Chancery Interprets Right of First Refusal Provision in LLC Agreement
HUMC Holdco, LLC, et al. v. MPT of Hoboken TRS, LLC, et al., C.A. No. 2019-0972-KSJM (Del. Ch. July 2, 2020)
Litigation arose among members of a limited liability company regarding the operating agreement’s right of first refusal provision after certain members entered in an agreement to sell membership interests and certain real estate to a third party. While the Court of Chancery denied defendants’ motion for judgment on the pleadings, the Court offered notable guidance on the interpretation of first-refusal right provisions.
The LLC member parties own and operate acute care hospital facilities in Hudson County, New Jersey. The operating agreement contains a right of first refusal which grants other members the right to purchase the membership interests “on the same terms and conditions” as a qualifying offer. The defendants entered into an agreement with a third party for the sale of its LLC membership interest with the sale cross-conditioned on the sale of certain real estate owned by defendants. The defendants closed on the real estate with the third party before providing the general manager with notice of the sale that would trigger the other member’s right of first refusal. After the plaintiffs filed suit for breach of the operating agreement, the defendants purportedly withdrew their first offer notice and executed a second agreement with the third party for the purchase of the membership interest. This second agreement omitted the real estate sale condition because that transaction had already closed. The defendants presented the plaintiffs with a second offer notice for the membership interests. Litigation among the parties ensued in the Delaware Court of Chancery, with defendants moving for judgment on the pleadings.
Relevant here, the Vice Chancellor addressed the scope of the right of first refusal and whether it was limited to defendants’ membership interests or also included their real estate. The plaintiffs’ pushed for a broad interpretation of the first-refusal right that encompassed the entire transaction – membership interests and real estate. The defendants argued for a narrower scope limited to the membership interests since the operating agreement’s right of first-refusal provision did not expressly encompass any properties other than the membership interests. Relying on the Court of Chancery’s decision in USA Cable v. World Wrestling Federation Entertainment, Inc., 2000 WL 875682 (Del. Ch. June 27, 2000), aff’d, 766 A.2d 462 (Del. 2000), the Court adopted “the well-reasoned rule of USA Cable, which is that the scope of the first-refusal right shall be construed as limited to the subject matter of the agreement containing the right, unless the parties expressly agree otherwise.” Applying this rule, the real estate aspect of the offer fell outside the first-refusal right. The Court, however, denied the request for judgment on the pleadings for further development of the factual record.