions from other states like Missouri, Colorado, and New York, the court emphasized that its holding was based on fundamental principles of contract law. 

There are three important lessons from the Doorly decision: (1) timing matters; (2) opportunity equals value; and (3) don’t put all your eggs in one basket. 

Timing Matters 

The Delaware Supreme Court rejected the idea that the adequacy of consideration for the promises in the Award Agreement should be based on whether they had value at the time of enforcement. Instead, the court emphasized that consideration is an element of contract formation only. Because the units had value at the time the Award Agreement was entered into, the contract was formed and any subsequent events were irrelevant to the binding nature of the formation event itself. 

Opportunity Equals Value 

The argument that the units did not have “actual value” because the value was contingent on future events was rejected by the court. The court noted that, as had been decided in a prior case involving this issue (Newell Rubbermaid Inc. v. Storm),² the fact that the value of the set of rights granted through the agreement was contingent on occurrence of uncertain future events such as remaining employed through vesting periods did not make the consideration illusory. The award had value because it granted an individual a set of contractual rights that created an opportunity to earn money the individual would not otherwise have received. The court further opined that it is a “general principle of contract law that consideration must be measured at the time the parties enter into their contract and that the diminished value of the economic benefit conferred, or even a complete lack of value [later], does not result in a failure of consideration.” No doubt the fact that Doorly had chosen to deprive himself of the value of the units by engaging in conduct that triggered their forfeiture in the first place did not help his argument. 

Don’t Put All Your Eggs in One Basket 

It’s particularly notable that in the underlying decision, the Chancery Court held that the units “were the sole consideration for the restrictive covenants” (emphasis added), leading to its conclusion that once North American Fire declared that Doorly had forfeited them, the contract became unenforceable for lack of consideration. This reasoning sends a word of warning to contract drafters to use care in identifying the consideration elements in an agreement. More often than not, there can be more than one element of the parties’ bargain that qualifies as consideration if the elements of consideration are described in more general terms. For example, Doorly’s access to confidential information, continued employment, and any number of other possibilities could have served as supplemental elements of consideration. Drafting a clause that isolates a singular item as the sole consideration increases the risk of a consideration failure argument having teeth.

 Delaware Law Has Been Evolving

This latest Delaware court decision rests on fundamentals of contract law rather than any particulars unique to Delaware law or public policy. At the same time, it is important to recognize that despite the favorable nature of this decision, the Delaware Chancery Court has, in recent years, moved away from the enforcement-friendly posture it once held toward restrictive covenants. As we have previously reported, there is a growing divide between how courts in Delaware treat equity awards and related competition-triggered forfeitures versus restrictive covenants enforced through injunctive relief.³ Although this new decision resolves one discrete issue arising from forfeiture mechanisms and their impact on consideration, it is unlikely to shift the broader trend of reluctance by the Delaware Chancery court to engage in reformation or similar efforts favorable to enforcing restrictions through injunctive relief. 

Employers should continue to monitor developments in Delaware carefully and consult employment counsel to ensure their agreements align with the most current legal standards as the landscape continues to evolve.