Delaware Cases: Good Faith, Non-Reliance and Fiduciary Duties


Last week, in American Capital Acquisition Partners, LLC v. LPL Holdings, Inc. (February 3, 2014), the Delaware Court of Chancery, in connection with a disputed earnout provision, allowed a  claim for breach of the implied covenant of good faith and fair dealing to survive a motion to dismiss. In taking this relatively rare step, the court showed a willingness to fill a ‘gap’ in contractual drafting with an obligation to act in good faith, and deal fairly, with respect to a matter the parties did not focus on in negotiations. Specifically, the claims that survived were based on allegations that clients, personnel and opportunities of the acquired company were actively diverted post-closing to another subsidiary of the buyer, thereby impeding the acquired company’s ability to meet the performance guidelines that would have entitled the sellers (plaintiffs) to certain contingent payments (both under the Stock Purchase Agreement (SPA) and their employment agreements).

On the other hand, the court dismissed the claims alleging breach of those implied covenants by the buyer in failing to make technological adaptations to help increase profitability because the plaintiffs anticipated, but failed to bargain for, such an obligation in the SPA.

Interestingly, this case also involved a non-reliance issue, and since the SPA included both an integration clause and a provision disclaiming reliance on extra-contractual representations, the court did not allow the sellers’ fraudulent inducement claim. Here’s the language:

“Non-Reliance. Except for the representations and warranties by the Company in this Agreement, Buyer and Seller each acknowledge and agree that no Person is making, and Buyer nor Seller is not relying on, any representation or warranty of any kind or nature, express or implied, at law or in equity, or otherwise, in respect of the Company, the Business, the Sellers or the Buyer, including in respect of the Company’s Liabilities, operations, assets, results of operations or condition.”

On a related topic, in the recent case of Blaustein v. Lord Baltimore Capital Corp. (January 21, 2014), the Delaware Supreme Court held that the directors of a closely held corporation do not have a fiduciary duty to consider buying out minority stockholders. Instead, stockholders should rely on contractual protections to facilitate liquidity. The court also affirmed that, based on the repurchase provisions in the relevant stockholders agreement, the implied covenant of good faith and fair dealing did not create a duty to negotiate a reasonable repurchase price for the shares.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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