Glen Schwaber v. Erel Margalit

• Court: Court of Chancery of Delaware
• Decided: July 13, 2022
• Docket: 2021-1038-LWW
• Status: Published

Opinion

COURT OF CHANCERY OF THE STATE OF DELAWARE LORI W. WILL LEONARD L. WILLIAMS JUSTICE CENTER VICE CHANCELLOR 500 N. KING STREET, SUITE 11400 WILMINGTON, DELAWARE 19801-3734

Date Submitted: April 14, 2022 Date Decided: July 13, 2022

Elena C. Norman, Esquire David J. Teklits, Esquire Richard J. Thomas, Esquire Kevin M. Coen, Esquire Young Conaway Stargatt Alexandra M. Cumings, Esquire & Taylor, LLP Morris, Nichols, Arsht 1000 North King Street & Tunnell LLP Wilmington, Delaware 19801 1201 North Market Street Wilmington, Delaware 19801

RE: Glen Schwaber v. Erel Margalit, et al., C.A. No. 2021-1038-LWW

Dear Counsel:

This decision concerns the defendants’ motion to dismiss for lack of subject

matter jurisdiction or, alternatively, to stay this action. The plaintiff has advanced a

single claim to nullify the certificates of cancellation of certain defendant entities on

behalf of which he is pressing derivative claims in arbitration. This court has subject

matter jurisdiction over the nullification claim. For the reasons discussed below,

however, I conclude that a stay pending the resolution of the arbitration is

appropriate. This action could require the court to assess the merits of claims

currently in arbitration, which risks frustrating the parties’ agreement to engage in C.A. No. 2021-1038-LWW July 13, 2022 Page 2 of 12

alternative dispute resolution. This action may also become moot, depending on the

outcome of the arbitration. The motion is therefore granted insofar as the case will

be stayed until further order of the court.

I. FACTUAL BACKGROUND1

Defendant JVP Corp IV, Inc. (“Corp. IV”) is a Cayman corporation and a part

of Jerusalem Venture Partners (“JVP”), a venture capital firm based in Israel.2

Corp. IV was the general partner of defendant Jerusalem Partners IV, L.P. (“Fund

GP”) and the managing member of defendant JVP IV, L.L.C (“Fund GP LLC”).3

Defendant Erel Margalit is the founder and chairman of JVP and the president of

Corp. IV.4

The other defendants in this action are—like Fund GP and Fund GP LLC—

canceled JVP entities.5 Those former entities are Jerusalem Venture Partners IV,

L.P., Jerusalem Venture Partners Entrepreneurs Fund IV, L.P. (the “Entrepreneur

Fund”), and Jerusalem Venture Partners IV-A, L.P. (together, the “Funds” and with

Fund GP and Fund GP LLC, the “Fund IV Entities”).

1 This background is drawn from the plaintiff’s Verified Complaint and the documents it incorporates by reference. Dkt. 1 (“Compl.”); see Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013). 2 Compl. ¶¶ 3, 20. 3 Id. ¶ 20. 4 Id. ¶ 19. 5 Id. ¶¶ 20-21, 23-25, 36. C.A. No. 2021-1038-LWW July 13, 2022 Page 3 of 12

Plaintiff Glenn Schwaber is a former employee of JVP who left the company

in late 2006.6 Schwaber was a limited partner of the Entrepreneur Fund and a

member of Fund GP LLC.7

The Funds were each governed by a limited partnership agreement; Fund GP

LLC was governed by an LLC Agreement; and Fund GP was governed by a limited

partnership agreement (together, the “Governing Agreements”).8 Consistent with

those Governing Agreements, the Funds were originally intended to last for ten

years. The Fund GP extended the Funds’ duration for a number of years with the

approval of the required majority of their respective limited partners.9

The last of those extensions expired on December 31, 2017.10 On or around

January 1, 2018, the Funds commenced the process of liquidating and winding up.11

On January 23, 2020, certificates of cancellation were filed for the Funds, Fund GP,

and Fund GP LLC with the Delaware Secretary of State.12

6 Id. ¶ 18. 7 Id. 8 Id. ¶ 43. 9 Id. ¶ 66. 10 Id. ¶¶ 66-67. 11 Id. ¶ 67. 12 Id. ¶¶ 18-25. C.A. No. 2021-1038-LWW July 13, 2022 Page 4 of 12

On November 30, 2021, in accordance with mandatory arbitration clauses in

the Governing Agreements, Schwaber commenced arbitration before the American

Arbitration Association relating to the liquidation of the Funds’ last remaining

substantial asset.13 In 2019, the Funds had sold their stock interests in a third-party

company to certain newly created entities (the “2019 Transaction”).14 Schwaber’s

statement of claims in the arbitration purports to bring nine counts derivatively and

double derivatively on behalf of the canceled Fund IV Entities for breach of fiduciary

duty, breach of contract, and unjust enrichment.15 Those claims concern, among

other things, the merits of the 2019 Transaction.

The day after filing his arbitration demand, Schwaber filed a single-count

Verified Complaint in this court, seeking to nullify the certificates of cancellation of

the five Fund IV Entities.16 Schwaber’s Complaint restates verbatim many of the

factual allegations underlying the claims he is pursuing in arbitration.17 He alleges

13 See Compl. Ex. C, Ex. D (Dkt. 1). 14 See Compl. ¶¶ 69-70. 15 See Compl. Corrected Ex. A ¶¶ 151-94 (Dkt. 45). 16 Dkt. 1. 17 Schwaber has challenged the confidential treatment of his Complaint and the exhibits to that Complaint. See Dkts. 6, 25, 26, 33. The defendants have moved for continued confidential treatment on the grounds that they bargained for private arbitration and Schwaber is attempting to air grievances that would otherwise remain non-public. See Dkts. 19, 32. C.A. No. 2021-1038-LWW July 13, 2022 Page 5 of 12

that he is seeking nullification so that the Fund IV Entities can proceed as derivative

claimants (and, in the case of Fund GP, as a respondent).18

On December 28, 2021, the defendants filed the present motion to dismiss or

stay.19 Briefing was completed on March 28, 2022.20 I heard oral argument on that

motion on April 14, 2022.21

II. LEGAL ANALYSIS The defendants move to dismiss this action under Court of Chancery

Rule 12(b)(1) for lack of subject matter jurisdiction due to the mandatory arbitration

clauses in the Governing Agreements. In the alternative, they ask that this action be

stayed pending the resolution of the arbitration. I conclude that the latter form of

relief is appropriate.

A. Subject Matter Jurisdiction

When considering a motion to dismiss under Rule 12(b)(1) for lack of subject

matter jurisdiction, I must take the allegations in the complaint as true and construe

all reasonable inferences in the non-movant’s favor.22 “The burden of establishing

18 See Compl. ¶¶ 141-60. 19 Dkt. 28. 20 See Dkt. 65. 21 Dkts. 68, 71. 22 See de Adler v. Upper N.Y. Inv. Co., 2013 WL 5874645, at *7 (Del. Ch. Oct. 31, 2013). C.A. No. 2021-1038-LWW July 13, 2022 Page 6 of 12

the Court’s subject matter jurisdiction rests with the party seeking the Court’s

intervention.”23

Despite seeking dismissal on that basis, the defendants acknowledge that this

court has subject matter jurisdiction over Schwaber’s nullification claim.24 A motion

to dismiss for lack of subject matter jurisdiction will be granted in favor of arbitration

only if the “dispute is one that, on its face, falls within the arbitration clause of the

contract.”25 The arbitration clauses in the Governing Agreements call for arbitrating

“[a]ny controversy or claim arising out of or relating to th[e] Agreement, or the

breach thereof.”26 But Schwaber’s nullification claim does not arise from the

Governing Agreements.

The defendants do not meaningfully dispute that reality. Instead, their

arguments in favor of dismissal largely concern when the court should entertain

Schwaber’s nullification claim. They contend that if the arbitrators resolve

Schwaber’s claims in the defendants’ favor, there may never be a need for a

nullification proceeding. That is not a matter of subject matter jurisdiction but of

23 Ropp v. King, 2007 WL 2198771, at *2 (Del. Ch. July 25, 2007). 24 See Defs.’ Opening Br. at 2, 11 (Dkt. 28). 25 NAMA Hldgs. v. Related World Mkt. Ctr., LLC, 922 A.2d 417, 429 (Del. Ch. 2007) (quoting SBC Interactive, Inc. v. Corp. Media P’rs, 714 A.2d 758, 761 (Del. 1998)). 26 See Compl. Ex. C § 13.6, Ex. E § 6.12. C.A. No. 2021-1038-LWW July 13, 2022 Page 7 of 12

timing and efficiency better addressed below with regard to the defendants’

alternative request for a stay.

B. Stay Pending Arbitration

The central issue before the court is whether this nullification action should

proceed alongside the arbitration or (subject to its outcome) await the arbitration’s

conclusion. “[T]his Court possesses the inherent power to manage its own docket

and may, on the basis of comity, efficiency, or common sense, issue a stay pending

the resolution of an arbitration, even for those claims that are not arbitrable.” 27 In

my view, it would be more equitable and efficient to stay this action pending the

conclusion of the arbitration.

First, as the defendants argue, allowing this action to proceed now could

frustrate the parties’ bargained-for right to mandatory arbitration. The pending

arbitration will resolve Schwaber’s merits-based claims in accordance with the

Governing Agreements. Allowing this nullification action to proceed could require

the court to undertake an independent assessment of the 2019 Transaction at issue

in those claims before the tribunal has ruled.

27 Julian v. Julian, 2009 WL 2937121, at *3 (Del. Ch. Sept. 9, 2009). C.A. No. 2021-1038-LWW July 13, 2022 Page 8 of 12

Schwaber cites this court’s decision in Capone v. LDH Management Holdings

LLC to assert that this action can be resolved without wading into the merits.28 But

the facts of this case are quite different from those in Capone. There, the parties had

not agreed to resolve their dispute in arbitration but were litigating in New York state

court.29 After the plaintiffs filed an action in this court to nullify the certificates of

cancellation of two limited liability companies they were suing in New York, the

New York court dismissed all but the plaintiffs’ breach of contract claims, which

were stayed pending the outcome of the Delaware nullification action.30 Vice

Chancellor Glasscock then addressed whether the defendants violated Section 18-

804(b) of the Delaware Limited Liability Company Act by canceling the LLCs

without setting aside a reserve to cover the plaintiffs’ known breach of contract

claims. He interpreted Section 18-804(b) to require the LLCs to make provision for

all potential non-frivolous claims against them of which they had notice before

winding up.31

By contrast, Schwaber asks this court to nullify the Fund IV Entities’

certificates of cancellation to sue on behalf of the entities at the same time that the

28 2018 WL 1956282 (Del. Ch. Apr. 25, 2018). 29 Id. at *6. 30 Id. 31 Id. at *14. C.A. No. 2021-1038-LWW July 13, 2022 Page 9 of 12

merits of their dispute are being addressed in private arbitration.32 The question

before this court is not whether the defendants made reasonable provision for known

and previously-asserted claims against the canceled entities (as in Capone) but

whether the defendants should have distributed or made reasonable provision for

legal claims belonging to the Fund IV Entities.33 Resolving that matter could require

this court to assess the merits of yet untested claims concerning the 2019

Transaction—the very claims the parties agreed to arbitrate.34 Beyond the

policy-based problems with assessing claims that the parties have elected to resolve

in alternative dispute resolution, advancing this action could lead to a ruling by this

court before the arbitrators decide the plaintiffs’ claims and perhaps to conflicting

judgments.35

32 Pl.’s Answering Br. 10 (Dkt. 60). 33 See Compl. ¶¶ 141-60. 34 See In re Arrow Inv. Advisors, LLC, 2009 WL 1101682, at *1 (Del. Ch. Apr. 23, 2009) (dismissing dissolution action where the plaintiff “was required to press his fiduciary duty claims in arbitration” but did not and refusing to “entertain a claim for dissolution premised on unproven breaches of fiduciary duty”); see also Havens v. Leong, C.A. No. 2021-0033- PAF (Del. Ch. Dec. 3, 2021) (ORDER) (staying dissolution action in deference to a prior- pending action where allowing the dissolution action to advance risked conflicting rulings and a receiver could petition the court for dissolution at the appropriate time). 35 See Xpress Mgmt., Inc. v. Hot Wings Int’l, Inc., 2007 WL 1660741, at *6 (Del. Ch. May 30, 2007) (stating that “the Court of Chancery’s inherent equitable discretion should not stand idle” when deciding to stay a dissolution action in favor of a separate litigation that would resolve which assets the company owned given, among other things, the risk of conflicting rulings). C.A. No. 2021-1038-LWW July 13, 2022 Page 10 of 12

The history of this litigation further supports my conclusion that proceeding

now could impair the defendants’ right to private alternative dispute resolution. For

example, Schwaber has moved to challenge the confidential treatment of his

Complaint (which restates verbatim many of the allegations at issue in the

arbitration) and the exhibits to his Complaint (including the arbitration statement of

claims).36 He has also sought discovery in this court that relates to the claims in

arbitration. By agreeing to arbitrate, the parties also agreed that American

Arbitration Association rules governing discovery and confidentiality would apply

in resolving their claims. That agreement could be rendered meaningless if the rules

of this court applied instead.

Declining to stay this action pending the arbitration would also be inefficient.

Schwaber argues that, without nullification, he will be foreclosed from attempting

to bring derivative claims to recover for the Fund IV Entities’ purported losses. But

Schwaber sought nullification after commencing the arbitration, which has been

proceeding for nearly eight months. Neither party has indicated that the arbitrators

have declined to hear Schwaber’s derivative or double derivative claims at this

juncture (and that is a matter for the arbitrators—not me—to decide).

36 See Dkts. 6, 25, 26, 33; supra note 17. C.A. No. 2021-1038-LWW July 13, 2022 Page 11 of 12

In fact, the defendants have repeatedly represented that they will not assert the

Fund IV Entities’ statuses as a defense in the arbitration.37 They have also made

clear that nothing prevents Schwaber from later seeking nullification if doing so

becomes necessary for him to obtain a complete remedy. If the arbitration panel

rules in the defendants’ favor, however, this action would be moot.

In addition, the defendants assert that granting nullification could lead to a

variety of unintended consequences. For example, they say that nullifying the

Fund IV Entities’ cancellations would reimpose various contractual and legal rights

and obligations under the Governing Agreements and Delaware law. They also

argue that the entities would once again be subject to reporting obligations.38

Although no evidence is in the record supporting these concerns, I am mindful that

the imposition of any such complexities will be unnecessary if the claims fail in

arbitration.

If the arbitration panel determines that Schwaber cannot pursue claims on

behalf of the Fund IV Entities without this court first addressing nullification,

37 Mot. to Dismiss Tr. Apr. 14, 2022 at 8-9 (Dkt. 71); Defs.’ Reply Br. at 1-2 (Dkt. 65). This representation gives rise to the question of whether canceled entities’ inability to sue is waivable. The parties did not brief that issue and—should it arise—it would more appropriately be addressed by the tribunal hearing Schwaber’s derivative and double derivative claims. 38 See Defs.’ Reply Br. 12-13. C.A. No. 2021-1038-LWW July 13, 2022 Page 12 of 12

nothing prevents Schwaber from moving to lift the stay of this action. The same is

true if Schwaber prevails in arbitration and nullification becomes necessary to obtain

a complete remedy. To press forward in this case now, however, risks frustrating

the defendants’ bargained for arbitration right, inconsistent judgments by this court

and the tribunal, and the public airing of a dispute that the parties agreed to privately

resolve. It also could lead to needless litigation in this court and to additional

complexities if the Fund IV Entities are revived. As such, a stay is appropriate.

III. CONCLUSION

For these reasons, the defendants’ motion to dismiss is denied and their

request to stay this action pending the resolution of the arbitration is granted. The

parties shall promptly inform the court of any developments in the arbitration that

are pertinent to this ruling.

Sincerely yours, /s/ Lori W. Will

Lori W. Will Vice Chancellor