Document: Nemec v. Shrader, Del. Supr., Nos. 305, 2009 and 309, 2009 (Del. Supr. Apr. 6, 2010)
This Delaware Supreme Court opinion affirms the Court of Chancery’s decision dismissing plaintiffs’/appellants’ claims that the defendants/appellees breached their implied duty of good faith and fair dealing when they elected to redeem the plaintiffs’ shares of the corporation’s stock pursuant to the corporation’s Officers Stock Rights Plan rather than allowing them to achieve a greater return by allowing the stock to remain outstanding so that it be cashed out for a more favorable price pursuant to the terms of a pending merger. The Court’s opinion emphasizes the fact that tremendous weight is to be afforded to the terms of a freely negotiated contract and that the duty of good faith and fair dealing must take a back seat to the terms of the contract when the contract in question expressly addresses the issue at hand so as not to allow a party to use this fiduciary duty principle as a mechanism for effectively renegotiating the terms of what it may consider to be a “bad deal.” The Court also highlighted a statement made by the Court of Chancery in its opinion below where it noted that “[c]ontractually negotiated put and call rights are intended by both parties to be exercised at the time that is most advantageous to the party invoking the option.” Finally, it is noteworthy that two of the five justices issued a rare dissenting opinion, which asserted that although it is correct that a party does not act in bad faith by relying on contract provisions that it bargained for, even if the result is to eliminate advantages that the counterparty would otherwise receive, in order to avoid running afoul of the implied covenant of good faith and fair dealing, the challenged conduct must also further a legitimate interest of the party acting in reliance of the contract.