Christopher Miller v. HCP & Company
Unreported Memorandum Opinion (2018)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
When an LLC operating agreement expressly waives fiduciary duties and grants a controlling member's board appointees sole discretion over the manner of a company sale, the implied covenant of good faith and fair dealing cannot be used to impose an obligation to conduct an open-market auction to maximize value for all members, as the contract contains no gap for the covenant to fill.
Facts:
- In 2014, HCP & Company and its affiliates ('HCP Entities') acquired a controlling interest in Trumpet Search, LLC ('Trumpet').
- On May 5, 2016, Trumpet's members, including co-founder Christopher Miller, executed a new Operating Agreement (OA).
- The OA established a distribution 'waterfall' that entitled the HCP Entities to receive the first approximately $30 million in proceeds from a sale, representing a 200% return on their investment, before other members like Miller received significant payouts.
- The OA explicitly waived all fiduciary duties for both members and managers and granted the HCP-controlled Board 'sole discretion' over the manner of any sale, with the only condition being that the sale must be to an independent third party.
- The OA also contained a 'drag-along' provision, obligating all members to consent to a sale approved by the Board.
- Less than a year later, the HCP-controlled Board pursued a sale of Trumpet to MTS Health Partners, L.P. without conducting a broad, open-market auction process.
- After limited negotiations and pressure from non-HCP board members, the Board approved a sale to MTS for $43 million, a price that provided the HCP Entities with their 200% return but left little to nothing for lower-ranking members.
Procedural Posture:
- Christopher Miller and his trust (Plaintiffs) filed a complaint in the Delaware Court of Chancery against HCP & Company, its affiliates, and its appointed managers (Defendants).
- The complaint alleged breach of the implied covenant of good faith and fair dealing, aiding and abetting, tortious interference, and civil conspiracy.
- The remaining 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 motion to dismiss.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a controlling member of an LLC breach the implied covenant of good faith and fair dealing by engineering a quick sale that benefits itself, when the LLC's operating agreement explicitly waives all fiduciary duties and grants the controller's board appointees 'sole discretion' over the manner of any sale to an unaffiliated third party?
Opinions:
Majority - Vice Chancellor Glasscock
No, a controlling member does not breach the implied covenant under these circumstances. The implied covenant of good faith and fair dealing applies only when a contract has a gap that the parties did not anticipate; it cannot be used to override the express terms of the agreement. Here, the Operating Agreement was not silent on the matter of a sale. It explicitly granted the Board 'sole discretion' over the manner of a sale and only restricted that discretion by requiring the sale to be to an unaffiliated third party. This provision, combined with the explicit waiver of all fiduciary duties and the distribution waterfall that created an obvious incentive for the controller to seek a quick sale, demonstrates that the parties had considered and contractually addressed the potential for a conflicted sales process. To use the implied covenant to impose an auction requirement would be to 're-introduce fiduciary review through the backdoor' and rewrite a bargain that the plaintiffs, for whatever reason, agreed to.
Analysis:
This decision reinforces Delaware's strong adherence to the principle of freedom of contract, especially within the alternative entity context of LLCs. It clarifies that the implied covenant of good faith and fair dealing is a narrow tool used to fill unanticipated gaps, not a free-floating fairness standard to rescue a party from a bad bargain. The case serves as a crucial warning to minority investors in LLCs that if fiduciary duties are waived, specific contractual protections (like auction requirements or floor prices) must be negotiated, as courts will not use the implied covenant to add protections that sophisticated parties could have bargained for themselves.
