Elf Atochem North America, Inc. v. Jaffari

Supreme Court of Delaware · 1999 · Corporations

CorporationsDelaware LLC ActLLC agreementsarbitrationforum selectionderivative actionsLLCDelaware LLC Act

Facts

Malek, Inc. filed a certificate of formation creating Malek LLC, a Delaware limited liability company, and then Elf, Malek, Inc., and Jaffari entered into a detailed LLC Agreement governing the venture. Under that Agreement, Elf invested $1 million for a 30 percent interest, Malek, Inc. contributed product rights for a 70 percent interest, and Jaffari was designated manager. The Agreement required arbitration in San Francisco for disputes arising out of the Agreement, the interpretation of its provisions, or the action or inaction of any member or manager, and it also provided for exclusive jurisdiction in California courts for nonarbitrable claims connected to the Agreement or the contemplated transactions. Elf later sued in Delaware, alleging misconduct by Jaffari as manager and asserting claims it characterized in part as derivative on behalf of Malek LLC.

Issue

Whether a Delaware LLC is bound by an LLC agreement executed by its members even though the LLC itself did not sign the agreement, and whether the agreement's arbitration and California forum-selection provisions validly bar a derivative or direct action in the Delaware Court of Chancery. The court also considered whether Section 18-109(d) prohibits LLC members from selecting exclusive dispute resolution outside Delaware.

Rule

Under the Delaware LLC Act, the LLC agreement is an agreement of the member or members as to the affairs of the LLC and the conduct of its business, and the Act's policy is to give maximum effect to freedom of contract and the enforceability of LLC agreements. Therefore, absent a contrary mandatory statutory prohibition, LLC members may contractually require that all disputes arising out of or related to the LLC agreement or contemplated transactions be resolved exclusively by arbitration or in courts outside Delaware, and such provisions apply regardless of whether claims are styled as direct or derivative. Section 18-109(d) is permissive, not restrictive, and does not bar exclusive foreign forum or arbitration provisions.

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Nora Kim and Daniel Ruiz formed Harbor Slate LLC, a Delaware LLC, by filing a certificate of formation in Delaware. A week later, the two members signed an LLC agreement in Chicago requiring arbitration in Oregon for any dispute about the LLC’s affairs, but Harbor Slate LLC itself did not sign; Nora later files in Delaware on behalf of the LLC against Daniel for misconduct as manager.

Is Harbor Slate LLC most likely bound by the arbitration provision?

Explanation. The majority held that an LLC agreement is defined as any agreement of the member or members as to the affairs of the LLC and the conduct of its business. Because the members are the real parties in interest and the LLC is their business vehicle, the LLC can be bound even if it did not separately execute the agreement. Nothing in the opinion requires the certificate to incorporate the clause or the LLC itself to sign. (Derived from Elf Atochem North America, Inc. v. Jaffari (1999).)