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Delaware Supreme Court Reverses Chancery in Dispute Involving Dueling Transfer Restrictions

Borealis Power Holdings Inc. v. Hunt Strategic Utility, LLC, No. 68, 2020 (Del. May 22, 2020)

The Delaware Supreme Court, reviewing the purportedly conflicting provisions of two agreements de novo, reversed the judgment of the Court of Chancery regarding which of the transfer restrictions in the agreements applied to a proposed sale of shares. The Court’s opinion provides important guidance on the interpretation and construction of contractual restrictions on transfer.

To understand the Supreme Court’s holding, it is important to review the nature of the parties’ relationships. In 2007, Borealis Power Holdings and BPC Health Corporation (together, “Borealis”) and Cheyne Walk Investments Pte Ltd. (“Cheyne Walk”) structured a transaction through which they would together purchase a 19.75% interest in Oncor Electric Delivery Company LLC (“Oncor”). Under this arrangement, each of Borealis and Cheyne Walk would own 49.5% of the stock of Texas Transmission Holdings Corporation (“TTHC”). For tax reasons, the remaining 1% of TTHC’s stock would be held by a third party, Hunt Strategic Utility Investment, LLC (“Hunt”). TTHC, in turn, would beneficially own 100% of Texas Transmission Investment LLC (“TTI”), which would in turn directly own the 19.75% interest in, and be a member of, Oncor. Following the transaction, Borealis, Cheyne Walk and Hunt, indirectly through TTHC, collectively owned a 19.75% interest in Oncor. The remaining 80.25% interest in Oncor was beneficially owned by Sempra Texas Holdings Corp. (“Sempra”). 

At the time of their investment in Oncor through TTI, Borealis, Cheyne Walk and Hunt, as the only stockholders of TTHC, entered into a stockholders agreement (the “TTHC Stockholder Agreement”) governing the relationship among them as stockholders of TTHC and as indirect owners of the limited liability company interests in TTI. At the same time, Oncor and its members (i.e., TTI, on the one hand, and a wholly-owned subsidiary of Sempra, on the other) entered into an investor rights agreement (the “Oncor IRA”). The Oncor IRA contained a provision granting Sempra, as the controlling member of Oncor, a right of first refusal (the “Oncor ROFR”) covering any proposed transfer of Oncor units. 

In 2018, Oncor attempted to acquire an unrelated company. In connection with funding TTI’s portion of that acquisition, Borealis, Cheyne Walk and Hunt amended the TTHC Stockholder Agreement to add procedures governing the sale of shares of TTHC (the “TTHC ROFO”). Under the TTHC ROFO, if any of Borealis, Cheyne Walk or Hunt desired to sell its shares of TTHC, the selling party had to give the non-selling parties notice of the proposed sale, following which the non-selling parties would have 20 days to exercise their option to purchase a pro rata (or greater, if only one non-selling party exercised its right) of the shares proposed to be transferred. 

Once it became clear that Oncor was nearing the completion of its acquisition, Hunt contacted Sempra to assess its interest in acquiring Hunt’s 1% of the shares of TTHC. Sempra concluded that the Oncor ROFR took precedence over the TTHC ROFO and delivered a non-binding proposal to Hunt. On July 11, 2019, Hunt and Sempra entered into a share purchase agreement (the “SPA”). Hunt delivered the SPA to Borelais and Cheyne Walk. Borealis responded by asserting that it intended to exercise its TTHC ROFO and purchase as many shares as were available. In response, Sempra sent a letter to Borealis and Cheyne Walk (and other related entities) stating that it was exercising its rights under the Oncor ROFR. 

That letter precipitated Borealis’ filing of a complaint against Hunt in the Court of Chancery for breach of the TTHC Stockholder Agreement. Borealis also sought a temporary restraining order to enjoin Hunt from transferring its TTHC shares to Sempra. Sempra intervened, seeking a declaratory judgment against Borealis and Hunt and alleging a breach of contract claim against TTI under the Oncor IRA. Cheyne Walk also intervened seeking declaratory judgments against Hunt and Sempra.

The Court of Chancery held that both the TTHC Stockholder Agreement and the Oncor IRA applied to Hunt’s proposed sale of its shares of TTHC to Sempra. The Court of Chancery found that Hunt’s proposed sale to Sempra gave Borealis and Cheyne Walk the right to purchase the shares pursuant to the TTHC Stockholder Agreement and gave rise to Sempra’s right to exercise the Oncor ROFR under the Oncor IRA. That Hunt’s proposed sale of TTHC shares implicated the TTHC Stockholder Agreement was clear on its face. Less clear was whether the sale of TTHC shares implicated the Oncor IRA. Nevertheless, the Court of Chancery concluded that Hunt’s sale of its shares of TTHC constituted a “Transfer” of units of Oncor under the Oncor IRA, as the definition of “Transfer” in that agreement was “remarkably broad” and would capture an “indirect” sale of Oncor units. Put differently, according to the Court of Chancery, Hunt’s sale of 1% of the shares of TTHC, a corporation that indirectly owned 19.75% of the units of Oncor, constituted an indirect “Transfer,” as that term was used and defined in the Oncor IRA, of the underlying Oncor units. 

The Supreme Court disagreed with the Court of Chancery’s key conclusion that the transfer of shares of TTHC was tantamount to a transfer of the Oncor units that TTHC indirectly owned creating a conflict between the TTHC ROFO and the IRA ROFR. In reversing the lower court’s judgment, the Delaware Supreme Court first looked at the Oncor IRA, noting that the Oncor ROFR was triggered “in the event that a Selling Member” of Oncor intended to transfer units of Oncor. The Supreme Court noted that the Oncor IRA further provided that “the Minority Member [of Oncor] and its Permitted Transferees . . .  shall not Transfer their [Oncor units] . . . unless such Selling Members [of Oncor] have first complied” with the Oncor ROFR.  (Emphasis added). The Supreme Court observed that the term “Minority Member” was defined in the Oncor IRA as TTI—i.e., the entity that was indirectly wholly-owned by TTHC and that directly held the Oncor units—and that the term “Selling Member” was defined as the “Minority Member” or the “Minority Member’s ‘Permitted Transferee.’” 

Thus, the Supreme Court found that the Oncor ROFR would trigger only “by transfers by the Minority Member [i.e., TTI] and its Permitted Transferees.” As Hunt was neither the “Minority Member” nor a “Permitted Transferee,” its proposed sale of its shares of TTHC did not implicate the Oncor ROFR. According to the Supreme Court, the triggering event for Sempra’s rights under the Oncor ROFR would be an intent by the Minority Member—TTI—to transfer its Oncor units.  Refusing to conflate Hunt’s sale of its shares of TTHC with TTI’s intent to transfer its units of Oncor, the Court held that Hunt’s proposed sale of its TTHC shares did not trigger Sempra’s rights pursuant to the Oncor ROFR. The Supreme Court concluded that Hunt’s proposed sale of its shares of TTHC, by contrast, clearly triggered Borealis’ rights under the TTHC Stockholder Agreement.  Accordingly, the Supreme Court held that Hunt could not consummate that sale without first complying with the TTHC ROFO under the TTHC Stockholder Agreement. The Supreme Court remanded the case with direction to enter judgment in favor of Borealis.

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