Delaware Holding Company Recognized for Jurisdictional Purposes

Johnson v. Smithkline Beecham Corp., 2013 U.S. App. LEXIS 11501 (3d Cir. June 7, 2013).

Issue Addressed: For purposes of diversity jurisdiction, should a holding company’s citizenship be defined by the activities of its limited liability company (LLC) subsidiary given that a holding company’s primary activity is to own and manage, not to operate its assets.

Short Answer: No.  The Circuit Court reaffirmed precedent dictating that the citizenship of a LLC is determined by the citizenship of the LLC’s members, not by the LLC’s activities. The Circuit Court concluded that GSK Holdings’ principal place of business is in Wilmington, DE where its board of directors reaches consensus-based investment resolutions regarding its subsidiary, GSK LLC.

The ‘nerve center’ test endorsed in Hertz Corp. v. Friend, 559 U.S. 77 (2010), dictates that a corporation’s citizenship, for purposes of diversity jurisdiction, requires the identification of the  single place that is the corporation’s actual center of direction, control, and coordination.

Players:

  • SmithKline Beecham Corp. – predecessor to GSK LLC. SmithKline Beecham converted from a PA corporation into a Delaware LLC in 2009. Following the conversion, SmithKline Beecham dissolved under PA law. SmithKline Beecham’s sole shareholder is GSK Holdings.
  • GSK LLC – large pharmaceutical company responsible for operating the U.S. division of GlaxoSmithKline plc, the British ‘global head’ of the GlaxoSmithKline group of companies formed in 2009.
  • GSK Holdings – DE  corporation founded in 1999 that holds GlaxoSmithKline’s plc’s investments in the U.S.

Brief Background:

The Plaintiffs filed a personal injury action against Defendants alleging that the Defendants were aware of the drug’s risks and engaged in an elaborate cover-up to avoid liability. In 2011, Smithkline asserted diversity jurisdiction; in response, Plaintiffs filed a motion arguing that diversity jurisdiction was lacking and removal improper because four of the seven Defendants, plus the Plaintiff Lucier, were Pennsylvania citizens.

Like any other holding company, GSK Holdings’ role is confined to the interest it owns in its subsidiary, GSK LLC. The plaintiffs argued that GSK Holdings conducted its substantive work in Philadelphia and London and that the  board’s meetings in Wilmington, DE were mere ratifications of business decisions made elsewhere. Indeed, the GSK Holdings board received various support services from individuals in both Philadelphia and London. Nonetheless, GSK Holdings insisted that that its reached business decisions only at the board meetings, located in Wilmington.

Case Highlights:

  • The Third Circuit reaffirmed the Supreme Court’s determination in Carden v. Arkoma, 494 U.S. 185, 189 (1990) which established that because unincorporated entities are not recognized as legal persons, courts must look to the citizenship of the people or corporations who comprise it to determine if diversity jurisdiction exists. The Third Circuit stressed that such a strict adherence to mechanical rules comports with the Court’s insistence on keeping jurisdictional rules as simple as possible. See *25-27. Thus, SmithKline Beecham’s formal conversion to GSK LLC emphatically changed  the “jurisdictional calculus.” See *41-42.
  • The court clarified that the fact that a holding company holds an LLC rather than a corporation, does not in itself complicate the nerve center analysis. The court emphasized that Hertz only requires that it determine GSK Holdings’ center of control, not the center of direction and control for GSK LLC. *40-41.
  • The court rejected the Plaintiffs’ ‘delegation theory’ which argued that GSK LLC’s principal place of business is in Philadelphia because GSK Holdings allegedly delegated managerial power to managers in Philadelphia. *35-38. The court explained that adopting the delegation theory would  reverse the Zambelli analysis which every Circuit Court faced with the question of a LLC’s citizenship has applied. See *28-31, citing Zambelli Fireworks Mfg. Co. v. Wood, 592 F.3d 412, 420 (3d Cir. 2010).  The Zambelli analysis establishes that for removal purposes, the citizenship of an LLC “is determined by the citizenship of its members.”
  • The court elaborated that the various corporate functions provided from Philadelphia and London were merely intended to inform or facilitate the investment resolutions made by the GSK Holdings board in Wilmington, DE. See *52-53. In so concluding, the court explicitly noted that it was neither carving out a holding-company exception to Hertz nor holding that the location of board meetings will invariably determine a holding company’s citizenship. See *54, ft 21.

Additional Arguments Rejected:

  • Platiffs’ fall-back argument in their efforts to defeat diversity jurisdiction was that although SmithKline Beecham converted to GSK LLC and dissolved as a PA entity, PA law preserves its citizenship for diversity jurisdiction purposes. The court accorded that SmithKline Beecham’s dissolution as a Pennsylvania corporation did not, standing alone, destroy its Pennsylvania citizenship. See *61-63. But, that since SmithKline Beecham did not simply dissolve, but also domesticated itself under Delaware law by converting to a DE LLC (GSK LLC),  under DE law, all of SmithKline Beecham’s debts, liabilities and duties laid with GSK LLC. *63-64. Thus, for purposes of establishing diversity jurisdiction, SmithKline Beecham’s Pennsylvania citizenship was moot.

We appreciate the assistance of our summer intern, Stephenie Reimer, in preparing this post.