Vinson & Elkins
MONTH-IN-BRIEF (Apr 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.