United States: The Delaware Rapid Arbitration Act: Quick And Easy – But Does It Work In The VC/PE Context?

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.