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Shareholder Representative Services LLC v. ExlService Holdings, Inc.

Court of Chancery of Delaware

August 27, 2013

Shareholder Representative Services LLC
v.
ExlService Holdings, Inc.,

Date Submitted: June 26, 2013

Peter B. Ladig, Courtney R. Hamilton, Morris James LLP.

William M. Lafferty, Leslie A. Polizoti, Bradley D. Sorrels, Morris, Nichols, Arsht & Tunnell LLP.

Dear Counsel:

This letter addresses the Defendant's Motion to Compel Arbitration and To Dismiss or Stay the Action. Because I find that the Plaintiff's claim for declaratory relief is a legal issue to be decided by the arbitrator, the Defendant's Motion to Compel Arbitration is granted.

A. Facts

The Motion relates to a merger agreement (the "Merger Agreement") signed by Defendant ExlService Holdings, Inc. ("EXL") and Plaintiff Shareholder Representative Services LLC ("SRS"). Under the Merger Agreement, EXL purchased Business Process Outsourcing, Inc. ("BPO") from its principal shareholders—SRS—and BPO became a wholly-owned subsidiary of EXL.[1] EXL placed $5, 000, 000 of the total consideration to be paid in the merger in an escrow account to satisfy any indemnification claims arising under Sections 9 or 10 of the Merger Agreement.[2] The parties finalized this arrangement by signing a separate escrow agreement (the "Escrow Agreement") one month after the Merger Agreement was signed.[3] The Merger Agreement indicates that all indemnification claims must be submitted within twenty months from the signing of the Merger Agreement—that is, by December 31, 2012 (the "First Cut-Off Date")—or else the claims are waived.[4] The Escrow Agreement contains similar language. Since the parties entered into the Escrow Agreement one month after the Merger Agreement, it appears to impose a second cut-off date (the "Second Cut-Off Date") for indemnification claims of January 31, 2013, exactly one month after the First CutOff Date.[5]

On January 24, 2013, after the First Cut-Off Date, but before the Second Cut-Off Date, EXL submitted notice of a liquidated claim of $254, 767 and a third- party claim of an unidentified amount by former customer SCI Funeral & Cemetery Purchasing Cooperative, Inc. ("SCI").[6] EXL also served notice on the escrow agent, Wells Fargo Bank, N.A., to ensure that the escrow funds would not be released to stockholders.[7] SRS objected to EXL's indemnity notice by letter dated February 21, 2013, [8] and on February 27, SRS commenced this action.[9] SRS seeks the following relief: (1) a declaratory judgment determining "the rights of the parties under the Merger Agreement and Escrow Agreement, "[10] and that EXL "has breached the Merger Agreement and the Escrow Agreement by asserting untimely and invalid indemnification claims, "[11] and (2) an injunction ordering EXL to withdraw its indemnification notice and prohibiting EXL from filing additional indemnification claims under the Merger Agreement or Escrow Agreement.[12]

SRS asserts that EXL missed the Cut-Off Date to submit its indemnification claims[13] and, in the alternative, challenges the substance of EXL's claims, arguing that EXL did not submit the claims in the level of detail required by the Merger Agreement.[14] In response, EXL filed the Motion to Compel Arbitration and to Dismiss or Stay the Action at issue here.[15] EXL argues that because SRS's claims arise under the Merger Agreement, they must be resolved through arbitration per Section 11.8(a) of the Merger Agreement.[16]

SRS counters that, because it seeks equitable relief in the form of an injunction, SRS's claims fall under an exception carved out of the mandatory arbitration clause in Section 11.8(f) of the Merger Agreement.[17] SRS further contends that because the Merger Agreement provides that "[t]he Arbitrator shall have no power or authority to grant injunctive relief, specific performance or other equitable relief, "[18] the Court of Chancery must address these claims. Finally, SRS maintains that its claims are properly couched in terms of equitable relief because Section 11.10(a) of the Merger Agreement provides that "[t]he parties agree that irreparable damage will occur in the event that any of the provisions of [the merger agreement] are not performed in accordance with their specific terms or were otherwise breached."[19]

B. Analysis

This Court lacks subject matter jurisdiction to resolve legal claims where the parties have agreed to resolve those claims through binding arbitration, because "arbitration provides an adequate legal remedy."[20] EXL concedes, and SRS does not dispute, that this Court, not the arbitrator, should determine the arbitrability of SRS's claims, because the arbitration clause of the Merger Agreement does not explicitly commit the determination of substantive arbitrability to the arbitrator.[21]

Accordingly, my only task is to determine the substantive arbitrability of SRS's claims. Section 11.8 of the Merger Agreement provides that:

Matters in dispute under or relating to this Agreement shall be finally resolved by mandatory binding arbitration in ...

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