Last week, the US Court of Appeals for the Eighth Circuit affirmed a lower court’s order that prevented a utility offtaker from terminating four wind PPAs based upon a finding that the separate wind project companies did not transfer a majority of their “direct ownership interests” without the consent of the utility offtaker when the parent of the project companies was transferred.
Each PPA at issue contained an identical provision that prohibited the project company from entering into a transaction that resulted in a “Change Control” without the utility offtaker’s consent. The PPAs defined “Change Control” as “the sale or transfer after the Effective Date of a majority of the direct ownership interest” in the project company. Following the sale of a parent company of the project companies, the utility offtaker served notice of termination on the project companies asserting that the recent sale of the parent company along with a 2012 transfer of a parent company out of a bankruptcy proceeding were done without the utility offtaker’s consent and resulted in a change of the project companies’ “direct ownership interests.” The utility offtaker thus argued that the project companies had breached their PPAs. In response, the project companies sued the utility offtaker seeking a declaration that they had not breached the change-of-control provision and an injunction preventing the utility offtaker from terminating the PPAs, both of which were granted by the lower court.
The Eighth Circuit, after first finding that that the term “direct ownership interests” was unambiguous, found that the only reasonable interpretation of the term was to mean ownership of membership units in the limited liability project companies. Although the court agreed that a parent company asserts a degree of control over its subsidiaries, it stated that “ownership of intermediate corporate entities is not direct ownership.” The court explained that direct ownership interest means ownership interest of the project companies themselves and not the “indirect ownership interest” of the parent company. Because neither the sale of the parent company nor its transfer pursuant to the 2012 bankruptcy case—both of which the court noted were “upstream of the [project companies] by many tiers of intermediate ownership”—involved the transfer of the project companies’ direct ownership interests, the court concluded that the project companies had not breached the terms of their respective PPAs.
The Eighth Circuit also rejected arguments made by the utility offtaker that the project companies had violated the PPAs’ anti-assignment clauses by turning over certain day-to-day operations and management of the wind projects to a third party without the utility offtaker’s consent. The court found however, that the project companies had merely delegated (rather than assigned) the operation and management tasks and that the PPAs did not prohibit the delegation of duties. The PPAs only prohibited the assignment of obligations and there was no evidence in the record that the project companies had transferred any obligations arising under the PPAs. Rather the project companies remained “ultimately responsible for their promised contractual obligations,” and thus they had not violated the anti-assignment clauses.
While the Eighth Circuit concluded here that the PPAs had not been breached, the case nevertheless highlights how important it is for developers, financing parties, and offtakers to carefully tailor PPA change-of-control and assignment provisions so that they are no broader than intended.