Arbitration – Arbitrability – Corporate – Bylaws & Other Agreements – Delaware Law

Local Social, Inc. v. Stallings (Lawyers Weekly No. 020-096-17, 40 pp.) (Michael Robinson, J.) 2017 NCBC 92

Holding: The plaintiff-corporation’s bylaws require arbitration of any dispute that results in a deadlock. Construing this arbitration clause broadly, only defendant’s counterclaim regarding plaintiffs’ failure to hold shareholders’ and board of directors’ meetings is subject to arbitration under the clause. However, an arbitrator must decide the arbitrability of claims arising under the parties’ shareholders’ agreement and stock purchase agreement.

The court grants defendant’s motion to compel arbitration of his third counterclaim. Litigation of this claim is stayed pending the outcome of arbitration. An arbitrator must decide the substantive arbitrability of (1) plaintiff’s fourth claim and defendant’s second counterclaim under the shareholders’ agreement and (2) plaintiff Eaddy’s tenth and eleventh claims under the stock purchase agreement. The court defers ruling on defendant’s request for a stay as to these claims pending the arbitrator’s decision on arbitrability. Otherwise, defendant’s motion to compel arbitration is denied.

Delaware law applies to the stock purchase agreement and the shareholders’ agreement.

The bylaws say that “the provisions of the Delaware Uniform Arbitration Act shall apply in any such arbitration proceedings.” Although the bylaws do not contain a choice of law clause, since the bylaws concern the internal affairs of a Delaware corporation, Delaware law applies to the bylaws.

The bylaws require arbitration of “[a]ny dispute arising under” the bylaws that “results in a deadlock.” Further, the arbitration provision expressly states that it does not prevent the parties from obtaining injunctive relief and specific performance in the courts.

Therefore, the court concludes that the arbitration provision does not generally provide for arbitration of all disputes. Consequently, the court must decide issues of substantive arbitrability, rather than submitting this question to an arbitrator.

Plaintiffs’ first claim alleges that defendant breached his fiduciary duties to plaintiff Local Social by misappropriating and diverting Local Social’s funds and assets for defendant’s personal expenses, deleting company records, and making disparaging comments about Eaddy and Local Social advisor Douglas Leggat to Local Social’s employees and customers.

The directors of Delaware corporations stand in a fiduciary relationship not only to the stockholders but also to the corporations upon whose boards they serve. The fiduciary duties defendant owes plaintiffs are beyond the bylaws and rest on an independent set of rights provided for in Delaware corporation law. Therefore, plaintiffs’ first claim is not subject to arbitration under the bylaws.

Plaintiffs’ various other claims (conversion, breach of the parties’ exit agreement, unfair trade practices, breach of the shareholders’ agreement’s non-disparagement provision, computer trespass, default on a promissory note and security agreement) do not depend on the existence of the bylaws or touch on matters that concern the rights or obligations thereunder, so they do not fall within the scope of the bylaws’ arbitration provision. The same is true of defendant’s counterclaims for breach of the exit agreement, breach of the shareholders’ agreement, failure to pay wages, and conversion.

Defendant claims that plaintiffs have failed to hold both an annual shareholders’ meeting and a regular meeting of the board of directors as required by the bylaws. While it is unclear whether this dispute results in a deadlock, any doubt as to arbitrability is to be resolved in favor of arbitration. Therefore, defendant’s counterclaim for breach of the bylaws must be sent to arbitration.

The shareholder’ agreement and the stock purchase agreement include their own arbitration clauses. These clauses generally provide for arbitration of all disputes and say that the rules of the American Arbitration Association will apply, thus satisfying both prongs of James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76 (Del. 2006). A non-frivolous argument exists that the parties’ claims under these agreements are arbitrable thereunder. Accordingly, an arbitrator must decide the arbitrability of the parties’ claims arising under these agreements.

This result is not affected by the shareholders’ agreement’s carve-out for deadlocked matters: a shareholder vote that results in a tie is deemed deadlocked, and the chairman of the board of directors has a tie-breaking vote with respect to any deadlocked matter. This limited carve-out, in conjunction with the otherwise broad scope of the arbitration provision, does not overcome the presumption created by a reference to the AAA rules in favor of having an arbitrator resolve disputes about substantive arbitrability.

Motion granted in part and denied in part.