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In Terrell v. Kiromic Biopharma, Inc., C. A. No. 2021-0248-MTZ (Del. Ch. Jan. 20, 2022), the Delaware Court of Chancery stayed a lawsuit because the plain text of the underlying alternative dispute resolution provision required that the designated committee – not the court – determine its scope.

Case background

The parties’ dispute in Terrell v. Kiromic Biopharma, Inc. turned on competing interpretations of a suite of documents granting stock options in a biotechnology company to its former director. The company – Kiromic Biopharma, Inc. – argued that language in the notice granting the director’s most recent options extinguished two earlier, more lucrative option grants. The director argued that the language preserves those earlier options. The company filed a motion to dismiss, seeking to confirm its interpretation.

At the hearing on the motion to dismiss, the Court of Chancery raised a threshold issue that the parties did not brief: whether the Stock Option Agreement permitted the court to interpret the scope of an alternative dispute resolution (ADR) provision, or whether the committee should interpret that provision. Specifically, section 15.1 in the Stock Option Agreement required the parties to submit “[a]ny dispute regarding the interpretation of this Agreement” to a committee of the company’s board:

Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by Optionee [Terrell] or the Company to the Committee for review. The resolution of such a dispute by the Committee shall be final and binding on the Company and Optionee.

The parties submitted supplemental briefing following oral argument on the motion to dismiss, disagreeing as to whether the ADR provision governed their dispute over the option grant language.

The Court of Chancery’s decision

The court referred to the ADR provision in the case at hand as a “circular problem,” because interpreting the dispute resolution provision would require the court to resolve a “dispute regarding the interpretation” of the Stock Option Agreement, violating that dispute resolution provision. In reaching its decision, the court explained that Delaware’s ADR jurisprudence required asking three questions:

(1) “What type of provision is Section 15.1: an arbitration provision, or something else?”;

(2) “Who decides whether a non-arbitration ADR provision applies to the dispute at hand?”; and

(3) “Who does the plain text of Section 15.1 charge with deciding its applicability?”

As to the first question, the court found that the ADR provision in the Stock Option Agreement did not call for arbitration. The court also noted that the ADR provision was not squarely an expert determination, though it did give the committee the authority to interpret the Stock Option Agreement.

Determining what type of dispute resolution mechanism the parties agreed to presents a question of contract interpretation, and Delaware follows an objective theory of contracts.The court explained that there was no basis to conclude the parties intended section 15.1 to be an arbitration provision because it did not grant the committee powers to resolve all legal and factual disputes, “analogous to the powers of a judge in a judicial proceeding.” Rather, section 15.1’s scope was narrower and limited to disputes over the Stock Option Agreement’s interpretation. The court also explained that section 15.1 did give the committee the power to award a remedy, but did not bind the committee to “the strict judicial investigation of an arbitration.”