Delaware Supreme Court Analyzes Contractual Right of First Refusal

This case summary was prepared by Spencer Miller.

In Borealis Power Holdings Inc. v. Hunt Strategic Utility Investment, L.L.C., the Delaware Supreme Court convened en banc to review the Court of Chancery’s interpretation of a right of first refusal provision in an investor rights agreement. The court’s analysis focused on “the plain and unambiguous” language of the provision, which ultimately did not apply to the party transferring its interest.

Energy Future Holdings Corporation (EFH) was the target of a leveraged buyout in 2007. To mitigate credit issues caused by the buyout, EFH put the regulated sector of its business into an entity named Oncor. EFH then decided to sell a minority stake in Oncore to insulate Oncor’s credit from EFH’s overleveraged operations. Borealis Power Holdings, Inc. and BPC Health Corporation (collectively, Borealis) partnered with Cheyne Walk Investment PTE LTD (Cheyne Walk) to purchase a 19.75% stake in Oncore through Texas Transmission Investment LLC (TTI). Borealis and Cheyne Walk each owned 49.5% of Texas Transmission Holdings Corporation (TTHC), which wholly owned TTI through Texas Transmission Finco LLC (TTFinco). Hunt Strategic Utility Investment, L.L.C. (Hunt), an ostensibly small player in this “complicated web of entities,” owned the remaining 1% of TTHC.[1] In sum, Borealis, Cheyne Walk, and Hunt collectively owned TTHC, which owned TTI through TTFinco; TTI owned the 19.75% stake in Oncor. Sempra Texas Holdings Corp. (STH) and Sempra Texas Intermediate Holding Company, LLC (STIH) owned the other 80.25% of Oncor through Oncor Electric Delivery Holdings Company LLC (Oncor Holdings).[2]
Oncor, TTI, Oncor Holdings, and STH executed the Oncor Investor Rights Agreement (Oncore IRA) at the time of sale, which provided STH and STIH (collectively, Sempra) with a right of first refusal (the ROFR) if any “Oncor LLC units” were transferred. Borealis, Cheyne Walk, and Hunt simultaneously executed the TTHC Shareholders Agreement (TTHC SA), which was later amended to provide “a process for selling shares in TTHC, including a right of first offer for non-selling shareholders (the ROFO).”[3] Conflict soon arose when Hunt tried to sell its 1% interest in TTHC to Sempra. Although Sempra believed its ROFR in the Oncor IRA preempted the ROFO in the TTHC SA, Borealis filed a complaint in the Delaware Court of Chancery to enjoin Hunt from transferring its shares to Sempra. Borealis also asserted a breach of contract claim against Hunt. The Court of Chancery ultimately concluded that Hunt’s sale triggered both the ROFR and the ROFO, meaning “Borealis and Sempra [had] separate contractual rights to purchase Hunt’s shares.”[4] The Court of Chancery, however, entered judgment for Sempra because selling the shares to Borealis would have breached the Oncor IRA. The TTHC SA importantly prohibited transfers that breached the Oncor IRA, so the ROFR prevailed over the ROFO when both provisions were germane to the transaction. Borealis and Cheyne Walk filed an expedited appeal to the Delaware Supreme Court.
The Delaware Supreme Court reviews “questions of contract interpretation de novo.”[5] The court, therefore, revisited the relevant provision in the Oncor IRA to determine whether the ROFR applied to Hunt’s sale. The court swiftly identified that the ROFR only applied to “transfers by the Minority Member and its Permitted Transferees,” and Hunt was neither the Minority Member nor a Permitted Transferee.[6] The Minority Member was clearly TTI and neither party argued that Hunt was a Permitted Transferee. Likewise, Hunt’s intent “to sell its stake in TTHC [did] not manifest an intent on TTI’s part to transfer Oncor LLC Units,” meaning Hunt did not act on behalf of the Minority Member by selling its stake.[7] Per New York and Delaware law, which governed the Oncor IRA and TTHC SA respectively, a contract is given effect if its meaning is plain and unambiguous[8]. The Oncor IRA unambiguously defined the parties and transactions subject to the ROFR, so the court enforced the ROFR as written.[9]
In addition, the Delaware Supreme Court addressed Sempra’s argument that the Oncor IRA’s definition of “transfer” intended to encompass “upstairs equityholders” like Hunt.[10] Sempra’s argument failed again to recognize the parties subject to the ROFR: Minority Members and Permitted Transferees. Thus, the court reiterated its previous findings and reversed the Court of Chancery’s judgment. In a concurrence, Justices Vaughn and Montgomery-Reeves addressed a second definition of “transfer” in the Oncor IRA that applied to “any ‘event’ by which a Member (TII) ‘[ceased] to be controlled by the Person controlling such Member.’”[11] The Justices found this secondary definition inapplicable because Hunt’s sale of a 1% interest could not effect a change in control of TTI.

[1] Borealis Power Holdings Inc. v. Hunt Strategic Util. Inv., L.L.C., No. 68, 2020, 2020 WL 2630929, at *1 (Del. 2020).
[2] In 2018, EFH was renamed Sempra Texas Holdings Corp. after Sempra Energy acquired EFH.
[3] Borealis Power Holdings Inc. v. Hunt Strategic Util. Inv., L.L.C., No. 68, 2020, 2020 WL 2630929, at *2 (Del. 2020).
[4] Id. at *4.
[5] Id. at *5.
[6] Id.
[7] Id. at *6.
[8] Id. at *5.
[9] The Oncor IRA tethered the ROFR to any event in which “a Selling Member intends to Transfer LLC Units.” In the same section of the contract, the Oncor IRA defined “Selling Member” as the Minority Member and its Permitted Transferees. Id. at *6.
[10] Id.
[11] Id. at *7.