An arbitration clause in a limited liability company (LLC) agreement controls in a dispute involving a shareholder, despite the fact that the LLC had converted to a corporation that did not have a similar dispute resolution mechanism in its incorporation documents. 3850 & 3860 Colonial Blvd., LLC v. Griffin. Section leaders consider the Delaware case an interesting decision because of the court’s strict contractual reading of an LLC agreement requiring arbitration and ignoring a defendant’s alleged misconduct in unilaterally reorganizing the company, potentially to the plaintiff’s detriment.

Courts Favor Arbitration

The shareholder plaintiff was a seed investor in an LLC. When the company’s sole director pursued a recapitalization of the company that reduced the plaintiff’s interest, and then that director oversaw the LLC’s conversion to a corporation, the plaintiff alleged contractual claims and breach of fiduciary duty in an action against the director and the corporate successor.

Before the Delaware Court of Chancery were two contracts: the LLC operating agreement between the parties that contains an arbitration provision and an incorporation document that does not contain an arbitration provision. The defendant prepared the second document, without notice to the plaintiff, to convert the LLC into a corporation. The defendants moved to dismiss the suit for lack of subject matter jurisdiction under Rule 12(b)(1), arguing that arbitration is required and provides an adequate remedy. The court ruled that the corporate charter does not supersede the original operating agreement and thus the parties have an enforceable arbitration provision.

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