Delaware Law Alert: Chancery Court Dismisses Challenge to Elimination of Tag-Along Rights in Private Equity-Backed Healthcare Merger

A recent Delaware Chancery Court decision provides important guidance for private equity sponsors, minority investors, and deal professionals regarding the enforceability of contractual waivers and the limits of the implied covenant of good faith and fair dealing in LLC agreements. The court’s ruling underscores the primacy of contract terms in LLC governance, and the limited role of equitable doctrines where fiduciary duties have been expressly disclaimed.

Khan, et al. v. Warburg Pincus, LLC, et al.¹ involved the merger of an urgent care provider and a primary care provider. The urgent care provider, a limited liability company, was majority owned by a private equity sponsor. As explained in more detail below, after the closing, the urgent care provider’s minority unitholders challenged the elimination of their tag-along rights and the allocation of merger consideration. 

The LLC Agreement and the Challenged Merger

WP CityMD Topco LLC (the “Company”) was formed in 2019 as a result of a merger between an urgent care provider and a physician-led multi-specialty group. Following that merger, funds controlled by a private equity firm owned 60% of the Company through Class A units, and certain physician-members gained a 17% ownership position through Class B units.

After the closing of the merger, the unitholders’ rights were governed by the Company’s LLC agreement, which provided several customary minority protections, including tag-along rights that allowed minority unitholders to participate in a sale or merger of the Company on equal terms with the majority. However, the LLC agreement permitted amendments to these rights with the consent of a majority of any class of unitholders who would be adversely affected by such amendments. It also included broad waivers of fiduciary duties for the private equity sponsor and its affiliates. It expressly permitted the private equity sponsor and its affiliates to act in their own best interest without regard to the interest of any other person, so long as they complied with the LLC agreement.

In 2022, the Company negotiated a merger transaction with a primary care provider, pursuant to which the Company’s Class A unitholders would receive all-cash consideration and minority classes (Class B unitholders and others) would receive a mix of cash and equity. To facilitate this structure, an amendment to the LLC agreement was required to eliminate the application of tag-along rights described above to this merger transaction. The amendment was approved by the requisite class votes after minority unitholders received detailed disclosures and the opportunity to consult independent counsel. Notably, both plaintiffs in this lawsuit voted in favor of this amendment.

Plaintiffs’ Claims of Unfairness and Coercion

Following a post-closing decline in the value of the equity consideration received by the minority investors in the merger, certain minority investors filed suit, alleging they were unfairly treated and coerced into approving the amendment. They brought claims for breach of the implied covenant of good faith and fair dealing, tortious interference with contract, and unjust enrichment. They alleged that the private equity sponsor’s actions frustrated their reasonable expectations when they signed the LLC agreement, and that the amendment process was tainted by inadequate disclosures and coercion. The defendants—which included the private equity sponsor, its affiliated funds, and primary care merger parties—moved to dismiss all claims under Court of Chancery Rule 12(b)(6) for failure to state a claim.

The Court’s Holdings

Vice Chancellor Lori Will dismissed all claims with prejudice. In so holding, she emphasized several key points:

1. No Breach of Implied Covenant Where Contract is Clear: To support their implied covenant claim, the plaintiffs argued that the Class B unitholders’ expectation when they signed the LLC agreement was that the Class A unitholders would not “negotiate away” the tag-along rights through a “coerced” amendment to permit differential merger consideration. In rejecting this argument, Vice Chancellor Will emphasized that the implied covenant of good faith and fair dealing is a limited and extraordinary remedy employed to analyze unanticipated developments or to fill gaps in a contract’s provisions. She found that the LLC agreement at issue expressly contemplated amendments that adversely affected the rights of a particular class of unitholders and outlined the steps required for approval of such amendments. Because the LLC agreement was not silent or ambiguous on these points, there was no “gap” for the implied covenant to fill. She declined to infer additional protections or equitable limitations beyond the parties’ negotiated terms.
2. Fiduciary Duties Effectively Waived: Vice Chancellor Will also relied on the parties’ waiver of fiduciary duties in the LLC agreement in dismissing the plaintiffs’ implied covenant claim. As discussed above, the LLC agreement contained broad waivers of fiduciary duties for the private equity sponsor and its affiliates, which permitted them to pursue their own interests so long as they complied with the agreement. Vice Chancellor Will reinforced that Delaware law permits such waivers in LLC agreements, and that the implied covenant cannot be used as a substitute for fiduciary duties that have been expressly disclaimed. In so ruling, she distinguished cases the plaintiffs had cited involving corporate fiduciaries, finding that in the context of an LLC (as opposed to a corporation), Delaware courts will assess “fairness” and “good faith” in view of the terms and purpose of the parties’ contract (i.e.,the LLC agreement).
3. No Viable Claims for Inadequate Disclosure: Vice Chancellor Will also rejected the plaintiffs’ claim that disclosures relating to the LLC agreement amendment were inadequate. Once again, she relied on the express terms of the LLC agreement, which eliminated fiduciary duties and required only reasonable and sufficient notice to Class A and Class B unitholders. She noted that the minority unitholders were provided with detailed information regarding the proposed merger and access to independent counsel. She further noted that if the minority unitholders wanted additional substantive disclosure requirements in the context of a vote to approve an amendment, they could have negotiated for such requirements when they entered into the LLC agreement.
4. Ancillary Claims Fail Without Underlying Breach: Because Vice Chancellor Will found that plaintiffs had not sufficiently pled a breach of any express or implied terms of the LLC agreement, she held that the related claims for tortious interference with contract and unjust enrichment also failed. 

Key Takeaways

This decision reinforces the different standard of review that Delaware courts will use in analyzing transactions involving limited liability companies as opposed to corporations. Rather than apply an entire fairness or other review standard applicable to transactions involving corporations, Delaware courts will use contract principles to review challenged transactions involving LLCs where the parties’ rights and obligations are set forth—or waived—in an LLC agreement. The decision confirms that Delaware courts will enforce well-drafted LLC agreements as written, even where the result is disparate treatment among classes of investors. Thus, minority investors in an LLC should be mindful of the scope of their contractual protections, especially where fiduciary duties have been waived. In negotiating LLC agreements, parties should attempt to anticipate potential conflicts and address them explicitly in the contract, as Delaware courts are unlikely to supply additional protections or read implied terms into such agreements after the fact.

¹ __ A.3d __, C.A. No. 2024-0523-LWW (Del. Ch. April 30, 2025, Will, V.C.).