Supreme Court of the State of Delaware, Leaf Invenergy Company, v. Invenergy Renewables LLC, Docket No. 308, 2018

Series B Investment Round

Series B Notes

Agreement Governing the Series B Notes

Noteholders’ Right to Convert to Equity and Incorporated an LLC Agreement

Series B Noteholders Could Convert Their Series B Notes into Equity before the Conversion Deadline

To Facilitate a Conversion, the Series B Note Agreement Incorporated an LLC Agreement (“the Series B LLCA”) That Would Come into Effect upon Conversion

The Series B LLCA Also Included Reciprocal Call and Put Rights that Invenergy and the Converted Noteholders Could Exercise Between December 22, 2013 and December 22, 2014

Damages for Breach of Contract

Expectation Interest

Delaware Contract Law

Court Below—Court of Chancery § of the State of Delaware
C.A. No. 11830-VCL

In 2008, Invenergy Wind LLC (“Invenergy”), a wind energy developer, was raising money for a Series B investment round, and Leaf Clean Energy Company (“Leaf Parent”), an investment fund, expressed interest. After extensive negotiations, Leaf Parent invested $30 million in Invenergy Series B notes through a vehicle called Leaf Invenergy Company (“Leaf”). The agreement governing the Series B notes (“Series B Note Agreement”) gave noteholders such as Leaf the right to convert to equity and incorporated an LLC agreement (“Series B LLCA”) that the noteholders and Invenergy would execute upon conversion.

The Series B Note Agreement and the Series B LLCA also included provisions that prohibited Invenergy from conducting a “Material Partial Sale”—a defined term—without Leaf’s consent unless Invenergy paid Leaf a premium called a “Target Multiple”—another defined term. Although the parties renegotiated several aspects of their agreements with one another over the next few years, the consent provisions persisted in substantially similar form into the Third Amended and Restated LLC Agreement (the “LLC Agreement”), which is the operative agreement in this dispute. Those consent provisions form the crux of this litigation.

Leaf filed suit after Invenergy closed a $1.8 billion asset sale—a transaction that Invenergy concedes was a Material Partial Sale—without first obtaining Leaf’s consent or redeeming Leaf’s interest for the Target Multiple.

The consent provisions unambiguously require Invenergy to pay Leaf the Target Multiple if it conducts a Material Partial Sale without Leaf’s consent, and the concept of efficient breach does not permit Invenergy to circumvent that requirement. Because Invenergy conducted a Material Partial Sale without Leaf’s consent and without paying Leaf the Target Multiple, Leaf is entitled to the Target Multiple as contractual damages. We thus award Leaf the Target Multiple in damages on condition that it surrenders its membership interests in Invenergy.

(…) Essentially, Invenergy could conduct a large asset sale with or without the noteholders’ consent. But in exchange for the right to conduct a sale without the noteholders’ consent, the noteholders were afforded the ability to cash out with a handsome agreed-upon return on their investment upon Invenergy’s exercise of that right.

The Series B notes matured on December 22, 2014, but Series B noteholders could convert their Series B notes into equity before the conversion deadline, which was initially set for December 22, 2011. As a practical matter, if Invenergy did poorly, the Series B noteholders would stay in the notes and preserve their debt covenant rights. On the other hand, if Invenergy did well, the Series B noteholders would convert into equity and capture an upside on their investment.

To facilitate a conversion, the Series B Note Agreement incorporated an LLC agreement (“the Series B LLCA”) that would come into effect upon conversion. The Series B LLCA gave the converted noteholder-members many rights similar to what they had as Series B noteholders.

The Series B LLCA also included reciprocal call and put rights that Invenergy and the converted noteholders could exercise between December 22, 2013 and December 22, 2014. Under Section 11.09 of the Series B LLCA, converted noteholders could “require that [Invenergy] purchase all but not less than all” of its interest. The same section provided that Invenergy could “redeem all but not less than all” of the converted noteholders’ interests. These rights collectively ensured that the Series B investors would either exit or renegotiate their investment by December 22, 2014.

The Court of Chancery’s damages discussion recognized the well-settled rule that damages for breach of contract are based on the non-breaching party’s— here Leaf’s—expectation interest. As the Court of Chancery correctly noted, “expectation” is a term of art. When determining expectation damages, courts determine an amount that will give the injured party “the benefit of its bargain by putting that party in the position it would have been but for the breach.” The primary element of expectation damages is the “the value that the performance would have had to the injured party,” or the “loss in value” caused by the deficient performance compared to what had been expected. And on this point, the Court of Chancery laid out the extensive evidence showing beyond any shadow of a doubt that Leaf and Invenergy both harbored the belief—one that persisted until after the court entered its Liability Order—that Leaf was entitled to payment of the Target Multiple if Invenergy engaged in Material Partial Sale without Leaf’s consent, as it did here.

We review questions of contract interpretation and questions of law de novo.

Because the Court of Chancery’s award of only nominal damages instead of the Target Multiple hinged upon its interpretation of Section 8.04, our analysis starts there. When we interpret contracts, our task is to fulfill the “parties’ shared expectations at the time they contracted.” But because Delaware adheres to an objective theory of contracts, the contract’s construction should be that which would be understood by an objective, reasonable third party.

(…) Because it is only the combination of the TerraForm deal plus the failure to obtain consent plus the failure to pay the Target Multiple that constituted the breach, the Court of Chancery should have considered the combination of all of those things when assessing what injury Leaf suffered from Invenergy’s breach and thus what amount of damages will return Leaf to the position it would have been in had Invenergy not breached Section 8.04.

(Supreme Court of the State of Delaware, May 2, 2019, Leaf Invenergy Company, v. Invenergy Renewables LLC, Docket No. 308, 2018)