Chancery Court Finds Arbitration Clause in Limited Liability Company Agreement Survives Company’s Conversion into Corporation Despite Corporation’s Litigation Only Approach
By Scott Waxman and Peter C. Seel
In 3850 & 3860 Colonial Blvd., LLC v. Griffin, the Chancery Court denied a motion to dismiss and stayed the proceedings on all counts, finding that the arbitration clause in the limited liability company agreement controlled and the case must be submitted to an arbitrator to decide the issue of substantive arbitrability.
On February 26, 2015, the Chancery Court in 3850 & 3860 Colonial Blvd., LLC v. Griffin, C.A. No. 9575-VCN (Del. Ch. February 26, 2015) (Noble, V.C.) addressed the recurring theme of substantive arbitrability in a dispute that involved the conversion of a limited liability company into a corporation and their conflicting dispute resolution mechanisms. In 2007, defendant Christopher Griffin (the “Defendant”) formed Rubicon Media LLC (“Rubicon LLC”). In 2011, the Defendant reformed Rubicon LLC’s capital structure and, in 2013, converted Rubicon LLC into a corporation: Rubicon Inc. (“Rubicon Inc.,” and together with the Defendant, the “Defendants”). Among other things, the conversion of Rubicon LLC into Rubicon Inc. altered the rights of shareholders with respect to the dispute resolution process. The operative clause in the LLC Agreement (the “LLC Provision”) directs the parties to resolve disputes through mediation and arbitration, whereas the corresponding provision in the Certificate of Incorporation (the “Charter Provision”) designates the Delaware Court of Chancery as the exclusive forum for all disputes.
The shareholder plaintiff 3850 & 3860 Colonial Blvd., LLC (the “Plaintiff”) brought this suit in the Court of Chancery asserting breach of fiduciary duty claims stemming from the recapitalization of Rubicon LLC. The Defendants moved to dismiss the case pursuant to Chancery Court Rule 12(b)(1) for lack of subject matter jurisdiction, arguing that, under the LLC Provision, the parties had agreed to resolve disputes through mediation and arbitration, including issues of substantive arbitrability. In opposing the Defendants’ motion, the Plaintiff argued that the Court is the proper forum to resolve any dispute concerning substantive arbitrability because the Charter Provision supersedes the LLC Provision.
As to which dispute resolution provision controls, Vice Chancellor Noble found that, with respect to disputes related to the recapitalization of Rubicon LLC, the LLC Provision controls and constitutes an enforceable agreement to arbitrate. In rejecting the Plaintiff’s argument that the Charter Provision superseded the LLC Provision, the Vice Chancellor found there was no explicit language in the Charter Provision to override the LLC Provision. Moreover, the Charter Provision and the LLC Provision can exist independently insofar as they relate to corporate governance and to the LLC Agreement, respectively.
Turning to the issue of substantive arbitrability, Vice Chancellor Noble noted that Delaware courts generally favor arbitration. However, there is a presumption that issues of substantive arbitrability are to be decided by the court, rather than by an arbitrator. To overcome this presumption, the Court requires “clear and unmistakable evidence” that the parties intended to arbitrate. Citing the Delaware Supreme Court’s opinion in James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76 (Del. 2006), the Vice Chancellor explained that such evidence is found where the arbitration clause (1) provides for arbitration of disputes generally and (2) empowers arbitrators to decide issues of arbitrability.
The Vice Chancellor found that the LLC Provision satisfied the two prongs of the Willie Gary test. The broad language of the LLC Provision required that the parties arbitrate “any dispute arising under or relating to” the LLC Agreement. Further, such disputes would be governed by the AAA’s Commercial Arbitration Rules, which grant arbitrators the power to decide issues of substantive arbitrability. Together, these clauses provide “clear and unmistakable evidence” of an agreement to arbitrate and the dispute concerning substantive arbitrability must be submitted to an arbitrator.