Chancery Issues Preliminary Injunction To Bar Arbitration on the Grounds that no Agreement was Formed
Hologram, Inc. v. Caplan, C.A. No. 2021-0736-KSJM (Del. Ch. Dec. 14, 2021)
The Court of Chancery issued a preliminary injunction barring arbitration because the parties had never reached an agreement that included arbitration. By way of background, two former high-school classmates agreed in principle to begin a company. One would own ninety percent of the shares and serve as president and CEO, and the other would own ten percent of the shares in exchange for providing ideas and business opportunities. The president sent paperwork to his former classmate via email, including a restricted stock purchase agreement that proposed a vesting period for shares, required specific terms for acceptance, and included an arbitration provision. The former classmate responded with a request to change the shares to non-vesting. Over the ensuing months, the two could not agree on final terms, and the specific terms of acceptance (including in-person execution and payment) were never met. Nearly eight years later, as the company raised a $65 million Series B investment, the former classmate suddenly reached out to inquire about his ownership status. He subsequently filed a private arbitration demand against the company in Illinois. The company responded by filing a Delaware action seeking a declaration that the arbitration was improper because no agreement had been reached between the parties in connection with the claims made by the former classmate. The company moved for a preliminary injunction to prevent the continuation of the Illinois arbitration.
The Court granted the preliminary injunction, enjoining the Illinois arbitration. The Court found that the company had a reasonable probability of success on the merits to demonstrate that the parties had never reached agreement on the terms of a restricted stock purchase agreement, and that the former classmate had never become a stockholder. His request to change the shares to non-vesting was a counteroffer that the company had never accepted. Hence, there was never a meeting of the minds necessary for contract formation, which was confirmed by their subsequent, unsuccessful efforts to reach agreement. Further, the parties never completed the in-person execution of the agreement that was required under the terms of both the initial proposal and the counteroffer. Based on thepossibility of wrongful enforcement of an alleged agreement to arbitrate, the Court also concluded that there was a likelihood of irreparable harm under well-established Delaware law. Finally, the Court found that the balance of the equities tipped in the company’s failure because any delay from arbitrating in Illinois that the former classmate might experience, even if he ultimatelywas successful in Delaware, would not be significant in light of the eight years that he had waited to demand arbitration of his dispute with the company.Share