Court rejects bid to force arbitration in stock case

Summary

• 8th Circuit upheld denial of motion to compel arbitration.
• Court found EquipmentShare co-founders never signed agreement.
• Dispute involved stock transfers tied to venture capital fund.
• Court rejected equitable estoppel and agency arguments.

The United States Court of Appeals for the 8th Circuit affirmed on April 29 the denial of a motion to compel arbitration in a stock-transfer dispute, finding two company co-founders were not bound by an arbitration provision in a partnership agreement they did not personally sign.

Judge Raymond W. Gruender authored the opinion, joined by Judges Jane Kelly and Ralph R. Erickson. The case was appealed from the U.S. District Court for the Western District of Missouri – Jefferson City.

The dispute centers on three contracts involving Jabbok and William Schlacks, co-founders, directors and major shareholders of EquipmentShare, and Neil Chheda, a venture capital investor, EquipmentShare shareholder and director.

In late 2020, Chheda developed a plan to establish a venture capital fund using EquipmentShare shares. Under the plan, the Schlacks brothers would receive common stock through an equity bonus plan, then transfer part of that stock to Schlacks 2020 Transfer, LLC to fund the venture. In December 2020, both brothers signed option agreements giving Transfer the option to acquire one-third of the shares they were set to receive.

The agreements were amended twice, in 2021 and again in late 2022. The second amendment doubled the number of shares Transfer would receive. The Schlacks brothers claimed they were unaware, alleging Chheda told them the amendment only changed dates.

Two months before the second amendment, the parties also executed the TKF II L.P. partnership agreement, which established the fund as a Delaware limited partnership. Its signatories were corporate entities connected to the Schlacks brothers and Chheda; the Schlacks brothers did not personally sign it. The agreement included a Delaware choice-of-law provision and an arbitration clause requiring disputes to be resolved under JAMS rules.

The dispute reached the court after Transfer attempted in February 2024 to exercise its option to purchase the shares. The Schlacks brothers refused, arguing the second amended option agreement was invalid. Chheda, Transfer and RC Opportunity filed for arbitration under the partnership agreement. The Schlacks brothers sued and sought injunctions against the arbitration. The district court denied all three motions, and the defendants appealed only the denial of their motion to compel arbitration.

The defendants had two main arguments on appeal: that the district court should not have decided arbitrability itself because the JAMS rules delegated that issue to the arbitrator, and that Delaware equitable estoppel and agency principles required the Schlacks brothers to arbitrate even though they did not sign the partnership agreement.

On the first point, the appellate court accepted that the partnership agreement delegated arbitrability questions to the arbitrator but held that a court must first determine whether a valid arbitration agreement exists between the relevant parties before enforcing an arbitration clause.

“The defendants’ argument fails because a valid arbitration agreement does not exist between the Schlacks brothers and the defendants,” Gruender wrote. “The Schlacks brothers are not parties to the partnership agreement … Therefore, the Schlacks brothers did not agree to delegate the arbitrability question.”

The defendants pointed to two 8th Circuit decisions, Eckert/Wordell Architects, Inc. v. FJM Properties of Willmar and Sadler v. Green Tree Servicing, LLC, but the court found both distinguishable, finding no “clear and unmistakable evidence” that the parties had agreed to arbitrate arbitrability.

The court also rejected the equitable estoppel argument, finding the Schlacks brothers could not be compelled to arbitrate because they did not receive a direct benefit from the partnership agreement.

On the agency argument, the defendants contended the Schlacks brothers were bound as agents to two corporate signatories — TKF II GP, of which they were managers and members, and EquipmentShare, of which they were officers and directors. The court looked to Delaware law to interpret the partnership agreement’s reference to “personal or legal representatives,” and because the agreement did not define the term, applied its ordinary meaning.

“Delaware defines ‘personal representative’ as a person who manages the legal affairs of another because of incapacity or death, such as the executor of an estate,” the opinion stated. “The Schlacks brothers cannot be ‘personal or legal representatives’ to any of the partner signatories because all the partners are corporate entities and thus incapable of being incapacitated or dying like a natural person.”

The 8th Circuit ultimately affirmed the district court’s judgment, concluding the defendants failed to establish that TKF II GP and EquipmentShare acted with “actual, implied or apparent authority” on behalf of the Schlacks brothers.

The case is Schlacks v. Chheda, Case No. 25-153.