A board can act in good faith, rely on experienced advisors, and still breach its contract. In Mudrick Capital Management L.P. v. QuarterNorth Energy Inc., 2026 WL 3256781 (Del. Ch. Oct. 29, 2026), the Delaware Court of Chancery held that a board’s valuation satisfied a contractual good‑faith requirement but failed a separate obligation to act in a commercially reasonable manner. The company was held liable for approximately $3 million in breach-of-contract damages, plus interest—all for a calculation the board honestly believed was correct.
Contracts frequently require boards and other decisionmakers to exercise discretion “in good faith and in a commercially reasonable manner,” particularly when determining valuations, earnouts, purchase-price adjustments, and other economic entitlements. QuarterNorth confirms that where a contract imposes both standards, they are independent requirements: good faith measures the decisionmaker’s subjective honesty; commercial reasonableness objectively measures the methodology. And the decision shows that a board can satisfy one and breach the other.
The dispute arose from QuarterNorth’s 2021 emergence from bankruptcy. First-lien creditors received most of the company’s common stock and board-designation rights, while second-lien creditors, including plaintiffs Mudrick Capital and Ellington Management, received warrants. To protect against cash distributions that would diminish the warrants’ value, the holders negotiated anti‑dilution adjustments triggered by dividends exceeding 30% of the company’s annual free cash flow. The adjustment formula required the board to determine the fair market value of one share “in good faith and in a commercially reasonable manner.”
In June 2023, QuarterNorth declared a cash dividend that triggered the adjustment. Relying on bids received during a recent sale process and advice from Barclays, the board valued the company at $1.7 billion. It then divided that amount by an undiluted share count, producing a higher per-share valuation and a smaller adjustment for the warrant holders. The holders sued for breach of both the good-faith and commercial-reasonableness requirements, arguing that the board had inflated the valuation and should have relied on lower over-the-counter broker quotes.
Following trial, Vice Chancellor Will rejected the bad-faith theory. Two directors employed by QuarterNorth’s largest stockholder recused themselves from the vote approving the valuation, and the remaining directors credibly testified that they acted independently. The board also relied on management and Barclays and had arrived at its $1.7 billion valuation months before the company’s eventual sale, undermining the plaintiffs’ claim that the board had inflated the valuation to protect the common stockholders’ merger proceeds. As the Court explained, “the use of a flawed valuation methodology” does not establish subjective bad faith where the valuing party acted honestly. Id. at *14.
Commercial reasonableness, however, was a different question. Unlike good faith, which requires subjective “honesty in fact,” commercial reasonableness imposes an objective standard: the methodology must be consistent with prevailing commercial and valuation practices. Id. at *15. On that score, the board got one thing right and another wrong. The board reasonably rejected the broker quotes because QuarterNorth’s shares traded in an illiquid, poorly informed market, with no transactions for several months surrounding the valuation date and no material market information about a valuable new oil well—making those quotes an unreliable measure of fair value. The Court therefore found it commercially reasonable to rely instead on a $1.7 billion valuation supported by arm’s-length bids from a sale process involving numerous potential buyers.
The board got the company’s overall $1.7 billion valuation right. It got the per-share math wrong. QuarterNorth divided that valuation by an undiluted share count that ignored more than 8 million in‑the-money warrants. But those warrants represented economic claims on the company’s equity that any buyer would have had to account for. By excluding them, QuarterNorth “assigned 100% of its equity value to the common stock” and “$0 to more than 8 million in-the-money Warrants.” Id. at *19. That calculation was not commercially reasonable. Standard valuation practice required accounting for the dilutive effect of in-the-money warrants and options. Using the appropriate fully diluted share count reduced the per-share valuation and increased the anti-dilution adjustment owed to the warrant holders.
The board’s good-faith reliance on its advisors did not cure the error. Barclays advised on QuarterNorth’s overall valuation but did not perform the specific per-share calculation required by the governing contracts. And even if it had supplied the incorrect denominator, the result would have been the same given the objective nature of the commercial reasonableness inquiry. As the Court put it: “an objectively unreasonable calculation breached the Warrant Agreements regardless of whether the Board adopted it in good faith.” Id. at *19 n.236 (emphasis added).
The bottom line of QuarterNorth is simple: A board can act in good faith, follow a sound process, and still expose its company to breach-of-contract liability where the contract also requires a commercially reasonable valuation. Good faith won’t save bad math. For boards, investors, and deal counsel, the decision offers several practical lessons:
- For boards, a sound process is not a substitute for a sound calculation. Independence, recusals, and reliance on qualified advisors may defeat allegations of bad faith, but they will not insulate an objectively unreasonable valuation. Boards should ensure that their advisors address the specific determination required by the contract—not simply a related enterprise or equity valuation—and that the methodology reflects accepted valuation practices and accounts for the company’s full capital structure.
- For investors, the methodology matters as much as the headline valuation. Holders of warrants, preferred equity, and other contractual economic rights should scrutinize valuations to confirm that the methodology employed conforms to industry standards and/or bargained-for requirements—particularly when outstanding securities risk diluting their interests, and notwithstanding the presence of an ordinary, robust valuation process.
- For deal lawyers, “good faith” and “commercially reasonable” are not interchangeable boilerplate. Delaware courts will give each requirement independent effect. Parties negotiating valuation provisions should specify the methodology, relevant inputs, and treatment of potentially dilutive securities where those details matter, rather than leave them to a later exercise of discretion—and, potentially, judicial review.1
[1] The views expressed in this article are those of the authors and do not necessarily reflect the views of Elsberg Baker & Maruri PLLC or its clients. This article is for general informational purposes only and does not constitute legal advice.
