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.