727 A.2d 286, 290 (Del. 1999)
Elf Atochem North America, Inc., a Pennsylvania corporation manufacturing solvent-based maskants for the aerospace industry, approached Cyrus A. Jaffari in the mid-nineties regarding a joint venture to develop and market his innovative water-based maskant.1 Jaffari served as president of Malek, Inc., a California corporation with limited resources and international sales expertise.2 The parties agreed to form a Delaware limited liability company to conduct the business.3
On October 29, 1996, Malek, Inc. filed a Certificate of Formation for Malek LLC with the Delaware Secretary of State.4 Subsequently, on November 4, 1996, Elf, Jaffari, and Malek, Inc. executed a comprehensive thirty-eight page LLC Agreement.5 Under its terms, Elf contributed one million dollars in exchange for a thirty percent interest in Malek LLC while Malek, Inc. contributed its rights to the water-based maskant technology for a seventy percent interest, and Jaffari was named manager of the LLC.6 Elf and Malek LLC also entered into an Exclusive Distributorship Agreement, and Jaffari signed an employment agreement with Malek LLC.7
The LLC Agreement contained detailed dispute resolution provisions.8 Section 13.8 required submission of any controversy or dispute arising out of the Agreement to arbitration in San Francisco, California, and barred members from instituting court actions except to compel arbitration or enforce an award.9 Section 13.7 provided for the exclusive jurisdiction of California state and federal courts over claims not subject to arbitration and included consent to personal jurisdiction in that state.10
On April 27, 1998, Elf filed a complaint in the Delaware Court of Chancery against Jaffari and Malek LLC, asserting claims both individually and derivatively on behalf of Malek LLC.11 The allegations included breaches of fiduciary duty by Jaffari, such as withdrawing funds for personal use and interfering with business opportunities, as well as breach of contract, tortious interference, and fraud.12 The Court of Chancery granted the defendants' motion to dismiss for lack of subject matter jurisdiction, prompting Elf's appeal to the Delaware Supreme Court.13
Whether the LLC agreement binds the LLC even though the LLC itself did not execute it?14
The Delaware LLC Act defines the limited liability company agreement as any agreement, written or oral, of the member or members as to the affairs of a limited liability company and the conduct of its business under 6 Del.C. § 18-101(7).15 The Act permits members to join together in an environment of private ordering to form and operate the enterprise under an LLC agreement.16
Yes. Elf and Malek, Inc., the members of Malek LLC, executed the Agreement on November 4, 1996, to carry out the affairs and business of Malek LLC and to provide for arbitration and forum selection.17
Although Malek LLC came into existence upon the filing of its Certificate of Formation on October 29, 1996, the statute contemplates that the certificate of formation is to be complemented by the terms of the Agreement executed by the members.18
The LLC is simply the joint business vehicle of the members, who are the real parties in interest, so Malek LLC's failure to sign the Agreement does not prevent the members' agreement from governing dispute resolution.19
The LLC agreement binds the LLC even though the LLC itself did not execute it.20
Whether the arbitration and forum selection clauses in the LLC agreement are valid under the Delaware LLC Act?21
Section 18-1101(b) of the Act establishes the policy of giving maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.22 Section 18-109(d) is permissive, allowing parties to consent to nonexclusive jurisdiction of courts or arbitration in a specified jurisdiction or to the exclusive jurisdiction of Delaware courts or arbitration.23
Yes. The Act can be characterized as a flexible statute.24 It generally permits members to engage in private ordering with substantial freedom of contract to govern their relationship, provided they do not contravene any mandatory provisions of the Act.25
The arbitration provision fosters the Delaware policy favoring alternate dispute resolution mechanisms, including arbitration.26 Such mechanisms are an important goal of Delaware legislation, court rules, and jurisprudence.27
Section 18-109(d) does not expressly prohibit vesting exclusive jurisdiction in arbitration proceedings or court enforcement in California.28 The legislature's use of may connotes a voluntary rather than mandatory set of options that complements the policy of maximum freedom of contract.29
The arbitration and forum selection clauses in the LLC agreement are valid under the Delaware LLC Act.30
Whether Elf's claims, including those asserted derivatively on behalf of the LLC, fall within the scope of the dispute resolution provisions?31
The Act expressly allows for a derivative suit under 6 Del.C. § 18-1001, but the derivative suit is a corporate concept grafted onto the limited liability company form.32 Sections 13.7 and 13.8 of the Agreement do not distinguish between direct and derivative claims and bar members from instituting any action except to compel arbitration or enforce an award in California.33
Yes. Elf's claims arose under the LLC Agreement or the transactions contemplated by the Agreement and were directly related to Jaffari's action or inaction in connection with his role as the manager of Malek LLC.34
The provisions in Sections 13.7 and 13.8 are so broad that they cover all claims, whether characterized as direct or derivative, because Elf contracted away its right to bring such an action in Delaware and agreed instead to dispute resolution in California.35
Even claims purporting to arise under the separate Distributorship Agreement are subsumed under the forum selection clause because they arise out of and are in connection with the LLC Agreement or transactions contemplated by it.36
Elf's claims, including those asserted derivatively on behalf of the LLC, fall within the scope of the dispute resolution provisions.37
Whether Section 18-109(d) of the Delaware LLC Act invalidates the parties' agreement to exclusive jurisdiction outside Delaware?38
Section 18-109(d) provides that in a written limited liability company agreement a manager or member may consent to be subject to the nonexclusive jurisdiction of the courts of, or arbitration in, a specified jurisdiction, or the exclusive jurisdiction of the courts of the State of Delaware, or the exclusivity of arbitration in a specified jurisdiction or the State of Delaware.39
No. Assuming Section 18-109(d) relates to subject matter jurisdiction, it is permissive.40 It provides that the parties may agree to the nonexclusive jurisdiction of the courts of a foreign jurisdiction or to submit to the exclusive jurisdiction of Delaware.41
The Act clearly does not state that the parties must agree to either one of the delineated options for subject matter jurisdiction.42 Had the General Assembly intended to prohibit vesting exclusive jurisdiction in arbitration or court proceedings in another state, it could have proscribed such an option.43
The Court of Chancery did not err in declining to strike down the validity of the forum selection and arbitration provisions of the Agreement.44
Section 18-109(d) of the Delaware LLC Act does not invalidate the parties' agreement to exclusive jurisdiction outside Delaware.45