297 A.3d 610
Del.2023Background
- Dr. Jason Terrell, former consultant and director of Kiromic, received three stock-option grants (2014, Jan. 2017, Nov. 2017) totaling ~1.5M options; the Nov. 2017 grant (Agreement 3) included a Release in the Grant Notice and an arbitration/ADR clause (Section 15.1) in the Stock Option Agreement.
- Post reverse stock splits, Agreement 3’s economic value dropped and its grant was reduced to 14,285 shares at a much higher strike price, magnifying the Release’s practical effect.
- The Release stated that, by signing the Grant Notice, the grantee had no other rights to other options or awards except securities issued on or prior to the date of the Grant Notice; Kiromic says this nullified the prior two grants; Terrell says the parenthetical exception preserved them.
- Section 15.1 of the Stock Option Agreement provided that disputes regarding interpretation of “this Agreement” be submitted to the Committee and that the Committee’s resolution be “final and binding.” The Grant Notice and Stock Option Agreement each incorporated the other.
- The Court of Chancery stayed the case and ordered the parties to submit the interpretive dispute to the Committee; the Committee (three directors) concluded Section 15.1 covered the Grant Notice and that the Release superseded earlier grants but provided no reasoning; the Chancery Court then dismissed Terrell’s suit without reviewing the Committee’s legal conclusions.
- The Delaware Supreme Court reversed the dismissal and remanded, holding the Chancery Court correctly stayed the matter for the Committee to act first but erred in failing to review the Committee’s legal determinations.
Issues
| Issue | Plaintiff's Argument (Terrell) | Defendant's Argument (Kiromic) | Held |
|---|---|---|---|
| Whether Section 15.1 is an arbitration provision | It's not arbitration; if it were, court would decide scope; in any event provision is unconscionable | Section 15.1 is non-arbitral expert/committee process and final | Court and Supreme Court: Section 15.1 is not an arbitration clause; treat as non-arbitral (expert-determination-like) process |
| Who decides the scope of Section 15.1 (i.e., whether it covers the Grant Notice/Release)? | Court should decide scope because the Agreement’s definition limits Section 15.1 to the Stock Option Agreement | Committee has exclusive authority under Section 15.1 and incorporated documents; committee should decide scope first | Committee decides scope in the first instance under the contract’s plain text; Chancery properly stayed for committee review |
| Whether courts must review the Committee’s legal determinations before dismissing for lack of jurisdiction | Chancery must review Committee’s legal conclusions (not fully insulated); absence of review makes Section 15.1 unconscionable | Committee’s decision is final and binding; courts cannot revisit its legal conclusions | Court: Judicial review is not precluded; expert-determination outcomes on legal questions are subject to judicial review (de novo for legal issues); dismissal without review was error |
| Whether Section 15.1 (and Agreement 3) is unconscionable | Section 15.1 is unconscionable because it lets company agents decide legal meaning of their own contracts without review; clause hidden and oppressive | Parties are sophisticated; freedom of contract supports enforcement | Court: Not unconscionable here; parties were sophisticated and judicial review is available, undercutting the core unconscionability claim |
Key Cases Cited
- Penton Bus. Media Holdings, LLC v. Informa, PLC, 252 A.3d 445 (Del. Ch.) (distinguishing arbitration from expert determinations and providing taxonomy for ADR clauses)
- AIU Ins. Co. v. Lexes, 815 A.2d 312 (Del. 2003) (courts decide scope of appraisal/assignment clauses; legal questions are for courts)
- Munyan v. Daimler Chrysler Corp., 909 A.2d 133 (Del. 2006) (questions of law reviewed de novo)
- Pers. Decisions, Inc. v. Bus. Planning Sys., Inc., 970 A.2d 256 (Del. 2009) (Delaware enforces voluntary agreements of sophisticated commercial parties)
- Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434 (Del. 2005) (recognition of implied covenant of good faith and fair dealing in Delaware contracts)
- Graham v. State Farm Mut. Auto. Ins. Co., 565 A.2d 908 (Del. 1989) (standards for unconscionability)