USA – CONNECTICUT Trends and Developments Contributed by: David I Albin and Cole Mayhew, Finn Dixon & Herling LLP
Campus Eye - independent legal significance of a Section 18-209 (f) merger Vice Chancellor Will’s opinion in Campus Eye Man - agement Holdings v Didonato , issued in August 2024, arose from the sale by an optometrist of a majority stake in his practice to a private equity fund. As part of the sale, the optometrist had the contractual right in the LLC Agreement to appoint one of three man - agers of the holding company LLC that now owned his business. However, contrary to the optometrist’s protective provisions, the private equity fund unilater - ally amended the LLC Agreement to convert it from manager-managed to member-managed without the optometrist’s consent, thereby eliminating his right to be a manager. The optometrist challenged this amendment in court and was granted summary judgment that the private equity fund could not independently amend the LLC agreement because, unsurprisingly, the LLC Agree - ment specifically provided that the optometrist had to consent to any such amendment. Undeterred, and relying on Benchmark , the private equity fund shifted tactics. Instead of a direct amend - ment of the LLC Agreement, the fund caused the LLC to be merged with and into another newly formed LLC. The LLC agreement of this newly formed LLC placed the business solely under the control of the private equity fund and eliminated the optometrist’s prior rights to share control of the entity. The optometrist then claimed that causing this merger with the intend - ed result of eliminating his contract rights violated the private equity fund’s Implied Covenant. In her decision, Vice Chancellor Will began by laying out the general principles of the Implied Covenant, namely that “[t]he doctrine ‘ensures parties to not ’frustrat[e] the fruits of the bargain’ by acting ‘arbi - trarily or unreasonably.’” But, importantly: “‘The application of the implied covenant of good faith and fair dealing [...] [sic] is limited to filling contractual gaps that neither party anticipated.’ It can fill a gap only if ‘it is clear from the contract that the parties would have agreed to that term had they thought to negotiate the matter.’”
the legality of the result must be tested by the require - ments of the second section.” Delaware courts have similarly applied the doctrine not only to competing statutory provisions, but also in instances where an entity’s governing documents may “compete” with, but fail to address, statutory realities – ie, statutorily-enabled actions exist independently of any contractual provision between private parties that fails to address the treatment of such actions spe - cifically. As the court in 2002’s seminal Benchmark Cap. Partners IV, L.P. v Vague succinctly put it within the context of a corporate charter being amended via statutory merger to the detriment of certain preferred stockholders: “[T]o the extent that the merger adversely affects the rights, preferences and privileges of [certain stock - holders], those consequences are the product of a merger, a corporate event which the drafters of the protective provision could have addressed, but did not.” So, in remaining silent, drafters will, as it were, memo - rialise the bedrock independence of these statutorily- enabled actions, leaving them free to be deployed by a counterparty in whatever creative ways may serve their purposes. But at the intersection of the Implied Covenant with the Doctrine of Independent Legal Significance lies the question made famous by the fictitious Dr Ian Mal - colm of Jurassic Park fame: “Yeah, but your [expert legal practitioners] were so preoccupied with wheth - er or not they could, they didn’t stop to think if they should.” The application of Dr Malcolm’s question is better framed here as this: just because the Independ - ent Legal Significance Doctrine says that a party can use a token statutory mechanism to circumvent a counterparty’s otherwise bargained-for rights, should such an act be permitted given the equitable purpose of the Implied Covenant? The outcomes from the col - lision of these two prominent doctrines may seem counter-intuitive at surface, but likely unsurprising to those who have followed the blunt application of the Independent Legal Significance Doctrine in Delaware case law through the years.
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