Title: Parfi Holding AB et al v. Mirror Image Internet, Inc.

State: delaware

Issuer: Delaware Supreme Court

Document:

Netteae 11:86am Frere Tu pe eat

IN THE SUPREME COURT OF THE STATE OF DELAWARE

PARFI HOLDING AB, GUNNAR
GILLBERG, PLENTEOUS CORP.
and GRANDSEN, LTD.,

No. 27, 2002

Plaintiffs Below,
Appellants, Court Below: Court of Chancery
of the State of Delaware in and for

v. New Castle County

INC., XCELERA.COM, INC.,
ALEXANDER M. VIK, GUSTAV
‘VIK and HANS MAGNUS
FAJERSON,

§

§

§

§

$

§

§

§

§

MIRROR IMAGE INTERNET, §—C.A. No. 18507
§

§

§

§

§

Defendants Below, §

Appellees! §

Cross-Appellants. §

Submitted: August 6, 2002
Decided: November 4, 2002

Before VEASEY,, Chief Justice, WALSH, HOLLAND and STEELE, Justices, and
RIDGELY, President Judge, Superior Court,’ constituting the Court en Banc.

‘Upon appeal from the Court of Chancery. REVERSED and REMANDED.

 

* Siting by designation pursuant to Del Const ar 1V, 12
Nato 88am Fro a

Melanie K. Sharp, Esquire, of Young, Conaway, Stargatt & Taylor, LLP,
Wilmington, Delaware; Of Counsel: M. Frederick Priteker, Esquire, and James W.
Stoll, Esquire (argued), of Brown Rudnick Berlack Israels LLP, Boston,
Massachusetts, for Appellants.

Jesse A. Finkelstein, Esquire, and Thad J. Bracegirdle, Esquire, of Richards,
Layton & Finger, Wilmington, Delaware; Of Counsel: Peter J. Macdonald, Esquire
(argued), Robin L. Alperstein, Esquire of Hale and Dorr, LLP, New York, New
York, for Appellees.

VEASEY, Chief Justice:
 

Met-02 1hfhan Fro

Inthis appeal, we hold that contracting parties who provide for the arbitration
of disputes in their agreements need submit to arbitration only those claims that
touch on the legal rights created by their contract. The Court of Chancery dismissed
fiduciary duty claims brought by minority stockholders of a Delaware corporation
fon the ground that the transactions giving rise to the stockholders’ causes of action
were also the factual basis for contract claims relating to the Underwriting
‘Agreement through which they acquired their interests in the company. The Vice
Chancellor reasoned that the arbitration clause the stockholders placed in their
Underwriting Agreement required them to bring all of their claims relating to the
‘ansactions, including the fiduciary duty claims, before the arbitration tribunal.

‘We disagree with this holding because the fiduciary duty claims the minority
stockholders asserted are not based on the rights and obligations created by the
underlying agreement thet required arbitration of claims “arising out of or in
‘connection with” the agreement itself. When contracting parties provide for the
arbitration of claims in their agreement, the arbitration provision, no matter how
broadly drafted, can reach only the claims within the scope of the contract, and the

fiduciary duty claims here are beyond that scope.
NaTe02 1:88am From THe Pos este

Accordingly, we reverse the judgment of the Court or Chancery dismissing
the minority stockholders’ claims and we remand the matter to the Court of
Chancery for proceedings consistent with this opinion.

Facts

Mirror Image Internet, Inc., is a Delaware corporation involved in designing
‘hardware to speed information retrieval and transmission across the Internet. Mirror
‘Image was formed in 1997 as a subsidiary of Mirror AB, a Swedish corporation.

‘Asa struggling start-up enterprise, Mirror Image required frequent infusions
Of capital to stay operational. Mirror AB could not, on its own, meet the financing
needs of its subsidiary. By 1999, Mirror AB had to seek outside investors who
could provide enough funds so that Mirror Image could meet its short-term
obligations and stave off bankruptcy.

Mirror Image found two investors, In March of 1999, Mirror Image entered
Jimto an agreement (the "Underwriting Agreement") with a corporation that is
currently known as Xcelera Inc., and Plenteous Corp. Xcelera is a Cayman Islands
Holding company. Plenteous is a Panamanian corporation. The Underwriting
Agreement provided Mirror Image $2 million in capital, $1.75 million of which
would be contributed by Xcelera and the balance provided by Plenteous, Once the

‘Agreement closed, Xcelera became the controlling stockholder with a 62% interest
2
sate stan Frome Tite Ponte Fos

in Mirror Image. Plenteous and two other stockholders, Grandsen, Ltd. and
Gillberg,? who were Mirror AB stockholders, were given the right to participate in
the offering. They provided the balance of the $2 million and became minority
stockholders in the corporation along with Mirror AB. In addition to setting the
Price and quantity terms of the stock offering, the Agreement granted Xcelera and
Plenteous the right to appoint four directors each to the Mirror Image board of
directors. Mirror AB retained the right to appoint one director. Finally, the parties
agreed that any dispute, controversy or claim “arising out of or in connection with
this Agreement, or the breach, termination or invalidity thereof, shall be settled by
arbitration” in Sweden?

‘The relationship among the parties deteriorated quickly after the stock offering
closed. After gaining control of the corporation, Xcelera initiated a series of
‘ansactions that it claims were designed to benefit Mirror Image. The minority
‘Stockholders believe Xcelera has benefitted only itself. Viewing these transactions

as part of a scheme to dilute their minority interest, Mirror AB formed a litigation

* Grandson i a Betish corporation. ier tan individu cen of Sweden,

» Underwcing Agreement § 202.
be
Hate stan From Tite Pare Foe

construct, Parfi Holding AB, which proceeded, along with Plenteous, Grandsea, and
Gittberg, to challenge Xcelera's actions.*

‘The first ewo undertakings that raised concern for Parfi occurred in April and
July of 1999. ‘The transactions involved subscriptions totaling over 13 thousand
shares of Mirror Image stock, ostensibly intended to raise $7 million that Mirror
Image required to continue operations. Mirror Image issued all of the stock to
Xcelera, boosting Xcelera’s holdings from 62.5% to 91.8% of the corporation's
equity. Parfi alleges that the subscriptions were unnecessary and designed solely to
allow Xcelera to strengthen its hold on Mirror Image by purchasing the stock at a
Price below fair market value, Xcelera allegedly did not provide the minority
stockholders sufficient time to decide whether to subscribe and ignored attempts by
other stockholders who attempted to exercise their right to participate in the
subscriptions.

Inthe third transaction, Xcelera allegedly used its control of the Mirror Image
board to arrange for a private placemem of Convertible Preferred Stock (the
“Convertible Preferred Stock Offering" or "November Offering"). According to

Parfi, the offering was designed to permit Xcelera to capitalize on the pending

 

* Pla wil be refered to collectively as Parl unless the analysis requires meotonig the speci pares
byname.

4.
Wetted 1ettan Frore Tite Powe Fst

‘announcement that Hewlett-Packard would enter into a strategic alliance with Mirror
Image. The strategic alliance involved a $32 million investment in the start-up by
‘the computer giant. Parfi claims that the Convertible Preferred Offering allowed
‘Xcelera to purchase Mirror Image stock at a pre-announcement bargain price before
the market received the information and improved its stock price.

In the fourth transaction Parfi contends that Xcelera usurped a corporate
opportunity that rightfully belonged to Mirror Image. In March of 2000, Exodus
Communications Inc. entered into an agreement to buy over 32 million shares of
Mirror Image stock (the "Exodus Transaction”).* Inexchange, Mirror Image would
receive $75 million in cash and over 3 million shares of Exodus stock. Xeelera
arranged for Exodus to pay 75% of the consideration directly to Xcelera since it
‘owned the vast majority of Mirror Image stock. Xcelera has allegedly exchanged
at an enormous profit its diluted stock for cash and Exodus stock.

Xcelera has profited greatly from its investment in Mirror Image. The price
of Xcelera stock rose from approximately $29 per share in July of 1999 t0 $190 per
share by February of 2000. Believing Xcelera has reaped this gain at the expense
of its fellow Mirror Image investors, Parfi has sought relief based on its dual legal

 

{By this ime, Micor Lage had inated two stock splits which ncresed the number of athorized shares
1096 ailion

Ss
Near shan Froee Tite Powe Fate

relationship with Xcelera. Parfi has brought @ contract claim against Xcolera as a
fellow investor who made certain assurances in the Underwriting Agreement.
Separately, Parfi asserts that, as a controlling stockholder, Xcelera has breached
fiduciary duties owed to Parfi under Delaware corporation law.
Arbitration Proceedings in Sweden

Abiding by the terms of the Underwriting Agreement, Parfi submitted its
breach of contract claims to arbitration in Sweden. The contract claims Parfi
Presented at arbitration did not involve a breach of any specific provision of the
Underwriting Agreement. Parfi sought to prove that Xcelera led its fellow
‘underwriters to rely on certain assumptions that induced them to enter into the
Contract. According to Parfi, Xcelera assured its fellow underwriters that the
Agreement provided only an interim solution to Mirror Image’s financing problem
and that Xcelera would, on behalf of the other investors, arrange for subsequent
stock offerings

 

‘much higher price, Xcelera, Parfi claimed, promised to use its
‘Controlling interest only to raise additional capital at a favorable rate of return and
assured Parfi that the controlling interest would ‘not be used to dilute its investment.
Plenteous also submitted to the arbitrators an e-mail in which a Xcelera board
‘member promised that Xcelera would seek Plenteous’ consent before Mirror Image

took any “corporate action." Parfi and Plenteous argued that Xcelera’s conduct
6
Hatt 11s8Tan Frome rite Fine Fos

amounted to a failure of these assumptions which invalidated the Agreement and
‘entitled the investors to damages for the resulting dilution of their investment.
Parfi did not base any of its arbitration claims on its starus as a stockholder of
Mirror Image. The arbitrators’ decision specifically noted that:
[Vlarious corporate actions in [Mirror Image] after the Underwriting
Agreement, undertaken under the laws of the State of Delaware, are
presently subject to litigation before the cours of that State. .. . The
claimants have . . . not based their case in the present arbitration on or
presented evidence regarding Delaware law. Also, they have not
invoked the duties . . . of Xcelera as majority shareholder. . . .°
The Arbitration Tribunal issued its decision on September 26, 2001. Parfi and
Plenteous could not convince the Tribunal that Xcelera entered into the Underwriting
Agreement with an intent to dilute the interests of the other investors. The Tribunal
held that the Agreement was meant to provide a short-term investment in capital,
‘and any long-term plan to secure financing was not a basic assumption upon which
the Agreement was based.” The Tribunal awarded damages to Plenteous, however,
because the arbitrators found that Plenteous” participation in the Agreement was

based on Xcelera’s assurance that it would seek Plenteous’ consent before engaging

Ab, Award a 25,

> ia, 26,

-
Meteo 1hstan Fro Tee Pie Pate

Mirror Image in any “corporate action."* The Tribunal determined that the April
and July subscriptions were "corporate actions,” and the Tribunal awarded Plenteous
‘damages for any resulting dilution in their interest in Mirror Image”

Proceedings in the Court of Chancery

In November of 2000, a few months after submining its contract claims to
arbitration, Parfi filed an action in the Court of Chancery alleging that Xcelera
breached fiduciary duties it owed to Mirror Image stockholders. Parfi alleged
various claims of fraud, conspiracy, implied contract and misappropriation of a
Corporate opportunity against Xcelera and the Xcelera directors who sit on the
Mirror Image board.

Xcelera responded with motions to dismiss based on lack of personal
Jurisdiction and failure to submit the fiduciary duty claims to mandatory arbitration
as provided in the Underwriting Agreement. The Court of Chancery granted
Xcelera’s motion for summary judgment and dismissed Parfi's claims, holding that
the broad arbitration clause in the Underwriting Agreement required Parfi to submit

for arbitration all claims related to the series of transactions that were challenged in

 

* td 28,31
va
Nett 118tee row Tie Pinna Fae

Sweden.'° With respect to the central issue, the court held that the fiduciary duty
claims were “in connection with" the Underwriting Agreement and were, therefore,
mandatorily arbitrable thereunder.

In the alternative, the Vice Chancellor (1) dismissed Xcelera's motion to

dismiss all counts against it for lack of personal jurisdiction;

 

2) denied Mirror
Image’s motion to dismiss plaintiffs’ derivative claims; (3) granted defendants’
motions to dismiss the fraud claims as well as the claims against the director
defendants for aiding and abetting fraud for failure to state a claim upon which relief
may be granted; (4) required the complaint be amended to change the derivative
Constructive fraud claims into counts for breach of fiduciary duty; (5) granted
defendants’ motions to dismiss the civil conspiracy claims; and (6) granted the
defendants’ motions to dismiss plaintiffs" breach of contract claim against Xcelera,
a8 well as their motion to dismiss plaintiffs’ tortious interference with contract claim

‘against the director defendants."

 

“Pach Holding AB, Mirror Image Interne, Ine, (Par S.J. Op") Be Ch, C.A. No, 18507 (Dee.
20,2001), a2.

Wid, a 2-3. These aherncive decisions were predicted on te possibilty tat cour's decision ox
srbrabiliy mip nce preva

a
Vettes 118ten Frore Tite Piae Fo

Issues on Appeal

Parfi claims the Court of Chancery erred: (1) by dismissing its fiduciary duty
claims as subject to arbitration because of the “arising out of or in connection with”
language of the Underwriting Agreement; (2) by finding that two of the plaintiffs,
Grandsen and Gillberg, were bound by the arbitration clause even though they did
not sign the Agreement; and (3) by finding that the individual director defendants
could seek the benefit of the arbitration clause even though they did not sign the
Underwriting Agreement."* Accordingly, Parfi asks this Court to reverse the trial
‘court's judgment and permit plaintiffs to proceed with their claims in the Court of
Chancery. We need to reach only the first issue on appeal to resolve the matter
before us.

The Underwriting Agreement Does Not Require Parfi and Plenteous to Submit
‘Their Fiduciary Duty Claims to Arbitration

This Court reviews de novo the Court of Chancery's interpretation of the

‘Underwriting Agreement" as well as the application of relevant law."*

" The baace ofthe Vee Cancel decision ha ot ben appealed andi ot addesed by his Coun
© Shook» Math. 792.4.24217,224 (De 1969)
™ RapidsAmericon Corp. Harris, 603 524796, 84 (De. 1992)

-10-
 

roe Tete Fue Fate

Parfi argues that the fiduciary duty claims it filed in the Court of Chancery
‘were not "in connection with" the Underwriting Agreement and, therefore, these
Claims fall outside the mandatory arbitration provided for in Section 20.2 of the
contract. Xcelera rests its counter-argument on the Vice Chancellor’s interpretation
of the arbitration clause as an obligation so broad in ‘Scope that it required Parfi to
assert its fiduciary duty claims along with its contract claims.

When the arbitrability of a claim is disputed, the court is faced with two
issues. First, the court must determine whether the arbitration clause is broad or
narrow in scope. Second, the court must apply the relevant scope of the provision
to the asserted legal claim to determine whether the claim falls within the scope of
the contractual provisions that require arbitration. If the court is evaluating a narrow
arbitration clause, it will ask if the cause of action pursued in court directly relates
to a right in the contract. If the arbitration clause is broad in scope, the court will
defer to arbitration on any issues that touch on contract rights or contract

performance. This is a case of first impression in Delaware."

 

"While Pats eppen preens his Cou fx opportunity to acute the approach for determining the
arbiabiity ofclaims, we ot that coun in several othe jrssctions employ esimilarinquiy. See. eg MitmBtst
‘Mesors Corp. Soler Chrter-Pomowsh, 723 F 2 188, 159(1" Ci. 19D), af din par tevin prt, 473 US. 614
(21985); Louis Dreys Negoce S.A. Bynad Shipping & Trading, ic, 252 F 9 218, Ted Ge BOON) Annes
Recovery Corp. v. Compusrived Phemal Imaging, Inc. 96 F.30 8, 93 (8* Ci. 1996); Ford v. NYLCure Heh
‘Plax o the Gulf Coat, In. 161 F-34243, 2501 (5° Ci. 1958) (aerpetng Texas law). nr Oi Spl by Amoco
Cad, 659 F-24789, 794 Cth Ci, 1981); Sle, Ine. v. Aas, Ine. 178.34 716,720 Cit. 1980), Coon
Brewing Co. v. Molin Breweries $1 F 361511, 115-16 JO" Cit. 1985) Armada Coal Export Inc.» Inert,
U.. TGF.28 1566, 1568 11" Cit. 1984; Sefer v. US, Home Corp, 750 So.24 633, 698 (Fa 198).

one
Vette e6ban Fro Tite Piste Fon

‘The Arbitration Clause in the Underwriting Agreement Establishes
«@ Broad Scope

‘The parties do not dispute that Section 20.2 of the Underwriting Agreement
has a broad scope. By agreeing to submit to arbitration "any dispute, controversy,
‘or claim arising out of or in connection with” the Underwriting Agreement, Xcelera,
Mirror AB, and Plenteous have signaled an intent to arbitrate all possible claims that
touch on the rights set forth in their contract.” ‘The issue is whether the arbitrable
Contract claims are connected to the fiduciary duty claims that are independently
rounded on Delaware corporation law.

‘The Fiduciary Duty Claims Are Beyond the Scope of the Arbitration Clause

‘The Vice Chancellor applied the arbitration clause to the fiduciary duty claims
‘because he read the contract term to require "the resolution of claims related to a
common set of underlying facts in a single forum."” We disagree with this
interpretation of what Mirror AB, Plenteous, and Xcelera intended to provide for
in their contract. The issue is whether the fiduciary duty claims implicate any of the
rights and obligations provided for in the Underwriting Agreement. Stated

 

ss See EY dvochem N, America v. Jafar ne, 727 A.24 286, 29 (De. 1999) (holding that “in connction
‘ih”cremes ao obipalon wo ssbmit clams related ote apreemoento aban),

” Perf 8.1. 0p 1228
Metra 1sttan Frere Tae Flee Fae

differently, do the fiduciary duty claims depend on the existence of the Underwriting
Agreement?

When parties to an agreement decide that they will submit their claims to
arbitration, Delaware courts strive to honor the reasonable expectations of the parties
and ordinarily resolve any doubt as to arbitrability in favor of arbitration."*
Nevertheless, arbitration is a mechanism of dispute resolution created by contract.”
‘An arbitration clause, no matter how broadly construed, can extend only so far as
the series of obligations set forward in the underlying agreement.” Thus, arbitration
clauses should be applied only to claims that bear on the duties and obligations under
the Agreement.”” The policy that favors alternate dispute resolution mechanisms,
such as arbitration, does not trump basic principles of contract interpretation,

‘When Xcelera, Mirror AB, and Plenteous agreed to the arbitration provision

in the Underwriting Agreement they did not commit to bring into arbitration every

 

"SBC Imeracive, Ine. ». Corporate Media Parner, 14 A.28 75, 761 (De. 1998)

"Seed. 31 761 (xing that “A court wl sox compel a party wo arbre. abet a clear expression of
‘such an inten).

% See Coors, $1344 1816 (A dispute within te scope of be contri stil condition precedent to

involuntary arbization") (ctton omined); se leo NYLCare Health Plas, 141 Fd w 280 tatng tt clan
“Is rbirable ifs ‘so inzewoven wih the contract that could noc sand alone, bts notebitrabe its completely
independent of the contract and could be maintained witout ference roa comract™) (quoting LL. Ina Co Lid
Haxford Accident & Inder. Co, 918 S.W 24 587, 89 (Tex App. 1996).

2% if Archon, 727.24. 295 (opto il cous determinson tha concac cain ms be sebenined
to ablation because they “bear cree ce the dues an obligations under te agree mea),

“13.
 

Mero 1:8tan From rate TA Foe

possible breach of duty that could occur between the parties. The arbitration
clause signals only an intent to arbitrate matters that touch on the rights and
performance related to the contract.” The term “arising out of or in connection
with" must be considered in that light. The Court of Chancery should have
Concentrated on the similarity of the separate rights pursued by plaintiffs under both
the contract and the independent fiduciary duties rather than the similarity of the
conduct that led to potential claims for both the contract and fiduciary breaches of
uy.

Parfi can maintain an action based on the alleged breaches of the independent
set of fiduciary duties that Xcelera owes Mirror Image stockholders even though the

claims arise from some or all of the same facts that relate to the transactions that

 

= The United Sutes Court of Appeals fer the Teoh Cireut provides simple ilsrton ofthis pice
“Uftwo smal busines owners executes sales conzact including a geeral abit clause and one assualt the oe,
‘We wouldthink elementary thatthe sale contrac did noc requre the Vit wo arbitrate the sort cam beease the tert
lain is ot related to te sales conuect.... is simply frttous tha the parties happened to have «conch
relationship." Coors $1 F.2d at 1516.

® See.eg, Bhstad.252F 34 224 ating thar bros arbtion clauses create a presumption ofarbsabiliy
{or colaera mates which implicate “issues of contntconsractiono he pts" rights aed obligations under i)
(ation ome); American Recovery, 96 F 3 19 (agreement ms "encompes the dispute" torque abieation),

Generally. purprtedly independent actions do not ouch matters implicated in &conracifthe indepen dest
«nue of ction could be bruh had the partis not signed cater Thus a physician can Bring teat aceon tot
on bebalffpatens against an HMO for fase adverising claims even hough th physician siged acontatto provide
‘eto beneficiaries der he HMO. NYLCare Heath Plan, 141 F.3d af 250-52. Abough the pysica tay Fey
on information isclosedtohim through his ageerent wth the HMO, the obligations under te costene se notelced
to the separt cutis the HMO owed potential pues under tr lew. dat 351-52. siialy a bewmg company
208d not be forced to submit to mandatory wrbication when it brings an antiustcnim
‘company simply becnse they ar involved i licensing agreement Coors 31 F ida 1515-
‘he arbition clause to ast fights against unfareampeton tht existed outside he are
‘America excep the pay tthe contrat could bring the ants acton, It 1316

 

  
  

“4
Netto stan Frome Tae Pine Fate

provided the basis for its contract claims. Xcelera’s fiduciary duties to Mirror
Image consist of a set of rights and obligations that are independent of any contract
and need be submitted to arbitration only if the claims based on fiduciary duties
touch on the obligations created in the Underwriting Agreement.” If the
Underwriting Agreement does not implicate Xcelera’s fiduciary duties, the
arbitration clause cannot bar Parfi from seeking the relief every other stockholder
is entitled to under Delaware law.

‘The Vice Chancellor painstakingly parsed the contractual language requiring
that claims "arising out of or in connection with’ the Underwriting Agreement must
>be submitted to arbitration.” He properly held that the fiduciary duty claims do not
“arise out of the” Agreement, But he concluded, we believe erroneously, that these
Claims are "in connection with” the Agreement. In our view, this latter conclusion

See Havens». Anar 997 WL 33957 (Del. Ch) a *8 aang ta if a agreements merely 2 “source
‘Mou do tte cn aro SYLCare ah ant 61 F381 ("Te fae opt

refered to, and related at «factual matter to, be couractconainng te abiraon clase [}
{eleva ”) (naling Priv. Cook, 908 80 24307, 313 (Tex. App. 1995)

2 See BALOTTIAFNKELSTED, DELAWARE AW Of CONORATIONS ANDBUSDESS ORGANIZATIONS, Forward
(2002) (in corporations, te basic onac among stockolders is contained inthe certfice of incorporation and to
some extent the by- ls).

* Compare American Recovery, 96F 34 94 (requiring abitaion of» corparte oppor claim because
of loyalty breach was based wpon a buinee expectancy created by the undeclying agreement, with Havens
5 (holding tht a corporate opportunity oes wot fl unde the arbiradon clase Of Wong agreement Decne
the caim involve usrpation of busines prospect ha did no "nurs. on" 2 conzact hat merely govers voting HGS
ne dviend dtribaons among Rocko)

 

 

™ Papi 84 Op.m29.
1S.
Nett thee From Tae Pine este

ives far too expansive a meaning to the word "connection." We conclude that the
analysis must turn on the issue of whether the fiduciary duty claims would be
assertable had there been no Underwriting Agreement. We hold that they would be
independently and separately assertable in that situation and are therefore not “in
‘connection with" the Agreemest.

‘The Underwriting Agreement does not establish rights and obligations
extensive enough to encompass the dispute Parfi has brought in the Court of
Chancery. The purpose of this Underwriting Agreement, like similar underwriting
agreements, was to “negotiate the amount of capital that the company [sought]

to raise, the type of security to be issued, the price and any special features of
the security, and the underwriter’s compensation.” The Agreement set out the
Jaws and other regulations.

 

typical warranties related to compliance with securiti
In addition, Mirror Image bargained for maintaining one seat on the board of
directors, and both Xcelera and Plenteous were entitled to appoint four directors
each. The performance of the Agreement, by its terms, was scheduled to conclude
‘onthe closing date, when the underwriters and the company committed to a schedule

for issuing the securities and paying the stated price per share.”

 

* MDCM Wolings, Ine. . Cred Suese irst Boston Corp, 261 F Sopp 24251,253 (SDNY)
» Underoniting Agreement §§ 1.1, 4.1644
16.
Heated stan Frome Tite Pe ese

Reviewing the provisions of the Agreement, Xcelera cannot point to any
‘contract term that creates a species of obligation upon which Parfi can base a breach
of fiduciary duty claim. ‘The Tribunal evaluating the Agreement noted that:

In the understanding of the Tribunal, the distinction between fair and

unfair dilution can absent express agreement be drawn only with

reference to applicable company law. It can be said that any agreement

resulting in some lasting relation between the parties thereto is
premised on the assumption that the other party or parties will in the
future behave within the limits of the law. Such assumption does not,
however, trigger legal remedies different from those which follow from

the application of the relevant law. . .. itis accordingly for the Courts

of the State of Delaware to determine whether there was “unfair”

dilution... .*

‘The Tribunal has interpreted the Underwriting Agreement to fall short of imposing
‘any continuing duty on the part of Xcelera to safeguard the minority stockholders?
investment against dilution. ‘The purported dilution rests on an alleged breach of
duty that is more “lasting” than the short-lived obligations bargained for in the
Underwriting Agreement. The fiduciary duties Xcelera owes Parfi are beyond the
contract and rest on an independent set of rights provided for in the Delaware
corporation law.

Even though we have determined that fiduciary duty claims lay outside the
scope of the Underwriting Agreement, we have nevertheless given the arbitration

* Ab, Awd 29 (emphasis supplied).

7
MetT02 2:60 roe Ttee Paine ste

clause its full effect. ‘The Vice Chancellor incorrectly assumed that “if other claims
‘based on the same conduct that is also alleged to be a breach of .. . the Agreement
are not ‘in connection with’ a breach or the invalidity of the Agreement,” then no
‘other non-contract claims could be "so ‘connected."*™* The court need only look to
the Tribunal’s decision to see that the arbitrators relied upon claims arising "in
connection with” the Underwriting Agreement to award Plenteous damages. The
Tribunal found that Xcelera breached an obligation to obtain Plenteous’ consent
before it entered into the stock subscriptions. The consent obligation was a
collateral agreement between Plenteous and Xcelera that did not “arise” from the
tights in the Underwriting Agreement, The Tribunal noted that collateral agreement
“was . . .no part of the Underwriting Agreement . . . but a separate promise from
one of the underwriters to another." The side agreement between the underwriters
could have been arbitrated only because the obligation arose “in connection with”
the Agreement.

By comparing the side agreement between the underwriters with the fiduciary
duty claim, obvious differences in the scope and the nature of the obligations prove

that the side agreement is a collateral matter to the Underwriting Agreement while

 

* PehSJ Op «29,
© nee Awad 930,
 

NtT82 12ttee ror

the unfair dilution claims and the corporate opportunity claims are not. The side
‘agreement was confined to only two parties, Xcelera and Plenteous.™* Xcelera’s
fiduciary duties as a controlling stockholder, by contrast, are owed to all Mirror
Image stockholders." Plenteous cannot claim a right to consent unless it bargained
for such a right. The right to protection against a controlling stockholder, however,
applies automatically when a party becomes a Mirror Image stockholder. The
consent Plenteous bargained for was confined to “corporate actions” taken by
‘Xcelera through Mirror Image.” An unfair dilution claim and corporate opportunity
claim would encompass all transactions initiated by Xcelera that prove a breach of

Xcelera’s fiduciary duty."

‘The Tribunal deal Mirror AB the beef of Pleneous right consent because Mior AB di not know
shout the e-mail. Since "the promis inthe e-mail was at given to Mier AB, this company cannot obain damages
‘onthe ground” Arb. Award a3

 

Kad v. Lynch Communications $y. ne, 688 A.24 1110, 1114 (De. 1984) (holding that a tokdolder
‘who owns a majority interes in or exercises conrl over the business afi of the corporation owes Fiduciary duties
(0 is felow aaekhalders).

% See i; se aso Del. Ch. R. Pr. 2.1 (aim may inate a deivative aon If he plait was a
stockholder ofthe corporation at the time of te trasaction complained of or ifthe plait’ terest in the
corporaon “devolved n the pla by operatic of aw”).

‘The Thibunal held thatthe deflation of “eorpore action” only reached the stock subseiptions. ‘The
[November Offering andthe Exodus Transaction did ne fll within ese agreement because Penteoss could not
‘demonstrate that hose ransactions "ll unde the concept of corporme action between” Xelea and Mior lage. AP
‘Asad 32

 

A stekelder may bring corporate opporanity cain for example, by alleging has fiduciary has saved
for himssit wn opportunity in which the corporation hasan expectancy, thas io the corporation's ie of busines, td
isa prospect tat the corporation is ancl ableto exploit Se Brox v. Cellular Info Ss, Inc, 673 A.24 148,185
(Del 1996). The fiduciary need not act hough the company to breach his duly of loyalty

19.
M802 12:00 Frome rite prea eset

Applying the arbitration clause to bar Parfi's action would lead to an absurd
‘outcome: every stockholder except Parfi could bring the unfair dilution claim. The
Vice Chancellor acknowledged this result but concluded that Parfi chose its
predicament by basing a contract claim on the conduct that could have provided a
stronger fiduciary duty claim.” We disagree because the mandatory arbitration
clause in the Agreement applies only to the rights relating to the initial offering of
Mirror Image stock. The parties likely did not intend the provision to act as a bar
to litigation over a set of rights and remedies that lay outside the scope of the
‘Agreement itself.

‘The Vice Chancellor correctly engaged in an analysis to scrutinize causes of
action carefully to search out artfully pleaded claims that attempt to avoid the
arbitration clause to which the plaintiffs have agreed.” But plaintiffs must split,
different claims that arise from the same transaction if some of those claims are
‘based on rights that cannot be adjudicated by an arbitrator, like the Tribunal here,
Who can grant relief based only on the limited set of duties created by a particular

agreement.“ While some agreements, by their nature, extend so far as to mandate

 

» Perf SJ. Op. #3031

* See Ei[Atchom, 727 A240 296 noting paatif cannot couch hr contrat caine derivative eons
'o vold ther obligation to abivae disputes rela tothe agreement).

“Of Dean Wier Reynolds In. v. Byrd, 470 U.S. 213, 2171985) (rejecting notion that judicial econorty
‘equrs a court to hear tn arbitrable lam wien athe ela i non-aPbizabl). Courts commonly spit arabic

200
  

NO-82 120060 Fore Tate Pu Fate

 

arbitration for breach of fiduciary duty claims,“ the Underwriting Agreement here

did not. ‘The right to vindicate breaches of fiduciary duty inflicted by a majority
‘stockholder on the minority is central doctrine of Delaware law.’ Absent a clear
expression of an intent to arbitrate breach of fiduciary duty claims, Parfi has the
rright to have the merits of those claims adjudicated by the Court of Chancery.“
Conclusion
We reverse the judgment of the Court of Chancery dismissing the complaint

and we remand to the court for proceedings consistent with this opinion.

aims fram non-arbrble clas. So, eg, Mederranean Enterprises Inc» Ssangyong Corp, 708F28 1458, W464

(Cir. 1983); Gregory» Electr Mechanical Corp. 83 38382, 385 (11* Ci. 1996) Americ Recovery, 96 F 34
91

© Se, EY/Atochem,727 4.24288, 293-95 (requiring putes wo sabe purponet duclary dy las
towPbitaton sac the series of grement createdasysem Seng forwaréhe governance and operon ofthe paris"
join veuire).

© Soe. Selig Mayflower Hotel Corp, 93 4.24107, 109-10 (Det 1952) (ootiag hat, 2 "seed rule
of law, 2 malorgystockaolder stands inthe poston of «fiduciary in relation tothe peopery ofthe minority
ocho)

DMS ProperienFirs Sco Assocats, 748 A.24 389,391 (Del. 200)(°A pay cannot be
meri of dispute nthe absence of clea expression of uch teat invalid agreement)
‘We need not decide whether oto what exen a properly dafed apreemeet can compel whitration of uclry dy
ins, as ha ase isnot before vs, aad we decie only the cae before us. Se Paramount Communication. In.»
(QVC Nerwork. ne, 637 A24 34, $1 (Del. 1993)

 

a.