The contractual interpretation issue before the Business Court in Schultheis v. Hatteras Capital Investment Management, LLC, 2014 NCBC 23, turned on the meaning of the word "with." Well, actually on the phrase "entering into any contract . . . with."
HCIM, one of the Defendants, had acquired a 55% membership interest in Hatteras Alternative Mutual Funds (HAMF). At that time, HCIM became the sole managing member of HAMF per an Operating Agreement. Four years later, HCIM signed an Asset Purchase Agreement to sell all the assets of HCIM and HAMF to two unrelated entities .
The HAMF Operating Agreement said in Section 2.03 that the consent of the non-managing members of HAMF was required before "the entering into any contract . . . with the Managing Member or an Affiliate of the Managing Member."
HCIM and HAMF were both parties to the Asset Purchase Agreement, but they were both sellers, on the same side of the transaction. Judge Jolly observed that:
The Interpretation Issue fundamentally raises the question of what it means to say that an entity enters into a contract "with" another entity in a multi-party transaction. As Defendants note with examples, the common use of the term "with" in this context refers to the contractual binding of bargaining parties on opposite "sides" of such a transaction, while one might use "alongside" or "along with" to refer to parties on the same "side" of a contract.
In isolation, the word "with" might have carried the day for the Plaintiffs and have required the consent to the deal from the non-managing members of HAMF, but the Court determined that their consent was not required. Two factors guided the Court's determination: Delaware decisions construing similar language, and a consideration of the "totality" of the Operating Agreement of HAMF.
Delaware Courts have construed the term "enter into an agreement with" to refer to two parties on the opposite sides of an agreement. See e.g. In re Quest Software Inc. Shareholders Litig., Civ. A. 7357-VCG, 2013 WL 3356034, at *1 (Del. Ch. July 3, 2013) (unpublished opinion) (target company “entered into an agreement with” acquiring company); In re PAETEC Holding Corp. Shareholders Litig., CIV.A. 6761-VCG, 2013 WL 1110811, at *1 (Del. Ch. Mar. 19, 2013)(unpublished opinion) (in the context of a merger, dissolving company “entered into an agreement with” absorbing company); Abacus Sports Installations, Ltd. v. Casale Const., LLC, CIV.A. N10L-08062CLS, 2012 WL 1415603, at *1 (Del. Super. Feb. 14, 2012) (unpublished opinion) (general contractor “entered into an agreement" with subcontractor).
But the Court also looked to the totality of the Operating Agreement and said that
Even if the court felt conflicted over the plain meaning of the word "with" in the context of § 2.03(f), the rest of the Operating Agreement as a whole clearly points to the parties' intention to vest the authority to sell HAMF in HCIM alone. Whether such an arrangement was inadvertent or, more likely, the result of deliberation and bargaining by the Parties, Plaintiffs cannot rest on the dictionary definition of the word "with" to substantively rewrite the Operating Agreement to provide them with rights they failed to secure at the outset.
The other pertinent provisions were Section 5.06, a "drag along" provision which obligated HAMF's non-managing members to accept an offer to consummate a Sale of [HAMF], and Section 2.02, which gave the Managing Member the sole authority to approve a Sale of [HAMF]. Although Section 2.02 might seem to be dispositive, it was expressly subject to Section 2.03 (which contained the problematic "with" language).
So, now that Judge Jolly has ruled that HCIM did not need the consent of the non-managing members of HAMF to engage in this transaction, is the case over? Not by a long shot, as the Complaint makes multiple other claims. And I picked up from one of the Defendants' briefs that the proposed buyer has walked away from this transaction as a result of the Plaintiffs' lawsuit.