In its recent decision in Miller v. HCP & Co., C.A. 2018 WL 656378, No. 2017-0291-SG (Del. Ch. Feb. 1, 2018), the Delaware Court of Chancery dismissed a case brought by minority members of a limited liability company claiming that the majority’s sale of the company was unfair to the minority members and violated the covenant of good faith and fair dealing implied in the company’s operating agreement. In doing so, the court reaffirmed the policy of Delaware and many other states, including New York, of enforcing broad contractual waivers of fiduciary duties and demonstrated the importance of carefully negotiating contractual rights and obligations when forming or investing in a limited liability company.
Case Background
In Miller, the company that was sold, Trumpet Search—a limited liability company offering clinical services to individuals with autism and other developmental disabilities—was controlled by a private equity firm, HCP & Company, and its affiliates. As the majority owner of membership interests, HCP was entitled to appoint four of the seven managers of the Trumpet Search Board, thereby controlling the Board of Managers. As such, HCP could effectively approve a sale of the company unilaterally with the only condition, as set forth in the operating agreement, that the sale be to an unaffiliated third party. Moreover, the operating agreement specifically provided that the members expressly agreed to waive all fiduciary duties to one another and from the managers to the members.
