The Chemours Company v. DowDupont Inc., et. al., C.A. No. 2019-0351-SG (Del. Ch. Mar. 30, 2020) (V.C. Glasscock)
In this memorandum opinion, the Delaware Court of Chancery dismissed a complaint for lack of subject matter jurisdiction, holding that an arbitration provision in a spin-off agreement between a parent corporation and its subsidiary required that the arbitration panel decide the arbitrability of the parties’ dispute.
In 2015, E. I. du Pont de Nemours and Company (“DuPont”) engaged in a spin-off (the “Spin-Off”) of its wholly-owned subsidiary, The Chemours Company (“Chemours”), through a series of transactions governed, in part, by a separation agreement (the “Separation Agreement”). In the Spin-Off, Chemours (1) paid a $3.91 billion dividend to DuPont, (2) agreed to split certain assets and liabilities with DuPont, and (3) became an independent, publicly traded entity. The complaint alleged that DuPont orchestrated the Spin-Off and drafted the Separation Agreement entirely for its benefit; DuPont prohibited Chemours from obtaining its own legal counsel, did not provide the schedule of liabilities Chemours would assume under the Separation Agreement until late in the process, and, during the lead-up to the Spin-Off, maintained that Chemours’ management “had no reason or right to assess the [Spin Off’s] economic terms,” framing the discussions among representatives of the two companies as “calibration sessions” and not “negotiations.” As part of the Spin-Off, DuPont hired Houlihan Lokey to opine that Chemours would be solvent as of the Spin-Off date. In preparing its financial analysis and opinion, Houlihan Lokey valued the liabilities allocated to Chemours, including certain environmental contingent liabilities (the “Environmental Liabilities”), based on the “High End (Maximum) Realistic Exposures” supplied and certified by DuPont.
Pursuant to the Separation Agreement, the parties agreed to negotiate a settlement of any dispute arising thereunder. In the absence of a negotiated resolution among the parties, the parties agreed to submit the dispute to binding arbitration. The arbitration provision expressly provided that all issues of arbitrability would be determined by the designated arbitration tribunal. The arbitration provision also granted the arbitration tribunal the power to provide “any relief or remedy that it deems just and equitable and that is in accordance with the terms of [the Separation] Agreement … [but that the panel] shall have no authority or power to limit, expand, alter, amend, modify, revoke or suspend any condition or provision of [the Separation] Agreement....”
The Environmental Liabilities allocated to Chemours eventually far exceeded the High End (Maximum) Realistic Exposure certified by DuPont. Chemours accordingly filed an eleven-count complaint in the Delaware Court of Chancery, challenging various provisions in, and the validity of, the Separation Agreement and seeking a return of the $3.91 billion dividend. DuPont moved to dismiss the Complaint, arguing the arbitration provision divested the Court of Chancery of subject matter jurisdiction.
The Court of Chancery granted the motion to dismiss, first rejecting Chemours’ argument that because DuPont dominated the negotiation process and unilaterally set the Separation Agreement’s terms, Chemours did not “mutually assent” to the Separation Agreement. In rejecting this argument, the Court first noted that the parties’ agreement to delegate arbitrability to the arbitration tribunal can only be challenged in court under state-law contractual-formation defenses. However, contrary to Chemours’ argument, the Court reasoned the parties mutually assented to the Separation Agreement because Chemours’ management and board of directors validly executed and approved the Separation Agreement—i.e., the “most powerful and persuasive evidence” of Chemours’ consent. In so holding, the Court rejected Chemours’ argument that it did not “really consent” because the Separation Agreement, including the arbitration provisions, were conceived, drafted, and executed by DuPont, in its capacity as the parent entity of Chemours, and, as a result, Chemours, as a subsidiary of DuPont, was unable to independently and effectively consent to arbitration. The Court observed that the fact that a parent entity dictates terms to its wholly-owned subsidiary does not constitute sufficient grounds under Delaware law to infer a lack of consent rendering the contract unenforceable. Under Delaware contract law, the consent of the board of directors of Chemours and the execution of the Separation Agreement by an officer of Chemours evidenced Chemours overt manifestation of consent. The Court likewise rejected Chemours’ alternative position that the Separation Agreement was not a contract but an invalid quasi-constitutional corporate document, reasoning that that argument violated the contractual intent of the parties to submit their dispute to arbitration and the FAA’s equal treatment principle.
Chemours next argued that the arbitration provision was substantively and procedurally unconscionable. First, Chemours argued the arbitration provision was substantively unconscionable because it required that Chemours pay the presumptive cost of challenging DuPont’s allocation of the Environmental Liabilities. The Court, however, reasoned that to invalidate an agreement to arbitrate, the arbitration provision itself must be unconscionable. Here, this provision concerned the burdens and costs associated with challenging the liabilities, not the power of the arbitration tribunal to determine arbitrability, and therefore was irrelevant to the Court’s analysis.
Chemours next argued that the arbitration provision was a substantively unconscionable waiver of Chemours’ legal rights because—by limiting the ability to provide certain state-law remedies and to hear a challenge to certain of the Separation Agreement’s terms while placing the burden on Chemours to challenge any terms—it limited the arbitration panel’s ability to grant certain state-law relief. The Court rejected this argument, reasoning that the arbitration provision did not unconscionably limit Chemours’ ability to pursue its rights, but instead required that Chemours pursue these rights in the arbitration. If needed, the arbitration panel could determine the limitations in the Separation Agreement were unconscionable and provide Chemours legal relief.
Finally, the Court addressed Chemours’ procedural unconscionability argument, which mirrored its argument that the arbitration provision is void for lack of consent. The Court reiterated that wholly-owned corporate subsidiaries operate for the benefit of their parent corporations. Thus, even if the negotiations would be procedurally unconscionable in other commercial settings, the procedures are not unconscionable in a parent-subsidiary context where the contract exists for the benefit of the parent corporation. The Court accordingly held that Chemours failed to demonstrate that the arbitration provision was unconscionable. Because the arbitration provision in the Separation Agreement assigned arbitrability to the tribunal, the Court dismissed the complaint for lack of subject matter jurisdiction.