Background
Shawville Power, LLC leased the Shawville Generation Station in Pennsylvania and held a right of first offer to buy the plant if its owner, a PSEG affiliate, decided to sell during the lease term. Shawville Power was part of the Heritage corporate group, which had borrowed $520 million and was insolvent by 2022. Its governing agreements required approval from an independent manager for specified “Material Actions,” including entering certain material intercompany relationships.
After GenOn and Strategic Value Partners negotiated to acquire the plant for $20 million through GenOn Energy Services, the Heritage Intermediate board voted to cause Shawville Power to waive its right of first offer without notifying or obtaining the vote of the independent manager. GenOn Energy Services then contracted with PSEG and completed the acquisition. Following Heritage’s bankruptcy, a litigation trust and reorganized Heritage entities asserted eleven claims arising from the transaction. Defendants moved to dismiss the complaint.
The Court’s Holding
Vice Chancellor David dismissed the two tortious-interference claims because the complaint did not plead an underlying breach of either the Heritage LLC agreements or the credit agreement. Waiving the right of first offer was a decision not to enter a transaction, not an affirmative “Material Action” furthering an intercompany relationship. Reading the agreements to require independent-manager approval would effectively allow that manager to compel Shawville Power to purchase a $20 million asset, an unreasonable result for provisions framed as negative covenants.
The court also dismissed the portion of the fiduciary-duty claim alleging a breach of the duty of candor. Because the waiver was not a Material Action, the independent manager had no right under the LLC agreement to attend or vote at the meeting, and the parties had made the candor theory depend on the contrary conclusion.
The fraudulent-transfer claim failed because Shawville Power did not transfer the right of first offer or a corporate opportunity to GenOn Energy Services; it merely declined to exercise the right, and dissipation or loss without a transferee is not a transfer under Delaware’s fraudulent-transfer statute. The corporate-waste claim also failed because the complaint did not support a reasonable inference that declining to spend $20 million while Heritage was insolvent and approaching bankruptcy lacked any rational business purpose. The court deferred the remaining counts to a subsequent ruling.
Key Takeaways
- A decision not to exercise a contractual purchase right did not constitute affirmative action prohibited by negative covenants in the governing agreements.
- A fraudulent-transfer claim requires a transfer to a transferee; merely relinquishing or failing to exercise a valuable opportunity was insufficient here.
- Even a disputed decision involving a potentially valuable asset does not constitute corporate waste when the pleaded facts disclose a rational business purpose.
Why It Matters
The opinion emphasizes the distinction between contractual restrictions on taking action and provisions that affirmatively require a company to act. Courts will not interpret negative covenants to give an independent manager the practical power to compel an insolvent company to undertake a major acquisition.
The ruling also places limits on efforts to repackage a waived business opportunity as a fraudulent transfer or corporate waste. It resolves only part of the dismissal motion, however; the fiduciary-duty, aiding-and-abetting, conspiracy, unjust-enrichment, and conversion theories not addressed in this opinion remain for a later ruling.