¶ 3701
Overview
Scope of the chapter. This chapter examines where disputes about an LLC are decided and by whom. It addresses four questions that arise at the outset of almost every contested matter among members and managers, and that the operating agreement can answer in advance. The first is which court has power over the subject matter of the dispute: in Delaware, the Court of Chancery, whose jurisdiction over LLC matters rests on its general equity jurisdiction and on a series of grants in the LLC act, and in the federal system, a district court whose diversity jurisdiction depends on the citizenship of every member of every LLC that is a party. The second is whether the court may exercise personal jurisdiction over the individuals and entities the plaintiff wishes to sue, a question that the Delaware act addresses for managers through the implied-consent provision of § 18-109 and that the Due Process Clause limits in every case. The third is whether the parties have chosen a forum, or a body of law, by contract, and whether the choice is enforceable against the persons who did not sign it. The fourth is whether the dispute must be arbitrated, who decides that question, and what an arbitrator may do with claims that the statute commits to a court.
Relation to other chapters. The internal affairs doctrine, which determines which state's law governs the relations among an LLC's members and managers, is treated in Chapter 12 and is noted here only where it bears on the choice of forum (see supra ¶ 1201). The choice of formation state, including the assessment of the Court of Chancery as a forum since 2024, is treated in Chapter 5 (see supra ¶ 540); this chapter applies that assessment to the drafting of forum and arbitration provisions (see infra ¶ 3780). The distinction between direct and derivative claims, which affects who may sue and where, is treated in Chapter 35, and the summary proceeding for books and records in Chapter 36. Remedies, including injunctions, receivers and the enforcement of arbitral awards that grant equitable relief, are treated in Chapter 38. Forum questions in cross-border structures, including LLCs formed outside the United States, are treated in Chapter 54.
Why the questions matter. Jurisdictional questions are often treated as preliminary matters to be resolved before the real dispute begins. In LLC litigation they frequently decide the dispute. A minority member who must arbitrate in the manager's home city under rules that limit discovery faces a different case from one who may file a summary books-and-records action in Wilmington and obtain a trial within weeks. A manager who lives abroad and has never visited Delaware may nonetheless be served under § 18-109 and required to defend there. A federal action filed on the assumption of diversity may be dismissed years later, after trial, when it emerges that a member of an upper-tier LLC shares the plaintiff's citizenship. Each of these results follows from rules that are settled, and each can be anticipated in the agreement.
The Delaware framework in summary. Delaware's LLC act gives the Court of Chancery jurisdiction to interpret, apply and enforce LLC agreements and the act itself (§ 18-111), to determine contested manager elections and member votes (§ 18-110), to order books and records (§ 18-305), to grant dissolution (§ 18-802) and to hear derivative actions (§§ 18-1001 to 18-1004). It provides a method of serving managers and liquidating trustees wherever they reside (§ 18-109(a)–(c)). It permits members and managers to consent to the jurisdiction of other courts or to arbitration, subject to a limited protection for members who are not managers (§ 18-109(d)). The Delaware Supreme Court has held that the act's policy of giving "maximum effect to the principle of freedom of contract" permits members to displace the Court of Chancery altogether in favor of arbitration or the courts of another state. Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 291, 295–96 (Del. 1999). The remainder of this chapter develops each of these elements and the federal rules that operate alongside them.
Terminology. In this chapter, a "forum selection clause" is a provision that designates the court or courts in which disputes must or may be brought. An "exclusive" clause requires that disputes be brought only in the designated forum; a "nonexclusive" or permissive clause consents to jurisdiction in the designated forum without precluding suit elsewhere. An "arbitration clause" requires the submission of disputes to arbitration, and a "delegation clause" assigns to the arbitrator the question whether a particular dispute falls within the arbitration clause, known as substantive arbitrability. Following the usage of the Court of Chancery, a "formal manager" is a person named or designated as a manager under the LLC agreement, and an "acting manager" is a person who, without that designation, "participates materially in the management" of the LLC within the meaning of § 18-109(a). Metro Storage Int'l LLC v. Harron, C.A. No. 2018-0937-JTL, slip op. at 1–2 (Del. Ch. July 19, 2019).