Christopher Miller v. HCP & Company
Memorandum Opinion, Date Decided: February 1, 2018 (2018)
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Rule of Law:
The implied covenant of good faith and fair dealing cannot be used to create new obligations, such as an auction requirement, where an LLC operating agreement expressly waives all fiduciary duties and grants a controlling member's board appointees 'sole discretion' over the manner of a company sale. The implied covenant only applies to fill gaps in a contract, not to protect a party from the foreseeable, self-interested actions of another party explicitly permitted by the agreement's terms.
Facts:
- HCP & Company, through its affiliates (the HCP Entities), was the majority member of Trumpet Search, LLC ('Trumpet').
- On May 5, 2016, Trumpet's members, including co-founder Christopher Miller, executed the Second Amended and Restated Operating Agreement (OA).
- The OA explicitly waived all fiduciary duties owed by members and managers and gave the HCP-controlled board 'sole discretion' to determine the manner of any sale of the company to an unaffiliated third party.
- The OA's distribution 'waterfall' entitled the HCP Entities to a 'first in line' 200% return on their investment upon a sale, creating a strong incentive for them to sell for a price sufficient to secure their return, but little incentive to seek a higher price that would benefit junior members like Miller.
- Less than a year after the OA was adopted, the HCP-controlled board initiated a sale process for Trumpet, focusing on a single buyer, MTS Health Partners, L.P.
- The board declined to conduct an open-market auction and gave non-affiliated managers, including Miller, very limited time and opportunity to solicit competing offers.
- A non-binding indication of interest from FFL Partners suggested a potential value of $50-$60 million, substantially higher than the standing offer.
- The board approved the sale of Trumpet to MTS for approximately $43 million, a price which secured the HCP Entities' preferred return but left little to no proceeds for Miller and other minority members.
Procedural Posture:
- Christopher Miller and the C & L Miller Revocable Trust filed a complaint in the Delaware Court of Chancery against HCP & Company, its affiliates, and its appointed managers.
- The complaint alleged, among other things, a breach of the implied covenant of good faith and fair dealing.
- The defendants filed a motion to dismiss the complaint under Court of Chancery Rule 12(b)(6) for failure to state a claim.
- The Court of Chancery held oral argument on the defendants' Motion to Dismiss.
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Issue:
Does a controlling member of an LLC and its board designees breach the implied covenant of good faith and fair dealing by conducting a limited sale process, rather than an open auction, when the LLC's operating agreement explicitly waives all fiduciary duties and grants the board 'sole discretion' over the manner of a sale?
Opinions:
Majority - Vice Chancellor Glasscock
No. The controlling member and its board designees did not breach the implied covenant of good faith and fair dealing because their actions were permitted under the express terms of the operating agreement. The court cannot use the implied covenant to override the plain language of the contract or to re-introduce fiduciary protections that the parties explicitly bargained away. The OA granted the board sole discretion over the manner of the sale, with the only specified limit being that the buyer be an unaffiliated third party. The economic incentive for the HCP Entities to pursue a quick sale at a price favorable to them was obvious from the face of the OA's distribution waterfall, and the plaintiffs agreed to this structure. Because the OA is not silent on the board's authority to conduct a sale, there is no 'gap' for the implied covenant to fill. To impose an auction requirement would be to rewrite the parties' bargain, not enforce it.
Analysis:
This opinion strongly reaffirms Delaware's commitment to freedom of contract, particularly in the context of LLCs. It establishes that when an LLC agreement clearly waives fiduciary duties and grants a party broad discretion, courts will not use the implied covenant as a backdoor to impose fiduciary-like standards, such as a duty to maximize value for all members. This decision serves as a stark warning to minority investors and founders that they cannot rely on the implied covenant to protect them from the foreseeable, self-interested exercise of power that they explicitly grant to a controlling member in an operating agreement. The case clarifies that the implied covenant is a narrow doctrine for unforeseen gaps, not a tool for rebalancing economic interests after a party regrets the deal it made.
