In re Oxbow Carbon LLC
| Decision Date | 12 February 2018 |
| Docket Number | C.A. No. 12447-VCL |
| Parties | IN RE OXBOW CARBON LLC UNITHOLDER LITIGATION |
| Court | Court of Chancery of Delaware |
Kenneth J. Nachbar, Thomas W. Briggs, Jr., Richard Li, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; R. Robert Popeo, Michael S. Gardener, Breton Leone-Quick, MINTZ, LEVIN, COHN, FERRIS, GLOVSKY & POPEO, P.C., Boston, Massachusetts; Attorneys for Oxbow Carbon LLC.
Stephen C. Norman, Jaclyn C. Levy, Daniyal M. Iqbal, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; David B. Hennes, C. Thomas Brown, Daniel V. McCaughey, Adam M. Harris, Elizabeth D. Johnston, ROPES & GRAY LLP, New York, New York; Attorneys for Oxbow Carbon & Minerals Holdings, Inc., Ingraham Investments LLC, Oxbow Carbon Investment Company LLC, and William I. Koch.
Kevin G. Abrams, Michael A. Barlow, April M. Ferraro, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Michael B. Carlinsky, Chad Johnson, Jennifer Barrett, David Elsberg, Silpa Maruri, QUINN EMANUEL URQUHART & SULLIVAN, LLP, New York, New York; Attorneys for Crestview-Oxbow Acquisition, LLC, Crestview-Oxbow (ERISA) Acquisition, LLC, Crestview Partners, L.P., Crestview Partners GP, L.P., Crestview Advisors, L.L.C., Robert J. Hurst, and Barry S. Volpert.
Brock E. Czeschin, Matthew D. Perri, Sarah A. Galetta, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Attorneys for Crestview-Oxbow Acquisition, LLC, Crestview-Oxbow (ERISA) Acquisition, LLC, Crestview Partners, L.P., Crestview Partners GP, L.P., Crestview Advisors, L.L.C., Robert J. Hurst, and Barry S. Volpert.
J. Clayton Athey, John G. Day, PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; Dale C. Christensen, Jr., Michael B. Weitman, SEWARD & KISSEL LLP, New York, New York; Attorneys for Load Line Capital LLC.
LASTER, V.C.
This post-trial decision addresses whether Oxbow Carbon LLC ("Oxbow" or the "Company") must be sold. Two minority members, who together own approximately one-third of Oxbow's equity, contend that they have a contractual right under Oxbow's limited liability company agreement1 to force the Company to engage in an "Exit Sale."2 The LLC Agreement defines an "Exit Sale" as "a Transfer of all, but not less than all, of the then-outstanding Equity Securities of the Company and/or all of the assets of the Company."3 The principal contractual dispute concerns language in the Exit Sale Right which states that the exercising party "may not require any other Member to engage in such Exit Sale unless the resulting proceeds to such Member (when combined with all prior distributions to such Member) equal at least 1.5 times such Member's aggregate Capital Contributions through such date."4
One reading of the 1.5x Clause is that if an Exit Sale does not satisfy its terms for a particular member, then that member can choose to participate in the Exit Sale, but cannotbe forced to sell. If the member does not choose to participate, then the member gets left behind when the other members sell. This interpretation relies on the fact that the 1.5x Clause speaks in terms of whether the exercising party can "require any other Member to engage in such Exit Sale."5
Another reading of the 1.5x Clause interprets the provision in light of the All Securities Requirement. Under this reading, if the Exit Sale does not satisfy the 1.5x Clause for any member, and that member chooses not to participate, then the Exit Sale cannot go forward because it no longer would involve "all, but not less than all, of the then-outstanding Equity Securities of the Company." Under this reading, failing to satisfy the 1.5x Clause for a particular member enables the member to block the Exit Sale.6
A response to the Blocking Theory posits that if an Exit Sale does not satisfy the 1.5x Clause for certain members, then the Exit Sale should be able to go forward if those members are topped off with additional funds sufficient to satisfy the 1.5x Clause.7 The Top Off Theory comes in two variants. One is the "Waterfall Top Off," in which the transaction proceeds are used first to satisfy the 1.5x Clause, then the remaining proceeds are distributed pro rata among all holders. The other is the "Seller Top Off," in which theminority members who exercised the Exit Sale Right can provide additional consideration to any members who need it to satisfy the 1.5x Clause.
A response to the Top Off Theory points out that under the LLC Agreement, an Exit Sale must treat members equally by offering "the same terms and conditions" to each member and allocating the proceeds "by assuming that the aggregate purchase price was distributed" pro rata to all unitholders.8 Using the Top Off Theory violates the Equal Treatment Requirements by providing different consideration to different members and distributing proceeds contrary to a pro rata allocation. Incorporating the Equal Treatment Requirements into the analysis means that all members must receive the same per unit consideration in an Exit Sale. If the members need different amounts to satisfy the 1.5x Clause, then the Equal Treatment Requirements mean that all members must receive the highest amount necessary to satisfy the 1.5x Clause for any member.9
The Exit Sale Right specifies that the consideration generated by the Exit Sale must exceed "Fair Market Value."10 The LLC Agreement defines this concept as a valuation determined "on a going concern basis, without any discount for lack of liquidity . . . or minority interest." The LLC Agreement establishes a contractual valuation process inwhich investment bankers determine Fair Market Value. In this case, the contractual valuation process generated a Fair Market Value for Oxbow of $2.65 billion, which equated to $169 per unit.11
The minority members in this case exercised the Exit Sale Right and secured a buyer who made an offer that satisfied the FMV Clause. But if the consideration contemplated by the offer was distributed pro rata, then the Exit Sale would not satisfy the 1.5x Clause for two members who own 1.4% of the Company's equity.12 The Small Holders invested in the Company in 2011 and 2012 at a price of $300 per unit. Taking into account distributions they have received to date, the Exit Sale would have to provide them with $414 per unit to satisfy the 1.5x Clause. The other members already have received sufficient distributions from Oxbow to satisfy the 1.5x Clause. The Company's majority member controls both of the Small Holders.
The majority member filed this lawsuit, invoking the Highest Amount Theory and claiming that the minority members could not enforce the Exit Sale Right because the proposed transaction did not generate proceeds of $414 per unit. The minority members responded with the Leave Behind Theory, contending that they could force everyone else to engage in the Exit Sale.
The parties filed cross-motions for summary judgment. I held that the plain language of the LLC Agreement foreclosed the Leave Behind Interpretation and supported the Highest Amount Interpretation. I recognized, however, that this reading produced a harsh result by effectively blocking an Exit Sale, and I observed that the implied covenant of good faith and fair dealing might have a role to play.
After the summary judgment ruling, the minority members amended their pleadings to contend that the implied covenant warranted reading a Top Off Option into the LLC Agreement. They appeared to prefer a Waterfall Top Off, which is economically superior for them, but they seemed satisfied with a Seller Top Off. The minority members also contended for the first time that the Small Holders had never been admitted as members. The parties litigated the case through trial.
The record at trial demonstrated that the minority members knew about the admission of the Small Holders in 2011 and 2012, but failed to challenge their admission until 2016. Laches bars the minority members' attempt to claim belatedly that the Small Holders are not members.
The record at trial demonstrated that during the negotiations over the LLC Agreement, the majority member revised the 1.5x Clause to implement a Blocking Option. When read together with the Equal Treatment Requirements, the 1.5x Clause calls for reading the LLC Agreement to implement the Highest Amount Interpretation.
The record at trial demonstrated that the original LLC Agreement intentionally left open the terms on which Oxbow would admit new members, thereby leaving a gap. The LLC Agreement empowers the board of directors (the "Board") to fill that gap bydetermining the terms and conditions on which the Company will admit new members. In 2011 and 2012, when the Company admitted the Small Holders, the Board did not fill the gap. Oxbow largely failed to follow proper formalities, and Oxbow did not obtain approvals that the LLC Agreement required. Consequently, a gap exists as to whether the 1.5x Clause covers the Small Holders.
The record at trial demonstrated that if the parties had addressed the issue in 2011 or 2012, when the Small Holders became members, then the majority member would not have insisted on a Highest Amount Option, nor would the minority members have insisted on a Leave Behind Option. It is possible that they would have agreed on using a Waterfall Top Off to satisfy the 1.5x Clause for the Small Holders. The most likely result is that they would have agreed to a Seller Top Off.
Issues of compelling fairness call for deploying the implied covenant to fill the gap created when the Company admitted the Small Holders. Without it, the fortuitous admission of the Small Holders guts the Exit Sale Right and enables the majority member to defeat a commitment he made in 2007 and otherwise would have to fulfill. Until March 2016, the majority member and his counsel believed that the minority members could use a Top Off to satisfy the 1.5x Clause for the Small Holders. Only at that point did the majority member and his counsel stumble across the combination of...
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