On May 29, 2015, the Delaware Court of Chancery refused to disqualify a neutral accounting arbitrator over its work with mutual clients of one of the litigant's counsel (AM Gen. Hldgs. LLC v. Renco Gp., Inc.; The Renco Gp., Inc. v. MacAndrews AMG Hldgs. LLC, C.A. Nos. 7639-VCN & 7668-VCN, (Del. Ch. May 29, 2015)). The Court held that while a relationship between a party's counsel and an accounting arbitrator could create a disabling conflict of interest, review of the arbitrator's judgment regarding its independence was generally performed after the arbitrator had rendered its decision. The Court added that ex ante disqualification was possible, but would require a more serious conflict than the mere existence of shared clients between a major law firm and a valuation firm.

In 2004, The Renco Group, Inc. transferred its interest in AM General LLC, the manufacturer of the Humvee vehicle, to AM General Holdings LLC (Holdco), a newly formed entity owned by Renco and MacAndrews AMG Holdings LLC (see generally The Renco Gp., Inc. v. MacAndrews AMG Hldgs. LLC, C.A. No. 7668-VCN, (Del. Ch. Jun. 19, 2013)). Under the LLC agreement governing the management of Holdco, Renco and AMG's relative ownership in and right to any distributions made by Holdco were to be determined by their "Revalued Capital Accounts" (for an example of provisions for the maintenance of capital accounts in an LLC agreement for an operating company, see Standard Document, LLC Agreement (Two Member, Managing Member-Managed): Section 3.03.)

In 2012, ahead of a planned distribution, Renco invoked the LLC agreement's appraisal procedures for the determination of the members' respective Revalued Capital Accounts. The appraisal procedures provided that as Holdco's managing member, MacAndrews was responsible for an initial determination of the Revalued Capital Accounts, but that Renco could request that MacAndrews obtain a third-party appraisal of Holdco from a qualified appraiser if it disagreed with MacAndrews's initial determination. If Renco disagreed with the first third-party appraisal, it could submit a second appraisal by its own qualified appraiser. If MacAndrews refused to accept the second appraisal, Renco and MacAndrews agreed to jointly select a third appraiser to make a final, binding appraisal.

Unable to come to an agreement, Renco and MacAndrews asked the Court of Chancery to appoint a third appraiser for them. On November 21, 2014, the Court appointed Valuation Research Corporation as the third appraiser, "subject to a conflicts check" (AM Gen. Hldgs. LLC v. Renco Gp., Inc., C.A. No. 7639-VCN, (Del. Ch. Nov. 28, 2014)).

At issue in the current opinion, Renco disputed the appointment of Valuation Research, claiming a conflict of interest owing to Valuation Research's disclosure that it had performed work for clients of Paul, Weiss, Rifkind, Wharton & Garrison LLP, counsel for MacAndrews. In particular, Renco emphasized that:

On these bases, Renco maintained that Valuation Research could not satisfy the "evident partiality" standard applicable when an arbitrator has made its finding, under which an arbitrator's failure "to disclose a substantial personal or financial relationship with a party, a party's agent, or a party's attorney that a reasonable person would conclude was powerfully suggestive of bias" is reason to invalidate the arbitrator's decision (Del. Transit Corp. v. Amalgamated Transit Union Local 842, 34 A.3d 1064, 1072 (Del. 2011)).

While acknowledging that the nature of the Valuation Research-Paul Weiss relationship was "well described" by Renco, the Court declined to disqualify Valuation Research as the third appraiser. According to the Court, the authorities cited by Renco were distinguishable because the alleged conflict in this case was "not so serious as to be disqualifying" and because Valuation Research had disclosed it before beginning its work. Instead, the Court relied on the more forgiving standard usually applicable to decisions to allow an arbitrator to begin its work. In that context, the Court has held that it should not, at the outset, interfere with an arbitrator's judgment of its ability to serve if it has disclosed possible conflicts, lest the Court invite "endless applications and indefinite delay" (Anadarko Petroleum Corp. v. Panhandle Eastern Corp., , at *2 (Del. Ch. Sept. 21, 1987)).

In relying here on the Anadarko standard for ex ante review of an appraiser's independence rather than the stricter standard for review of the appraiser's independence after it renders a decision, the Court cautioned that it did not intend to establish a rule that the independence of an appraiser can never be challenged beforehand. The Court offered that "actual misconduct or close relationships" or the failure to disclose potential conflicts of interest could make the ex ante disqualification of an arbitrator appropriate. In this case, however, the Court determined that several additional factors weighed in favor of allowing Valuation Research to proceed with its work, including that:

The Court added that although it was not disqualifying Valuation Research at the outset, there was still "the safeguard of judicial review ex post," at which point it could revisit the arbitrator's judgment that it did not have a disabling conflict of interest.

The decision in AM General Holdings v. Renco Group provides comfort that under ordinary circumstances, the Court of Chancery will be reluctant to disqualify a valuation firm solely because of its mutual clients with a party's counsel, even if the work generated from those clients is somewhat lucrative for the valuation firm. Particularly where large and complex transactions are at the heart of the dispute, the Court acknowledged that "[i]t is hard to believe that major law firms and valuation firms, to whom clients turn for their broad experience and professionalism, would not have common clients."

At the same time, the Court cautioned that the inquiry into a conflict of interest, even before the appraiser has begun its work (where the standard to find a conflict is stricter), is fact-specific and can result in the disqualification of the appraiser. The Court listed examples of conduct that might have caused it to reach a different conclusion, if:

The Court in this section of its opinion did not explicitly state that it would have disqualified the appraiser had a single Paul Weiss attorney working on the case also worked in the past with Valuation Research. However, it is worth reiterating that the Court mentioned the fact that there were no such attorneys as a factor in its determination to allow Valuation Research to proceed with its work. This underscores the need for law firms to be scrupulous about erecting and maintaining Chinese walls to control the flow of information among teams who may have clients with conflicting interests.