DealLawyers.com Blog

Fenwick’s latest Securities Law Update highlights a spring Delaware Chancery Court decision addressing stockholder agreements under DGCL Section 122(18), Masimo Corp. v. Kiani (Del. Ch.; 4/26).

In April 2026, the Delaware Court of Chancery issued a significant decision interpreting the new DGCL § 122(18), which governs stockholder agreements. In the underlying case, founder and former CEO/chair Kiani sued Masimo in California for severance and a “Special Payment” under the terms of his employment agreement after resigning from the company for “Good Reason” following his removal from the board. The Special Payment (2.7 million RSUs (approximately 5% of Masimo’s outstanding shares) plus $35 million) was triggered by Kiani losing his chair title or a board “Change in Control,” and removing him for cause required a 75% supermajority board vote.

Masimo countersued in Delaware to invalidate the employment agreement as a product of breaches of fiduciary duty (relying on a Delaware forum clause in its bylaws). Despite the “employment agreement” label, the court found the agreement’s substance (governing board composition and allocating control rights long-term) made it a § 122(18) governance/stockholder agreement, citing Masimo’s own “poison pill” characterization of the arrangement.

The court held that § 122(18) abrogates the “Independent-Source Principle” for qualifying stockholder agreements and eliminates the requirement of explicit language to route fiduciary claims away from Delaware. The broad “arising out of or relating to” forum language included in the agreement was held to capture Masimo’s fiduciary duty and waste claims; the case was dismissed in Delaware and sent to California.

The employment-agreement-deemed-stockholders-agreement had a California forum selection clause. As the decision explains, “Independent-Source Principle” refers to the idea that “a contractual forum selection clause cannot encompass corporate fiduciary duty claims where the at-issue fiduciary duties arise independently of the contract.” Here’s what the decision says about that argument in the context of this case and Section 122(18):

Under the Company’s reading of precedent, Delaware courts have preserved Delaware as a forum for fiduciary duty claims to ensure the state can provide oversight for those who control its corporations. Although that may have been Delaware law once, it no longer is, at least for governance agreements under recently enacted § 122(18).

The court reasoned that Section 122(18)’s proviso (“provided that no provision of such contract shall be enforceable against the corporation to the extent such provision is contrary to the certificate of incorporation or would be contrary to the laws of this State (other than § 115 of this title) if included in the certificate of incorporation”), specifically the exclusion of Section 115 which “preserves Delaware courts as a mandatory option to adjudicate internal affairs claims” means that the “legislature authorized stockholder agreements that route internal affairs claims related thereto exclusively to a non-Delaware forum.”

The legislative synopsis expressly memorializes that intent by stating, “[t]he proviso excludes § 115, so that corporations may enter into contracts under § 122(18) with exclusive forum and arbitration provisions that do not select the courts of this State to adjudicate claims under the contracts.” The legislature reaffirmed that intent in the synopsis for the 2025 amendment to § 115, writing “[§] 115 [is] not intended to prevent . . . the selection of a forum other than a court in this State, if the provision is included in a stockholder agreement or other writing signed by the stockholder against whom the provision is to be enforced.”

Fenwick’s summary takeaways are:

– Section 122(18) will be construed broadly

– Substance over label controls

– A company’s own characterizations can later be used against it

They suggest that companies be careful how they characterize agreements “that touch on governance or control rights,” lest those characterizations later come up in litigation.

– Meredith Ervine