Court Relies on Canons of Construction to find LLC Agreement Consent Right Inapplicable to Contemplated Sale of Subsidiary Stock
By: Scott E. Waxman and Michael C. Payant
In AM General Holdings LLC v. The Renco Group, Inc., et al., CA. No. 7639 and The Renco Group, Inc. v. MacAndrews AMG Holdings, LLC, et al., C.A. No. 7668-VCS (Del. Ch. June 26, 2020), the Delaware Court of Chancery (the “Court”) considered the latest dispute in a nearly decade-long litigation between The Renco Group, Inc. (“Renco”) and MacAndrews AMG Holdings LLC (“MacAndrews”), regarding interpretation of the Limited Liability Company Agreement (the “Agreement”) for AM General Holdings LLC (“Holdco”). Relying on canons of construction, the Court determined the Agreement did not provide Renco a consent right with respect to a contemplated subsidiary sale, and granted MacAndrews’ motion for judgment on the pleadings.
MacAndrews began actively pursuing a sale of the capital stock of AM General LLC (“AMG”), a subsidiary and the primary asset of HoldCo, in September 2018. In February 2019, Renco moved for a preliminary injunction that would entitle it to 30 days’ notice before any sale of AMG, so it could assert a purported consent right with respect to such sale. Without ruling on the merits, the Court entered an order in March 2019 requiring MacAndrews to give Renco 10 days’ notice before signing any binding deal to sell AMG. In November 2019, MacAndrews informed Renco it had found an interested buyer and provided Renco with proposed sale materials, but it refused to assure Renco it would solicit consent.
As ongoing disagreement over the consent right impeded a potential sale, MacAndrews amended its complaint in March 2020 to ask the Court for an order declaring that the Agreement provided Renco no consent right for a sale of the Capital Stock of AMG. MacAndrews subsequently moved for judgment on the pleadings.
In its analysis, the Court first summarized the relevant provisions of the Agreement. It highlighted MacAndrews’ broad authority under one section to act for HoldCo as the Managing Member, but it noted this authority was specifically limited by another section. The limiting section specifies actions the Managing Member may not take without Renco consent, including the following:
- “[A]ny voluntary sale . . . of [Holdco] (including the Capital Stock of any of its Subsidiaries (other than GEP)) not in the Ordinary Course of Business . . . .” (the “Subsidiary Sale Provision”); and
- Any “AM General Major Decision” (the “Major Decision Provision”). This includes an “AM General Extraordinary Event”, which in turn captures “the sale to a Person(s) that is neither (x) a Member nor (y) an Affiliate of [AMG] . . . of a majority of the Capital Stock of [AMG] . . . .”
Crucially, however, an “AM General Extraordinary Event” was carved-out from the definition of an “AM General Major Decision” if it occurred “at any time after December 31, 2013 on terms that are no less favorable to [Renco] than to [MacAndrews]” (the “Carve-out”).
The Court noted it was obligated under court rules to review facts pleaded and inferences arising from such facts in a light most favorable to the non-moving party. However, if the Agreement’s meaning was unambiguous, the Court noted it was obligated to grant judgment on the pleadings.
MacAndrews argued that the Major Decision Provision governed the contemplated sale, because the sale was for “the majority of the Capital Stock of AM General” and was therefore an AM General Extraordinary Event. However, the sale fit within the Carve-out because it would occur (i) after December 31, 2013, and (ii) on terms that were not less favorable to Renco than MacAndrews. Accordingly, MacAndrews argued, the sale would not constitute an AM General Major Decision requiring Renco’s consent.
Renco countered on several fronts. First, Renco argued the more general Subsidiary Sale Provision governed the proposed sale, because the contemplated sale was “a sale of the Capital Stock of a HoldCo subsidiary”. Renco pointed out that the Subsidiary Sale Provision specifically carved out one HoldCo Subsidiary (GEP), so if the parties had intended to also carve out AMG, they would have done so expressly. Second, Renco argued that any sale of AMG would result in the liquidation of HoldCo, which would require Renco’s consent under a separate paragraph of the consent provisions. Either of the above, Renco contended, introduced sufficient ambiguity to preclude judgment on the pleadings. Finally, in the alternative, it argued that if the Major Decision Provision applied, it should be construed to give Renco an implied right to receive information prior to closing. This would permit Renco to assess whether the sale was truly “no less favorable” to it than to MacAndrews, as required for Carve-out to apply.
MacAndrews responded that well-settled canons of construction resolved any potential ambiguity. It first invoked the canon that specific language or provisions take precedence over general language or provisions. The Subsidiary Sale Provision covered HoldCo asset sales in the abstract, MacAndrews agreed, but it did not govern where Major Decision Provision applied, such as the present dispute involving the sale of a majority of AMG’s Capital Stock. MacAndrews also cited the canon against rendering contractual terms superfluous. Were the Court to hold that the Subsidiary Sale Provision provides a perpetual consent right, it would render the language “after December 31, 2013” and “on terms no less favorable” elsewhere in the Agreement surplusage.
Citing the same canons and restating the reasoning outlined by MacAndrews, the Court held that the Agreement unambiguously did not provide for a Renco consent right to the contemplated AMG stock sale. Renco requested the Court to consult extrinsic evidence, but the Court noted that the relevant provisions were not ambiguous on their face and refused a “judicial rewrite of clear contract terms.” Furthermore, the Court concluded the Renco consent right for a liquidation of HoldCo was irrelevant to the sale of AMG Capital Stock.
The Court next declined to find an implied information right. The Court determined the dispute boiled down to remedies: was Renco was entitled to pre-sale notice that might allow it to enjoin the AMG sale or limited to a post-sale action for damages? Noting again the broad Member-Manager powers of MacAndrews under the Agreement, and the Court’s own conclusion that the consent provisions in the Agreement did not limit the ability of MacAndrews to sell a majority of AMG’s capital stock, the Court held the Agreement did not limit MacAndrews’ managerial power to determine the terms of such a sale. As such, it declined Renco’s assertion of an implied information right.
Having concluded the Agreement unambiguously did not grant Renco a consent right to the contemplated AMG sale, the Court granted MacAndrews’ motion for judgment on pleadings under Rule 12(c).
AM General Holdings LLC v. The Renco Group, Inc., et al., CA. No. 7639 and The Renco Group, Inc. v. MacAndrews AMG Holdings, LLC, et al., C.A. No. 7668-VCS (Del. Ch. June 26, 2020)