The Delaware Court of Chancery granted defendants' motion to dismiss an action brought by minority unitholders of Trumpet Search, LLC ("Trumpet"). Defendants were unitholders that collectively held a majority of membership units in Trumpet and had the power to appoint four of the seven managers on the Trumpet board of directors. In a memorandum analyzing the ruling, Cadwalader attorneys said that the decision in Christopher Miller, et al., v. HCP & Co., et al., C.A. No. 2017-0291-SG (Del. Ch. Feb. 1, 2018) (i) serves as a powerful reminder of the broad freedom of contract that Delaware law accords entities such as LLCs, offering both the promise of great latitude to contracting parties and the threat of serious pitfalls for parties that fail to carefully protect their interests in the agreements, and (ii) underscores the limits on an implied covenant breach claim under Delaware law.
In the Trumpet case, plaintiffs alleged that defendants breached the implied covenant of good faith and fair dealing in the Operating Agreement by approving a sale without conducting an open auction of Trumpet, which they claimed would have "resulted in a substantially higher sales price" and "thereby ensure[d] maximum value for all members." However, the Operating Agreement waived all fiduciary duties on the part of Trumpet and the board of directors, permitting the board of directors to determine, in its sole discretion, the manner in which a sale should occur, subject only to the condition that the sale be to an unaffiliated third party and the board notify other members of the details of the sale in writing. In granting defendants' motion to dismiss, the Court found that the Operating Agreement did not contain a gap for the Court to fill by implying in an "auction sale requirement," and that defendants' negotiated sale of Trumpet did not frustrate plaintiffs' reasonable contractual expectations.
In the memorandum, the attorneys outlined in greater detail the following key takeaways from the Court's decision:
- The implied covenant of good faith and fair dealing as applied in Delaware does not operate to rewrite a contract simply because regretful plaintiffs wished they had negotiated a better or different deal.
- The negotiated, mutual waiver of fiduciary duties narrows the already slim chance a Delaware court will apply the implied covenant of good faith and fair dealing.
- Waiver of fiduciary duties, conditioned on a sale to an unaffiliated third party and written notification of the sale details to all members, granted the board unfettered discretion to determine the marketing and structure of Trumpet's sale.
- Plaintiffs offered no reason to believe defendants' conduct frustrated their reasonable expectations.
- The court highlighted certain conduct that may be sufficiently egregious to implicate the implied covenant in similar situations.
The memorandum was authored by Jason Halper and James Fee.
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