Miller v. HCP & Co.

Facts

Trumpet Search was an LLC governed by an Operating Agreement (OA). In 2014 and 2016, the defendants contributed significant capital to Trumpet and became unitholders. Trumpet issued different classes of units to different investors with early investors receiving Class A, B, and C units. Defendants received Class D and E units. Pursuant to the OA, if Trumpet was sold to a third party, unitholders would be paid in a reverse alphabetical order (a “waterfall”) with Class D and E unitholders receiving payment before Class A, B, and C unitholders. Therefore, Class A, B, and C unitholders could receive very little if the purchase price covered only the money owed to Class D and E unitholders.

By May 2016, defendants were the largest holder of membership units in Trumpet and an amended OA was executed creating the Class E units. As a majority holder of the Class D and E units, if Trumpet were sold, defendants were entitled to most of the first $30 million in proceeds. Defendants were also entitled to appoint four of the seven managers on Trumpet’s Board. The OA gave the Board sole discretion regarding the manner in which Trumpet could be sold. However, the sale could only be to an unaffiliated third party. Additionally, under the OA, every member needed to consent to a sale of the company and approved by the majority of the Board.

Less than a year later, Trumpet was sold to MTS Health Partners, LP for $43 million. No alternative buyers were sought and plaintiffs believed that Trumpet could have been sold for a higher price in an open auction process.