Borealis Power Holdings Inc. v. Hunt Strategic Utility Investment, L.L.C.

• Court: Court of Chancery of Delaware
• Decided: January 22, 2020
• Docket: CA No. 2019-0582-SG
• Status: Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

BOREALIS POWER HOLDINGS INC. ) and BPC HEALTH CORPORATION, ) ) Plaintiffs, ) ) v. ) ) HUNT STRATEGIC UTILITY ) INVESTMENT, L.L.C., ) ) Defendant. ) ) SEMPRA TEXAS HOLDINGS CORP., ) and SEMPRA TEXAS ) INTERMEDIATE HOLDING ) COMPANY LLC, ) ) Plaintiff Intervenors, ) ) v. ) C.A. No. 2019-0582-SG ) BOREALIS POWER HOLDINGS INC., ) BPC HEALTH CORPORATION, ) TEXAS TRANSMISSION ) INVESTMENT LLC, and HUNT ) STRATEGIC UTILITY INVESTMENT ) L.L.C., ) ) Defendants. ) ) CHEYNE WALK INVESTMENT PTE ) LTD, ) Plaintiff Intervenors, ) ) v. ) ) HUNT STRATEGIC UTILITY ) INVESTMENT, L.L.C., SEMPRA ) TEXAS HOLDINGS CORP., and ) SEMPRA TEXAS INTERMEDIATE ) HOLDING COMPANY, LLC, ) ) Defendants. )

MEMORANDUM OPINION

Date Submitted: December 20, 2019 Date Decided: January 22, 2020

William M. Lafferty, Thomas W. Briggs, Jr., Daniel T. Menken, and Aubrey J. Morin, of MORRIS NICHOLS ARSHT & TUNNEL LLP, Wilmington, Delaware; OF COUNSEL: Richard I. Werder, Jr., Renita N. Sharma, Elisabeth B. Miller, and Ryan A. Rakower, of QUINN EMANUEL URQUHART & SULLIVAN, LLP, New York, New York, Attorneys for Plaintiffs and Defendants Borealis Power Holdings Inc. and BPC Health Corporation.

Blake Rohrbacher, Brian S. Yu, and Kevin M. Regan, of RICHARDS, LAYTON & FINGER P.A., Wilmington, Delaware; OF COUNSEL: Neil A. Steiner, of DECHERT LLP, New York, New York, Attorneys for Plaintiff Intervenors Cheyne Walk Investments Pte Ltd.

David C. McBride, Martin S. Lessner, Ryan M. Bartley, and Paul J. Loughman, of YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: J. Christopher Shore and Alive Tsier, of WHITE & CASE LLP, New York, New York; Aaron Colodny, of WHITE & CASE LLP, Los Angeles, California, Attorneys for Plaintiff Intervenors and Defendants Sempra Texas Holdings Corp. and Sempra Texas Intermediate Holding Company, LLC.

Peter J. Walsh, Jr., J. Matthew Belger, and Andrew H. Sauder, of POTTER ANDERSON & CARROON LLP, Wilmington, Delaware; OF COUNSEL: Jessica B. Pulliam, of BAKER BOTTS LLP, Dallas, Texas; Vernon Cassin, of BAKER BOTTS LLP, Washington, D.C, Attorneys for Defendant Hunt Strategic Utility Investment, LLC. P. Clarkson Collins, Jr., Ian D. McCauley, and Kathleen A. Murphy, of MORRIS JAMES LLP, Wilmington, Delaware, Attorneys for Defendant Texas Transmission Investment LLC.

GLASSCOCK, Vice Chancellor This post-trial Memorandum Opinion resolves a discrete set of contractual

issues. Defendant Hunt Strategic Utility Investment, L.L.C. (“Hunt”) owns one

percent of the shares in a utility holding company. It wishes to sell that investment.

It believes that its right to do so is subject, contractually, to what amounts to two

conflicting rights of first refusal; one in favor of two affiliated parties here—Borealis

Power Holdings, Inc. and BPC Health Corporation (together, “Borealis”)—and

another in favor of intervenor Sempra Texas Holdings Corp. (“STH”). Borealis

wishes to vindicate its right and purchase Hunt’s interest. So does STH. As a result,

while Hunt is the Defendant, its position resembles the plaintiff in an interpleader

action; it will sell to whichever entity the Court finds to have superior contractual

rights to purchase its interest.

The resulting contractual inquiry required the examination of two complex

and inter-related contractual schemes, to determine the parties’ intentions with

respect to the proposed transaction here. Readers of this Memorandum Opinion will

find the resolution of those contractual issues challenging but comprehensible, I

assume, as did I. Far more laborious will be comprehending the convoluted

relationship among the many contracting entities, a necessary preliminary to a

reasoned resolution of the contractual issues just referenced. Considerations of

investors in the underlying utility—including satisfaction of regulators, preservation

1 of entity creditworthiness, and tax avoidance—have resulted in an ownership

structure of Byzantine complexity, set out in eye-watering detail below.

Have traversed these entity and contractual badlands, I determine that STH’s

preclusive purchase rights are superior to that of Borealis. My reasoning follows the

aforementioned footsore factual recitation, below.

I. BACKGROUND1

This is a post-trial Memorandum Opinion. The following facts were

stipulated by the parties or proven by a preponderance of evidence at trial.

A. The Parties and Relevant Non-Parties

Figure “A”, attached at the end of this Memorandum Opinion, graphically

represents the relationship of the contracting entities discussed below.

Non-party Oncor Electric Delivery Company LLC (“Oncor”) is a Delaware

limited liability company headquartered in Dallas, Texas.2 Oncor is an electric

utility company operating the largest transmission and distribution system in Texas.3

Oncor delivers electricity to more than 3.6 million homes and businesses and

operates more than 138,500 miles of transmission and distribution lines.4

1 Citations to Joint Trial Exhibits (“JX”) are expressed as JX __, at __. Page numbers for JXs are derived from the stamp on each JX page, expressed in the form of JX 000.000. For clarity, certain citations to JXs reference the section number of a document (§) instead of the JX page. Citations in the form “Tr.” refer to the trial transcript. 2 Pretrial Stipulation and Order, D.I. 226 (“PTSO”), ¶ 3. 3 Id. 4 Id. 2 Defendant Texas Transmission Investment LLC (“TTI”) is a Delaware limited

liability company.5 TTI directly owns 19.75% of Oncor.6 TTI is 100% owned by

non-party Texas Transmission Finco LLC (“TTFinco”), a Delaware limited liability

company.7 TTFinco is, in turn, 100% owned by non-party Texas Transmission

Holding Corporation (“TTHC”), a Delaware corporation.8

Litigants Borealis Power Holdings, Inc. and BPC Health Corporation—

defined above jointly as Borealis—are Ontario corporations headquartered in

Toronto, Ontario.9 Borealis collectively owns 49.5% of TTHC.10 Borealis’ ultimate

parent is non-party Ontario Municipal Employee Retirement System (“OMERS”).11

OMERS is a statutorily-created pension fund that handles the retirement benefits for

the government employees of Ontario, Canada.12 OMERS has approximately $100

billion Canadian dollars of assets under management.13

Plaintiff Intervenor Cheyne Walk Investment Pte Ltd. (“Cheyne Walk”) is a

Singaporean private limited company headquartered in Singapore.14 Cheyne Walk

5 Id. ¶ 4. 6 Id. ¶ 3; JX 70, at 46. 7 PTSO, ¶ 5. 8 Id. ¶ 6. 9 Id. ¶ 7. 10 Id. Due to the convoluted nature of this litigation, I refer to all parties with multiple titles as “Litigants”—the precise titles of such parties can be found in the case caption. 11 Id. ¶ 13. 12 Id. 13 Trial Tr. 444:22–445:1 (Zucchet). 14 PTSO, ¶ 8. 3 owns 49.5% of TTHC.15 Cheyne Walk is managed and controlled by a wholly-

owned subsidiary of non-party GIC Private Limited (“GIC”), a Singaporean private

limited company headquartered in Singapore.16 GIC is a sovereign wealth fund that

manages assets on behalf of Singapore’s government, and currently has over $100

billion of assets under management.17

Defendant Hunt is a Delaware limited liability company headquartered in

Texas.18 Hunt owns 1% of TTHC and holds no other assets.19 Hunt’s ultimate parent

is non-party Hunt Consolidated, Inc. (“Hunt Consolidated”), a privately held

Delaware corporation headquartered in Dallas, Texas.20 Hunt Consolidated is

engaged in a variety of businesses.21

Non-party Oncor Electric Delivery Holding Company, LLC (“Oncor

Holdings”) is a Delaware limited liability company.22 Oncor Holdings directly owns

80.25% of Oncor.23 Litigant Sempra Texas Intermediate Holding Company

15 Id. 16 Id. ¶ 14. 17 Trial Tr. 347:14–348:12 (Baldwin). 18 PTSO, ¶ 8. 19 Id. ¶ 9; Trial Tr. 188:6–188:9 (Hernandez). 20 PTSO, ¶ 16. It is sometimes unclear from the record which Hunt Consolidated-affiliated entity is being referred to; thus, Hunt is also used herein to refer to any entity under the Hunt Consolidated umbrella (including the Hunt Defendant here). 21 Trial Tr. 141:1–141:8 (Hernandez) (“[Hunt Consolidated is] a privately owned company that is in a variety of businesses, principally energy-related, oil and gas, LNG, electric, power transmission and distribution assets. We also have an investment portfolio, an agriculture business, and a real estate business.”). 22 PTSO, ¶ 10. 23 Id.; JX 70, at 46. 4 (“STIH”) is a Delaware limited liability company and was formerly known as

Energy Future Intermediate Holding Company LLC (“EFIH”).24 STIH owns 100%

of Oncor Holdings.25 STIH is 100% owned by Litigant STH, a Texas corporation.26

STH was formerly known as Energy Future Holdings Corp. (“EFH”).27 STIH and

STH’s ultimate parent is Sempra Energy (“Sempra”), a California corporation.28

Sempra is a publicly-traded energy infrastructure holding company headquartered in

San Diego, California with a market capitalization of approximately $40 billion.29

Sempra holds energy infrastructure investments in California, Texas, Mexico, and

South America.30

B. Origin of Oncor’s Current Ownership Structure

On October 10, 2007, KKR & Co Inc., Texas Pacific Group, and Goldman

Sachs Capital Partners executed a $45 billion leveraged buyout (“LBO”) of TXU

Corp.; TXU Corp. was subsequently renamed EFH.31 The transaction was the

largest LBO in history.32 Post-closing, EFH, an energy company, was structurally

divided into two parts. EFH’s unregulated businesses were held by Texas

24 PTSO, ¶ 11. 25 Id. 26 Id. ¶ 12. 27 Id. 28 Id. ¶ 15. 29 Id.; Trial Tr. 11:1–11:6 (Mihalik). 30 PTSO, ¶ 15. 31 Id. ¶ 17. 32 Trial Tr. 143:6–143:7 (Hernandez). 5 Competitive Electric Holdings Company LLC, EFH’s indirect wholly-owned

subsidiary.33 The regulated side of the business, represented by Oncor, was held

through EFH’s subsidiaries EFIH and Oncor Holdings.34 At the time of the LBO,

Oncor was (and continues to be) regulated by the Public Utility Commission of

Texas (“PUCT”).35

After the LBO closed, EFH sought to “ring-fence” Oncor from the rest of its

business to preserve Oncor’s credit quality.36 The structure—Oncor Holdings as a

bankruptcy-remote entity to hold EFH’s equity interest in Oncor—created a “‘clean’

legal and structural separation between Oncor . . . and EFH and its subsidiaries.”37

However, credit rating agencies conveyed in discussions with EFH that ring-fencing

Oncor from a legal perspective was insufficient to decouple Oncor from the EFH

corporate family credit rating.38 This was significant because, due to the amount of

debt incurred by EFH as part of the LBO, EFH’s own credit ratings were

downgraded.39 This created a threat that Oncor itself could be downgraded.40 The

33 JX 1, at 4, 7. Texas Competitive Electric Holdings Company LLC consisted of two “functionally separate energy businesses,” Lumiant—which had 18,365 MW of generation in Texas—and TXU Energy, the then-largest retail electric provider in Texas. Id. at 4. 34 JX 1, at 7; Trial Tr. 225:7–225:9 (Horton). 35 JX 20, at 3; JX 69, at 3. 36 JX 1, at 32. 37 Id. 38 Trial Tr. 225:10–225:19 (Horton). 39 JX 20, at 5. 40 Trial Tr. 226:12–226:14 (Horton); JX 20, at 5. Anthony Horton, former Executive Vice President and CFO of EFH, testified as to two business consequences to EFH if Oncor was downgraded: (1) “TXU Energy, our unregulated retail business, would have had to post collateral to Oncor” and (2) “[Oncor] would have certainly been in a situation where that would have been 6 credit rating agencies signaled that if EFH sold “somewhere between 19 to 20

percent” of Oncor, the agencies would consider decoupling Oncor from EFH’s

family credit ratings and rating Oncor independently on its own financial metrics.41

EFH thus sought bids for up to 20% of the membership interests in Oncor.42

On January 28, 2008, Borealis and GIC Special Investments submitted

separate written non-binding bids to purchase 20% of Oncor.43 GIC’s bid noted that

while it had “sufficient capacity to acquire the full 20%” it had had “preliminary

discussions with a small number of selected major investors in respect of forming a

consortium of two with each party acquiring 10%.”44 As for Borealis, Steven

Zucchet, who worked on behalf of OMERS Infrastructure on the purchase of

Borealis’ minority interest in Oncor, testified that while its non-binding bid “solely

identified [Borealis]” as the prospective purchaser they “indicated that [Borealis]

frowned upon by PUCT, the regulators in Texas, or its public utility, as well as the legislators. And I believe that could have impacted their rates.” Trial Tr. 226:12–227:5 (Horton). 41 Trial Tr. 225:20–226:4 (Horton). 42 JX 2, at 7; JX 5, at 1. The record also suggests that the ring-fencing, the minority sale, or both were done at the behest of the PUCT. JX 11, at 3. At trial the apparent primary motivation for the sale itself was the requirements of the credit rating agencies. It is unclear from the record the extent to which the ring-fencing was motivated more or less by the PUCT compared to credit rating agency demands. 43 JX 7; JX 8. In its written proposal, GIC Special Investments noted that it was the “private equity investment arm” of the Government of Singapore Investment Corporation Pte Ltd. JX 8, at 4. It appears from the record that the Government of Singapore Investment Corporation Pte Ltd. is within the same corporate family (or is the same entity) as GIC, which was referred to in the stipulated facts as GIC Private Limited. For clarity, I will refer to all investment entities affiliated with the Government of Singapore—other than Cheyne Walk—as GIC. 44 JX 8, at 5. 7 would be looking and needing partners to make . . . the final investment.”45

Thereafter, Borealis and GIC sought permission from EFH and its advisors to partner

with each other for a bid for the 20% interest—such permission was apparently

granted.46

On April 14, 2008 Borealis and GIC submitted a joint final binding offer for

20% of the membership interests of Oncor.47 Borealis and GIC proposed a structure

where they would form a Delaware corporation (the “Tax Blocker”),48 which would

in turn form a Delaware limited liability company that would directly hold the Oncor

membership interests;49 Borealis and GIC proposed that they would each directly

own 49.5% of the Tax Blocker.50 The bid noted that Borealis and GIC would

“require the participation of a minority third party co-investor.”51 Borealis and GIC

sought to sell 1% of the Tax Blocker to a minority third party co-investor such that

neither had control of the Tax Blocker, allowing them to take advantage of Section

892 of the Internal Revenue Code.52 Section 892 of the Internal Revenue Code

45 Trial Tr. 452:15–452:17 (Zucchet). OMERS Infrastructure is the infrastructure investment arm of OMERS. Id. at 444:11–444:15 (Zucchet). 46 JX 13, at 1. Steven Zucchet testified that he “made a very strong appeal to the sponsors and their investment bank that they should allow OMERS and GIC to partner up . . . .” Trial Tr. 456:6– 456:12 (Zucchet). 47 JX 23. 48 Trial Tr. 367:23–368:2 (Zucchet). 49 The Tax Blocker was eventually TTHC; the limited liability company was eventually TTI. 50 JX 23, at 6. 51 Id. 52 Trial Tr. 455:5–455:12 (Zucchet), 437:3–437:9 (Baldwin), 668:18–669:1 (Evenden). For clarity, I note that this was contemplated to be 1% of 20% of Oncor—a .2% ownership interest. 8 provides beneficial tax treatment for sovereign investors.53 The purpose of the

proposed transaction structure—namely, the Tax Blocker and the 1% investor—was

to allow Borealis and GIC to reduce their tax exposure in connection with the

investment.54

After the submission of Borealis and GIC’s joint final binding offer, EFH

expressed interest in moving forward with the transaction.55 On August 11, 2008,

Borealis, Cheyne Walk (GIC’s indirect wholly-owned subsidiary), and TTHC (the

Tax Blocker) executed a term sheet (the “Term Sheet”) that outlined terms with

respect to the minority investment in Oncor.56 The Term Sheet anticipated that TTI,

—the limited liability company formed to directly hold the Oncor membership

interests—would enter into a Contribution and Subscription agreement with Oncor

“in connection with the subscription by [TTI] of limited liability company interests

in Oncor.”57 The next day, the Contribution and Subscription Agreement was

executed, pursuant to which Oncor agreed to sell 125,412,500 LLC units (amounting

to a 19.75% equity stake) to TTI for approximately $1.25 billion.58 The sale was

53 Id. at 668:18–668:21 (Evenden). The section is codified at 26 U.S.C. § 892. 54 Trial Tr. 369:19–370:11 (Baldwin), 454:17–454:21 (Zucchet). 55 JX 25, at 1 (“The sponsors will be prepared to move forward at $1.27 bn value level . . .”). 56 JX 34. 57 Id. at 3. 58 JX 35; PTSO, ¶ 19. 9 subject to the execution of an investor rights agreement among Oncor, Oncor

Holdings, EFH, and TTI.59

In line with the proposed structure in the joint final bid—and consistent with

the tax strategy of Borealis and GIC—the Term Sheet and the Contribution and

Subscription Agreement contemplated a yet-to-be-identified minority investor in

TTHC.60 On September 30, 2008, a representative from Torys LLP—M&A counsel

to Borealis and GIC in connection with the Oncor investment—sent Hunter Hunt—

the current Co-CEO of Hunt Consolidated—a “teaser” outlining the contemplated

minority investment in TTHC.61 The teaser noted that the minority investor in

TTHC would hold at least 1% and not more than 5% of the investment.62 The next

day a Borealis representative emailed Kirk Baker at Hunt a suite of documents

pertaining to the proposed investment.63 On October 10, 2008 Steven Zucchet

conveyed to representatives of GIC that they had “a verbal commitment from Kirk

[Baker] that Hunt will step in as a 1% co-investor . . . .”64

59 JX 35, § 6.3(c); PTSO, ¶ 19. 60 JX 34, at 8–9; JX 35, § 6.2(d). A condition to the closing of the Contribution and Subscription Agreement was that TTI “shall have received an irrevocable and legally binding equity commitment . . . to acquire between 1% and 5% of the capital stock and shareholder debt of [TTHC] . . . .” JX 35, § 6.2(d). 61 JX 36; Trial Tr. 154:9–154:10 (Hernandez). Hunter Hunt is also the CEO of Hunt Energy. Trial Tr. 154:9–154:10 (Hernandez). 62 JX 36, at 6. Anthony Horton testified that he suggested the minority interest in TTHC should be “as high as 5 percent” because he “felt it was going to be very difficult to find a 1 percent owner of a 20 percent stake in a minority ownership.” Trial Tr. 250:5–250:14 (Horton). 63 JX 37. 64 JX 41, at 1. 10 The transaction to sell a 19.75% minority stake in Oncor to Borealis, Cheyne

Walk, and Hunt closed on November 5, 2008.65 Following closing, the direct

ownership of Oncor’s LLC units was as follows: Oncor Holdings owned

approximately 80%, TTI owned 19.75%, and Oncor Management Investment LLC

(“OMI”) owned approximately .25%.66 TTI was a single-asset entity wholly-owned

by TTHC.67 TTHC—itself a single purpose entity created to own equity interests in

TTI—had the following ownership structure: Cheyne Walk owned 49.5%, Borealis

owned 49.5%, and Hunt owned 1%.68 TTHC had a five-member board: two board

seats for each of Borealis and Cheyne Walk, and one board seat for Hunt.69

Three documents, among others, were executed contemporaneously in

connection with the minority sale. First, TTHC, Borealis, Cheyne Walk, and Hunt

entered into the initial TTHC Shareholders Agreement “to govern the relationship

among the parties in their respective capacities as holders of Shares in the capital of

[TTHC] and as indirect holders of limited liability company interests in TTI LLC

and Oncor.”70 Second, Oncor Holdings, TTI, and OMI entered into the Second

65 PTSO, ¶ 19. 66 Id. ¶ 21. Members of Oncor management owned LLC units of Oncor through OMI. Id. While the PTSO states that OMI owned .25% of Oncor’s LLC units, Oncor’s November 5, 2008 Second Amended and Restated LLC Agreement reflects a .21% ownership. JX 47, at 47. Later documents put OMI’s stake at .22%. JX 69, at 2–3. 67 PTSO, ¶ 20. 68 Id. ¶¶ 20, 24. 69 JX 46, § 2.1. TTHC retains this board structure. JX 171, § 2.1. 70 PTSO, ¶ 20; JX 46, at 6. 11 Amended and Restated LLC Agreement of Oncor.71 Finally, Oncor, Oncor

Holdings, TTI, and EFH entered into an investor rights agreement (the “Oncor IRA”)

to “establish . . . the rights and obligations arising out of, or in connection with, their

ownership of [Oncor] LLC Units.”72

The Oncor IRA—still in effect—contains restrictions on the ability of TTI to

transfer its Oncor LLC units. Section 3.1(c) of the Oncor IRA provides that

“Transfers73 of LLC Units74 may only be made in strict compliance with all

applicable terms of [the Oncor IRA] and [Oncor’s] LLC Agreement.”75 During a

period commencing on the earlier of November 5, 2015 or a Qualified IPO,76 private

Transfers—those permitted by applicable securities law but not under a registration

statement or pursuant to Rule 144 of the Securities Act of 1933—cannot be

71 PTSO, ¶ 25. 72 Id. ¶ 22; JX 45, at 4. 73 “Transfer” is defined as: “any direct or indirect transfer, sale, gift, assignment, exchange, mortgage, pledge, hypothecation, encumbrance or any other disposition (whether voluntary or involuntary, by operation of Law, pursuant to judicial process or otherwise) 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 Permitted Transferee thereof, such event shall be determined to constitute a ‘Transfer’ subject to the restrictions on Transfer contained or referenced herein.” JX 45, at 47. 74 “LLC Unit” is defined as “an equal, fractional part of all the Interests, and having the rights and obligations specified with respect thereto in [Oncor’s LLC] Agreement, and any successor,” and “Interest” is defined as “a limited liability company interest in Oncor . . . .” JX 45, at 44; JX 47, at 41. 75 JX 45, § 3.1(c). 76 The parties have stipulated that to date a “Qualified IPO” has not occurred. PTSO, ¶ 55. 12 consummated unless the transferor complies with Section 3.9 of the Oncor IRA.77

Section 3.9 provides EFH a Right of First Refusal (“ROFR”) in the event TTI intends

to Transfer its LLC Units. In that case, Section 3.9 requires TTI or its Permitted

Transferees78 to provide EFH with written notice of its intent to Transfer (a “Notice

of Intention to Sell”)79 accompanied by an irrevocable written offer (an “Inside

Offer”) to sell or otherwise Transfer to EFH all of the LLC Units offered on the same

terms and conditions as set forth in the Notice of Intention to Sell.80

C. Sempra Purchases EFH out of Chapter 11 Bankruptcy; InfraREIT Transaction

On April 29, 2014, EFH and many of its affiliates filed voluntary petitions for

Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the

District of Delaware.81 Oncor itself did not file for bankruptcy and multiple

unsuccessful attempts were made to purchase EFH’s ownership stake in Oncor under

the jurisdiction of the bankruptcy court.82 After nearly four years of bankruptcy

proceedings, on March 9, 2018 Sempra purchased EFH for $9.45 billion pursuant to

77 JX 45, §§ 3.1(a)(iv), 3.9(a). Such Transfers also needed to comply with Section 3.4, which is not at issue in this Action. Id. § 3.1(a)(iv) 78 Permitted Transferees are limited to affiliates and successor entities of the Members (TTI and Oncor Holdings). Id. at 45. 79 The “Notice of Intention to Sell” must state “(i) the number of LLC Units . . . to be Transferred . . . (ii) the purchase price therefor, including a description of any non-cash consideration sufficiently detailed to permit valuation thereof, (iii) the identity of the proposed transferee and (iv) any other material terms and conditions of the proposed Transfer, including the proposed Transfer date . . . .” Id. § 3.9(b). 80 Id. 81 PTSO, ¶ 22. 82 Trial Tr. 144:13–145:1 (Hernandez), 11:19–11:24 (Mihalik), 146:10–146:14 (Hernandez). 13 a plan of reorganization that was confirmed by the Bankruptcy Court on February

27, 2018.83

Before the acquisition by Sempra was completed, the transaction was

approved by the PUCT.84 The PUCT’s Order addressed the joint report and

application of Oncor and Sempra for PUCT approval of Sempra’s proposed

acquisition of EFH’s approximately 80% indirect interest in Oncor and found that

the acquisition was in the public interest provided that all the regulatory

commitments described in the Order were met.85 The Order also noted that Sempra

must receive PUCT approval of any transaction in which Sempra seeks to acquire

the 19.75% ownership interest in Oncor held by TTI.86

Subsequent to the acquisition, EFH was renamed STH and EFIH was renamed

STIH.87 Oncor Holdings also purchased the approximately 0.25% of Oncor’s LLC

Units owned by OMI with proceeds from a capital contribution to Oncor Holdings

from Sempra.88 On the same day Sempra’s purchase of EFH closed, Oncor Holdings

83 PTSO, ¶ 40. TXU and Luminant, the unregulated side of EFH’s business, had already been spun off from EFH under new parent company Vistra. JX 68, at 2. 84 PTSO, ¶ 40. 85 JX 69, at 1. 86 Id. at 2. 87 PSTO, ¶ 41. 88 Id.; JX 69, at 2–3. 14 and TTI entered into the Third Amended and Restated LLC Agreement of Oncor

(the “Oncor LLC Agreement”).89

InfraREIT is an electric transmission and distribution company.90 On October

18, 2018 Oncor agreed to acquire all of the equity interests of InfraREIT for $1.275

billion.91 As part of the negotiations in the InfraREIT transaction, Sempra attempted

to purchase Hunt’s equity interest in TTHC, but that attempt was abandoned prior to

closing.92 In connection with funding TTI’s portion of the InfraREIT transaction,

Borealis, Cheyne Walk, and Hunt agreed to amend the TTHC Shareholders

Agreement (the “TTHC SA”).93 Also in connection with such funding, the parties

created TTFinco, resulting in TTI’s current ownership structure, with TTHC owning

100% of TTFinco and TTFinco owning 100% of TTI; ownership of TTHC was not

affected by the creation of TTFinco.94

89 PTSO, ¶ 25; JX 70. While the PTSO states that OMI entered into the Third Amended and Restated LLC Agreement of Oncor, the agreement itself does not reflect that—unlike the Second Amended and Restated LLC Agreement of Oncor, there is no OMI signature block. Compare JX 70 with JX 47, at 36 (OMI signature block). This would be consistent with the description of the transaction—in both the PTSO and the PUCT Order—as including STH’s purchase of OMI’s Oncor LLC Units. 90 PSTO, ¶ 42. 91 Id. 92 Trial Tr. 768:2–768:7 (Christensen) (“Q: Was Sempra Contemplating a purchase of the 1 percent as part of IntraREIT? A: It was. Q: Did that proceed? A: No, that did not proceed. That came out of the term sheet.”); Id. at 477:8–478:4 (Zucchet). The Executive Vice Present and CFO of Sempra testified that Sempra had taken steps, including holding discussions with credit rating agencies, to determine whether such an acquisition would affect Oncor’s credit rating. Id. at 36:12–36:24 (Mihalik). 93 PSTO, ¶ 42; JX 171. This is the current operative TTHC Shareholders Agreement. 94 PTSO, ¶ 43. 15 D. Hunt’s Sale Process

As part of the amendments to the TTHC SA, the parties—Borealis, Cheyne

Walk, and Hunt—made changes to Section 6.4, titled “Right of First Offer.”95 The

changes modified Hunt’s obligations to Borealis and Cheyne Walk in connection

with a sale of its ownership interest in TTHC. Hunt’s motivation to push for these

changes was that it had been interested in buying the majority stake in Oncor during

the bankruptcy process, but once Sempra purchased EFH, Hunt “no longer had an

interest in maintaining [the 1% ownership stake in TTHC]” because “for Hunt it was

always a lot more strategic value to be a minority shareholder when [it was]

interested in potentially someday acquiring.”96

The amendments to the TTHC SA gave Hunt a “Minority Shareholder Special

Period”—a period in which Hunt (and only Hunt) could seek to sell its interest in

TTHC outside of the process normally required by the TTHC SA.97 The period

95 Trial Tr. 723:17–723:21 (Evenden); JX 171, § 6.4. Section 6.4.1 reads: “[i]f at any time any Shareholder (each, a ‘Selling Shareholder’) wishes to sell some or all of the Shares held by the Selling Shareholder, it shall give notice thereof (the ‘First Offer Notice’), to the other Shareholders (the ‘Other Shareholders’ which term, for greater certainty, excludes the Selling Shareholder and its Affiliates). The First Offer Notice shall state that the Selling Shareholder wishes to sell such number of the Shares (the ‘Optioned Shares’) held by it and shall state the price (which shall be payable in cash and shall be identical on a per share basis) which the Selling Shareholder is willing to accept for such Optioned Shares.” JX 171, § 6.4.1 (emphasis omitted). 96 Trial Tr. 145:23–146:14 (Hernandez), 147:23–148:9 (Hernandez). 97 JX 171, § 6.4.1. Section 6.4.1.1 reads: “[n]otwithstanding anything to the contrary in this Article 6, during the period (the ‘Minority Shareholder Special Period’) commencing on the date hereof and ending on the date that is 90 days after the earlier of (a) the consummation of the transactions contemplated by that certain Agreement and Plan of Merger, dated as of October 18, 2018, among Oncor and InfraREIT Inc. and certain other parties specified therein, as the same may be amended from time to time (as amended, the ‘InfraREIT Merger Agreement’), and (b) the termination of 16 began on October 30, 2018 (the day the TTHC SA was executed) and was prescribed

to end 90 days after the earlier of (i) the closing of the InfraREIT transaction or (ii)

the termination of the InfraREIT merger agreement in accordance with its terms.98

In the Minority Shareholder Special Period, Hunt could market its Shares99 in TTHC

the InfraREIT Merger Agreement in accordance with its terms, [Hunt] shall be free to conduct a marketing process with respect to the Shares held by it and to make non-binding offers to sell (or solicit non-binding offers to purchase) such Shares to (or from) one or more Third Parties (as defined below) on such terms as [Hunt] shall determine in its sole discretion, in each case without delivering a First Offer Notice to the Other Shareholders; provided, that (i) [Hunt] shall not offer to sell the Shares held by it to (or solicit or accept offers to purchase such Shares from) Elliott Management Corporation or Bluescape Energy Partners, or any pass-through or structured finance vehicles that serve primarily as investment vehicles for such entities (any such entity or vehicle, an ‘Excluded Third Party’) and (ii) if as a result of the marketing process described above, [Hunt] receives a bona fide written offer from a Third Party (other than an Excluded Third Party) to purchase the Shares held by it that it has determined it would like to accept, it shall deliver a First Offer Notice, together with a copy of the bona fide written offer (which offer shall include the name and address of the proposed transferee), to the Other Shareholders prior to accepting such offer.” Id. § 6.4.1.1 (emphasis omitted). Section 6.4.1.2 reads: “[i]f [Hunt] notifies the Other Shareholders at any time during the Minority Shareholder Special Period that it intends to conduct a marketing process as contemplated by Section 6.4.1.1, upon [Hunt’s] request, [TTHC] shall, and shall cause [TTFinco] and [TTI] to, reasonably cooperate and assist the Minority Shareholder with any due diligence process undertaken by any Third Party (other than an Excluded Third Party) in connection with such marketing process, including by (i) providing reasonable access at reasonable times upon reasonable advance notice to the books, records and other documents of [TTHC], [TTFinco] and [TTI] and (ii) providing reasonable access at reasonable times upon reasonable advance notice to the directors and officers of [TTHC], [TTFinco] and [TTI] so any such Third Parties may ask questions of such persons; provided, however, that, in the case of both clauses (i) and (ii), (x) such access would not violate applicable law or contract or jeopardize the protection of the attorney client or other applicable privilege and (y) any such Third Party has executed a confidentiality agreement in form reasonably acceptable to [TTHC’s] Board. For the avoidance of doubt, any such marketing process (including any such due diligence process) shall be at [Hunt’s] sole cost and expense (other than any general and administrative or ‘overhead’ expenses that are normal and incidental to [TTHC] providing the access to books, records, documents, directors and officers contemplated above).” Id. § 6.4.1.2. 98 Id. § 6.4.1.1. 99 “Shares” means “shares of capital stock of [TTHC] now or from time to time issued and outstanding and includes the Class A Shares, the Class B Shares, any Shares into which Shares may be converted or changed or which result from a consolidation, subdivision, reclassification or redesignation of Shares, any Shares which are received as a stock dividend or distribution payable 17 without first delivering a “First Offer Notice” to Borealis and Cheyne Walk.100

Outside of the Minority Shareholder Special Period, the TTHC SA gave the Other

Shareholders (those not attempting to sell their Shares) a Right of First Offer

(“ROFO”) which required a “Selling Shareholder”—“any Shareholder [who] . . .

wishes to sell some or all of the Shares”—to deliver a First Offer Notice to the Other

Shareholders before marketing its Shares.101 The First Offer Notice must state that

the Selling Shareholder wishes to sell a quantity of Shares (the “Optioned Shares”)

held by it and the price (which shall be payable in cash and shall be identical on a

per share basis) that the Selling Shareholder is willing to accept for such Optioned

Shares.102 While Hunt is not required deliver a First Offer Notice before marketing

its Shares in the Minority Shareholder Special Period, if Hunt receives a bona fide

written offer pursuant to the Minority Shareholder Special Period, it then must

deliver a First Offer Notice to Borealis and Cheyne Walk.103 Under the TTHC SA,

within 20 business days after receiving a First Offer Notice the Other Shareholders

have the option to purchase their pro rata amount of the Optioned Shares for the

in Shares and any Shares which may be received by the parties. hereto or bound hereby as a result of a merger, arrangement or other reorganization of or including [TTHC].” Id. at 12. 100 Id. §§ 6.4.1.1, 6.4.1.2. 101 Id. § 6.4.1. 102 Id. 103 Id. § 6.4.1.1. Hunt is also required to deliver the bona fide written offer to Borealis and Cheyne Walk. Id. 18 price set out in the First Offer Notice.104 If such option is not exercised within 20

business days, the Other Shareholders are deemed to have rejected the offer to

purchase such Optioned Shares.105 Additionally, in certain circumstances during the

Minority Shareholder Special Period—such as if the Other Shareholders agree that

Hunt may sell to the prospective transferee or the Other Shareholders do not agree

to purchase the Optioned Shares within 25 business days of receipt of a First Offer

Notice—certain “Tag-Along Rights” do not apply.106 In other words, during the

Minority Shareholder Special Period Hunt is permitted to market its Shares free of

Borealis’ and Cheyne Walk’s right to insist on being bought out pursuant to the Tag-

Along Rights as well. In negotiating the terms of the Minority Shareholder Special

Period, Borealis and Cheyne Walk attempted to insert Sempra as an Excluded Third

Party—one who could not purchase Hunt’s Shares pursuant to the Minority

Shareholder Special Period—but Hunt rejected this proposal as a “nonstarter.”107

104 Id. § 6.4.3.1. Each of Borealis and Cheyne Walk also have the option to purchase each other’s pro rata amount should the other party decline to exercise its right to purchase pursuant to the First Offer Notice. Id. § 6.4.4. 105 Id. § 6.4.3. If the Other Shareholders agree to purchase the Optioned Shares, a sale is to be completed by the 20th business day after the Other Shareholders give notice of their election to purchase the Optioned Shares, however, if the sale is not completed within 60 business days after the Other Shareholders give notice of their election to purchase the Optioned Shares, then such event is a “Stalled Sale” and the Other Shareholders are deemed to have rejected the offer made to them to purchase the Optioned Shares. Id. § 6.4.6. 106 Id. § 6.4.7. The “Tag-Along Rights” can be found in Section 6.5 of the TTHC SA. 107 JX 158, at 4 (“We attempted to include Sempra as an unacceptable purchaser because as part of the s. 892 structuring the 1% owned by the Hunts has heightened governance rights which we may not want Sempra to have in TTHC (for example it comes with a board seat), but the Hunts refused to accept the Sempra carve out.”); Trial Tr. 724:15–724:24 (Evenden), 779:11–779:16 19 Anticipating that the PUCT would approve the InfraREIT transaction in April

2019, Hunt planned for a mid-May closing of the transaction.108 The Minority

Shareholder Special Period would terminate 90 days thereafter in accordance with

the TTHC SA.109 In April 2019, Hunt reached out to Sempra to “reengage with them

and see if they would be willing or see if they were interested in committing to a sale

[of Hunt’s 1% interest in TTHC] during that period.”110 On April 11, 2019, Nathan

Christensen, Senior Vice President and General Counsel of Hunt Consolidated,

emailed Trevor Mihalik, Executive Vice President and Chief Financial Officer of

Sempra, a “summary of the ROFO provisions of the [TTHC SA]” in advance of a

scheduled call that afternoon.111 On May 28, 2019 Hunt’s counsel, Baker Botts

L.L.P. (“Baker Botts”), emailed Sempra’s counsel, White & Case LLP (“White &

Case”), to inquire if White & Case had conferred with Sempra regarding the

acquisition.112 A call appears to have occurred between the parties on May 30,

2019.113

(Christensen) (“I was communicating that introducing this exclusion on Sempra was a total nonstarter . . . .”). 108 Trial Tr. 787:19–788:7 (Christensen). The transaction ultimately closed on May 15, 2019. Id. at 785:5–785:7 (Christensen). 109 JX 171, § 6.4.1.1. 110 Id. at 788:11–788:14 (Christensen). 111 JX 199; Trial Tr. 756:13–756:17 (Christensen), 11:3–11:9 (Mihalik). 112 JX 201, at 6–7. 113 Id. at 3. 20 On June 13, 2019, Sempra delivered to Hunt a non-binding proposal for the

purchase of Hunt’s 1% stake in TTHC (the “Hunt Shares”) for approximately $23.32

million along with a due diligence request list related to the proposal.114 The

proposal outlined Sempra’s interpretation of the interaction between Sempra’s

ROFR in the Oncor IRA and the ROFO in the TTHC SA. Sempra stated its

“understanding that Section 6.4 of [the TTHC SA] . . . contains a right of first offer

in favor of the other shareholders of TTHC in connection with proposed transfers of

shares in TTHC.”115 However, Sempra continued that it “also understand[s] that

Section 6.3 of the [TTHC SA] provides that, notwithstanding anything to the

contrary in the [TTHC SA], no transfer of shares in TTHC may be consummated if

such transfer would result, directly or indirectly in a breach of [the Oncor IRA].”116

Sempra concluded that “the [TTHC SA] and Oncor IRA, when read together, results

in an agreement whereby any transfer of shares in TTHC that is not made in

compliance with Sempra’s right of first refusal contained in Section 3.9 of the Oncor

114 PTSO, ¶ 49; JX 202. The parties have also stipulated that the proposal included the purchase of “certain notes.” PTSO, ¶ 49. 115 JX 202, at 4. 116 Id. Section 6.3 of the TTHC SA reads: “[n]otwithstanding anything to the contrary in this Agreement, a Shareholder shall not be permitted to Transfer any Shares, and neither [TTHC] nor any other Shareholder will recognize any such purported Transfer or any purported Shareholder related thereto, if such Transfer would result, directly or indirectly, in a breach of . . . the [Oncor IRA] . . . .” JX 171, § 6.3. 21 IRA constitutes a breach of the Oncor IRA by TTI.”117 Such a transaction, in

Sempra’s view, would be a nullity.

The next day, Hunt sent Sempra’s non-binding proposal to Borealis and

Cheyne Walk.118 Hunt enclosed Sempra’s legal due diligence request list and

requested that “[c]onsistent with [their] obligations under the [TTHC SA]”119

Borealis and Cheyne Walk “provide [their] cooperation and assistance in connection

with the limited confirmatory due diligence investigation that Sempra is planning to

carry out.”120 On June 18, 2019, Borealis responded to Hunt via email.121 Borealis

noted that it did “not believe [Hunt’s] June 14th letter constitutes a First Offer Notice

under the [TTHC SA]” and that “TTHC does not agree with Sempra’s inference in

its June 12th letter to you that [Hunt] may not transfer its TTHC interest to the current

TTHC shareholders pursuant to the ROFO provisions of the [TTHC SA] without

first complying with the ROFR provisions of the Oncor IRA.”122 Borealis noted that

117 JX 202, at 4. 118 JX 204. It is, at some points, unclear from the record whether an individual is representing Borealis or OMERS, or Cheyne Walk or GIC. The two witnesses at trial who purported to represent Borealis and Cheyne Walk, Steven Zucchet and Rhys Evenden respectively, appear from the record to be, respectively, employees of OMERS and GIC yet act on behalf of the two majority shareholders in TTHC. Therefore, for clarity, I will refer to any communications to or from a Borealis or OMERS representative as a communication to or from Borealis and will refer to any communications to or from a Cheyne Walk or GIC representative as a communication to or from Cheyne Walk. 119 It appears that Hunt was referring specifically to the requirements of Section 6.4.1.2 of the TTHC SA. Trial Tr. 785:16–786:18 (Christensen). 120 JX 204, at 7–8. 121 JX 205. 122 Id. at 1. 22 it would “honor its cooperation and assistance obligations under the [TTHC SA]”

but that it expected Hunt to provide to Sempra any due diligence information that

was in Hunt’s possession.123

After a series of emails between Hunt and Borealis discussing a Sempra non-

disclosure agreement for the proposed transaction and due diligence materials,

Borealis emailed Hunt on July 1, 2019 that it would “be following up with a formal

response shortly, but wanted to advise you in advance that we are not going to

consent to the sale of Hunt’s 1% interest in TTHC to Sempra.”124 Borealis’ formal

letter, dated July 2, 2019, conveyed its view that the proposed sale to Sempra was

not a “Permitted Transfer” under the TTHC SA.125 Borealis continued that any

“Transfer” under the TTHC SA that was not a “Permitted Transfer” required the

consent of both Borealis and Cheyne Walk, and Borealis would not consent to the

transaction.126 Therefore Borealis did “not believe [it was] necessary or reasonable

to enter into a confidentiality agreement or provide the documents requested by Hunt

as part of Sempra’s due diligence.”127

Hunt responded by letter on July 8, 2019.128 Hunt stated that the TTHC SA

imposed no bar on Hunt’s sale of the Hunt Shares to Sempra because the consent

123 Id. 124 JX 210, at 4. 125 JX 213, at 6. 126 Id. 127 Id. 128 JX 220. 23 right did not apply to “Transfers of Shares ‘expressly permitted by, and in

accordance with, Article 6’ of the [TTHC SA].”129 Hunt stated that it “plan[ed] to

comply with the right of first offer provisions contained in Section 6.4 [of the TTHC

SA] prior to effecting a Transfer of its Shares to Sempra.”130 Thus, Hunt concluded

that “a Transfer of Shares to Sempra in compliance with Section 6.4 is permitted by

Article 6 and does not require [Borealis’ or Cheyne Walk’s] consent.”131 Hunt

cautioned that if Borealis and Cheyne Walk did not cooperate with the due diligence

process Hunt could “only conclude that [they] are not acting in good faith and are in

clear breach of the terms of the [TTHC SA].”132

On July 11, 2019 Hunt and STIH executed a Share Purchase Agreement (the

“SPA”) whereby Hunt agreed, among other things, to sell to STIH (and STIH agreed

to buy) the entirety of the Hunt Shares subject to the satisfaction of certain conditions

precedent including that either (1) Borealis and/or Cheyne Walk’s ROFO shall have

(i) expired without being exercised or (ii) been waived, or (2) STIH shall have

received a judicial determination that it is entitled to purchase the Hunt Shares

notwithstanding any purported exercise by Borealis or Cheyne Walk of their

ROFO.133

129 Id. at 6. 130 Id. at 7. 131 Id. 132 Id. 133 PTSO, ¶ 50; JX 228. STIH also agreed to purchase certain notes held by Hunt. PTSO, ¶ 50. A week later, a Sempra presentation noted that they “are moving forward to complete the 24 Hunt sent the executed SPA to Borealis and Cheyne Walk as an exhibit to a

July 11, 2019 letter purporting to be a “First Offer Notice delivered by the Hunt

Shareholder pursuant to Section 6.4.1 of the [TTHC SA].”134 The letter enumerated

the equity interests (and notes) Hunt wished to sell, the price it was willing to accept,

and other terms. The letter “confirm[ed] that [Hunt] ha[d] received a bona fide

written offer from a Third Party (who is not an Excluded Third Party)” and asked

Borealis and Cheyne Walk to “provide notice within twenty (20) Business Days

from receipt of this letter as to whether you will (i) purchase your pro rata portion of

[the Hunt Shares] (and, if you wish to purchase more than your pro rata portion,

indicate how many additional [Shares] you wish to purchase) or (ii) agree that [Hunt]

may sell [the Hunt Shares] to a Third Party.”135

On July 22, 2019, Borealis sent a letter to Hunt stating that, pursuant to

Section 6.4.3.1 of the TTHC SA, it was exercising its ROFO and would purchase its

pro rata portion of the Hunt Shares, as well as any of the Hunt Shares that Cheyne

Walk declined to purchase, for the price and on the payment terms set out in Hunt’s

July 11, 2019 letter.136 Borealis noted that because “it had exercised [its] right to

acquisition of Hunt’s 1% interest in TTI as it contains certain ownership/ROFO rights and has tactical value to Sempra, however, given the tactical importance of Hunt’s stake, GIC and OMERS have been unwilling to support Hunt in certain aspects of this divestiture.” JX 230, at 11. 134 JX 225, at 4. 135 Id. 136 PTSO, ¶ 52; JX 231. A December 11, 2018 OMERS internal presentation noted that “OMERS is now able to rely on s.897(I) of the US Tax code (“s.897”) and is no longer constrained to own less than 50% of a US blocker to qualify for the capital gains tax exemption under s.892.” JX 189, 25 elect to purchase [the Hunt Shares] under Section 6.4 [of the TTHC SA], any attempt

to Transfer those Shares to [STIH]—or any other third party—would constitute a

breach of Section 6.4.”137 Borealis reiterated that it would not provide its consent

for Hunt to transfer the Hunt Shares to STIH.138 Borealis alleged that Hunt had

breached the TTHC SA by executing the SPA “prior to providing Borealis the First

Offer Notice and prior to allowing the Other Shareholders to exercise their

contractual right to acquire Hunt’s Shares before a binding offer to sell or purchase

had been made.”139 Borealis contended that Hunt was “contractually obligated to

deliver a First Offer Notice, together with a copy of the bona fide written offer prior

to accepting such offer . . . .”140 Borealis also alleged other breaches of the TTHC

SA by Hunt, including Hunt’s agreement in the SPA to provide confidential

communications between TTHC shareholders to Sempra.141

On July 24, 2019, STH sent a letter to Borealis, Cheyne Walk, TTI, TTHC,

and TTFinco purporting to exercise its ROFR pursuant to Section 3.9(a) of the Oncor

IRA and designating STIH to purchase the Hunt Shares.142 The letter stated that

“[p]ursuant to Section 3.9 of the [Oncor IRA], the Hunt Shares constitute Offered

at 2. Referring to Hunt’s July 11 letter, Cheyne Walk noted in a July 11, 2019 internal email that “[d]ue to the structure, we are not able to buy ‘our half’” of the offered shares. JX 227, at 1. 137 JX 231, at 4. 138 Id. 139 Id. 140 Id. 141 Id. at 5. 142 PTSO, ¶ 53; JX 236. 26 Units for purposes of the [Oncor IRA], and the ROFO Transfer [to Borealis] is

subject to STH’s (or STH’s designee’s) right of first refusal as set forth in the

[Oncor] IRA.”143 STH asserted that the letter “constitute[d] STH’s notice of exercise

of the right of first refusal” and noted that it “expect[ed] TTI to comply with its

obligations under the [Oncor IRA].”144 STH also “expect[ed] TTI . . . to cause TTHC

and the applicable TTHC Shareholders (i) to cooperate in the consummation of the

ROFR Purchase [by STIH], and (ii) not to attempt or purport to Transfer the Hunt

Shares to the applicable TTHC Shareholders in connection with the ROFO Transfer

[to Borealis], or to any other person or entity other than STIH.”145

E. Procedural History

On July 29, 2019, Borealis filed a Verified Complaint asserting a claim against

Hunt for breach of the TTHC SA. Borealis also filed a motion seeking a temporary

restraining order (“TRO”) enjoining Hunt from transferring the Hunt Shares to STIH

pending resolution of the dispute between Borealis and Hunt. On August 2, 2019,

STH and STIH filed a Motion to Intervene. On August 6, 2019, I heard Oral

Argument on Borealis’ TRO Motion and STH and STIH’s Motion to Intervene. At

the hearing, I granted STH and STIH’s Motion to Intervene. On August 7, 2019,

STH and STIH filed a Verified Complaint in Intervention against Borealis, TTI, and

143 JX 236, at 4. 144 Id. 145 Id. 27 Hunt asserting claims for declaratory judgments against Borealis and Hunt, and a

claim against TTI for breach of contract (the “Sempra Complaint”). On August 12,

2019, Cheyne Walk filed an Unopposed Motion to Intervene, which I granted on

August 13, 2019; Cheyne Walk filed its Verified Complaint in Intervention asserting

claims for declaratory judgments against Hunt, STH, and STIH on August 14, 2019.

Upon entering a status quo order (the “SQO”) resolving Borealis’ TRO

Motion on August 13, 2019, I set the Sempra Complaint for an expedited trial on the

merits.146 The SQO prevented STIH and Hunt from consummating the sale during

the period ending on the earlier of (i) the Court issuing a Judgment,147 (ii) December

31, 2019 (since extended to January 30, 2020),148 (iii) the dismissal of this Action,

or (iv) further order of this Court.149 The SQO also equitably tolled the running of

the Minority Shareholder Special Period until ten business days after I issue a

Judgment.150

The Sempra Complaint pleads four claims.

The first claim, for declaratory relief against Borealis, seeks a declaration that

“Borealis’ attempt to purchase [the Hunt Shares] pursuant to its [ROFO] triggered

146 Order Regarding Pl.’s Mot. for a Temporary Restraining Order, D.I. 73, ¶ 1. 147 “Judgment” means “a final judgment determining whether STIH and Hunt are entitled to consummate the Sale, notwithstanding the purported exercise by Borealis or any other person of the right to purchase the Hunt Shares pursuant to Section 6.4 of the [TTHC SA].” Id. ¶ 3. 148 Order Amending August 13, 2019 TRO Order, D.I. 287, ¶ 2. 149 Order Regarding Pl.’s Mot. for a Temporary Restraining Order, D.I. 73, ¶ 3. 150 Id. ¶ 7. 28 STH’s [ROFR] under Section 3.9 of the [Oncor IRA] and STIH (as the designee of

STH) is entitled, notwithstanding Borealis’ purported exercise of its [ROFO], to

consummate the transactions contemplated by the [SPA].”151

The second claim, for a declaratory judgment against Borealis, seeks a

declaration that “(1) Borealis’ attempt to purchase the [Hunt Shares] pursuant to its

[ROFO] triggers STH’s [ROFR] set forth in Section 3.9 of the [Oncor IRA]; (2) the

failure to permit STIH (as STH’s designee) to purchase the [Hunt Shares] pursuant

to STH’s [ROFR] constitutes a material breach of the [Oncor IRA]; and (3) as a

result of that breach and pursuant to Section 3.1(c) of the [Oncor IRA], any attempt

by Borealis to purchase [the Hunt Shares] pursuant to its [ROFO] is null and void

and of no force and effect, and Oncor shall not recognize or be bound by any such

purported Transfer and shall not effect any such purported Transfer.”152

The third claim, for a declaratory judgment against Hunt, seeks a declaration

that “any attempt by Hunt to sell the [Hunt Shares] to Borealis pursuant to its

[ROFO] is null and void and of no force and effect, and Oncor and TTI shall not

recognize or be bound by any such purported Transfer pursuant to Section 3.1(c) of

the [Oncor IRA].”153

151 Intervenors Sempra Texas Holdings Corp. and Sempra Texas Intermediate Holding Company LLC’s Verified Compl. in Intervention, D.I. 54 (“Sempra Compl.”), ¶ 40. 152 Id. ¶ 45. 153 Id. ¶ 50. 29 The fourth claim, for breach of contract against TTI, alleges that TTI breached

the Oncor IRA by, among other things, “taking no action to recognize or effectuate

STH’s [ROFR] or to oppose the Borealis Suit.”154

This matter was tried on an expedited basis, to allow a decision during the

period provided in the SQO. My analysis follows.

II. ANALYSIS

Below, I find that the course of events preceding this litigation gave both

Borealis155 and STH separate contractual rights to purchase the Hunt Shares.

Borealis’ right originates in a stockholders’ agreement, the TTHC SA. During

the Minority Shareholder Special Period, the parties to that agreement—including

Hunt—agreed to grant Borealis a right to purchase upon the receipt by Hunt of a

bona fide written offer for Hunt’s interest in TTHC. Hunt’s agreement to sell its

shares to STIH invoked Borealis’ right to purchase, which became exercisable when

Hunt delivered a contractually-defined “First Offer Notice” to Borealis and Cheyne

Walk on July 11, 2019.

STH’s right to purchase the Hunt Shares originates in a separate contract, the

Oncor investor rights agreement—the Oncor IRA. The Oncor IRA gives STH a

right of first refusal where TTI intends to sell its interest in Oncor. Here, of course,

154 Id. ¶ 56. 155 I note that because Cheyne Walk did not exercise its right to purchase the Hunt Shares, for simplicity my analysis focuses only on Borealis but applies to Cheyne Walk where applicable. 30 the transaction contemplated is a sale of Shares in TTHC—a holding company that

indirectly represents an ownership interest in Oncor—and not a sale of Oncor LLC

Units themselves. Nonetheless, under the Oncor IRA, a sale of TTHC Shares to

Borealis is a “Transfer” of Oncor LLC Units triggering STH’s right of first refusal,

because the definition of “Transfer” in the Oncor IRA is broad enough to encompass

the sale of shares of TTHC—an entity that serves solely as an indirect holding

company for Oncor. Therefore, STH’s right to purchase the Hunt Shares arose by

Hunt’s offer to sell its shares to Borealis, because the resulting transfer of TTHC

Shares to Borealis would constitute a contractual “Transfer of Oncor LLC Units”

under the explicit terms of the Oncor IRA. In other words, under the TTHC SA,

Hunt’s attempt to sell its shares to STIH triggered Borealis’ right to purchase—

Hunt’s offer to Borealis pursuant to that right triggered STH’s own right to purchase

under the Oncor IRA.

While both Borealis and STH have separate rights to purchase the Hunt

Shares, such rights are mutually exclusive: the Hunt Shares are finite and only one

entity can purchase them in their entirety. I find that STH’s right is superior to that

of Borealis because the TTHC SA explicitly prohibits a sale of TTHC Shares that

violate the Oncor IRA. In other words, under these facts, Hunt is contractually

bound via the TTHC SA to sell to Borealis, if and only if such sale does not breach

the Oncor IRA. A sale of the Hunt Shares to Borealis instead of STH, however,

31 would breach the IRA, by contravening STH’s contractual right to purchase the

shares. Thus, STH is the proper transferee of the Hunt Shares. I explain my rationale

in more detail below.

***

Resolution of the Sempra Complaint requires a determination of the relative

supremacy of STH’s ROFR compared to Borealis’ ROFO.156 STH’s ROFR is

granted in the Oncor IRA, a New York law-governed agreement.157 Borealis’ ROFO

arises from the TTHC SA, a Delaware law-governed agreement.158 The differing

choice of law in these agreements need not complicate my analysis, however,

because “New York and Delaware law are generally harmonious in their approach

to contract interpretation, and each state emphasizes the interpretive primacy of

giving effect to the parties’ intention as expressed by the written words of their

agreements.”159 Both New York and Delaware law will give effect to the ordinary

156 While the mechanics of Hunt’s obligations during the Minority Shareholder Special Period essentially have the effect of converting Borealis and Cheyne Walk’s right of first offer into a right that resembles a right of first refusal, the parties in this litigation have referred to Borealis and Cheyne Walk’s right as a ROFO, and such usage has the benefit of distinguishing the right from STH’s right of first refusal (ROFR). Therefore, I refer to Borealis and Cheyne Walk’s right to purchase the Hunt Shares as a ROFO, even though the right is not a right of first offer as such. 157 JX 45, § 5.6(a) (“This Agreement shall be governed by and construed in accordance with the Laws of the State of New York without giving effect to any otherwise governing principles of conflicts of law.”). 158 JX 171, § 1.9 (“This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware (without giving effect to any conflicts or choice of law provisions thereof that would cause the application of the domestic substantive law of any other jurisdiction).”). 159 Rohe v. Reliance Training Network, Inc., 2000 WL 1038190, at *8 (Del. Ch. July 21, 2000) (internal citations omitted). 32 meaning of contractual terms if such terms are clear and unambiguous.160 A contract

is ambiguous under New York law where “the provisions in controversy are

reasonably or fairly susceptible of different interpretations or may have two or more

different meanings”161—Delaware law has the same approach.162 The laws of both

states are in accord that parol evidence may not be used to interpret an unambiguous

contract.163

1. The TTHC SA Gives Borealis a Conditional Right to Purchase the Hunt Shares

Under the TTHC SA, Hunt’s receipt of a bona fide written offer from a non-

Excluded Third Party during the Minority Shareholder Special Period triggers

Hunt’s requirement to deliver a First Offer Notice to Borealis and Cheyne Walk.164

160 In re IBP S’Holders Litig., 789 A.2d 14, 54–55 (Del. Ch. 2001) (Explaining that under New York law, “[i]f a contract’s meaning is plain and unambiguous, it will be given effect.”); Brainard v. New York Cent. R.R. Co., 151 N.E. 152, 154 (N.Y. 1926) (“If the court finds as matter of law that the contract is unambiguous, evidence of the intention and acts of the parties plays no part in the decision of the case. Plain and unambiguous words, undisputed facts, leave no question of construction except for the court. The conduct of the parties may fix a meaning to words of doubtful import. It may not change the terms of a contract.”); GMG Capital Investments, LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 780 (Del. 2012) (Under Delaware law, “[t]he Court will interpret clear and unambiguous terms according to their ordinary meaning.”). 161 Goldman Sachs Grp., Inc. v. Almah LLC, 924 N.Y.S.2d 87, 90 (N.Y. App. Div. 2011). 162 Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997) (“When the provisions in controversy are fairly susceptible of different interpretations or may have two or more different meanings, there is ambiguity.”). 163 IBP, 789 A.2d at 55 (Under New York law, “[p]arol evidence may not be used to create a contractual ambiguity; rather, such ambiguity must be discerned by the court from its consideration of the contract as an entire text.”); Exelon Generation Acquisitions, LLC v. Deere & Co., 176 A.3d 1262, 1267 (Del. 2017) (Under Delaware law, “[i]f a contract is unambiguous, extrinsic evidence may not be used to interpret the intent of the parties, to vary the terms of the contract, or to create an ambiguity.”). 164 JX 171, § 6.4.1.1. 33 I find that the SPA— a binding agreement to purchase the Hunt Shares for a specified

price upon the occurrence of certain closing conditions—between STIH (a non-

Excluded Third Party) and Hunt is a bona fide written offer under the TTHC SA

sufficient to require Hunt deliver a First Offer Notice to Borealis and Cheyne Walk.

Hunt contends it delivered such First Offer Notice on July 11, 2019. A First Offer

Notice must state (1) that the Selling Shareholder wishes to sell the Optioned Shares

and (2) the price (which shall be payable in cash and identical on a per share basis)

which the Selling Shareholder is willing to accept for such Optioned Shares.165 The

notice delivered by Hunt to Borealis and Cheyne Walk on July 11, 2019 fulfils these

requirements and therefore I find that that notice, JX 225 in the trial record, is a First

Offer Notice as defined in Section 6.4.1 of the TTHC SA.

The TTHC SA prescribes that after receipt of a First Offer Notice the recipient

has the right to purchase its pro rata portion of the Optioned Shares—here, the Hunt

Shares.166 The First Offer Notice delivered by Hunt references Borealis’ and Cheyne

Walk’s ability to exercise such right.167 Borealis validly exercised that right in its

165 Id. § 6.4. 166 Id. § 6.4.3 (“Each of the Other Shareholders shall have the right, exercisable by notice given to the Selling Shareholder within 20 Business Days after receipt of the First Offer Notice . . . to agree that it will purchase its pro rata share (based on the number of Shares of the same class (or which are convertible into the same class) as the Optioned Shares which are owned by it compared to the number of Shares of the same such class which are owned by all of the Other Shareholders) of the Optioned Shares for the price and on the terms of payment set out in the First Offer Notice . . . .”). 167 JX 225, at 4 (“As required pursuant to Section 6.4.3 of the [TTHC SA], please provide notice within twenty (20) Business Days from receipt of this letter as to whether you will (i) purchase your pro rata portion of such Subject Shares (and, if you wish to purchase more than your pro rata 34 notice to Hunt dated July 22, 2019—JX 231 in the trial record—agreeing to purchase

all of its pro rata portion of the Optioned Shares and any additional remaining

Optioned Shares.168 That right is conditional however, because the TTHC SA

contains an “Overriding Prohibition on Transfer” in certain circumstances:

“[n]otwithstanding anything to the contrary in this Agreement, a Shareholder shall

not be permitted to Transfer169 any Shares, and neither [TTHC] nor any other

Shareholder will recognize any such purported Transfer or any purported

Shareholder related thereto, if such Transfer would result, directly or indirectly, in a

breach of . . . the [Oncor IRA] . . . .”170 Thus, Transfers of TTHC Shares are not

permitted where such Transfer—here, the sale of the Hunt Shares to Borealis—

“would result, directly or indirectly” in a breach of the Oncor IRA.

portion, indicate how many additional Subject Shares you wish to purchase) or (ii) agree that the Hunt Shareholder may sell the Subject Shares to a Third Party.”). 168 The remaining Optioned Shares would be Cheyne Walk’s pro rata portion. 169 “Transfer” is defined in the TTHC SA as “any direct or indirect sale, transfer, exchange, assignment, gift, bequest, disposition, mortgage, lien, charge, pledge, encumbrance, grant of security interest or any arrangement by which direct or indirect possession, legal title or beneficial ownership passes from one Person to another, or to the same Person in a different capacity, whether or not voluntary, whether or not by operation of law and whether or not for value, and any agreement to effect any of the foregoing and ‘Transferred’, ‘Transferring’ and similar variations have corresponding meanings.” JX 171, at 12. 170 Id. § 6.3. This section also applies to breaches of the Oncor LLC Agreement and a Registration Rights Agreements—no party has alleged a breach of either agreement. 35 2. STH has a Right to Purchase the Hunt Shares under the Oncor IRA, and a Sale to Borealis would Breach the IRA

STH’s ROFR right arises from the Oncor IRA. When TTI “intends to

Transfer171 LLC Units”172 in a private Transfer,173 it must deliver to STH a written

notice of its intention to Transfer such LLC Units accompanied by “a written offer .

. . irrevocable for ten (10) Business Days from its receipt to sell or otherwise Transfer

to [STH] or its designee . . . all, but not less than all, of the Offered Units.”174 Such

an offer is defined as an “Inside Offer.”175 Thus, the Oncor IRA gives STH a right

(pursuant to an Inside Offer) to purchase Oncor LLC Units in the event TTI intends

to Transfer such LLC Units.176

At first glance, conflict between the TTHC SA ROFO and the Oncor IRA

ROFR is not apparent. One—the TTHC SA ROFO—gives Borealis and Cheyne

Walk a right to purchase TTHC Shares in the event Hunt receives a bona fide written

171 “Transfer” as used in the Oncor IRA has a different definition than “Transfer” as used in the TTHC SA. 172 LLC Unit “means an equal fractional part of all the Interests, and having the rights and obligations specified with respect thereto in [the Oncor LLC Agreement], and any successor entity”; Interest “means a limited liability company interest in [Oncor], including the right of the holder thereof to any and all benefits to which a holder thereof may be entitled as provided in [the Oncor LLC Agreement] together with the obligations of a holder thereof with all of the terms and provisions of [the Oncor LLC Agreement].” JX 45, at 44; JX 47, at 41. 173 Private Transfers are those under Section 3.1(a)(iv)(B)(2) of the Oncor IRA—no party to this Action has argued that either purported sale here (to Borealis or STIH) does not fall under such Section. 174 JX 45, § 3.9(b). The “Offered Units” are the “number of LLC Units . . . to be Transferred . . . .” Id. 175 Id. 176 Id. 36 offer for such Shares during the Minority Shareholder Special Period. The other—

the Oncor IRA ROFR—requires TTI to deliver an Inside Offer granting STH a right

to purchase Oncor LLC Units in the event TTI intends to Transfer such LLC Units.

However, STH and STIH have submitted that a sale of the Hunt Shares is in fact a

“Transfer” of Oncor LLC Units by TTI under the Oncor IRA, triggering Sempra’s

ROFR right.

The definition of “Transfer” in the Oncor IRA reads:

any direct or indirect transfer, sale, gift, assignment, exchange, mortgage, pledge, hypothecation, encumbrance or any other disposition (whether voluntary or involuntary, by operation of Law, pursuant to judicial process or otherwise) 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 determined to constitute a “Transfer” subject to the restrictions on Transfer contained or referenced herein.177

For STH and STIH to prevail, this definition must encompass the sale of shares of

the entity (TTHC) two levels upstairs from TTI and three levels removed from Oncor

itself. I find that it unambiguously does so.

Transfer, as defined in the Oncor IRA, is remarkably broad. That a sale of

TTHC Shares is not a direct sale of Oncor LLC Units is of no consequence because

the definition explicitly covers “indirect” sales. Black’s Law Dictionary supplies

177 Id. at 47. 37 the definition of “indirect,” in pertinent part, as “[n]ot direct in relation or

connection; not having an immediate bearing or application.”178 “Transfer” covers

not only indirect sales of LLC Units themselves, but any “interest therein” or “rights

thereto.” A Transfer may also be “involuntary” which is defined in the same

dictionary in pertinent part as “without will or power of choice.”179 Thus, a Transfer

may occur without the will of TTI or without any choice by it.

I find that the sale of the Hunt Shares constitutes an indirect sale, and,

therefore, a Transfer of Oncor LLC Units under the Oncor IRA. Such a sale is one

“not direct in relation or connection” to Oncor LLC Units themselves but still

constitutes a sale of such LLC Units because the sale is one of a nearly identical

interest. TTI owns only Oncor LLC Units; TTFinco owns only TTI units; and TTHC

owns only TTFinco unit. To hold TTHC Shares is to indirectly hold Oncor LLC

Units. This was true at the time the Oncor IRA was executed and remains true

today.180 Thus, a sale of the Hunt Shares is a “Transfer” of “LLC Units (or any

interest (pecuniary or otherwise) therein or rights thereto)” under the Oncor IRA.

178 Indirect, Black’s Law Dictionary (5th ed. 1970). Under Delaware law “[b]ecause dictionaries are routine reference sources that reasonable persons use to determine the ordinary meaning of words, we often rely on them for assistance in determining the plain meaning of undefined terms.” Freeman v. X-Ray Assocs., P.A., 3 A.3d 224, 228 (Del. 2010). New York courts will likewise refer to dictionaries to determine a word’s ordinary meaning. E.g. Lend Lease (US) Const. LMB Inc. v. Zurich Am. Ins. Co., 71 N.E.3d 556, 561 (N.Y. 2017); Arentz v. Morse Dry Dock & Repair Co., 164 N.E. 342, 344 (N.Y. 1928); Ledon v. Havemeyer, 24 N.E. 297, 299 (N.Y. 1890). 179 Involuntary, Black’s Law Dictionary (5th ed. 1970). 180 Such an “undisputed background fact[]” is “appropriate for the trial court to consider . . . to place the contractual provision in its historical setting without violating [the principle that, if a 38 Because Borealis’ purchase of the Hunt Shares would constitute a “Transfer”

under the Oncor IRA, it triggered the requirement for TTI to deliver an Inside Offer

to STH permitting STH to purchase the Hunt Shares.181 Therefore, both Borealis

and STH, under separate agreements, assert a legal right to purchase the Hunt

Shares—those legal rights, however, are mutually exclusive because only one entity

can own the Hunt Shares. This conundrum notwithstanding, my inquiry ends here

because of the transfer restriction in the TTHC SA. That “Overriding Prohibition

on Transfer” bars any Transfers (like the sale of the Hunt Shares to Borealis) if such

Transfer would violate the Oncor IRA. Because upon the receipt of the Inside Offer

STH will have a right to purchase the Hunt Shares—a right which it seeks to

exercise—a sale of the Hunt Shares to Borealis pursuant to the valid exercise of

Borealis’ own right to purchase182 instead would result in a breach of Section 3.9(a)

contract is unambiguous, extrinsic evidence may not be used to interpret the intent of the parties, to vary the terms of the contract, or to create an ambiguity].” Smartmatic Int’l Corp. v. Dominion Voting Sys. Int’l Corp., 2013 WL 1821608, at *4 (Del. Ch. May 1, 2013) (quoting Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 n.7 (Del. 1997)). New York law similarly sanctions the use of “undisputed background facts” in interpreting an unambiguous contract. E.g. Ronnen v. Ajax Elec. Motor Corp., 671 N.E.2d 534, 536 (N.Y. 1996). 181 Under the Oncor IRA, the triggering event for the delivery of an Inside Offer is TTI’s “intent”— voluntary or involuntary—to transfer LLC Units “or an interest therein or rights thereto.” I find that the parties meant “intent” here to mean TTI’s expectation of a Transfer, and not some oxymoronic expression of involuntary desire on the part of an entity. The intent to Transfer occurred upon Hunt’s commitment via the First Offer Notice to sell an indirect interest in Oncor to Borealis. Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1160 n.21 (Del. 2010) (citing Gore v. Beren, 867 P.2d 330, 337 (Kan. 1994)) (“In placing a construction on a written instrument, reasonable rather than unreasonable interpretations are favored by law. Results which vitiate the purpose or reduce terms of the contract to an absurdity should be avoided.”). 182 In JX 231. 39 of the Oncor IRA.183 Because the TTHC SA explicitly bars a Transfer that breaches

the Oncor IRA, STH’s exercise of its right to purchase the Hunt Shares (through its

designee STIH) will extinguish Borealis’ own exercised right to purchase the Hunt

Shares. Thus, upon exercise of its ROFR right, STH will be the only party with the

right to purchase the Hunt Shares.

III. CONCLUSION

Hunt’s First Offer Notice to Borealis, dated July 11, 2019, permitting Borealis

to exercise its right to purchase the Hunt Shares gave rise to TTI’s duty to deliver an

Inside Offer (as defined in Section 3.9(b) of the Oncor IRA) to STH. Upon the

exercise of STIH’s (as STH’s designee) option to purchase the Hunt Shares pursuant

to the Inside Offer, Borealis’ right to purchase the Hunt Shares will be void, under

the terms of the TTHC SA. The parties should submit a form of order consistent

with this Memorandum Opinion.

183 I note that the mechanics of STH’s ROFR in the Oncor IRA require TTI to deliver an Inside Offer to STH, which has not occurred here. I have found that Borealis’ exercise of its right to purchase the Hunt Shares gave rise to STH’s contractual right to receive an Inside Offer from TTI. The parties’ dispute here reflected an uncertainty over whether TTI must deliver such Inside Offer—that TTI has not delivered the Inside Offer is of no moment; the status quo order has prevented Hunt and STIH from consummating a sale to this point. Because of these factors, I decline to consider whether TTI is in breach of the Oncor IRA at this time, as STH and STIH assert in claim four. Likewise, because STH has not yet had the opportunity to exercise its right to purchase pursuant to an Inside Offer, I decline to reach STH and STIH’s third claim—against Hunt—which will presumably become moot going forward. 40 Figure A184

184 PTSO, ¶ 3 (underlining in original). 41