Oxbow Carbon & Minerals Holdings, Inc. v. Crestview-Oxbow Acquisition, LLC
202 A.3d 482
| Del. | 2019Background
- Oxbow Carbon LLC (controlled by William Koch) admitted two small Koch‑affiliated investors (Family LLC and Executive LLC, the “Small Holders”) in 2011–2012 without strict compliance with LLC Agreement admission formalities; those investors paid $35M and later received distributions. Minority Members (Crestview and Load Line) held put/Exit Sale rights exercisable after seven years if Oxbow refused a put purchase.
- The LLC Agreement contains a Put Right (forcing Oxbow to buy units) and an Exit Sale Right that allows a minority to compel a sale of all units if (among other things) every Member would receive at least 1.5x its capital contribution (the “1.5x Clause”), plus an Exit Sale definition requiring transfer of "all, but not less than all" Equity Securities.
- Dispute: Crestview exercised its put; Oxbow rejected. Crestview sought to force an Exit Sale; Oxbow argued the Small Holders’ inclusion meant no market Exit Sale could meet the 1.5x Clause for all Members. The Court of Chancery held the plain language required the "Highest Amount Interpretation" but found a contractual gap about the Small Holders’ admission and, via the implied covenant, implied a Seller Top‑Off allowing an Exit Sale.
- On appeal, the Delaware Supreme Court agreed the Highest Amount Interpretation (all Members must get the highest amount needed to satisfy 1.5x) is the plain‑text reading, but it reversed the Court of Chancery’s finding of a contractual gap and held the implied covenant could not be used to imply a Top‑Off as to the Small Holders.
- The Supreme Court also vacated the Chancery Court’s remedies ruling (including finding a breach of the Reasonable Efforts clause) because, under the plain agreement, no Exit Sale capable of satisfying the LLC’s express requirements existed under prevailing market conditions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper interpretation of Exit Sale and 1.5x Clause | Minority: The LLC permits a Top‑Off or a leave‑behind approach so Crestview can force an Exit Sale without every Member receiving 1.5x | Koch/Oxbow: Plain language requires an Exit Sale to pay all Members pro rata; the Highest Amount Interpretation controls and blocks an Exit Sale unless all Members receive the highest needed amount to satisfy 1.5x | Held: Highest Amount Interpretation is the only reasonable plain‑text reading — all Members must receive the highest amount necessary to satisfy 1.5x; Leave‑Behind/Top‑Off not supported by text |
| Validity/status of Small Holders as Members | Minority: Small Holders weren’t properly admitted (procedural failures) and their status should not block Exit Sale | Koch/Oxbow: Even if some formalities were imperfect, parties treated Small Holders as Members; laches and admissions bar late challenge | Held: Court of Chancery correctly found laches barred belated challenge; Small Holders are Members and enjoy Member rights under the agreement |
| Use of implied covenant to supply Top‑Off | Minority: Gap in contract (either Top‑Off Gap or a Small‑Holders‑Rights Gap) permits implying a Top‑Off so Exit Sale can proceed | Koch/Oxbow: No contractual gap; agreement delegates admission terms to Board and addresses Exit Sale mechanics — cannot rewrite contract via implied covenant | Held: Supreme Court reversed — no gap existed re: admission terms; implied covenant cannot be used to imply a Seller Top‑Off; trial court erred in implying that remedy |
| Remedies / Reasonable Efforts breach | Minority: Koch/Oxbow breached reasonable efforts; relief (backstop, fees) was appropriate | Koch/Oxbow: No practicable Exit Sale existed that could meet express LLC conditions; therefore no breach or improper remedies | Held: Remedies ruling vacated — because no Exit Sale meeting LLC’s express terms was realistically available, Court of Chancery’s remedies decision was vacated |
Key Cases Cited
- Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) (limits implied covenant; assesses when court may imply contractual terms)
- Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434 (Del. 2005) (describes implied covenant as tool to imply terms when parties left matters open)
- Gerber v. Enterprise Products Holdings, LLC, 67 A.3d 400 (Del. 2013) (framework for implying terms based on what parties would have agreed to at contracting)
- Blaustein v. Lord Baltimore Capital Corp., 84 A.3d 954 (Del. 2014) (permissive contractual language granting discretion to company does not create gap for implied covenant to supply terms)
- Nationwide Emerging Managers, LLC v. Northpointe Holdings, LLC, 112 A.3d 878 (Del. 2015) (discusses limits on invoking implied covenant; a claim not fairly raised at trial may be deemed waived)
- Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126 (Del. Ch. 2009) (when contract confers discretion, implied covenant requires discretion be used reasonably and in good faith)