Opinion ID: 1895452
Heading Depth: 1
Heading Rank: 9

Heading: Classification by Elf of its Claims as Derivative is Irrelevant

Text: Elf argues that the Court of Chancery erred in failing to classify its claims against Malek LLC as derivative. Elf contends that, had the court properly characterized its claims as derivative instead of direct, the arbitration and forum selection clauses would not have applied to bar adjudication in Delaware. In the corporate context, the derivative form of action permits an individual shareholder to bring `suit to enforce a corporate cause of action against officers, directors and third parties.' [39] The derivative suit is a corporate concept grafted onto the limited liability company form. [40] The Act expressly allows for a derivative suit, providing that a member ... may bring an action in the Court of Chancery in the right of a limited liability company to recover a judgment in its favor if managers or members with authority to do so have refused to bring the action or if an effort to cause those managers or members to bring the action is not likely to succeed. [41] Notwithstanding the Agreement to the contrary, Elf argues that Section 18-1001 permits the assertion of derivative claims of Malek LLC against Malek LLC's manager, Jaffari. Although Elf correctly points out that Delaware law allows for derivative suits against management of an LLC, Elf contracted away its right to bring such an action in Delaware and agreed instead to dispute resolution in California. That is, Section 13.8 of the Agreement specifically provides that the parties ( i.e., Elf) agree to institute [n]o action at law or in equity based upon any claim arising out of or related to this Agreement except an action to compel arbitration or to enforce an arbitration award. [42] Furthermore, under Section 13.7 of the Agreement, each member ( i.e., Elf) consent[ed] to the exclusive jurisdiction of the state and federal courts sitting in California in any action on a claim arising out of, under or in connection with this Agreement or the transactions contemplated by this Agreement. [43] Sections 13.7 and 13.8 of the Agreement do not distinguish between direct and derivative claims. They simply state that the members may not initiate any claims outside of California. Elf initiated this action in the Court of Chancery in contravention of its own contractual agreement. As a result, the Court of Chancery correctly held that all claims, whether derivative or direct, arose under, out of or in connection with the Agreement, and thus are covered by the arbitration and forum selection clauses. This prohibition is so broad that it is dispositive of Elf's claims (counts IV, V and VI of the amended complaint) that purport to be under the Distributorship Agreement that has no choice of forum provision. Notwithstanding the fact that the Distributorship Agreement is a separate document, in reality these counts are all subsumed under the rubric of the Agreement's forum selection clause for any claim arising out of and those that are in connection with the Agreement or transactions contemplated by or related to that Agreement under Sections 13.7 and 13.8. We agree with the Court of Chancery's decision that: plaintiffs's claims arise under the LLC Agreement or the transactions contemplated by the Agreement, and are directly related to Jaffari's action or inaction in connection with his role as the manager of Malek. Plainly, all of plaintiff's claims revolve around Jaffari's conduct (or misconduct) as Malek's manager. Virtually all the remedies that plaintiff seeks bear directly on Jaffari's duties and obligations under the LLC Agreement. Plaintiff's complaint that Jaffari ... has totally disregarded his obligations under the LLC Agreement  also lends support to my conclusion. [44] The Court of Chancery was correct in holding that Elf's claims bear directly on Jaffari's duties and obligations under the Agreement. Thus, we decline to disturb its holding.