Updates

Delaware Transactional Law Updates

Sort By Year: 2019|2018|2017|2016|2015|2014|2013|2012|2011|2010|2009| 2008| 2007| 2006|

EQUITABLE RELIEF IS NOT A REMEDY FOR BREACH OF CONTRACT

In AM General Holdings LLC v. The Renco Group, Inc., C.A. No. 7639-VCS (Apr. 10, 2019), a member of an LLC requested the Court to remove the managing member. The LLC agreement did not provide a mechanism for removal. In a previous decision, the Court dismissed the fiduciary duty claims. However, the member argued that it had the right to remove the managing partner because the agreement provided that the members were entitled to seek “specific performance” and “other appropriate relief or remedy”.

The Court declined to grant equitable relief to remove the managing partner because the remedy for breach of contract was only limited to damages, specific performance and injunctions, but not equitable relief. Had the member successfully argued breach of fiduciary duty and based the request of removal on the breach, the Court might be able to grant the equitable remedy of removal.

BOTTOM LINE: Make sure you provide a mechanism of removal of a member in an LLC agreement.

REMOVAL OF REFERENCES IN A FULLY INTEGRATED AGREEMENT ELIMINATES THEIR EFFECT

In Quantlab Group GP, LLC v Eames, C.A. 2018-0553-JRS (Mar. 19, 2019), a purported election was held to remove a general partner and replace it with another LLC. The general partner disputed this purported removal and election. The limited partners requested the court to declare that the general partner was validly removed and the other LLC was validly elected as the sole general partner. In a previous decision, the Court has ruled that the election was invalid under the limited partnership agreement but did not address a voting trust agreement and its effect on the limited liability agreement. The limited partners claimed that the election was valid based on this voting trust agreement. Both the voting trust agreement and the limited partnership agreement required the voting trust agreement to be incorporated into the limited partnership agreement for it to be effective. The voting trust agreement was explicitly mentioned and incorporated in the first amended limited partnership agreement. However, the second amendment removed any reference to the voting trust agreement. The Court ruled that the voting trust agreement did not modify the limited partnership agreement because the limited partnership agreement was fully integrated and specifically addressed the process of election and removal of a general partner.

BOTTOM LINE: The following language has been found by the court to be an unambiguous integration clause:

“This Agreement contains the entire agreement among the Partners with respect to the matters of this Agreement and shall supersede and govern all prior agreements, written or oral, including, without limitation, the Amended Agreement.”

A PROVISION WHICH SPECIFICALLY NAMES THE PARENT AND A PARTICULAR SUBSIDIARY DOES NOT COVER A SUBSEQUENTLY BOUGHT SUBSIDIARY

In Silver Management Group, Inc. v. AdvisorEngine Inc., a licensor sued a licensee for license fee under licensing agreements. Under the agreements, the licensee was entitled to sub-license the licensed product. A Particular provision required the licensee to share with the licensor a portion of the fees the licensee charged the customers for the licensed product “and related technology and business operations services of [the licensee] and its wholly-owned subsidiary, NestEgg Wealth, Inc.” The licensee acquired a new subsidiary and started to sell the new subsidiary’s software together with the licensed product. The licensor argued that the new subsidiary’s software was a “related technology” of the licensee and therefore the licensee was entitled to a portion of the fees the licensee charged for the new subsidiary’s new software.

The Court rejected this argument because the provision’s mention of a particular wholly owned subsidiary following the name of the licensee meant the use of the licensee’s name in the provision did not include any of its subsidiaries. The provision did not cover the new subsidiary’s software.

BOTTOM LINE: The following is a provision which the Court found to be unambiguous and leave no room for the implied covenant:

“The Monthly license fees for the Licensed Software shall be twelve percent (12%) of the gross fees . . . charged by [the licensee] to its customers for [the licensed product] and related technology and business operations services of [the licensee] and its wholly-owned subsidiary, [name of the subsidiary]….”

CONTROLLING SHAREHOLDER’S CONSENT TO PERSONAL JURISDICTION WAS IMPLIED BY ITS SUBSTANTIAL CONTROL OVER THE BOARD THAT ADOPTED FORUM-SELECTION BYLAWS

In In Re Pilgrim’s Pride Corporation, Consol. C.A. No. 2018-0058-JTL (Mar. 15, 2019), minority stockholders sued the controlling stockholder which was a Brazilian entity in connection with the corporation’s acquisition of subsidiaries owned by the controlling stockholder. The minority stockholders alleged that the acquisitions were not at arm’s length with the controlling stockholder. On the same day as the committee of independent directors gave the final approval for the acquisition, the board of directors adopted a forum-selection bylaw which mandated the Chancery Court as the exclusive forum for any claims of breach of fiduciary duty owed by any “stockholder of the Corporation or the Corporation’s stockholders.” The controlling stockholder moved to dismiss the complaint for lack of personal jurisdiction.

The Court denied the motion to dismiss. While the forum-selection bylaw contained no explicit reference to personal jurisdiction, the Court emphasized that the controlling stockholder implicitly consented to the Court’s personal jurisdiction because it had substantial control over the board of directors that adopted the forum-selection bylaw. In addition, it noted that had the forum-selection bylaw included a provision limiting its coverage to cases where the courts had personal jurisdiction over the defendants as in Boilermakers Local 154 Retirement Fund v. Chevron Corporation, there would have been no implied consent.

BOTTOM LINE: To eliminate implied consent to personal jurisdiction in a forum-selection bylaw, use the following language from a 2013 decision by our current chief justice when he was the chancellor:

“Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the state of Delaware, in all cases subject to the court’s having personal jurisdiction over the indispensible parties named as defendants.”

UNILATERAL TERMINATION OF AN AGREEMENT ALLOWED UNDER AN AGREEMENT DOES NOT VIOLATE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING

In Vintage Rodeo Parent, LLC v. Rent-A-Center, Inc., C.A. No. 2018-0928-SG (Mar. 14, 2019), a buyer sued a target to enforce a merger agreement. The merger agreement provided that each party was entitled to terminate the agreement after the “End Date” unless either party gave notice to extend the “End Date” to the other party before the “End Date”. The buyer failed to give notice of extension to the target before the “End Date”. After the “End Date”, the target terminated the agreement. The buyer argued that the target violated the implied covenant of good faith and fair dealing by exercising the termination right.

The Court held that the target rightfully terminated the merger agreement. Commercially reasonable efforts did not require the target to give advance notice and the merger agreement did not provide so either. Given that the merger agreement’s provisions on the rights to extend the “End Date” and to terminate the agreement were unambiguous, there was no gap for the implied duty of good faith and fair dealing to fill. The implied covenant of good faith and fair dealing was not meant to address equitable fairness but rather to ensure the parties were faithful to and acted in a way that was consistent to the terms and purpose of the contract.

BOTTOM LINE: According to the court, the following language had no gap for the implied covenant to fill:

“This Agreement may be terminated prior to the Effective Time by action of [the target] or [the buyer], as the case may be: . . .

(b) by either [the target] or [the buyer]:

(i) upon written notice to the other party, whether before or after receipt of the Company Stockholder Approval, if the Merger shall not have been consummated by [the End Date] . . . .[the right to terminate this Agreement is not available] to “to any party whose breach of any provision of this Agreement causes the failure of the Closing to be consummated by the End Date.”

WITHOUT OVERSEAS ENTITIES’ CONSENT, DELAWARE COURTS DO NOT HAVE PERSONAL JURISDICTION OVER THEM IN RELATION TO MATTERS OCCURRED OVERSEAS

In Otto Candies, LLC v KPMG LLP, a company allegedly defrauded its creditors and bondholders. The creditors and bondholders sued the Swiss accounting firm and its Delaware and Mexican member firms, which audited the relevant financial statements for negligent misrepresentation. The Swiss accounting firm and the Mexican member firm which were neither Delaware nor U.S.-based entities moved to dismiss for lack of personal jurisdiction.

The Court ruled that it had no personal jurisdiction over those foreign entities because the relevant audits did not occur in Delaware. It also held that Section 3104(c)(6) of the Delaware long-arm statute 10 Del. C., which gives the Court jurisdiction over nonresidents who contract to insure or act as surety for any agreement, among other things, executed or to be performed within Delaware, did not apply because discovery confirmed neither the Swiss accounting firm nor its Mexican member firm insured the Delaware member firm for anything related to this action, including any Delaware risk or the relevant audits.

BOTTOM LINE: Make sure you include a forum-selection clause in agreements with foreign entities.

SIGNATORIES TO AN AGREEMENT ARE NOT NECESSARILY BOUND BY ALL PROVISIONS

In Plaze, Inc. v. Callas, C.A. No. 2018-0721-TMZ (Feb. 28, 2019), a buyer bought a corporation from a seller but not the production facilities. The buyer instead leased the production facilities from a lessor that was owned and controlled by the seller. Later, the lessor sued the buyer/lessee for violations of the leases in a Georgia state court. The seller was not a party in the Georgia action. The lease did not contain a forum-selection clause. However, the buyer/lessee sought preliminary injunction in the Delaware Chancery Court against the action in Georgia based on a forum-selection clause in the stock purchase agreement. The stock purchase agreement provided that the “Parties” agreed to submit to the jurisdiction of the Delaware courts in relation to litigations “arising out of or relating to” the sale of the corporation. Yet, even though the lessor was one of the signatories and had other obligations under the stock purchase agreement, it was not included in the definition of the “Parties”.

The Court held that the stock purchase agreement’s forum-selection clause did not bind the lessor. This was consistent with the stock purchase agreement’s contractual scheme to limit the lessor’s obligations and the lease’s inferred expectation for litigations in Georgia. Furthermore, the single agreement theory did not apply since none of the contracts required the lessor to litigate exclusively in a particular state.

BOTTOM LINE: Make sure you define all parties and their respective obligations under an agreement.

EXPANSIVE RIGHTS IN A CONTRACT LEAVES NO GAP FOR BREACH OF IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING TO FILL

In Glidepath Limited v. Beumer Corporation, C.A. No. 12220-VCL (Feb. 21, 2019), a seller sold an LLC in a 2-stage transaction. In the first stage, the buyer acquired 60% ownership in the LLC and took over management of the LLC’s operations. The buyer was required to pay the seller contingent considerations if the LLC had sufficient net profit under the buyer’s management. In the second stage, there was a put-call mechanism where the buyer eventually exercised the call option to acquire the remaining 40% ownership in LLC below the option price. The seller claimed that the buyer did not use best effort to manage the LLC so that there was no sufficient net profit for the seller to receive the contingent considerations. The seller sued the buyer for breach of implied covenant of good faith and fair dealing.

The Court held that there was no breach of the implied covenant. Under the agreement, the agreement granted the buyer expansive rights over the LLC including the right to appoint a single manager who would exercise “the powers of the [LLC]”, manage its “business and affairs”, and “make all decisions and take all actions for the [LLC]….” The operating agreement granted the manager the right to veto or authorize the actions that the members consented to while the seller retained the right to veto on extraordinary matters. With these provisions, the Court found no gap in the operating agreement for the implied covenant to fill.

BOTTOM LINE: Do not expect to use the implied covenant to trump expansive rights in a contract.

PARTIES CAN CONTRACT TO ELIMINATE AND REPLACE COMMON-LAW FIDUCIARY DUTIES

In Inter-Marketing Group USA, Inc. v. Amstrong, C.A. No. 2017-0030-TMZ (Jan. 31, 2019), a unitholder brought a derivative suit against the general partner of a limited partnership and individuals who were allegedly in control of the general partner for breach of fiduciary duty. The general partner moved to dismiss since the limited partnership failed to make a pre-suit demand or plead demand futility. The unitholder argued that a demand was futile given exposure to substantial personal liability if the suit moved forward.

The limited partnership agreement provided that “[a]ny standard of care and duty imposed by [law or the agreement] shall be modified, waived or limited” so long as the general partner acted in what it believed to be in the best interest of the partnership. The general partner argued that this provision eliminated common-law fiduciary duties that formed the basis of the substantial risk of personal liability. The unitholder contended that the provision modified but did not eliminate common-law fiduciary duties. Following the Delaware Supreme Court’s controlling decision in Norton v. K-Sea Transportation Partners L.P. which addressed a provision functionally identical to the one in this case, the Court held that the provision in this case eliminated rather than modified common-law fiduciary duties.

BOTTOM LINE: The following language eliminates common law fiduciary duties and replaces them with a contractual fiduciary duty:

“Any standard of care and duty imposed by this Agreement or under the Delaware Act or any applicable law, rule or regulation shall be modified, waived or limited, to the extent permitted by law, as required to permit the General Partner to act under this Agreement or any other agreement contemplated by this Agreement and to make any decision pursuant to the Authority prescribed in this Agreement, so long as such action is reasonably believed by the General Partner to be in, or not inconsistent with, the best interests of the Partnership.”

THE COURT APPLIED ESTABLISHED DEFINITIONS TO REMOVAL FOR CIVIL WRONGS

In A&J Capital, Inc. v. Law Office of Krug, C.A. No. 2018-0240-JRS (Jan. 29, 2019), a displaced manager of an LLC requested the Court to declare he had been improperly removed. According to the LLC agreement and a management agreement, he could be removed only “for gross negligence, intentional misconduct, fraud or deceit….”

The LLC’s new manager argued that a manager who violated any of the standards of conduct could be removed regardless of whether there was an intent or harm. The Court rejected this argument and explained that harm or intention to harm was an indispensable element of such civil wrongs as intentional misconduct, fraud and deceit. It was “no easy task” to prove these wrongdoings. The court noted that, more to the point, contractually imposed standards of conduct were necessarily based on the presumption that the conduct must either be harmful or cause harm to justify removal.

BOTTOM LINE: When drafting a list of civil wrongs that justify removal, if you want one to be removed even when there was no harm or intent to harm, you must so provide.

“BONA FIDE” IS A SUBJECTIVE STANDARD

In Fetch Interactive Television LLC v. Touchstream Technologies Inc., C.A. No. 2017-0637-SG (Jan. 2, 2019), a licensee sued to enjoin a licensor from canceling a license agreement. A provision of the license agreement prohibited the licensee from “tak[ing] any action on account of…infringement [with respect to a third party] without first obtaining the written consent of [the licensor].” A provision of the license agreement provided that after the time permitted to the licensee to cure the breach, the licensor could terminate the license agreement if the breach was, in the general counsel’s opinion, a “bona-fide, materially significant threat” to the licensor’s intellectual property rights or its business.

The licensor canceled the agreement, citing the licensee’s emailed offer to an infringer to sublicense the infringed technology as a material breach. The licensee argued that the emailed offer was not a material breach because the infringer did not take it seriously. The Court disagreed and pointed to DV Realty Advisor LLC v. Policemen’s Annuity and Ben Fund where the Delaware Supreme Court held that “bona fide” was a purely subjective standard based upon the point of view and knowledge of the determining party. Given that the licensee was trying to undercut the licensor in a material dispute with the infringer and refused to disclose the extent of the attempt, the Court ruled that the determination of material breach by the licensor’s general counsel was bona fide.

BOTTOM LINE: Avoid using the phrase “bona fide” in an agreement if you want more certainty.

DO NOT RELY ON AMBIGUITY OF TERMS IN A CONTRACT TO GET WHAT YOU WANT!

In Zayo Group, L.L.C. v. Latisys Holdings, L.L.C., C.A. No. 12874-VCS (Oct. 26, 2018), a buyer sued a target for breaches of representations and warranties contained in a stock purchase agreement. During the drafting of the terms of the stock purchase agreement, the buyer added a representation and warranty clause to the effect that no customers submitted written notices to manifest their intent “to cancel, terminate, materially modify, refuse to perform” the contracts with the target. Prior to closing, some customers delivered written notice of their intent not to renew their contracts with the target.

The buyer argued that non-renewal was “tantamount to termination and cancellation” and, as a result, the target was in breach of the representations and warranties. The Court found that the meaning of “terminate” was ambiguous and looked to extrinsic evidence. Given the drafting history showed that the buyer accepted target’s deletion of the phrase “or refuse to renew” from the form of representation and warranty proposed by the buyer. In addition, other sections of the stock purchase agreement indicated that “terminate” referred to the cancelation of a contract or agreement before the obligations were performed. Since renewal is distinct from termination, there was no breach of the representation and warranty.

BOTTOM LINE: Share this decision with your litigators to determine whether or not you should retain drafts of documents.

COURT WILL ENFORCE UNAMBIGUOUS EXCLUSIVE JURISDICTION CLAUSES

In Lexington Services Ltd. v. U.S. Patent No. 8019807 Delegate, L.L.C., C.A. No. 2018-0157-TMR (Oct. 26, 2018), a Maltese company owned a patent that was subject to a security interest. In accordance with its rights under the applicable security agreement, the secured party sold the patent when the Maltese company defaulted on its obligations to the secured party.

The Maltese company filed a lawsuit in the Chancery Court of Delaware alleging the patent was fraudulently transferred. Although the Security Agreement contained a forum-selection clause requiring the parties to bring any dispute “arising out of or in connection with [this agreement] or its subject matter or formation must be brought in Ireland”, the Maltese company argued the transferees could not invoke the forum-selection clause since they were not signatories to the security agreement. The Court reasoned that the security agreement contemplated the assignment of the patent and, as a result, the Court held that the transferees were closely related to the security agreement and could invoke the forum-selection clauses.

BOTTOM LINE: Consider including the following language in forum selection clauses which has been found by the court to unambiguously mandate exclusive jurisdiction in particular courts:

“Each party irrevocably agrees that…the Courts of…shall have exclusive jurisdiction over any dispute or claim arising out of or in connection with this agreement or its subject matter or formation (including non-contractual disputes or claims) and, for such purposes, irrevocably submits to the exclusive jurisdiction of such courts. Any proceedings, suit or action arising out of [or] in connection with this agreement shall therefore be brought in the Courts of ….”

PARENT OF THE GENERAL PARTNER IS NOT RESPONSIBLE FOR GENERAL PARTNER’S BREACHES OF THE LIMITED PARTNERSHIP AGREEMENT

In Wenske v. Blue Bell Creameries, Inc., C.A. No. 2017-0699-JRS (Nov. 13, 2018), following the discovery of bacterial contamination in their ice cream products, a limited partnership suspended production and distribution of its dairy products and paid a fine due to poor food safety policies and practices. The general partner of the limited partnership and its parent were sued for breach of the limited partnership agreement.

Noting that the limited partnership agreement vested the general partner with the exclusive authority to manage the limited partnership, the Court rejected an argument to the effect that the general partner formed a joint venture with the general partner and, as a result, was liable to the limited partners. A provision to the effect that “the [general partner] on [the partnership’s] behalf, may engage itself or another [p]artner to provide management or other services to [the partnership]” simply allowed the general partner to separately engage the services of another partner and did not reflect an agreement that the parent of the general partner would assist in the management of the limited partnership.

BOTTOM LINE: If you want the parent of a general partner liable to a limited partnership and its partners, include the obligation in the limited partnership agreement!

THE FAILURE TO ADDRESS AN ISSUE IN AN LLC AGREEMENT LEADS TO UNINTENDED CONSEQUENCES

In Domain Associates, L.L.C. v. Shah, C.A. No. 12921-VCL (Aug. 13, 2018), a member was expelled from a member-managed LLC and argued that the Delaware Limited Liability Company Act (the “LLC Act”) required the LLC to pay him the fair value of his member interest.  The LLC and its members argued that, consistent with the right to modify the fair value requirement in the LLC Act, the LLC agreement specified the amount owed to a member upon a member’s retirement, resignation, death, incapacity or bankruptcy and should control the amount to be paid to the expelled member.

The Court found that neither the provision in the LLC agreement or the LLC Act fair value requirement applied to the expulsion. Given the LLC was member-managed, the Court looked to partnership law for guidance. The Court noted that each member benefited proportionately from the elimination of the expelled member’s interest. As a result, the LLC and its members were jointly and severally liable for the obligation to pay the value of the expelled member’s interest to the expelled member. The limitation of liability contained in the LLC Act did not change the analysis given it applies to obligations to third parties, not other members. The Court suggested that the members would have had a stronger argument against personal liability if the LLC Agreement had expressly provided that the LLC only was responsible to pay the value of the expelled member’s capital account.

BOTTOM LINE: Any checklist for drafting an llc agreement should include (1) the need to consider what to pay an expelled llc member and (2) whether llc member is personally responsible for obligations owed to other members.

REVLON DUTIES COULD BE APPLICABLE TO OPTION TRANSACTIONS

In Carr v. New Enterprise Associates Inc., C.A. No. 2017-0381-AGB (Mar. 26, 2018), a corporation (the seller), sold a warrant with an option to purchase all of the stock of the corporation. The warrant transaction was conditioned upon the buyer purchasing another company in which the controlling stockholder of the seller was the largest investor. A minority stockholder sued the controlling stockholder of the seller and its directors alleging breach of fiduciary duty.

The seller argued that the transaction was a grant of the option to buy the seller and not a change in control or sale of the company subject to the dictates of Revlon. The Court rejected the idea that option transactions could never be subject to Revlon duties. Instead, the applicability of Revlon to an option transaction would likely depend on its “conditionality and specific features”. The Court suggested two examples to illustrate this point: (1) Revlon would apply when the option was unconditional and immediately exercisable; and in contrast, (2) Revlon might not apply if the option was contingent upon material contingencies that neither party could control.

BOTTOM LINE: Once again, substance over form matters. An unfettered right to exercise a “warrant” may subject a sale to Revlon duties.

Material Adverse Effect Clauses Require Specificity To Properly Reflect The Intent Of The Parties

In Akorn, Inc. v Fresenius Kabi AG, C.A. No. 2018–0300–JTL, the Chancery Court permitted a buyer to terminate a merger agreement including language to the effect that disproportionate industry effects should be taken into account in determining whether there had been a material adverse effect.

After the execution of the merger agreement, (i) the target’s EBITDA decreased by 86% in the year after the execution of merger agreement, (ii) the target significantly changed its business operations, and (iii) the acquiror’s investigations found problems with seller quality control which could be in violation of applicable regulatory requirements.

Even if the seller could not represent that its representations in the merger agreement were true and correct at the time of closing, the merger would move forward except when such failure “would not be reasonably expected” to result in a material adverse effect.

The Court found there was evidence that the seller’s downturn exceeded that of its peers and was disproportionate to the unforeseen competition in the industry.

BOTTOM LINE: The Court suggested that the parties could have excluded specific matters from the definition of material adverse effect; take the time and make the effort to do so!

Court Will Ratify Actions Taken Promptly To Correct Errors

In Almond et al. v. Glenhill Advisors LLC, C.A. No. 10477-CB, the Chancery Court denied post-trial claims challenging a series of transactions leading to the acquisition of a company. Prior to the acquisition, the certificate of incorporation was amended to implement a reverse stock split. After the reverse stock split, the acquiror had sufficient shares to move forward with a short-form merger. After the merger closed, it was discovered that the reverse split was mistakenly structured to reduce by a factor of 2500-to-1, instead of 50-to-1. The sole stockholder of the company remaining after the merger approved a DGCL Section 204 resolution to ratify the actions taken to cure the mistake. The former minority stockholders of the company argued that as a result of the mistake, the acquiror did not have enough shares to affect a short term merger. The Court disagreed and granted judicial ratification under DGCL Section 205 given the mistakes were unintended and the acquiror took prompt action to fix the mistakes after its discovery.

BOTTOM LINE: Acknowledge and cure mistakes promptly to reap the benefits of DGCL section 205.

Note The Difference Between Preliminary Discussions And Negotiations In The Context Of MFW Requirements

In Olenik v. Lodzinski, C.A. No. 2017-0414-JRS, a controlling stockholder conducted discussions with a target for approximately nine months before making a formal offer. As a result, the plaintiffs argued that the controlling stockholder failed to meet the requirements of MFW which require the controlling stockholder to condition a transaction on the uncoerced approval by both an independent special committee and an informed majority of the minority stockholders in order to obtain the benefit of business judgement deference.

The Court disagreed with plaintiff’s proposition that the controlling stockholder failed to meet the requirements and noted the distinction between “preliminary discussions” and “negotiations”. The Court opined that “in most instances, ‘negotiations’ begin when a proposal is made by one party which, if accepted by the counter-party, would constitute an agreement between the parties regarding the contemplated transaction.” The requirement is triggered from the “outset of negotiation” and not by “extensive preliminary discussions”. The Court noted that the negotiation process did not start until the Company submitted an offer letter which was “the first real move in the negotiating bout”. The preliminary discussions did not amount to bargaining but just exploratory exchanges, and did not include discussions on the price, which was a distinguishing feature of negotiations.

BOTTOM LINE: You do not lose the benefit of the business judgement rule when you explore possibilities and do not address price.

When Common Law Fiduciary Duties Are Unambiguously Eliminated In A Limited Partnership Agreement, Recourse Against The General Partner Is Limited To Breach Of Contract Claims

In Wenske et al. v. Blue Bell Creameries, Inc., C.A. No. 2017-0699-JRS, the limited partnership agreement required the general partner to “use its best efforts to conduct…business…in accordance with sound business practices in the [dairy industry]”.  When bacterial contamination was found in ice cream products, the partnership suspended production and distribution of its dairy products and was fined for poor food safety policies and practices. The plaintiffs sued the defendants including the general partner of the partnership for breach of the limited partnership agreement. The defendants argued that the limited partnership agreement did not incorporate government guidelines for the industry that the plaintiffs relied on in their pleadings. The Chancery Court ruled that the terms should be given their plain meaning and interpreted according to a reasonable person’s understanding. According to the Court, the wording “sound business practices” referred to government guidelines and accepted practices. In addition, the Court made it clear that given the partnership agreement unambiguously eliminated common-law fiduciary duties, the plaintiffs correctly characterized the claim as a breach of contract.

BOTTOM LINE: Consider including the following language in a partnership or LLC agreement which has been found by the court to unambiguously eliminate common law fiduciary duties: “[a]ny standard of care and duty imposed by this Agreement or under [DRULPA] or any applicable law, rule or regulation shall be modified, waived or limited, to the extent permitted by law, as required to permit [the general partner] to act under this Agreement or any other agreement contemplated by this Agreement and to make any decision under the authority prescribed in this Agreement, so long as the action is reasonably believed by [the general partner] to be in, or not inconsistent with, [the partnership’s] best interests.”