I was pleased that Mack Sperling, who maintains the blog North Carolina Business Litigation Report, told me about this post on his blog. It discusses a recent North Carolina case that turns on what it means to enter into a contract “with” someone.
Here are the relevant facts, as reported by Mack:
HCIM, one of the Defendants, had acquired a 55% membership interest in Hatteras Alternative Mutual Funds (HAMF). At that time, HCIM became the sole managing member of HAMF per an Operating Agreement. Four years later, HCIM signed an Asset Purchase Agreement to sell all the assets of HCIM and HAMF to two unrelated entities.
The HAMF Operating Agreement said in Section 2.03 that the consent of the non-managing members of HAMF was required before “the entering into any contract . . . with the Managing Member or an Affiliate of the Managing Member.”
HCIM and HAMF were both parties to the Asset Purchase Agreement, but they were both sellers, on the same side of the transaction.
The plaintiffs argued that HCIM and HAMF’s entry into the asset purchase agreement conflicted with the operating agreement. Sensibly, the judge disagreed.
But I don’t want to win fights, so as always, the question is how this dispute could have been avoided.
I wouldn’t rely on adroit use of propositions to distinguish (1) my entering into a contract on the same side of the transaction as Acme from (2) my entering into a contract on the other side of the transaction (or another side, in the case of a transaction with three sides).
Sure, using between might make it harder to argue meaning (1), but it might not preclude a fight.
So perhaps it would be safest not simply to refer to entry into a contract, but also to state that the provision applies only to a transaction entered into for one or more specified purposes.
The fact pattern shows that the objective can’t be phrased as “I don’t want to win, I just want to avoid fights.” It’s more a case of “I want to achieve X by such clear drafting that no one will think it worth while to try to deprive me of X by arguing that the contract does not give me X.”
Here it looks as if HAMF was trying to use what was probably meant as a “no self-dealing by manager without consent of non-managing members” provision as if it were a “no sale of all assets without consent of non-managing members” provision.
Putting a limit on the types of contracts (rather than who the parties are) would work for the “no sale of all assets” objective (“Manager shall not contract for the sale of substantially all the assets of the Company without the consent of all the other Members of the Company”), but it might not work for a “no self-dealing” provision. (Why is such a provision necessary? Doesn’t the background law prohibit self-dealing anyway?)
The attempt to specify self-dealing contracts by party identification came to grief — I’m assuming the Operating Agreement aimed at something like “Contracts between the Managing Member and the Company require the approval of all the Members.”
That approach seems to leave a loophole by which the Managing Member can avoid the need for all-Member approval by adding one or more additional persons as parties to the self-dealing contract.
To avoid or close the loophole, Ken suggests specifying the type of contract that needs special approval. How do you specify what constitutes a self-dealing contract so clearly that the Managing Member can’t deny that a particular contract involves self-dealing?
Not sure the concept of “sides” in a multi-party contract helps. In a four-party contract in which A and B are selling all their respective assets to C and D, A and B may both be “sellers,” but they still have duties to each other, the implied duty of good faith and fair dealing at a minimum. So in that sense, the contract is in part “between” A and B and in the same sense, A and B have contracted “with” each other.
The fact pattern as given suggests an underlying tug-of-war between (a) non-managing members of HAMF who thought the Managing Member was selling the assets of HAMF too cheaply because a sale at that price was in the Managing Member’s interest but not the Company’s; and (b) a Managing Member who thought the non-managing Members were trying to play dog-in-the-manger by threatening to kill a good deal unless they got more pie.
Having no “unanimous consent for sale of all assets” provision, the non-managing members apparently tried to stretch a poorly-drafted “no self-dealing” provision to serve the purpose.
At the time the Managing Member got his 55% interest, he probably should have narrowed the “no self-dealing” provision in the operating agreement to say that all-Member approval was necessary for contracts to which *only* the Company and the Managing Member were parties.