Richards Layton & Finger

Delaware's Next Step: Developments in the Step-Transaction Doctrine

January 17, 2012

The Delaware courts have long embraced the maxim that ‘‘equity regards substance rather than form.’’ One embodiment of this rule is the step-transaction doctrine, which allows a court to treat a multi-step transaction as a single transaction. But the step-transaction doctrine has historically played little part in Delaware law. While it has made a few limited appearances, only recently has the doctrine emerged as a tool for interpreting Delaware contracts.

The most recent use of the step-transaction doctrine appeared in the Court of Chancery’s November 2011 opinion in Coughlan v. NXP, which applied the doctrine to interpret an earn-out provision in a merger agreement governed by Delaware law. Noting that ‘‘it is the very nature of equity to look beyond form to the substance of an arrangement,’’ Coughlan suggests that the step-transaction doctrine—as a method of contract interpretation—may become a more common feature in Delaware law.

In this article, we discuss the genesis of the step-transaction doctrine and its first appearance in Delaware. Then we examine the Coughlan opinion and what it may mean for practitioners.