In this case, the Delaware Supreme Court—in Borealis Power Holdings Inc. v. Hunt Strategic Utility Investment, L.L.C., Del. Supr., No. 68, 2020 (May 22, 2020)—addressed whether a minority shareholder in the parent company of another entity that owned a minority stake in LLC was subject to that LLC’s right of first refusal (ROFR) or whether the ultimate parent company’s shareholders’ agreement, which also contained a ROFR, took priority. The LLC in question was Oncor Electric Delivery Company LLC (Oncor), which was majority owned by Sempra entities, through Oncor Electric Delivery Holdings Company LLC (Oncor Holdings). The remaining members of Oncor own a minority stake in Oncor through an entity called TTI, which was ultimately owned by a parent company, Texas Transmission Holdings Corporation (TTHC) and of which the three relevant entity members— Hunt, Borealis, and Cheyne Walk—own 1%, 49.5%, and 49.5%, respectively. The Court’s opinion includes an organization chart for reference.
TTHC’s shareholders—i.e., Hunt, Borealis, and Cheyne Walk—executed a shareholder agreement (TTHC Shareholder Agreement). The TTHC Shareholder Agreement provided a process for selling shares in TTHC, including a right of first offer (ROFO) for non-selling shareholders. Similarly, Oncor and its equity holders entered into an Oncor IRA, which contained a ROFR in Sempra’s favor.
Hunt (one of the three owners of TTHC) wanted to sell its 1% interest in TTHC, and reached out to Sempra to see whether it was interested in purchasing such interest. However, Hunt’s sale of its 1% stake was subject to the TTHC Shareholder Agreement, which gave Borealis and Cheyne Walk a ROFO in the event that Hunt wished to sell. On the other hand, Sempra argued that the sale was also subject to the Oncor IRA, which provided Sempra with a ROFR in the event Oncor LLC units are transferred.
Sempra concluded that the ROFR in the IRA took priority over the ROFO in the shareholder agreement and sent a nonbinding proposal to Hunt to purchase his 1% interest. Hunt and Sempra executed a share purchase agreement; however, Borealis declined to consent to the sale, and responded that it would exercise its ROFO to purchase as many shares as were available, and that it considered any attempt to transfer those shares to any other third party a breach of the ROFO set forth in the TTHC Shareholder Agreement. In response, Sempra sent a letter to Borealis, Cheyne Walk, and the other TTHC-affiliated entities stating that it was, in fact, exercising its ROFR.
The Delaware Supreme Court addressed whether Hunt’s sale triggered (a) the ROFR in the Oncor IRA and/or (b) the ROFO in the TTHC Shareholder Agreement, and (c) if both applied, which was to be given priority.
The Court of Chancery had previously decided in Sempra’s favor, holding that Hunt’s sale of its 1% stake in TTHC was also a “transfer” of Oncor LLC units, as defined in the Oncor IRA. The court thus held that Hunt’s proposed sale triggered Sempra’s ROFR—a right that preempted Borealis’s TTHC Shareholder Agreement ROFO because the source of the ROFO was the TTHC Shareholder Agreement, which itself stated that enforcement of the TTHC Shareholder Agreement could not breach the Oncor IRA.
However, the Delaware Supreme Court reversed the Court of Chancery’s decision, and concluded that the Oncor IRA did not apply to the Hunt sale. To reach this conclusion, the Court first analyzed the Oncor IRA. Section 3.1 of the Oncor IRA, titled “Restrictions On Transfer of LLC Units” provided that “[t]he Minority Member and its Permitted Transferees may only Transfer LLC Units as follows . . .” before listing a number of conditions. The Court then looked to Section 3.9 of the Oncor IRA, titled “Right of First Refusal,” which provided that, “in the event that a Selling Member intends to Transfer LLC Units . . . such Selling Member shall deliver to [Sempra] . . . written notice of its intention to Transfer LLC Units.”
Next, the Court looked to several important definitions governing the Oncor IRA: “Selling Member” was defined in Section 3.9 as “the Minority Member [or its] Permitted Transferee.” “Minority Member” was defined in the preamble of the Oncor IRA as TTI. Finally, “Transfer” was defined as “any direct or indirect transfer . . . of any LLC Units (or any interest (pecuniary or otherwise) therein or rights thereto), [and] in the event that any Member that is a corporation, partnership, limited liability company or other legal entity (other than an individual, trust or estate) ceases to be controlled by the Person controlling such Member or a Permitted Transferee thereof, such event shall be deemed to constitute a ‘Transfer’ subject to the restrictions on Transfer contained or referenced herein.”
Sempra argued that the intent of the parties to the Oncor IRA was to bind TTI’s ultimate equity holders and to restrict their transfers of the ultimate parent. In support of its position, Sempra cited the first part of the “Transfer” definition, which purported to encompass “any direct or indirect transfer” of Oncor LLC Units. Sempra argued that any Hunt transfer was an indirect transfer of 1% of TTI’s Oncor LLC Units. Moreover, Sempra argued that even if the Hunt sale was not alone a “Transfer” under the first part of the definition, it was, alternatively, a “Transfer” under the second part, because a transfer of Hunt’s interest to another TTHC shareholder would change control of TTHC, and thus of TTI.
However, the Court held that both of these contentions suffered from the same flaw; they failed to address the subject—stated conjunctively as “the Minority Member and its Permitted Transferees,” or the “Selling Member”—of the operative portions of Section 3.1 and Section 3.9 of the Oncor IRA, of which the verb phrases “may only Transfer” and “intends to Transfer” served as the predicate. That subject, according to the Court, was not accidental or unimportant. Rather, it provided critical information about the scope of the ROFR.
The court, therefore, deemed it unnecessary to parse the definition of “Transfer” to determine the scope of Section 3.1 and Section 3.9. The fact that the ROFR was only triggered by transfers by the Minority Member was dispositive in Borealis’s favor; and, this was true regardless of whether the Hunt sale could be said to effect an indirect transfer of Oncor LLC Units.
The court thus found the Oncor IRA did not apply to the Hunt sale because the ROFR was triggered only by transfers by the Minority Member and its Permitted Transferees, and Hunt was neither. In other words, Hunt was not TTI, nor was it a Permitted Transferee, nor could it, as a minority shareholder of TTI’s ultimate parent, express the intent of TTI or unilaterally cause it to act. Accordingly, the court held Hunt’s sale, therefore, did not trigger Sempra’s ROFR, that Borealis’s ROFO applied, and that the Hunt sale could not go through without first satisfying that ROFO.
*This article was written with assistance from our summer associate Steve Grecco.