Ropes & Gray secured a major victory in the Delaware Supreme Court on behalf of client William I. Koch, founder and CEO of Oxbow Carbon LLC, in a case with important implications for the law of contracts, the implied covenant of good faith and fair dealing, and the governance of Delaware LLCs, which are the preferred form of organization for privately-held businesses.
In a 47 page decision written by Justice Valihura, the Delaware Supreme Court, sitting en banc, unanimously reversed a post-trial decision of the Delaware Court of Chancery that permitted certain minority investors in Oxbow to force a contractual “Exit Sale” of the company under its LLC Agreement through the implied covenant of good faith and fair dealing, based on the Court of Chancery’s subjective view of “fairness.” In accepting Ropes & Gray’s arguments on behalf of Mr. Koch, the Supreme Court held that the implied covenant could not be used to circumvent a contractually-required price floor, which could not be met under prevailing market conditions. The Supreme Court reiterated bedrock Delaware law that the implied covenant is a “limited and extraordinary legal remedy” and cannot be used by a court to “re-write the agreement between the parties.”
The Supreme Court’s decision should give companies and their boards comfort that Delaware courts will enforce contracts between sophisticated parties as they are written, and that the implied covenant may not be used to vary such contracts except under extreme circumstances.
The Ropes & Gray team on the case was led by litigation & enforcement partner David Hennes, who argued the appeal in the Delaware Supreme Court, and included partners Tom Brown and Dan McCaughey.
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