United States: Court Of Chancery Holds That Arbitrability Of Advancement Claim Must Be Determined By Arbitrator

In the recent decision of Blackmon v. O3 Insight, Inc., C.A. No. 2020-1014-SG (Del. Ch. Mar. 9, 2021), the Delaware Court of Chancery held that the arbitrability of a Delaware director's claim for advancement must be determined by an arbitrator.

The Petitioner, Theodore Blackmon, is a director and stockholder of respondent O3 Insight, Inc. (the "Company"), a Delaware corporation.  In September of 2020, the Company sued Blackmon in Alabama alleging breach of his fiduciary duty to the Company. The Certificate of Incorporation and Bylaws of the Company provide for advancement following tender of an undertaking to repay.

Blackmon filed an action in the Delaware Court of Chancery seeking advancement of his legal fees. The Company moved to dismiss for lack of subject matter jurisdiction.  The Petitioner had signed an agreement (the "Stockholders Agreement"), which stated: "any dispute, controversy or claim arising out of, relating to, or in connection with, this Agreement . . . shall be finally settled by arbitration. The arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association" (the "AAA rules").

Vice Chancellor Glasscock noted that under the AAA rules, issues of arbitrability—whether the arbitrator is empowered to decide a particular issue—are reserved for the arbitrator.

The Company argued that because the Stockholders Agreement invokes the rules of the AAA, the Court of Chancery is without jurisdiction to determine whether the issue of the Petitioner's entitlement to advancement of legal fees is reserved to arbitration.

In conducting its analysis, the Court noted that "Delaware arbitration law mirrors federal law", and that "[j]ust as the arbitrability of the merits of a dispute depends upon whether the parties agreed to arbitrate that dispute, so the question of who has the primary power to decide arbitrability turns upon what the parties agreed about that matter."  Slip op. at 3 (quoting James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 78-79 (Del. 2006)).

Given that "the question of who decides arbitrability is itself a question of contract", the Court analyzed whether the parties contractually bound themselves to have arbitrability in this context decided by an arbitrator.  The Court noted that the arbitration clause of the stockholders agreement submitted all issues "arising out of, relating to, or in connection with" the Stockholder's Agreement to arbitration under the AAA rules. Slip op. at 4.

The Court, citing Willie Gary, found that the decision of whether the claims are subject to arbitration, a gateway issue referred to as "substantive arbitrability", must be decided by the arbitrator in the first instance.  Accordingly, the Court granted the Company's motion to stay the action pending the arbitrator's decision on the arbitrability of the advancement claim.

Key Takeaway: Although the Delaware Court of Chancery is vested with subject matter jurisdiction to adjudicate advancement claims of directors of Delaware corporations, such jurisdiction may be contractually vested in an arbitrator, and the Court will look to the operative agreement to determine whether the Court, or the arbitrator, decides the arbitrability of the claim.

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