Background
This action involved a complex web of holding companies that ultimately own and control Oncor Electric Delivery Co. (Oncor).3 Approximately 80 percent of Oncor is held by Sempra Texas Holdings Corp. (Sempra).4 The remaining 20 percent is held by (i) Borealis Power Holdings, Inc. and BPC Health Corp. (collectively Borealis), (ii) Cheyne Walk Investment Ltd. (Cheyne Walk), and (iii) Hunt Strategic Utility Investment LLC (Hunt) through a holding company named Texas Transmission Investment LLC (TTI).5 Both Borealis and Cheyne Walk owned 49.5 percent of TTI and Hunt owned 1 percent.
Hunt sought to sell its holdings in TTI, which ultimately owns units of Oncor.6 Hunt’s sale of its equity interest potentially triggered conflicting rights stemming from two sources: (i) a right of first offer in the Texas Transmission Holdings Corporation Shareholders Agreement (the TTHC SA), which gives matching rights to Borealis and Cheyne Walk if Hunt seeks to transfer its interest in TTI; and (ii) a right of first refusal in Oncor’s Investment Rights Agreement (the IRA), which gives a right of first refusal to Sempra if TTI contemplates a transfer of its units in Oncor.7
Both Borealis and Sempra sought to purchase Hunt’s units in TTI.8 Borealis sought Hunt’s units because that would make Borealis the majority unitholder in TTI. Sempra wanted to purchase Hunt’s units because that would make Sempra the tiebreaker between Borealis and Cheyne Walk in decisions concerning TTI.
The Court of Chancery held on an expedited basis that Borealis’s purchase of Hunt’s shares constituted a “Transfer” under the IRA and triggered the requirement to offer the shares to Sempra.9 Because Sempra has the right to purchase the shares, and it seeks to exercise that right, selling to Borealis would breach the IRA.10 And because the TTHC SA prohibits transfers that breach the IRA, Sempra’s exercise of its right to purchase extinguished Borealis’s right to purchase.11 Consequently, the Court of Chancery found that Sempra was the only party with the right to purchase the Hunt shares and entered judgment in Sempra’s favor.12
Delaware Supreme Court analysis
The Delaware Supreme Court disagreed with the Court of Chancery’s analysis, and held that the right of first refusal in the IRA only applied if TTI sought to sell its membership interests in Oncor, not if Hunt sought to transfer its interest in the holding companies that ultimately own Oncor.13 “To hold otherwise,” the court reasoned, “would be to impute the contractual intentions of a minority member of a company’s controller to the company itself—a result that runs contrary to settled corporate-law principle.”14
The court found the IRA does not apply to the Hunt sale because the right of first refusal was only triggered by transfers by the “Minority Member” and its “Permitted Transferees,” and Hunt was neither.15 The fact that the right of first refusal was only triggered by transfers by the Minority Member was dispositive in Borealis’s favor regardless of whether the Hunt sale could be said to effect an indirect “Transfer” of Oncor LLC Units.16
The Delaware Supreme Court analyzed the syntax and sentence structure of the IRA in order to interpret the meaning of the word “Transfer.” The court focused on the “subject of the operative sentence,”17 and observed “the verb phrase ‘may only transfer’ serves as the predicate.”18 The court further explained that the subject of the operative sentence is neither accidental nor unimportant because it is the same subject for which the verb phrase “intends to transfer” serves as the predicate in a related provision in the IRA addressing transfers.19
“In sum,” the Delaware Supreme Court held, “Hunt is not TTI, nor is it a Permitted Transferee, nor can it, as a minority shareholder of TTI’s controller, express the intent of TTI or unilaterally cause it to act.”20 Thus, “Hunt’s sale … does not trigger Sempra’s” right of first refusal.21 Accordingly, Borealis’s right of first offer applies and the Hunt sale may not go through without first satisfying that right of first offer.
Takeaway
This opinion shows the care and thoughtfulness that the Delaware Supreme Court will apply when it is determining the meaning of contractual language. When there are competing provisions or competing agreements, the Delaware Supreme Court will parse the language of the contract and analyze the sentence structure to determine the parties’ intent when they entered into the contract.
- 2020 WL 2630929 (Del. May 22, 2020).
- Id. at *6 (noting that the Court of Chancery observed the definition of transfer in the agreement was remarkably broad).
- Id. at *3
- Id.
- Id. The Supreme Court’s opinion includes a chart indicating the ownership interests of Sempra, Borealis, Cheyne Walk, Hunt, the holding companies each of those entities owns, and the ultimate ownership of Oncor, which is helpful in understanding how Borealis and Sempra came to have competing rights to the sale of Oncor’s units.
- Id.
- 2020 WL 2630929, *4-6.
- Id. at *4.
- Id. at *6.
- Id.
- Id.
- Id. at *6-7.
- 2020 WL 2630929, at *8.
- Id.
- Id. at *7.
- Id.
- Id. at *8.
- Id.
- 2020 WL 2630929, at *8.
- Id.
- Id.
Client Alert 2020-405a
