In this memorandum opinion, the Court of Chancery denied the defendants’ motion to dismiss the plaintiffs’ claims that defendants breached a purchase agreement and the company’s LLC agreement by acting in bad faith to determine the fair market value of the plaintiffs’ units. The Court granted the motion to dismiss the rest of the plaintiffs’ claims, including breach of another section of the company’s LLC agreement, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing.
In December 2005, Madison Dearborn Partners, LLC (“Madison Dearborn”) acquired a controlling interest in BF Bolthouse Holdco, LLC (the “Company” or “Bolthouse”), a food and beverage producer. Under Section 6.4 of Bolthouse’s LLC Agreement, the members of Bolthouse’s board (the “Board”) owed the Company and its members the same fiduciary duties that a director of a Delaware corporation would owe a corporation and its stockholders. From 2005 through 2008, the plaintiffs, who were employees of Bolthouse subsidiary Wm. Bolthouse Farms, Inc. (“Bolthouse Farms”) at the time, collectively purchased 7,611 Class B Common Units of Bolthouse pursuant to a purchase agreement. The purchase agreement provided that, in the event a plaintiff’s employment with Bolthouse Farms was terminated for any reason, the Company was entitled to repurchase, within 210 days of the termination, all or part of the plaintiff’s Class B Units (the “Repurchase Option”). Under the Repurchase Option, the Company could repurchase vested Units at their “Fair Market Value” and could repurchase non-vested Units at the lesser of their Fair Market Value and the price paid for the Units. The purchase agreement required that the Board determine the Fair Market Value of the Units in good faith, but did not require Bolthouse to provide the owners of repurchased Units with any information about the repurchase decision. On February 25, 2010, the plaintiffs voluntarily terminated their employment with Bolthouse Farms, and thereafter Bolthouse gave timely notice of its intent to repurchase the plaintiffs’ Units and of the Board’s determination that the Fair Market Value per Unit was $0.00.
In September 2008, the Campbell Soup Company had expressed interest in acquiring Bolthouse in a deal implicitly valuing the Class B Units at approximately $1,000 per Unit, but the parties did not reach an agreement. Further, on February 1, 2010, the Company’s President and CEO discussed Bolthouse’s bright future prospects, and two days later sent an email to the plaintiffs that included a schedule valuing the Class B Units at approximately $200 per Unit. In August 2012, Campbell acquired Bolthouse for approximately $1.55 billion, with the Class B Unit holders receiving approximately $1,200 per Unit. The plaintiffs brought this action for, among other things, breach of the purchase agreement and the LLC Agreement and breach of fiduciary duties in connection with the $0.00 valuation. The defendants moved to dismiss under Court of Chancery Rule 12(b)(6).
The plaintiffs contended that the defendants breached the purchase agreement by determining in bad faith that the Fair Market Value of the plaintiffs’ Units was $0.00. The Court, in denying the motion, noted that the email to the plaintiffs valuing the Units at $200 madeit reasonably conceivable that the Units should have been valued at an amount greater than $0.00 as of the plaintiffs’ resignation just three weeks later. The Court also determined that it was reasonably conceivable under the minimal pleading standard for contractual bad faith claims articulated in Clean Harbors, Inc. v. Safety-Kleen, Inc. that the defendants acted in bad faith. The Court also found that the plaintiffs sufficiently alleged a breach of the contractual duty of loyalty under Section 6.4 of the LLC Agreement, as the Court found it was reasonably conceivable that the defendants acted in bad faith.
The Court dismissed the plaintiffs’ common law breach of fiduciary duty claims as duplicative of their breach of contract claims. The Court also dismissed the plaintiffs’ claim that the defendants’ failure to deliver annual audited financial statements to them breached a contractual obligation. The Court found that the LLC agreement required delivery of such financial statements to those who were members of the Company on the date of delivery and that plaintiffs were not members on that date. In dismissing the plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing, the Court found that the implied covenant did not apply to the dispute over the Fair Market Value provision in the purchase agreement because the dispute was governed by the express terms of that agreement. As the purchase agreement required the Board to act in good faith, if the Board did not act in good faith, it breached the express terms of the agreement and, therefore, the implied covenant would not be applicable. According to the Court, there was no contractual gap in this case that the implied covenant could have filled.
The full opinion is available here.