ABSTRACT
The implied covenant of good faith is an increasingly important doctrine in the jurisprudence of the Delaware courts. This is so because sophisticated managers of alternative entities – principally limited liability companies and limited partnerships – present their prospective investors with agreements that drastically limit the fiduciary duties of those managers, leaving the investors with limited recourse when they seek to challenge related party transactions. Relief may be found if the investors can show that the manager’s actions were not expressly permitted by the operative LLC or partnership agreement. In other words, the agreement contains a gap and that gap ought to be filled by the implied covenant, thus satisfying the reasonable expectations of the investors. This essay explores how the Delaware courts would decide whether the implied covenant applies to a case of ‘sandbagging’; that is whether the buyer in a merger or asset acquisition can maintain an action against the seller for breach of a representation or warranty if the buyer allegedly knew that the representation was false at the time the contract was entered into.
Loewenstein, Mark J, Reflections on the Implied Covenant of Good Faith and Fair Dealing Under Delaware Law: The Case of Sandbagging (January 22, 2024), Delaware Journal of Corporate Law (Forthcoming).
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