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LLC v. Griffin

Court of Chancery of Delaware

February 26, 2015

3850 & 3860 Colonial Blvd., LLC

Date Submitted: October 3, 2014.

Joel Friedlander, Esquire Christopher M. Foulds, Esquire Friedlander & Gorris, P.A.

R. Montgomery Donaldson, Esquire Polsinelli PC.

Dear Counsel:

Plaintiff was a seed investor in a limited liability company ("LLC"). The company's sole director pursued a recapitalization that reduced Plaintiff's economic interest. Later, the director oversaw the company's conversion into a corporation. Plaintiff brings fiduciary duty and contractual claims against the director and the corporate successor to the company. Before the parties can reach the merits of their dispute, the proper forum for resolving the claims must be established. The company's operating agreement provides for arbitration (following mediation); the successor corporation's charter calls for litigation in this Court. Defendants have moved to dismiss this action for lack of subject matter jurisdiction under Court of Chancery Rule 12(b)(1) because arbitration is required and provides an adequate remedy.

Defendant Christopher E. Griffin ("Griffin") formed Rubicon Media, LLC ("Rubicon LLC") in 2007 as part of a plan to build a business combining social networking and online betting in international markets.[1] Plaintiff 3850 & 3860 Colonial Blvd., LLC ("Colonial" or the "Plaintiff") contributed to that effort.[2]Griffin, the sole director and managing member of Rubicon LLC, later arranged for its conversion into a corporation, Defendant Rubicon Media, Inc. ("Rubicon Inc., " and collectively with Griffin, the "Defendants"), in March 2013.[3]

Griffin planned to use funds raised by Rubicon LLC to acquire a majority interest in Collisse Group Limited ("Collisse") and operate through a Collisse subsidiary named Betable, Ltd. ("Betable").[4] Colonial invested $500, 000 in July 2008 and obtained a 7% interest in the Class A units of Rubicon LLC.[5] The initial seed round left Griffin with 76.9% of the Class A units of Rubicon LLC, corresponding to a 76.1% economic interest in Collisse. In 2011, Griffin decided to pursue a different business strategy.[6]

In connection with this new strategy, Griffin made changes to Rubicon LLC's capital structure. At some point in 2011, Betable (or Collisse) returned a $3 million investment to a venture capital firm.[7] Later, on November 30, 2011, Griffin effected a recapitalization, creating Recap A Common Units and Recap B Common Units ("Recap A" and "Recap B, " respectively).[8] The Recap A had an aggregate liquidation preference of $200, 000 and no part of any other distributions. The Recap B shared "operating distributions and any distributions from any sale, liquidation, merger or other capital transactions" exceeding the $200, 000.[9] Griffin received 96% of the Recap B, and the other shareholders received a combination of 100% of the Recap A and 4% of the Recap B.[10] Griffin also approved the Second Amended and Restated Limited Liability Company Agreement of Rubicon Media LLC, dated November 30, 2011 (the "New LLC Agreement").[11] Despite language in the Amended and Restated Limited Liability Company Agreement of Rubicon Media LLC (the "Old LLC Agreement"), Colonial was not given the option to consent to these changes.[12]

Colonial received notice of the recapitalization through a November 5, 2012, letter from Griffin.[13] The letter claimed that "Betable was not a viable business model"[14] and that the $200, 000 liquidation preference had origins in an "independent 3rd party valuation" of Collisse's remaining assets, conducted in connection with the redemption of the venture capital firm's shares.[15] Griffin claimed to have conducted the recapitalization "in lieu of liquidating the remaining assets and dissolving the company."[16] He did not mention significant business developments postdating the recapitalization.[17]

Griffin sent another letter to investors in October 2013[18] to inform them of an initial closing of a "[f]inancing in March 2013, [in which] the new Series A investors required Rubicon Media LLC to convert from a limited liability company into a corporation."[19] The letter also made several claims relating to the earlier recapitalization, including that (1) an independent valuation "valued the entire company at approximately $100, 000 to $150, 000"[20] and (2) "[f]rom the time of the reorganization forward, Rubicon Media began a completely new business with a new business model, new employees, new licenses and new technology."[21] Griffin also provided a copy of the Amended and Restated Certificate of Incorporation of Rubicon Inc., dated July 3, 2013 (the "Certificate of Incorporation"), and stock certificates.[22]

The incorporation changed certain rights of investors. In particular, Rubicon LLC had adopted a dispute resolution process of arbitration preceded by mediation; Rubicon Inc. implemented a litigation-only approach. Article Twelfth of the Certificate of Incorporation designates this Court as the exclusive forum for dispute resolution (the "Charter Provision"):

Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery in the state of Delaware will be the sole and exclusive forum for any stockholder . . . to bring . . . any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation's stockholders . . . or . . . any action asserting a claim against the Corporation, its directors, officers or employees governed by the internal affairs doctrine, except for . . . which the Court of Chancery does not have subject matter jurisdiction.[23]

The corresponding provision in the LLC Agreements (the "LLC Provision") calls for mediation, followed by arbitration:

11.10.1 Mediation/Arbitration. In the event of any dispute arising under or relating to this Agreement, the parties hereby agree to mediate any such dispute before a mediator from Judicial Dispute Resolution, LLC or Judicial Arbitration and Mediation Services [("JAMS")] in New York, New York. If the dispute is not resolved within sixty (60) days from the request for mediation, such dispute shall be submitted to arbitration under the Commercial ...

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