CURRENT MONTH (April 2025)
Delaware Court of Chancery Holds LLC Agreement Forecloses Implied Covenant Challenge to Conflict Transaction
By K. Tyler O’Connell, Morris James LLP
In Kahn v. Warburg Pincus, LLC, 2024-0523-LWW (Del. Ch. Apr. 30, 2025), the Delaware Court of Chancery granted the defendants’ motions to dismiss an action brought by a class of minority members challenging a conflicted merger transaction. Specifically, the minority member plaintiffs held class B units with tag-along rights under the governing limited liability company agreement, which permitted them to participate pro rata in any sales of the controlling members’ interests. The agreement provided, however, that this provision could be amended by a majority of the class B (minority) members acting by written consent. The agreement also expressly eliminated all fiduciary duties.
The majority (class A) members negotiated a sale to a third-party acquirer in which the majority members would receive exclusively cash consideration, whereas the minority members would receive a mix of cash and equity in the post-merger company. The majority then distributed an information statement seeking the minority members’ written consent to the merger transaction—as well as amendments to the limited liability company agreement to allow for the members to receive disparate consideration (i.e., eliminating the minority members’ tag-along rights). A majority of the minority members approved the amendments and the transaction. Following the acquisition, the acquired company disclosed a large goodwill impairment charge on the combined company, greatly decreasing the value of the equity consideration.
The minority member plaintiffs’ main theory was that the implied covenant of good faith and fair dealing that inheres in every agreement under Delaware law prevented the majority from depriving the minority from their bargained-for rights to equal consideration via a conflict of interest transaction, like the merger. The Court disagreed, however.
The Court reasoned that “[t]he logical first step in assessing an implied covenant claim is to determine whether the contract has a gap.” Here, there was no “gap” to fill. The Court observed that “the LLC Agreement contemplates amendments adversely affecting the rights of a particular class of units and outlines the steps required for approval of such amendments.” The plaintiffs did not dispute that the amendments eliminating the tag-along rights were approved by a majority of the minority members. Moreover, the LLC agreement expressly eliminated fiduciary duties, which supported that the Court should be hesitant in applying the implied covenant. The Court similarly ruled that “[n]o free-floating duty of disclosure” was owed in the context of the information statement seeking minority member approval. The Court reasoned, again, that the agreement eliminated fiduciary duties. The agreement also had some minimal notice requirements for member meetings, but it did not impose any substantive obligations with respect to the information to be provided when seeking action by members’ written consent. Accordingly, the Court of Chancery ruled that the plaintiffs failed to state a claim upon which relief may be granted, and it dismissed their complaint.
Tyler O’Connell is a Partner at Morris James LLP in Wilmington, Delaware. Any views expressed herein are not necessarily those of the firm or any of its clients.
