Merinoff v. Empire Merchants, LLC

The Delaware Court of Chancery examined a claim by two former managers of a Delaware LLC for the advancement of their legal expenses. The LLC’s operating agreement contained a mandatory forum-selection clause that provided: [T]he parties “agree that any suit, action, or other legal proceeding arising out of this Agreement shall be brought in the United States District Court for the Southern District of New York or in any courts of the state of New York sitting in the Borough of Manhattan. . . .”

The forum-selection clause also contained a carve-out provision to the effect that “[a]ny legal proceeding arising out of this Agreement which, under [Delaware’s Limited Liability Company] Act or, to the extent made applicable to the Company pursuant to this Agreement, the DGCL, is required to be brought in the Delaware Court of Chancery may only be brought in the Delaware Court of Chancery and the parties hereto hereby consent to the jurisdiction of the Delaware Chancery Court under such circumstances.”

The former managers argued that the carve-out applied to their claim because the forum-selection provision incorporated the DGCL, which they contended requires all advancement claims brought by Delaware entity officers or directors be filed in the Court of Chancery.

The Court rejected this argument for two reasons. First, the court found that the forum-selection provision did not incorporate the DGCL. Second, the Court found that even if the DGCL had been incorporated, the DGCL does not require that all advancement proceedings be brought in the Court of Chancery to the exclusion of courts in other jurisdictions.

BOTTOM LINE: LLC managers may contractually agree in an LLC’s operating agreement that claims arising out of the LLC Agreement must be brought exclusively in a jurisdiction other than Delaware. A forum-selection clause identifying multiple jurisdictions must clearly set forth the types of claims that will be determined in each forum. Notably, the parties did not address the effects, if any, that Section 18-109(d) may have had on the forum-selection clause at issue.