Court Of Chancery Issues Important Decision On Implied Covenant Breach Claims

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...