The Delaware Rapid Arbitration Act: Quick and Easy – But Does it Work in the VC/PE Context?

14 January 2016 Privacy, Cybersecurity & Technology Law Perspectives Blog

The Delaware Rapid Arbitration Act (DRAA), effective as of May 2, 2015, is a recent arbitration statute that promises to be popular among parties to a wide range of business agreements. The DRAA is intended to be used principally for the resolution of commercial disputes between businesses, but it has been appearing in venture capital financing documents. Will the Act prove to be effective in the intra-corporate context, as well?

What are the advantages of the DRAA?

The DRAA offers the possibility of prompt dispute resolution on a confidential basis. Speedier than both court proceedings and conventional arbitration, the DRAA promises a resolution within 120 days – a mere four months – unless the parties agree otherwise. Because the process is significantly faster than other alternatives, it is more economical, as well.

Are there any traps for the unwary?

 In order to use the DRAA, the parties must satisfy certain criteria laid out in the Act.

  • There must be a signed, written agreement to arbitrate, since arbitration is a voluntary process.
  • The agreement to arbitrate, or the arbitration provision of the relevant contract, must be governed by Delaware law and must specify use of the DRAA.
  • At least one party to the agreement must be a business entity formed in Delaware or having its principal place of business in Delaware, establishing a basis for Delaware jurisdiction.

Parties also face a host of drafting issues when considering whether or not to use the Act, including:

  • Who will the arbitrators be, or how will they be selected?
  • How many arbitrators will there be?
  • Where will the hearing be held?
  • Will the right of appeal be waived, or will there be a private appeal – and if so, who will hear it?

Will the Act work in the VC/PE context?

 Many commentators have dismissed use of the Act in the intra-corporate context, especially for public companies. Time will tell if the Act gains favor among private companies. And because arbitration under the Act is confidential, it may be awhile before the Delaware Supreme Court can issue any definitive, public guidance. Relevant issues are likely to include:

  • While the “actual signature” requirement is often cited as preventing use of the Act in the intra-corporate context, in fact it is fairly routine to obtain the signatures of all stockholders to an initial Series A round of VC financing, and some parties are starting to do so.
  • If the parties did not invoke the Act in their Series A round, can they do so later? For example, what if a stockholders agreement is amended by the requisite majority in a Series B round to “add in” use of the Act – are parties who don’t sign the amendment still required to arbitrate?
  • In the PE and public company context, use of the Act for intra-corporate matters is also not categorically ruled out. For example, parties to a “PIPE” financing (Private Investment in Public Equity) could invoke the Act to govern aspects of their unique relationship.  But could the confidentiality of arbitration come into tension with a public company’s disclosure obligations?

These and other issues will need to be examined with care before deciding whether the benefits of the Act can be realized – without undue collateral cost – in a particular intra-corporate context. It is quite clear, however, that the possibility cannot simply be dismissed.

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.

Related Services