Chancery Interprets Contractual Language Permitting Asset Sale

Morris James LLP

AM Gen. Holdings LLC v. The Renco Grp., Inc., C.A. No. 7639-VCS (Del. Ch. June 26, 2020)

Under fundamental contract interpretation principles, the Court of Chancery will interpret a contract to give effect to specific over general contract language, and to avoid interpretations that render contractual language as surplusage.

Parties to an LLC agreement disputed whether the agreement gave the non-managing member a right to consent to a sale of the capital stock of a subsidiary that was the entity’s primary asset. The managing member asserted that the dispute over consent rights was impeding a sale, sought declaratory relief from the Court, and moved for judgment on the pleadings.

Examining the provisions in the agreement, the Court held that the agreement was unambiguous, and thus, subject to interpretation at the pleadings stage, in favor of the managing member. Although the agreement gave the non-managing member consent rights for a broad range of transactions, there were various explicit carve-outs, including for certain transactions after a specific date so long as the terms of the transactions were no less favorable for the non-managing member than for the managing member. The managing member represented that funds from the capital sale would be distributed in accordance with the waterfall provisions of the LLC agreement, with no side arrangement that would benefit the managing member or its affiliates. The Court thus reasoned that the general provision providing consent rights must give way to the specific carve-out, permitting this particular kind of transaction without consent rights. Indeed, an interpretation to the contrary would render as surplusage the contractual language that defined the consent carve-outs, to which the parties had agreed.

The Court further declined to read into the agreement implied informational rights about the transaction for the non-managing member. The Court reasoned that the agreement gave the managing member the sole authority to determine if a proposed transaction fell within a carve-out. Without express informational rights to facilitate seeking a pre-closing injunction, the non-managing member would have to seek other available remedies in the event the managing member moved forward with a carved-out transaction.

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