In Borealis Power Holdings Inc. v. Hunt Strategic Utility Investment, L.L.C., the Delaware Supreme Court reversed the Court of Chancery and held the ROFR in an investor rights agreement was not applicable to an indirect equity holder.

The facts were complex.  Hunt Strategic Utility Investment, L.L.C. (“Hunt”) owned a one-percent stake in Texas Transmission Holdings Corporation (“TTHC”), a utility holding company. The remaining ninety-nine percent was split equally between two Borealis entities (Borealis Power Holdings, Inc. and BPC Health Corporation, together, “Borealis”) and Cheyne Walk Investment PTE LTD (“Cheyne Walk”). Thus, neither Borealis nor Cheyne Walk owned a majority stake in TTHC, as each owned 49.5%.

TTHC wholly owned Texas Transmission Finco LLC (“TTFinco”), which wholly owned Texas Transmission Investment LLC (“TTI”). TTI in turn owned 19.75% of  Oncor Electric Delivery Company LLC (“Oncor”). The remaining 80.25% of Oncor was held by Sempra Texas Holdings Corp. (“STH) and Sempra Texas Intermediate Holding Company, LLC (“STIH” and, together with STH, “Sempra”).

Oncor and its equityholders entered into an investor rights agreement (the “Oncor IRA”). The parties to the IRA were Oncor itself, the record owners of its units—TTI and Oncor Holdings—and STH.  Borealis, Hunt, and Cheyne Walk were not parties to the Oncor IRA. The Oncor IRA included a right of first refusal provision (“ROFR”).

The direct shareholders of TTHC and TTHC also entered into a shareholders agreement (the “TTHC SA”) that provided a process for selling shares in TTHC, including a right of first offer for non-selling shareholders (the “ROFO”).

On July 11, 2019, Hunt and Sempra (through STIH) executed a share purchase agreement (the “SPA”) with respect to Hunt’s one percent interest in TTHC. That same day, Hunt sent the SPA to Borealis and Cheyne Walk attached as an exhibit to a letter alleged to be a First Offer Notice. Borealis responded on July 22 that it would exercise its ROFO under the TTHC SA and 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. In response, Sempra sent a letter to Borealis, Cheyne Walk, TTHC, TTFinco, and TTI stating that it was exercising its ROFR under the Occor IRA.

A few days later, Borealis filed a complaint in the Delaware Court of Chancery asserting a claim against Hunt for breach of the TTHC SA. Borealis also sought a temporary restraining order enjoining Hunt from transferring the Hunt shares to Sempra.

The Delaware Supreme Court analyzed the provisions of the Oncor IRA.  Section 3.1 of the Oncor IRA, entitled “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 under which the Minority Member and its Permitted Transferees may transfer Oncor LLC Units. Section 3.9 of the Oncor IRA, entitled “Right of First Refusal” (the “ROFR”), provided that,

In the event that a Selling Member intends to Transfer LLC Units . . . such Selling Member shall deliver to [STH], so long as it has an indirect interest in the Company and thereafter Parent . . . written notice of its intention to Transfer LLC Units . . . and the terms and conditions of the proposed Transfer . . . . The Notice of Intention to Sell shall be accompanied by a written offer . . . to sell or otherwise Transfer to the  ROFR Party . . . for a price in cash . . . all, but not less than all, of the Offered Units, on the same terms and conditions as set forth in the Notice of Intention to Sell.

The term “Offered Units” in this section was defined as “LLC Units or IPO Units, as the cases may be.” “Minority Member” was defined in the Preamble of the Oncor IRA as “Texas Transmission Investment LLC”—TTI, for short. “Selling Member” was defined in Section 3.9 as “the Minority Member” or the Minority Member’s “Permitted Transferee.”

Finally, “Transfer”

 means any direct or indirect transfer . . . of any LLC Units (or any interest (pecuniary or otherwise) therein or rights thereto). 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.

The Court found the Oncor IRA does not apply to the Hunt Sale because the ROFR in Section 3.9 was only triggered by transfers by the Minority Member and its Permitted Transferees, and Hunt was neither. Because Section 3.9 was only triggered by transfers by the Minority Member, it did not matter whether the Hunt sale constitutes a “transfer” as contemplated by the Oncor IRA, or whether the sale transfers “Oncor LLC Units.” Put another way, the fact that the ROFR 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.

Despite the plain language of Section 3.9, Sempra argued that the intent of the parties to the Oncor IRA—TTI, Sempra, and Oncor itself—was to bind TTI’s upstairs equityholders and restrict their transfers of that upstairs equity. In support of this argument, Sempra turned to the definition of the term “Transfer” in the Oncor IRA. It argued that the first sentence of the definition, which purports to encompass “any direct or indirect transfer” of Oncor LLC Units, includes any transfers in upstairs equity, because transfers of upstairs equity indirectly transfer control of Oncor LLC Units. Sempra also argued in the alternative that, even if the Hunt sale was not a “Transfer” under the first sentence, it was a “Transfer” under the second sentence, because a transfer of Hunt’s interest to Borealis or Cheyne Walk would change the control of TTHC, and thus of TTI.

The Delaware Supreme Court held both of these contentions suffer from the same flaw; they omit to address the subject of the operative sentence in Section 3.1 of the Oncor IRA of which the verb phrase “may only Transfer” serves as the predicate. That subject, according to the Court, was not accidental or unimportant—it was the same subject for which the verb phrase “intends to Transfer” serves as the predicate in Section 3.9. As noted, that subject, which was stated conjunctively as “the Minority Member and its Permitted Transferees,” or the “Selling Member,” does not include Hunt. It was therefore unnecessary to parse the definition of “Transfer” to determine the scope of Section 3.1 and Section 3.9; this was addressed in the opening sentences on both of those sections. In sum, Hunt was not TTI, nor was it a Permitted Transferee, nor could it, as a minority shareholder of TTI’s controller, 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.