Elf Atochem North America, Inc. v. Jaffari
727 A.2d 286 (1999)
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Rule of Law:
Under the Delaware Limited Liability Company Act, forum selection and arbitration clauses in an LLC agreement are binding on the members and the LLC itself, even if the LLC is not a formal signatory to the agreement. The Act's paramount policy of freedom of contract allows members to contractually override the Act's default jurisdictional provisions.
Facts:
- Elf Atochem North America, Inc. ('Elf') and Cyrus A. Jaffari agreed to form a joint venture to market an environmentally-friendly maskant developed by Jaffari.
- They chose to use a Delaware Limited Liability Company (LLC) as the business vehicle for their joint venture.
- Jaffari's company, Malek, Inc., filed a Certificate of Formation with the Delaware Secretary of State, creating Malek LLC.
- Subsequently, Elf, Jaffari, and Malek, Inc. entered into a comprehensive LLC Agreement to govern the new company, Malek LLC.
- The LLC Agreement provided that Elf would contribute $1 million for a 30% interest, while Malek, Inc. would contribute its technology for a 70% interest.
- The Agreement contained clauses requiring all disputes to be resolved by arbitration in San Francisco, California and granting exclusive jurisdiction to California state and federal courts for related legal actions.
- Malek LLC, the entity at the center of the venture, was not itself a signatory to the LLC Agreement.
- A dispute arose where Elf alleged that Jaffari, as manager, breached his fiduciary duties and mismanaged Malek LLC.
Procedural Posture:
- Elf Atochem North America, Inc. filed a lawsuit, both individually and derivatively on behalf of Malek LLC, against Cyrus A. Jaffari and Malek LLC in the Delaware Court of Chancery.
- The defendants filed a motion to dismiss the case for lack of subject matter jurisdiction, based on the arbitration and forum selection clauses in the LLC Agreement.
- The Delaware Court of Chancery (the trial court) granted the defendants' motion to dismiss.
- Elf Atochem North America, Inc. (appellant) appealed the dismissal to the Delaware Supreme Court (the highest court in the state).
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Issue:
Does a forum selection clause in a limited liability company (LLC) agreement, which was signed by the members but not the LLC itself, validly strip Delaware courts of subject matter jurisdiction over derivative claims brought on behalf of the LLC?
Opinions:
Majority - Veasey, Chief Justice
Yes, a forum selection clause in an LLC agreement validly strips Delaware courts of subject matter jurisdiction, even for derivative claims brought on behalf of the LLC which was not a signatory. The Delaware LLC Act is founded on the principle of freedom of contract, allowing members to privately order their affairs through the LLC agreement. The court reasoned that the LLC agreement is the central governing document, and its provisions bind not only the members who signed it but also the LLC entity they created. The LLC is merely the vehicle for the members' joint venture, and the agreement defining its affairs, per the Act's definition, is the agreement 'of the member or members.' Therefore, derivative claims, which are brought on behalf of the LLC, are still subject to the dispute resolution mechanisms agreed upon by the members. The court also held that the statutory provisions granting jurisdiction to Delaware's Court of Chancery are default rules that can be, and were, contracted around by the members. The Act's permissive language in 6 Del.C. § 18-109(d) does not prohibit parties from selecting an exclusive forum outside of Delaware.
Analysis:
This decision solidifies the contractarian nature of the Delaware Limited Liability Company Act, establishing that the LLC agreement is the paramount source of authority governing the LLC's internal affairs. By holding that members can contractually waive the right to sue in Delaware courts, even for derivative actions, the court strongly affirmed that statutory default rules can be displaced by private ordering. This enhances Delaware's reputation as a jurisdiction that provides maximum flexibility and predictability for sophisticated business entities, encouraging parties to form LLCs there with the assurance that their bargained-for agreements will be strictly enforced.
