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By Michael Greene
March 3 — The Delaware Chancery Court Feb. 26 held that an arbitration provision in an LLC agreement remained enforceable, even though the LLC was converted into a corporation that did not require such claims be arbitrated.
Vice Chancellor John W. Noble determined that the parties had an enforceable agreement to arbitrate because the LLC's arbitration provision was not superseded by the successor corporation's charter.
Accordingly, he stayed an investor's breach of fiduciary duty and contractual claims against the successor corporation and its director pending arbitration.
Rubicon Media LLC's sole director pursued a recapitalization and later arranged for the conversion of the LLC into a corporation, Rubicon Media, Inc.
The plaintiff, a seed investor in the LLC, filed a lawsuit in the chancery court against the director and the successor corporation seeking reformation of Rubicon Inc.’s capital structure to restore it to its position before the recapitalization.
The defendants moved to dismiss the action for lack of subject matter jurisdiction claiming the parties are required to arbitrate their dispute under the LLC agreement.
The plaintiff contended that its litigation rights changed as a result of the incorporation. It asserted there was no agreement to arbitrate the claims because Rubicon Inc.'s charter implemented a litigation-only approach.
Vice Chancellor Noble, however, declined to find that the charter provision was the operative agreement.
Even though a new contract will generally control over an old one, courts “have found that arbitration provisions can continue to apply to actions taken while the original contract was effective, even if the original contract has since been replaced by another,” he opined.
He determined that the plain reading of the agreements did not support the position that the charter provision superseded the LLC provision with respect to the resolution of disputes related to the recapitalization.
“First, there is no language explicitly replacing the LLC Provision with the Charter Provision. Second, although they use broad mandatory language and might have some overlap, the LLC Provision and the Charter Provision maintain independent existence to the extent that (generally speaking) they relate to the LLC Agreement and corporate governance, respectively,” Vice Chancellor Noble said.
After determining the LLC agreement to be the operative agreement, Vice Chancellor Noble next addressed whether the court should decided the whether the parties agreed to arbitrate.
Echoing another recent chancery court opinion, he noted that while the question of substantive arbitrability—whether the parties agreed to arbitrate—is generally decided by the court, this presumption can be rebutted where the parties intended otherwise.
Vice Chancellor Noble found this presumption had been rebutted by the “arising out of or relating to” language in the LLC agreement and that the parties agreed to be bound by the AAA’s Commercial Arbitration Rules, which empower an arbitrator to rule on jurisdiction.
In addition to finding that the LLC provision facially established that parties agreed that the arbitrator determine the substantive arbitrability of the claims, the Vice Chancellor also determined that the plaintiff failed to make a no non-frivolous argument about substantive arbitrability that the court must resolve.
Accordingly, the defendants' motion to dismiss was denied and the lawsuit was stayed pending arbitration.
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The opinion is available at http://courts.delaware.gov/opinions/download.aspx?ID=220090.
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