How JV Sponsors Can Draft Enforceable Promote Forfeitures for Their Own Principals and Employees

A senior principal at a sponsor firm resigns, joins a competitor, and still expects her share of the promote on three deals the firm sponsored. Whether the firm must pay depends on how the forfeiture clause in its partnership or promote participation agreement is written.

The promote is the sponsor’s extra share of profits once investors recover their capital plus an agreed return. Many sponsors share part of it with principals and employees to reward and retain them. Since 2024, the Delaware Supreme Court has made clauses that forfeit this kind of deferred payment much easier to enforce, as long as they are written as conditions to payment rather than as penalties for breach.

Below are the key cases, the contract language behind them, and the drafting steps that follow from them.

Cantor Fitzgerald and six departing partners

Cantor Fitzgerald, L.P. v. Ainslie, 312 A.3d 674 (Del. 2024), involved six partners in Cantor’s Hong Kong office. In September 2010, the office’s chief operating officer, Angelina Kwan, resigned and immediately joined Reorient Group, a rival brokerage. In May 2011, two senior leaders, Brad Ainslie and Jason Boyer, also resigned. Their resignation letters said they intended to join “an entity which may be viewed as a competitor.” Both joined Reorient and helped it recruit Cantor’s employees and customers. During 2011, three Cantor brokers also resigned, and each joined another competitor, ICAP, within a year.

Each partner had signed Cantor’s partnership agreement. When a partner left, the agreement paid out the partner’s account over four years. The first payment came within 90 days. The remaining payments came on each of the next four anniversaries, subject to this condition.

provided that such Partner has not engaged in any Competitive Activity or otherwise breached a Partner Obligation prior to the date such payment is due.

In other words, no payment was owed to a partner who had competed before the payment date.

Cantor determined that all six had competed within a year of leaving and stopped paying. The withheld amounts ranged from just under $100,000 to over $5 million per partner.

Cantor had already lost a more conventional fight. It asked a Hong Kong court to bar Ainslie and Boyer from working for Reorient, and the court refused, finding the noncompete in their employment agreements unenforceable.

The partners then sued in the Delaware Court of Chancery, about three years after leaving. In 2023, that court ruled for them. It treated the payment condition like a noncompete and held it unenforceable, mainly because it lasted four years. In January 2024, the Supreme Court reversed.

Why Cantor prevailed

The court distinguished a noncompete from a forfeiture. A noncompete prohibits a person from working. A forfeiture leaves the person free to work anywhere but costs them a payment they would otherwise receive. A forfeiture cannot be enforced by a court order barring work, and it does not deprive the public of anyone’s services. So the reasonableness test that applies to noncompetes, which asks whether a restriction is too long, too broad, or covers too much territory, does not apply.

The court also held that the clause was not a penalty. It was a condition precedent, meaning something that must be true before a payment is owed. Because the condition was not met, Cantor’s duty to pay never arose. Delaware’s penalty rules apply to remedies for breach of contract, not to conditions that go unmet.

Cantor’s agreement also stated that the forfeiture restricted no one. Section 11.02(c) said so directly.

Nothing in this Article XI shall be considered or interpreted as restricting the ability of a former Partner in any way from engaging in any Competitive Activity, or in other employment of any nature whatsoever.

The court relied on that language as confirming that the clause governed only money, not where anyone could work.

The record supported the result. Cantor’s internal documents suggested it had withheld payments from about 40 percent of its former partners under these terms. The court also noted that the plaintiffs had benefited from the same clause during their own time as partners, whenever it was enforced against others who left. The court held them to the bargain they had accepted.

One drafting detail decided the case

Cantor’s agreement listed two separate conditions to payment, and failing either one ended Cantor’s duty to pay. The first required that the partner not breach any of the agreement’s covenants, including a covenant not to compete. The second required only that the partner not compete.

The trial court held the covenants too broad to enforce. Because an unenforceable covenant cannot be breached, the first condition could not support the forfeiture. Cantor prevailed on the second condition alone, because it did not depend on any covenant being enforceable. It asked only whether the partner competed.

For a partnership agreement, this means a forfeiture that depends on breach of a noncompete or exclusivity covenant is only as strong as that covenant. A forfeiture tied directly to the conduct does not carry that risk.

LKQ and a plant manager’s stock awards

LKQ Corp. v. Rutledge, 337 A.3d 1215 (Del. 2024), involved a plant manager, not a senior partner. Robert Rutledge began working in 2009 at an LKQ auto parts recycling facility in Lake City, Florida. LKQ granted stock awards to about 2 percent of its workforce, and Rutledge was one of them. Over several years he signed award agreements, each with three linked provisions.

A covenant not to compete.

the Key Person shall not directly or indirectly (1) be employed by, engage or have any interest in any business which is or becomes competitive with the Company or its subsidiaries.

A forfeiture.

the RSUs, the shares of common stock of the Company underlying the RSUs, or any proceeds received by the Key Person upon the sale of shares shall be forfeited by the Key Person to the Company without any consideration therefore, if the Key Person is not in compliance, at any time during the period commencing on the date of this Agreement and ending nine months following the termination of the Key Person’s affiliation with the Company.

And a repayment obligation.

If the shares of common stock of the Company underlying the RSUs have been sold, the Key Person shall promptly pay to the Company the amount of the proceeds from such sale.

In other words, an employee who competed while employed or within nine months after leaving forfeited the stock and had to repay the proceeds of any shares already sold.

In April 2021, Rutledge resigned while earning $109,000 a year and soon joined a competitor. LKQ demanded repayment of the proceeds of every share he had received and sold, about eight years of awards worth hundreds of thousands of dollars.

LKQ’s ordinary noncompete failed. It was in a separate agreement governed by Illinois law, and the federal courts held it unenforceable because it barred him from an entire industry and LKQ could not justify its 75 mile radius. The stock award agreements, however, were governed by Delaware law.

A federal appeals court asked the Delaware Supreme Court whether the Cantor rule applied outside partnerships. In December 2024, the court answered yes. The rule covers stock awards and similar incentive pay. It also makes no difference that LKQ sought repayment of amounts already received. The court treated that as the return of a benefit the employee no longer qualified for, not as a penalty.

The federal appeals court then reversed the ruling for Rutledge. LKQ Corp. v. Rutledge, 126 F.4th 1247 (7th Cir. 2025). It found he was far from unsophisticated, pointing to his management role, his salary, and the fact that these awards went to fewer than 2 percent of LKQ’s employees. It also found that losing those awards was not the kind of extraordinary hardship that would call for reasonableness review.

For sponsors, LKQ matters most for promote shared below the senior level. A vice president or associate who receives a share of the promote and later joins a competitor is in much the same position as Rutledge.

Why the wording matters

A forfeiture written as damages for breach raises a penalty question. Under Delaware Bay Surgical Services, P.C. v. Swier, 900 A.2d 646 (Del. 2006), a preset damages amount is enforceable only if actual damages were hard to estimate at signing and the amount is reasonable. Otherwise, the clause is void and recovery is limited to actual losses. A forfeiture written as a condition to payment avoids that test, because an unmet condition is not a breach.

The Cantor court also made clear that Delaware courts will hold sophisticated parties to the terms they signed, absent unconscionability, bad faith, or other extraordinary circumstances. Apart from the narrow exception discussed below, a court is unlikely to rewrite a clearly drafted forfeiture for either party. The clause the parties sign is the clause that will be enforced.

Where the courts have drawn limits

The Supreme Court has since decided several cases that define how far these clauses reach.

Unclear scope. In Village Practice Management Co., LLC v. West, 342 A.3d 295 (Del. 2025), a senior vice president at a health care company held equity units. He resigned in 2021 and joined a company his former employer considered a competitor, and the company declared his vested units forfeited. His agreement forfeited the units if a “Participant” engaged in “Detrimental Activity,” and the plan defined Participant by reference to employees and consultants. The trial court read the term to cover only current employees and ruled for him. The Supreme Court reversed because the term could reasonably be read either way, and it sent the case back for further litigation. The forfeiture was not struck down, but an unclear definition kept both sides in court years after he left.

When a court may excuse a condition. In Thompson Street Capital Partners IV, L.P. v. Sonova United States Hearing Instruments, LLC, 340 A.3d 1151 (Del. 2025), a buyer’s main source of recovery for problems found after closing was a $7.75 million escrow. The merger agreement said the buyer “shall have no right to recover” unless it gave a proper claim notice. The buyer sent its notice one business day before the escrow was due to be released, with no supporting documents. The court held that this language created a condition precedent that could forfeit the buyer’s claim. Because Delaware’s common law disfavors forfeitures, however, the court also held that a judge may excuse an unmet condition under Restatement (Second) of Contracts § 229, a widely followed rule, if the condition was not material, meaning essential to the deal, and enforcing it would cause a forfeiture out of proportion to the harm. If the condition was material, the analysis ends and the forfeiture stands. The court sent the case back to decide those facts, noting that materiality can depend on the condition’s purpose and the parties’ negotiations.

Noncompetes alongside forfeitures. In 2025, trial courts in several cases held that a noncompete in an equity agreement failed for lack of consideration, meaning nothing of value supported it, once the equity was forfeited or found to be worth very little. The Supreme Court reversed that approach in 2026. In Payscale Inc. v. Norman, 361 A.3d 886 (Del. 2026), it held at the pleading stage that equity that may or may not pay off can support a noncompete, and that how much the equity is worth bears on whether the noncompete is reasonable, not on whether a contract was formed. An earlier unpublished order, North American Fire Ultimate Holdings, LP v. Doorly, 361 A.3d 2 (Del. 2026) (table), made a related point, holding that consideration is measured when the agreement is signed, so a later forfeiture does not undo it. A noncompete and a forfeiture can coexist in one agreement, but the noncompete is still tested for reasonableness.

Sophistication. In LKQ, the court left open whether a clawback “so extreme in duration and financial hardship that it precludes employee choice by an unsophisticated party” should still be reviewed for reasonableness. These clauses are on firmest ground with senior principals.

Eight drafting steps

Sponsors can use these steps in the agreements that share promote with their own principals and employees.

1. Write it as a condition to payment. State that the person has no right to receive promote unless and until stated conditions are met. Cantor’s “provided that” language and Thompson Street’s “shall have no right to recover” followed by “unless” are both models the Supreme Court has accepted. Keep “damages,” “penalty,” and “payable upon default” out of the clause.

2. Define each forfeiture event directly, and make each one sufficient alone. Describe the conduct itself, such as competing, soliciting the partnership’s investors or employees, or committing fraud. Do not make forfeiture depend on breach of a separate covenant that a court might find unenforceable.

3. State when the condition applies. Village Practice shows the cost of leaving this unclear. State expressly that the condition covers conduct after the person leaves, and for how long, as Cantor did (“prior to the date such payment is due”) and LKQ did (“nine months following the termination”).

4. State that the condition is material. After Thompson Street, the agreement should state that satisfying each core condition is material to the economic deal, and the negotiating record should support it.

5. Confirm the person remains free to work. Include a statement like Cantor’s Section 11.02(c). Both Cantor’s and LKQ’s agreements also allowed the company to seek a court order barring competition, and the LKQ court noted that neither company sought one. Keep any noncompete in a separate provision, and do not seek an order barring the same conduct relied on for the forfeiture.

6. Tie any clawback to the same condition. A clawback is a right to recover amounts already paid. LKQ’s repayment obligation worked because it followed from the forfeiture condition. Apply the same approach to promote already distributed, and secure it with an escrow, a holdback of future distributions, or personal guarantees in which each principal backs only its own share.

7. Use a Delaware entity and Delaware law. Delaware’s partnership statute expressly permits forfeitures, and its LLC statute gives maximum effect to freedom of contract. In LKQ, the noncompete governed by Illinois law failed, while the forfeiture governed by Delaware law was upheld.

8. Take more care with junior staff. Given the question LKQ left open, keep forfeiture periods and clawbacks for junior team members proportionate, and make sure they understand the terms when they sign.

The same rules apply to the sponsor’s own promote

These rules work in both directions. A capital partner can use the same drafting approach to make forfeiture of the sponsor’s promote after a cause event easier to enforce. Because a court is unlikely to rewrite a clearly drafted forfeiture, the sponsor’s protection lies in the JV agreement itself. Sponsors should negotiate narrow cause definitions, notice and cure rights, a neutral determination of whether cause exists, and limits on any clawback when that agreement is drafted.

What to do now

Sponsors should review the agreements that share promote with their own principals and employees. A few questions cover most of it. Does each clause state that there is no right to the promote unless stated conditions are met? Does each forfeiture event stand independently? Is the time period clear, including after the person leaves? Is materiality addressed? Is any clawback tied to the same condition and secured? Are the terms proportionate for junior team members? These changes are best made before anyone leaves, not after a dispute begins.

This article is general information, not legal advice. Whether a specific provision is enforceable depends on its exact terms and the agreement as a whole.