“The Context Is Different” – Court of Chancery Opinion Blesses Implied Covenant Gap Filling in LLC Agreement
The Delaware Court of Chancery’s recent opinion in Cygnus Opportunity Fund LLC et al. v. Washington Prime Group LLC et al. presents a veritable grab bag of potential blog posts, from a suggestion that an officer of an Limited Liability Company could be contractually bound by an LLC Agreement he never signed to the interesting interplay (and potential conflict) between an officer’s duty of obedience to the LLC’s board and the officer’s duty of disclosure to investors. The focus here — and we believe chief among the thorny issues addressed in Cygnus — is the Court of Chancery’s decision to sustain a claim for breach of the implied covenant of good faith and fair dealing with respect to an issue that the LLC Agreement expressly addressed. What makes it even more fascinating is the tone of the Opinion: Vice Chancellor Laster evidently came to an early conclusion that, taking the allegations as true for purposes of a pleading motion, there was some inherent unfairness in the Defendants’ conduct that needed to be set right. Left unclear is the impact of this decision, assuming it is not disturbed on appeal, on Delaware’s long-standing deference to parties’ agreements and, in particular, limitations of duties, in the LLC context. In any event, the Opinion should serve as a cautionary tale for companies considering converting to an LLC form through a non-consensual bankruptcy process.
For Delaware LLCs, Contractual Freedom Overrides Equitable Defenses
Limited liability companies, as “alternative entities” under Delaware law, enjoy significantly greater freedom in ordering their internal affairs than do corporations. The contractarian bent of Delaware law is at its height in both the legislative and the judicial treatment of LLCs. Unlike corporations, LLCs may contract out of fiduciary duties on the part of their managers, and may control the nature and availability of remedies for breach of an LLC agreement.
Caveat Emptor Still Rules The Day For MLPs
Just as a $700 million damages award and its accompanying sharp criticism of legal opinions garner headlines, so does reversal of that ruling. The Delaware Supreme Court closed out 2022 with its decision in Boardwalk Pipeline Partners, LP v. Bandera Master Funds LP, reversing the Court of Chancery’s sizeable post-trial award on narrow contractual grounds. The reversal is a substantial victory for the defendants. But for non-parties, of note was the Delaware Supreme Court’s decision to leave intact the trial court’s conclusions regarding law firm opinions. Taken together, both courts’ rulings offer meaningful guidance for parties and counsel negotiating complex transactions and considering inclusion of opinion of counsel conditions (or, attempting to satisfy such conditions in existing contracts).
