Avoiding judicial dissolution through arbitration

Although Delaware courts are experts in business matters, the parties nevertheless may prefer arbitration. Then it’s comforting to know that Delaware courts are not so jealous of their jurisdiction that they won’t enforce the arbitration clause. Of course it helps to have federal arbitration law on your side, but sometimes it comes down to what the agreement says, and the court has some leeway there.

These issues arose in two recent Delaware LLC cases in which a party was trying to avoid judicial dissolution through arbitration. Terex Corp. v. STV USA, Inc., 2005 WL 2810717 (Del.Ch., Oct 20, 2005) interpreted the arbitration provision as precluding a judicial action for dissolution.

However, in Willie Gary LLC v. James & Jackson LLC, 2006 WL 75309 (Del.Ch., Jan 10, 2006), Strine interpreted the arbitration provision as permitting judicial determination of the threshold arbitration issue and of injunctive relief. The agreement provided for "judicial determination" of dissolution grounds and for court action for injunctive relief and specific performance. Strine distinguished the earlier opinion in Terex, though explicitly reserving the possibility that the parties could "contract to have an arbitrator hear claims for dissolution" [slip p. 10, n. 32]). The Delaware Supreme Court affirmed last week.

Both opinions address an interesting issue concerning the effect of incorporating AAA rules in the agreement. Here’s a discussion of the Supreme Court opinion by the victorious Francis Pileggi, linking an earlier discussion of the Chancery opinion.  The discussions include links to the opinions.

Comments

[Robert Schwartz]

how to avoid the problem:

Section 7.11. Arbitration. Any disputes, controversies or claims arising out of or relating to the formation, operation, dissolution or winding up of the Corporation (including, without limitation, the expulsion of a Sharholder) or the negotiation, execution, delivery, performance or breach of this Agreement shall be settled by arbitration conducted in Franklin County, Ohio in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. If the amount claimed or disputed in such arbitration is equal to or more than $100,000, it shall be conducted before a panel of three arbitrators.

[Francis Pileggi]

Thank you, Professor, for your summary of the case. In reply to the comment or suggestion by Robert Schwartz, the important point in the recent Delaware Supreme Court decision, (as explained in more detail in the Chancery Court decision), is that by incorporating the AAA rules, without more, the net result may be that one will also be limited to the AAA for any emergency injunctive relief sought, and the threshold issue of arbitrability will be decided by the AAA and not a court.

[Robert Schwartz]

Injunctive Relief and Arbitration:

Section 4.1. Arbitration. Any action, proceeding, controversy or claim arising out of or relating to this Agreement shall be finally settled by arbitration in Columbus, Ohio in accordance with the Commercial Arbitration Rules of the American Arbitration Association in effect on the date of this Agreement and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Notwithstanding the foregoing, the parties hereto agree that because the Shares are unique and that a transfer of Shares in violation of Article 2 of this Agreement would result in immediate and irreparable injury, loss and damage to the parties hereto and a remedy at law for such a violation would be inadequate, the Company may seek temporary, preliminary and permanent injunctive relief for any violation of Section 2.1.1 or to recover Shares transferred in violation of Section 2.1.1. If a court determines such relief should be granted, the parties agree that such relief may be granted without any requirement that the Company or any Shareholder post a bond in order to obtain any such relief.