Parties to Delaware LLC Agreements Cannot Circumvent Fiduciary Duty Waivers via Implied Covenant of Good Faith and Fair Dealing

On April 30, 2025, the Delaware Court of Chancery issued a memorandum opinion dismissing with prejudice a postclosing challenge to the VillageMD acquisition of CityMD. The Delaware Supreme Court later summarily affirmed.

The Delaware Court of Chancery found that where an LLC agreement (i) eliminates fiduciary duties, (ii) authorizes conflicted action/self-interest, and (iii) expressly addresses the challenged conduct through detailed governance and amendment provisions, plaintiffs cannot repackage fairness or disclosure theories as an implied covenant claim. Unlike Delaware corporations — where fiduciary duties are structural and cannot be eliminated by contract — Delaware LLCs and partnerships are built around freedom of contract, and courts will not “import” fiduciary-like obligations by implication when the parties have bargained them away.

The Khan et al. v. Warburg Pincus, LLC, et al. opinion reinforces longstanding Delaware law regarding LLCs and partnerships: Parties to such agreements can agree to waive fiduciary duties, and the courts will not permit one party to get around such waivers through invocation of the implied covenant of good faith and fair dealing. This can include instances in which minority shareholders receive consideration that differs from majority investors, provided that the majority investor follows the agreed terms as written.

Background

CityMD, an urgent care provider, was initially owned by physician founders. In 2017, private equity firm Warburg Pincus acquired a majority stake through affiliated funds (WP Investors). CityMD later merged with Summit Medical Group, and the combined entity was organized as WP CityMD Topco LLC, a Delaware limited liability company (the Company). The WP Investors held 60% ownership through Class A units, whereas the physicians held 17% ownership position through Class B units with different rights.

The unitholders’ relationships were governed by the Company’s Amended and Restated Limited Liability Company Operating Agreement (the LLC Agreement), which included several minority protections — including “tag-along” rights and class-consent requirements for amendments — while also broadly waiving fiduciary duties and permitting the WP Investors to act “exclusively” in their own interests as long as they complied with the LLC Agreement.

In November 2022, VillageMD agreed to acquire the Company in a transaction valued at approximately $9 billion that closed in January 2023. The merger consideration differed by class: The Class A unitholders (the WP Investors) would receive all cash, while other unitholders (including the plaintiffs, former Class B unitholders) would receive a mix of cash and VillageMD equity. Consistent with the LLC Agreement, however, the transaction was conditioned on a class vote approving an amendment to the LLC Agreement to account for the differing consideration. To that end, minority holders received an information statement describing the need for the amendment and directing the partial rollover holders to their own, independent counsel for questions. Additionally, the Company held several information sessions to discuss the transactions with unitholders. The requisite votes were obtained in favor of the merger and the amendment. The amendment and merger were approved, and the plaintiffs accepted millions of dollars in merger consideration.

Plaintiffs did not challenge the deal terms at closing and, by all accounts, were content with the mix of cash and VillageMD equity — and the equity’s potential upside — for more than a year. However, in early 2024, a roughly $12 billion “goodwill impairment” charge related to VillageMD was disclosed, after which the plaintiffs filed suit in the Delaware Court of Chancery, essentially demanding to retrade their VillageMD equity for additional cash. The plaintiffs alleged that the implied covenant of good faith and fair dealing in the LLC Agreement was violated because their merger proceeds were part cash and part VillageMD equity (rather than all cash), and they further alleged that the buyer of VillageMD tortiously interfered with the LLC Agreement because the buyer had sought to minimize the transaction’s cash component.

On April 30, 2025, Vice Chancellor Lori W. Will dismissed the complaint with prejudice. Vice Chancellor Will held that the LLC Agreement left no contractual “gap” for the implied covenant to fill and rejected the plaintiffs’ effort to inject corporate-style fiduciary duty and disclosure concepts into an LLC Agreement that expressly waived fiduciary duties, authorized self-interested conduct, and expressly set out a class-consent pathway for amendments that materially and adversely affect a class. Having found no breach of the implied covenant, the court held that the tortious interference claims against the buyer necessarily failed as well. The plaintiffs appealed, and the Delaware Supreme Court summarily affirmed.

Key Issues

The Warburg case raises a few key issues: (1) fiduciary duty waiver in LLCs, (2) limits on implied covenants and “gap f illing” by courts, and (3) disclosure duties.

The Court of Chancery emphasized that under Delaware law, LLCs have the statutory right to “alter and even eliminate” f iduciary duties through the operating agreement. When they do, courts will not use the implied covenant as a substitute. Thus, operating agreements can be critical governance tools that enable investor-led sale processes and tailored economic terms. By contrast, fiduciary duties of directors and officers in Delaware corporations — such as disclosure obligations in the stockholder voting context — arise from statute and common law. Thus, these duties and obligations are not freely disclaimable, as in LLCs. This is of course a big advantage for LLCs, as it reduces the risk of future litigation regarding fiduciary duties, giving more flexibility to negotiate and change governance structures. As seen in Warburg, plaintiffs tried to argue for corporate-like “coercion” and “disclosure” constraints, but the Delaware Court of Chancery declined to import those concepts where the LLC Agreement eliminated fiduciary duties and explicitly stated an amendment process.

When analyzing implied covenants, the court framed the “first logical step” as determining whether the contract is truly silent on the issue, emphasizing that if the contract addresses the conduct, the implied covenant cannot be used to circumvent it. In Warburg, the LLC Agreement expressly contemplated amendments that disproportionately and adversely affected a class, albeit conditioned on class consent — and that is exactly what occurred. Thus, the court rejected the notion of an “implicit term” preventing Warburg from negotiating away the tag-along rights because the LLC Agreement provided a clear method to amend it.

Additionally, the opinion warns against “bending” the implied covenant into a “fiduciary substitute” where fiduciary duties were eliminated as part of a detailed governance scheme. This rule also applied to self-interest and differential consideration, as the LLC Agreement allowed Warburg-affiliated individuals to act solely in their best interest so long as they complied with the contract’s express terms. Because the LLC Agreement permitted self-interested behavior and provided an amendment mechanism, a differential-consideration deal structure did not create an implied covenant breach simply because it felt “unfair” ex post.

The Court of Chancery also rejected the plaintiffs’ claim that they were coerced and uninformed about material terms in the negotiations and that the implied covenant required “full material disclosure” before the vote/consent. The court explained that there was no free-flowing disclosure duty where fiduciary duties are waived, reasoning that there was no automatic fiduciary-based disclosure overlay. The LLC Agreement contained notice provisions (i.e., “reasonable and sufficient notice” for member meetings), and the court treated that as addressing the issue of disclosure. Therefore, there was no “gap” to fill with an implied disclosure regime for written consents.

In terms of the additional claims brought by plaintiffs, once the Court of Chancery found no express or implied covenant breach, the tortious interference claims against the buyer failed without an underlying breach. The court also found that the unjust enrichment claim failed where an express contract governed the relationship, emphasizing that unjust enrichment claims should not be used as a “means to rewrite a comprehensive contract governing the entirety of the parties’ relationship after finding disappointment in the resulting agreement.” This reinforces the notion that liability releases should be integrated clearly in transaction documentation and disclosed, especially outside the corporate statutory framework.

Takeaways

Under Delaware law, courts will not impose implied covenants concerning fiduciary or disclosure duties on an LLC where those duties/obligations are waived in the operating agreement. Rather, the analysis will start and end with the contract unless there is a true “gap.” The Warburg opinion reaffirms Delaware’s highly contractarian approach: The operating agreement is the deal, and the courts will seek to respect the deal. Thus, when fiduciary duties are disclaimed and self-interest is permitted, plaintiffs cannot use the implied covenant as a backdoor “fairness” claim, and similarly, courts will not “bend” the implied covenant doctrine into a fiduciary substitute where parties chose a detailed contractual governance scheme.

Sidley law clerk Katie Lutz contributed to this Sidley Update.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.