Nemec v. Shrader

Supreme Court of Delaware · 2010 · Corporations

991 A.2d 1120 (2010)

Updated August 22, 2026

CorporationsContractsImplied covenant of good faith and fair dealingFiduciary dutiesUnjust enrichmentstock redemptionput rightcall right

Facts

Under Booz Allen's Stock Plan, retired officers had a two-year post-retirement put right to sell shares back to the company at book value, after which the company had the right to redeem those shares at any time at book value. Nemec and Wittkemper retired in March 2006, their put rights expired in March 2008, and in April 2008 Booz Allen redeemed their remaining shares at approximately $162.46 per share. At that time, Booz Allen had already agreed on the purchase price for the sale of its government business to The Carlyle Group, a transaction expected to generate over $700 per share for stockholders when it closed in July 2008. The redemption prevented the plaintiffs from sharing in that later transaction and increased the proceeds distributed to the remaining working stockholders by nearly $60 million.

Issue

Whether Booz Allen breached the implied covenant of good faith and fair dealing by redeeming the plaintiffs' shares pursuant to an express contractual right shortly before a profitable transaction closed, and whether the same conduct also supported fiduciary duty and unjust enrichment claims. More specifically, the court considered whether Delaware law permits implied covenant, fiduciary duty, or unjust enrichment theories to alter the economic consequences of an express redemption provision.

Rule

The implied covenant of good faith and fair dealing is a limited and extraordinary remedy that supplies terms only for developments or gaps neither party anticipated, and it cannot be used to circumvent the parties' bargain or imply terms that contradict an express contractual right. A party generally cannot base an implied covenant claim on conduct authorized by the agreement; contract terms will be implied only when the other party acted arbitrarily or unreasonably so as to frustrate the fruits of the bargain reasonably expected at the time of contracting. Where a dispute arises from obligations expressly addressed by contract, fiduciary claims based on the same facts are treated as contract claims and are foreclosed as superfluous.

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Pine Harbor Analytics, a Delaware corporation based in Austin, grants senior officers shares under a plan stating that for 18 months after retirement the retiree may sell the shares back to the company at book value, and after that period the company may redeem the shares at book value at any time. After Elena Park's 18-month window expires, the company redeems her shares at book value two weeks before announcing a lucrative asset sale that causes the remaining stockholders' shares to be worth four times more.

If Park sues for breach of the implied covenant of good faith and fair dealing, what is the strongest argument for dismissal?

Explanation. The majority held that the implied covenant is a limited gap-filling doctrine and generally cannot be based on conduct authorized by the agreement. Where the contract expressly gives the company the right to redeem at book value at any time after the retiree's put period expires, the court will not imply a term delaying redemption merely because a later sale made the contract a bad deal for the retiree.