DealLawyers.com Blog

In a memorandum opinion from late April in Faiz Kahn v. Warburg Pincus, LLC (Del. Ch.; 4/25), the Chancery Court addressed claims relating to the acquisition of urgent care provider, CityMD, by an affiliate of Walgreens Boots Alliance. Specifically, the court dismissed claims by physician-cofounder minority members of CityMD that an amendment to CityMD’s LLC agreement eliminating the minority members’ tag-along right to participate in transactions on the same terms as CityMD’s PE-affiliated majority investors breached the implied covenant of good faith and fair dealing.

The urgent care provider’s limited liability company agreement gave minority members a tag-along right to participate in transactions on the same terms as private equity-affiliated members. The agreement permitted amendments to such rights if a vote of the affected member class was secured. It also waived fiduciary duties owed by the private equity affiliates and allowed them to act in their own interests.

The private equity affiliates negotiated disparate consideration for themselves in the merger. Thus, an amendment to the limited liability company agreement was required to eliminate the minority’s tag-along right. The requisite class vote was obtained after members received a detailed information statement.

About a year after the transaction closed, the minority members’ consideration lost value when Walgreens disclosed a $12.4 billion goodwill impairment charge due to downward revisions in the company’s forecast. Plaintiffs filed suit.

In dismissing the claims, Vice Chancellor Will states that the implied covenant is “a limited and extraordinary legal remedy” that only applies when the contract does not address the conduct at issue. Therefore, the first step in an implied covenant assessment is to determine whether the contract has a gap.

Here, the LLC Agreement explicitly addressed the matters at issue. It set out requirements to amend its terms—including the tag-along right—leaving no gap for the implied covenant to fill . . . the LLC Agreement contemplates amendments adversely affecting the rights of a particular class of units and outlines the steps required for approval of such amendments.

And because the LLC agreement waived fiduciary duties and permitted the WP investors to act in their own interests, it also “has no gap preventing the WP Investors from negotiating for disparate consideration—or undertaking an Amendment to permit it. By its very terms, the LLC Agreement allowed the WP Investors to put their interests ahead of Class B unitholders, so long as the WP Investors complied with the LLC Agreement’s terms.”

We’re posting memos in our “Fiduciary Duties” Practice Area.

– Meredith Ervine