U.S. M&A Newsletter — May 13, 2025

In a reminder of the contrast that can exist between corporate fiduciary duty standards and contractual governance principles applicable to limited liability companies in Delaware, the Delaware Court of Chancery (the “Court”) held in Faiz Khan and Ralph Finger v. Warburg Pincus, LLC, et al. (April 30, 2025) that a limited liability company’s operating agreement effectively waived fiduciary duties and precluded a contractual claim that, according to the Court, improperly invoked corporate law concepts and exceeded the reach of the implied covenant of good faith and fair dealing.

Background

Warburg Pincus LLC (“Warburg”) acquired a majority stake in urgent care provider CityMD in June 2017, through six of its funds (the “Warburg Investors”). Two years later, CityMD, which had been co-founded by several partners including plaintiff Dr. Faiz Khan, announced its plans to merge with Summit Medical Group (“Summit”), resulting in the surviving combined entity, WP CityMD Topco LLC, a Delaware limited liability company (the “Company”). Dr. Khan, plaintiff Dr. Ralph Finger and other non-Warburg-affiliated investors of CityMD held 17% ownership of the Company through Class B units while the Warburg Investors held 60% ownership of the Company through Class A units. 

The Company’s limited liability company agreement (the “LLCA”) included several protections for minority unitholders (the “Minority Holders”), such as a tag-along right allowing them to participate on equal terms in certain sales of Company units by the Warburg Investors (the “Tag-Along Right”) and requiring prior majority consent from any unitholder class whose rights would be affected by an amendment to the LLCA. The LLCA also included broad waivers of the Warburg Investors’ fiduciary duties, including explicitly permitting the Warburg Investors to act in their own interest so long as they were acting in compliance with the LLCA.

In 2022, the Company signed a merger agreement with Village Practice Management Company LLC (“VillageMD”), which is majority owned by Walgreen Boots Alliance, Inc. (“Walgreens”), pursuant to which Class A unitholders would receive $3.3 billion in cash and the Minority Holders would receive a mix of $1.6 billion in cash and at least $2 billion worth of equity (such merger, the “Merger”). Because of this disparate consideration, the Merger was conditioned on the Minority Holders approving an LLCA amendment that would (i) permit this allocation of consideration and (ii) waive application of the Minority Holders’ Tag-Along Right (the “Amendment”). The merger agreement also required the Minority Holders sign and execute a letter of transmittal, which included a broad release of claims concerning the merger agreement and the Amendment (the “Letter of Transmittal”), to receive their merger consideration. The Minority Holders had 20 days from receipt of an information statement describing the Merger to submit a rollover election form, the Letter of Transmittal and consent to the Amendment.

The Company obtained the requisite votes in favor of both the Merger and the Amendment as well as the executed Letters of Transmittal. The Merger closed on January 3, 2023, resulting in a combined company controlled by Walgreens. 

Following a post-closing decline in value of the equity consideration received, the plaintiffs brought suit against the Company, Warburg, the Warburg Investors, VillageMD and Walgreens, alleging, amongst other claims, breach of the implied covenant of good faith and fair dealing by the Warburg Investors and the Company.

Court’s Analysis

The Court found that no breach of the implied covenant of good faith and fair dealing occurred, primarily as the LLCA expressly addressed the matters at hand by setting out the requirements for amending the Minority Holders’ Tag-Along Right to allow for differential consideration and the definitive waiver of the Warburg Investors’ fiduciary duties. Vice Chancellor Will cited Kuroda v. SPJS Hldgs., L.L.C. (Del. Ch. 2009) to explain that a successful claim for breach of the implied covenant of good faith and fair dealing requires: 

• a specific implied contractual obligation, 
• a breach of such obligation by the defendants, and 
• resulting damage to the plaintiffs. 

The Court disagreed with the plaintiffs that any implicit term in the LLCA exists to prevent elimination of the Tag-Along Right as “the implied covenant cannot be wielded to rewrite the [LLCA] or grant the plaintiffs rights they never bargained for”. The implied covenant can imply contractual terms if the contract has a gap that needs to be addressed, but it is not a means to obtain a different deal “when remorse has set in”. Instead of the LLCA prohibiting amendment or elimination of the Tag-Along Right, the LLCA specifies the majority consent needed to approve any amendment that would adversely affect the rights of a particular class of units, which the Company obtained prior to closing the Merger. As such, no gap exists that the implied covenant needs to fill. 

Further, the plaintiffs claimed that the “coerced” Amendment injured Class B unitholders in permitting differential consideration in a way that constituted wrongful conduct “in the corporate context” in violation of the LLCA. The plaintiffs cited In re Delphi Financial Group Shareholder Litigation (Del. Ch. Mar. 6, 2012), which found a breach of fiduciary duties where a controlling stockholder coerced minority holders into approving a charter amendment for disparate consideration in a merger. Here, the Court distinguished between fiduciaries of a limited liability company and fiduciaries of a corporation under Delaware law, finding that the LLCA expressly eliminated fiduciary duties owed by the Warburg Investors and allowed the Warburg Investors to act solely in their own interests, as permitted under the Delaware Limited Liability Company Act. The Court reaffirmed that “fiduciary duty claims are not a replacement for implied covenant claims, especially where fiduciary duties are disclaimed in an LLC agreement”. Instead, the Court is reviewing actions for “fairness” and “good faith” in light of the terms and purpose of the parties’ contract, and not whether a fiduciary is acting consistent with corporate fiduciary duties of loyalty and care. 

In response to the plaintiffs’ argument that the LLCA required full material disclosure and that the Minority Holders’ vote was not fully informed, the Court noted that there was “no free-floating duty of disclosure […] because, as discussed, the LLC Agreement eliminated fiduciary duties”. Consistent with its reasoning in discussing the amendment process, the Court noted that if the parties wanted to set out substantive disclosure requirements in this context, they should have provided so in the LLCA. 

The Court also referenced the LLCA being the governing contract amongst the parties and the lack of breach of any LLCA term (whether express or implied) in dismissing the plaintiffs’ other claims relating to tortious interference and unjust enrichment. 

Our Take

This case serves as a helpful reminder that contractual waivers of fiduciary duties in LLC agreements are valid and will be enforced. When parties negotiate joint venture arrangements in a Delaware LLC structure, they should consider the pros and cons of a waiver of fiduciary duties to avoid potential future disputes of whether fiduciary duties override specific agreements between the parties to the joint venture. The Court’s narrow reading of implied covenant of good faith and fair dealing is also an important reminder that parties should negotiate and secure specific rights they would want to have, and that the implied covenant “fills a gap,” but does not serve as a means to change the deal the parties have negotiated. 

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