The Delaware Chancery Court recently addressed the relationship between fiduciary duties and contractual obligations. A former employee and shareholder brought suit against the employer and its board of managers, alleging breach of contract based on bad faith, breach of the implied duties of good faith and fair dealing, and breach of fiduciary duties of the managers. Each employee purchased equity interests (Units) in the company pursuant to a Purchase Agreement that gave the company a right, if the employee was terminated or left voluntarily, to repurchase the Units at "Fair Market Value," to be determined "in good faith by the Board in its sole discretion after taking into account all factors determinative of value." The suit arose after the company exercised its repurchase right at a value of $0 per Unit.
The Court cited the principle that Delaware law recognizes the primacy of contract law over fiduciary law. When a dispute arises from obligations that are expressly addressed by contract, the dispute will be treated as a breach of contractclaim, instead of a breach of fiduciary duty claim. There is a narrow exception when the fiduciary duty claim depends on additional facts that are broader in scope, and involve differences in consideration in terms of potential remedy, than the contract claims. Since this dispute related to the exercise of a contractual repurchase right, the Court found that the managers' duties when exercising the repurchase option were intended to be defined under contract law and solely by reference to the Purchase Agreement, foreclosing any common law fiduciary claim.
The Court also addressed the breach of the implied covenant of good faith and fair dealing claim, ruling that since the Purchase Agreement expressly addressed the repurchase right such express terms shall govern and cannot be overridden by the implied covenant. The Court noted that applying the implied covenant is a "cautious enterprise" and the Court would only infer contractual terms to handle contractual gaps or developments that the asserting party pleads neither party anticipated.
Stewart v. BF Bolthouse Holdco LLC, C.A. 8119-VCP (Delaware Court of Chancery, August 30, 2013