In my latest legal ethics column for The Bencher, the publication of the American Inns of Court, (in which I have been writing an ethics column for over 20 years), I address some of the legal ethics issues that arise when a partner in a law firm laterally moves to another law firm–an increasingly common occurrence in the legal profession today.
Chancery won’t let new challenge to advancement pact delay directors’ legal fee reimbursement
The Court of Chancery recently refused to reconsider its decision that, pending resolution of a challenge to the validity of their indemnification agreements, Stimwave Technologies Inc. must advance defense costs to a CEO and a director in actions by the company and the U.S. Department of Justice.
Vice Chancellor Sam Glasscock’s May 13 letter-to-counsel opinion denied Stimwave’s motion to reargue his April 1 bench ruling after rejecting the medical device developer’s contention that his order to advance expenses effectively granted mandatory relief without a trial when key facts were in dispute.
The Vice Chancellor said he granted preliminary injunctive relief because of “the summary nature of, and the public policy undergirding, advancement actions” where the Court “has long recognized that a delay in recognizing advancement rights may ultimately render those rights illusory.”
The short decision is yet another example of the Court’s reluctance to let companies inject novel objections to established advancement provisions to hold up reimbursement of defense funds to eligible officers and directors in actions relating to their corporate positions.
According to its website, Stimwave is a Delaware-chartered medical technology company founded by former CEO Laura Perryman in Pompano Beach, Florida, that markets an electronic pain relief device. In April 2018, its board adopted, and the stockholders ratified, an indemnification agreement that she would supposedly be able to immediately offer to the directors and officers.
But one year later, Stimwave had undergone management changes and filed suit against Laura and Gary Perryman in an underlying action in Chancery. When she and fellow director Gary Perryman sought legal fee reimbursement for that suit and an investigation by the U.S. Department of Justice, the request was denied. Stimwave Technologies Incorporated v. Laura Tyler Perryman, et al., C.A. No. 2019-1003-SG, complaint filed (Del. Ch. Feb. 11, 2020).
They filed a complaint for advancement, with a motion to expedite and request for temporary restraining order February 11, 2020, claiming Stimwave violated their valid agreements.
The Vice Chancellor on February 20 granted their motion to expedite, but denied their TRO motion, and instructed the parties to proceed to a judgment on the pleadings. Then on April 1, from the bench, he denied their motion for judgment on the pleadings but converted it into a motion for interim relief, which he granted.
When Stimwave sought reargument — arguing that the decision violated the fundamental precept that mandatory injunctive relief be ordered only after trial or on facts not legitimately in dispute, citing C & J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret. Tr., 107 A.3d 1049, 1071–73 (Del. 2014). But the Court said it appeared that Stimwave’s board validly adopted the indemnification bylaw in April 2018 and the shareholders ratified it days later.
That, coupled with (a) the Perrymans’ apparent promise to repay the advanced funds if the court found them not to be entitled to advancement and (b) the bylaw’s wording that, the court found, likely referred to current officials that included the Perrymans, seemed on its face, to favor the petitioners here, the court said.
But Stimwave maintained that the wording actually only applied to an earlier designated director and not the Perryman petitioners apparently due to a problem with the timing of the board’s adoption, the stockholder ratification and when the CEO conferred the indemnification.
The vice chancellor said on its face, the indemnification more likely applied to the then-current officers and directors. He found that under the circumstances, since the Perrymans had apparently made the required commitment to repay the advance funds if they were for any reason not entitled to them, the court’s practice was to require payment until the validity of the pacts was resolved.
“Litigating a defense attacking the validity of a contract for advancement before providing advancement might leave the petitioners unable to effectively vindicate their contractual advancement rights, assuming they exist, as well as to defend the underlying substantive action and investigation, threatening imminent irreparable harm,” the opinion said
However, he limited the advancement order to legal costs incurred from the date of the opinion forward, excluding legal fees the Perrymans had already incurred in responding to the DOJ’s investigation.
The vice chancellor reasoned in support of his holding that: “the unusual procedural posture of this matter, the nature of the respondent’s defense that the indemnification agreements are void, and the fact that the forgoing defense will be addressed promptly,” and because the petitioners could seek to recover those amounts once the validity of the indemnification agreements is resolved.
Books-and-Records Cases: The Fainthearted Need Not Apply
A recent Delaware Court of Chancery post-trial opinion addressing a demand for books-and-records by an LLC member did not attract my attention for the rather routine legal issues it decided, but it provides an opportunity to rely on it as a launchpad for broader commentary generally on this common type of Delaware corporate and commercial litigation. This post is intended for advanced readers of these pages who have followed at least some of the 200-plus highlights on this blog regarding Delaware decisions on DGCL Section 220 over the last 15 years, and a fewer number of case highlights regarding the analog to Section 220 in the Delaware LLC Act: Section 18-305.
In Riker v. Teucrum Trading, LLC, C.A. No. 2019-0314-AGB (Del.Ch. May 12, 2020), the Court determined after trial that only some of the requested data requested by the LLC member, and not yet provided, was required to be produced, although the case followed a familiar pre-trial pattern: The company initially refused to produce most of the documents requested prior to the suit being filed; then additional documents were produced after suit was filed, but not as many as requested. At trial, the Court needed to determine how many of the documents still requested were required to be produced.
Procedural History
The complaint was filed in April 2019. Court guidelines suggest a trial date within 90 days of the complaint for summary proceedings such as these, but through no fault of the court, that timetable may not always be possible. In this case, a pre-trial mediation took place that resulted in additional documents being produced, and that process added additional months to the timetable for trial. Post-trial briefing was also submitted.
Highlights of Decision
- The Court held that all the “form and manner” requirements of the statute were met, in terms of stating a proper purpose, for example. See pages 8-18.
- Valuation was recognized as a well-established statutory proper purpose, so the focus was on whether the documents requested were necessary in order to perform a valuation using the DCF method, which the plaintiff testified he was qualified to perform. The Court held that he was entitled to only one of the documents requested–most of them already having been produced. See generally, Lim v. PowerWise, highlighted on these pages, a 2010 Chancery decision that determined what documents were necessary to pursue the proper purpose of valuation in the context of that case.
- The second purpose was recognized as proper–investigation of mismanagement–but a prerequisite for pursuing such a purpose is presenting a “credible basis” of wrongdoing which the plaintiff in this case did not establish in connection with the documents requested for this category of requests. See pages 21-28.
General Commentary on Section 220/Books-and-Records Cases
Hundreds of highlights on these pages, over the last 15 years, of Delaware decisions on demands for books and records–based on both the corporate statute and the LLC Act–and the many cases of this type that I have handled over the last 30 years or so, reveal a few common themes:
- Although a reading of DGCL Section 220 and Section 18-305 of the LLC Act may appear to the casual observer as relatively simple and straightforward, the many hundreds of published decisions interpreting those statutes tell a different story.
- Exhortations in ample Delaware corporate litigation decisions instruct Delaware lawyers to “employ the tools at hand”, including Section 220, prior to filing a plenary action, especially a derivative suit which requires that one plead with particularity why pre-suit demand is futile. But what a blunt instrument Section 220 can be. Notably, Section 220 case law is often used by analogy when applying Section 18-305.
- Highlights on these pages of decisions on this topic recite the many nuances and prerequisites that must be mastered for a successful books and records claim under either statute, often added by judicial gloss, which are not obvious from a reading of the statutes only.
- Having represented both companies and stockholders/members in these cases over the years, there are many traps for the unwary. Companies have many arrows in their quiver to oppose a request under either statute. In addition to challenging a proper purpose (which can include a defense that the stated purpose is not the “true” purpose), a fertile field for disputes in this area relates to whether each of the documents requested is necessary to accomplish the stated purpose.
- These cases are not for the faint of heart because:
(i) As this case indicates, the litigation can last for a year or more (and some cases highlighted on these pages have lasted several years through appeal);
(ii) In connection with the litigation lasting as long as some plenary cases, the fees incurred in these cases can be substantial for matters such as discovery (however limited and circumscribed by the narrow scope and summary nature of these cases) and motion practice, for example, related to discovery disputes (though dispositive motions are strongly discouraged.);
(iii) As the instant case highlighted above exemplifies, the results of trial in these types of case are often unsatisfying to the extent that even if one is successful–which is never a certainty–the court merely orders the production of documents. This contrasts with a typical trial in which success often means a monetary award or substantive relief. So too, an order for production of records does not equate with receipt of records. It’s not uncommon that a continuing struggle ensues to enforce the production ordered by the court.
(iv) Truly egregious behavior, as an exception to the American Rule, must be presented before the court will engage in fee shifting–otherwise each party pays its own fees. Thus, the economics must support pursuing one of these cases through trial, and possible appeal.
Chancery Rules on Real-Party-In-Interest Issue
A recent letter ruling by the Delaware Court of Chancery is noteworthy, in part, because it deals with the issue of a real-party-in-interest, and there is a relative paucity of comprehensive case law on this somewhat esoteric procedural issue. The decision in Fortis Advisors v. Allegan W.C. Holding, Inc., C.A. No. 2019-0151-MTZ (Del. Ch. May 14, 2020), was made in the context of the discovery obligations of the plaintiff acting in its role as a shareholder representative.
The Court in this matter denied a motion to force stockholders to participate in discovery and be subject to trial subpoenas–rejecting the argument that they were the “real parties in interest”. A formal agreement appointed Fortis Advisors as the shareholders’ representative, as well as a “lawful agent and attorney-in-fact.” The motion also sought, in the alternative, to make Fortis Advisors responsible for procuring and producing documents from the stockholders it represented.
Key Takeaways:
- This ruling essentially resolved a discovery dispute, and the court reasoned that if it granted the Motion to Compel data directly from the shareholders, then the agreed-upon shareholder representative structure would be displaced, and it would also circumvent Rule 34, regarding who was in control over documents. Nor should the efficiency of the representative structure for resolving post-closing disputes be disturbed by treating the shareholders as the real parties in interest, the Court reasoned.
- Prior Chancery decisions have held that Stockholder Representatives are considered the real parties in interest, and those representatives may bring an action without joining the stockholders. See footnotes 23 and 24.
- Notably, Court of Chancery Rule 17(a) was not cited, though it refers to real parties in interest, and provides for flexibility to add those parties to a case if needed.
Chancery says no controller fiduciary liability for chairman who wasn’t in buyout control group
This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
The Delaware Court of Chancery recently ruled that Connecture Inc.’s Chairman of the Board and his affiliated investment company were not part of a control group accused of breaching their fiduciary duties by shortchanging shareholders in a go-private buyout of the web-based health insurance vendor in Gilbert v. Perelman, et al. No. 2018-0453-SG, memorandum opinion (Del. Ch. April 29, 2020).
Vice Chancellor Sam Glasscock’s April 29 memorandum opinion found board chairman David Jones Jr. and his investment affiliate, Chrysalis Ventures II, L.P., owed no duty to the minority as part of a control group because Francisco Partners GP IV Management Limited had a majority voting share without their holdings.
The Vice Chancellor defined corporate controllers as “stockholders who, through control of the majority of the voting shares (or otherwise) can seize the corporate machinery and turn it to their own benefit. When they do so, they control the entity; the property, in part, of the minority stockholders. In that sense, when they employ that control they too are fiduciaries.”
Applying Almond v. Glenhill
The opinion should be of interest to M&A specialists in that Vice Chancellor Glasscock sets out the reasons that, for purposes of this ruling, those two defendants are not part of the control group even though Securities Exchange Commission rules may include them in the “purchaser group.”
He used Chancellor Andre Bouchard’s 2018 Almond v. Glenhill Advisors opinion to explain when a transaction participant could be a necessary part of the control group – giving rise to fiduciary duties — even though, as here, its stock was not needed as part of a majority holding. But shared interests and goals are not enough to impart such duties. he said. Almond v. Glenhill Advisors LLC, 2018 WL 3954733, at *25–26 (Del. Ch. Aug. 17, 2018), aff’d Almond v. Glenhill Advisors, LLC, 224 A.3d 200 (Del. 2019).
History
Connecture Inc. a Delaware-chartered company based in Wisconsin that provides an online health insurance marketplace to connect health insurance consumers with providers, offered a series of private stock placements to raise capital between 2015 and 2017.
As a result of its purchases during this period, a group of Cayman Islands limited partnerships which the court collectively labeled “Francisco Partners” acquired a 56 % voting share of Connecture in 2017 – 68 % when combined with Jones and Chrysalis’ holdings.
In response to several abortive offerings by seven prospective suitors for Connecture, Francisco Partners – supported by Jones and Chrysalis — made an offer in late 2017 to acquire the remaining stock in a forced cash-out merger for $.30 cents a share.
According to Gilberts’ complaint, there was no provision for a minority vote on the buyout, but by that time, the board had decided to delist the stock from NASDAQ trading because of its failure to comply with listing requirements and the share price had dropped to $.17 cents.
The merger was finalized in April 2017, Gilbert’s suit was filed in June, and Jones and Chrysalis moved to dismiss
Not needed, not liable
Jones and Chrysalis owned a total of 11.2 percent of Connecture, which Francisco Partners did not need to force the buyout.
Vice Chancellor Glasscock found that whatever role Jones and Chrysalis had in the buyout, they could not have any control group fiduciary liability unless they were a necessary part of the control group and under Almond they could not be a part of that group unless their stock was needed to form a majority or they served some other role necessary to the transaction.
Almond requires one of two conditions, he said: “There must be an arrangement between the controller and the minority stockholders to act in consort to accomplish the corporate action, and the controller must perceive a need to include the minority holders to accomplish the goal, so that it has ceded some material attribute of its control to achieve their assistance.”
Liable as a director?
Neither of those conditions are present here, Vice Chancellor Glasscock said. He granted Jones and Chrysalis’ dismissal motions as to that charge.
As to the separate breach-of-duty charge against Jones for his actions as a director, the Court noted that Jones is protected from liability for violations of his duty of care by 8 Del C. § 102(b)(7) in an exculpatory provision that shields him unless there are particularized allegations of self-interest or bad faith.
In that light, he asked the parties to decide in the next week whether they would set out their arguments in briefs as to Jones’s liability as a director separate from his actions as an alleged control group participant.
Advancement Allowed Prior to Date of Undertaking
A recent letter ruling from the Court of Chancery on a nuance of the law of advancement deserves to be remembered. The Court’s decision in Day v. Diligence, Inc., C.A. No. 2020-0076-SG (Del. Ch. May 7, 2020), is short but important due to its clarification of a finer point regarding the duty of a company to advance fees prior to the date of the undertaking required under DGCL Section 145(e). The Court reasoned that an advancement obligation may cover fees incurred prior to the receipt of a requisite undertaking.
The multitude of highlights of advancement decisions that have appeared on these pages over the last 15 years provide extensive details about the intricacies of Section 145(e), as do the several book chapters I have written on the topic. This cursory post assumes a basic understanding of the Delaware law of advancement of fees for directors and officers pursuant to Section 145(e), and based on that assumption this pithy post provides the following quote from the Day case, that should be in the toolbox of every corporate litigator.
The Court held, after reciting DGCL Section 145(e), that:
Nothing in the language of the statute, or the policy implicit therein, limits advancement to sums incurred post-undertaking, to my mind. The Defendant, I note, has pointed to none. Nor has it cited to precedent….
Court of Chancery says GoPro directors had no duty to doubt managers’ soaring drone camera predictions
This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
The Delaware Court of Chancery recently grounded a GoPro Inc. investor suit over the troubled launch of the Karma camera drone for failure to show the directors faced liability for allegedly concealing product development and revenue problems that they knew would cause a major stock price drop in the matter styled In Re GoPro, Inc. Stockholder Derivative Litigation, No. 2018-0784-JRS, memorandum opinion issued (Del. Ch. April 28, 2020).
The Court’s April 28 memorandum opinion dismissed a consolidated breach-of-duty action because it failed to clear the pre-suit demand threshold hurdle by casting sufficient doubt that the directors could fairly review the charges either because of their action or inaction regarding the disastrous 2016 launch.
Not obliged to doubt
He found that the board, which got persistently optimistic development projections in the face of repeated setbacks, “was under no obligation to disclose what it did not know or did not believe to be true. Nor was it obliged to doubt the information it was receiving from GoPro’s management.”
The directors were not conflicted by a related federal securities suit over disclosures because they faced no liability in that action, and they were not beholden to CEO/founder Nicholas Woodman just because his 76% control of GoPro’s stock enabled him to remove them “at will,” the Vice Chancellor said.
According to the opinion, GoPro, a Delaware-chartered motion camera and software developer based in California announced early in 2016 that it would produce a drone to house the latest version of its HERO camera series; but it repeatedly delayed the launch due to production ramp-up issues, inventory shortages, abnormally high product returns and ultimately, a recall of the drone.
However, management’s revenue guidance remained unchanged during that period and the board eventually revised its estimate down from $1.5-$1.3 billion to $1.25-to $1.3 billion, but the company only generated $1.185 billion which resulted in a 12% stock price decline.
The securities action
That triggered a consolidated shareholder securities action in federal court in California claiming GoPro officers and directors hid an expected revenue shortfall through false and incomplete disclosures under Sections 10(b) and 20(a) of the Securities Exchange Act. Bielousov v. GoPro Inc., 2017 WL 3168522 preliminary settlement approved (N.D. Cal. Oct. 30, 2017).
Attorneys for those plaintiffs announced a tentative $6.75 million settlement in October 2017.
The derivative action
The Court of Chancery consolidated suit charged breach-of-duty, disclosure violations and insider trading on non-public information by some directors who exploited their non-public company information as first addressed in Brophy v. Cities Service Co., 70 A.2d 5 (Del. Ch. 1949).
By November, the full release of the Karma drone and Hero camera had been pushed back to December 2016 but even that promise was compromised by battery defects and supply chain problems in the first 2,500 drones that lowered GoPro’s 2016 revenues to $1.185 billion. Eventually the company issued a recall of the drones.
In May 2019, GoPro asked the Court to dismiss the combined Chancery suit for failure to first either seek board review of the charges or to show why the directors were too conflicted to do so.
Arguments for excusal
The Delaware plaintiffs argued that:
(1) a majority of the defendants faced a substantial likelihood of personal liability for allowing and failing to correct false statements,
(2) a majority of the board is beholden to Woodman,
(3) the directors would be conflicted about any suit against the Brophy defendants and
(4) the Bielousov action renders a majority of the directors interested.
The problem with those four arguments, the vice chancellor said, is that the plaintiffs lack sufficient factual particularity to support their false statement assertions “either as an affirmative choice to mislead stockholders or as a matter of poor oversight.”
There is ambiguity as to which type of claim they want to pursue, but whether they claim an intentional misrepresentation or a failure to supervise, the suit fails because of the deference of the business judgment rule and the protection of the exculpatory clause in the GoPro charter, the vice chancellor said.
That clause, authorized under 8 Del. C. § 102(b)(7), bars money liability for directors for any ordinary breach of the duty of care, and cannot be overcome without proof that the directors face a threat of liability, such as for a breach of the duty of loyalty; but only one member of the GoPro board – Woodman – is alleged to have personally made a false statement, the opinion says.
Nothing sticks
Even if the other directors acquiesced to Woodman’s alleged falsehood, that is not enough to support a claim of affirmative board misconduct, and it is well-settled that a controlling shareholder’s power to remove directors does not mean they lack independence from him, the Court wrote.
“Although plaintiffs throw everything against the wall, nothing sticks,” he said in granting the motion to dismiss. “While Plaintiffs urge the Court to infer scienter, the complaint pleads no facts that would allow a reasonable inference a majority of the board knew GoPro was misleading investors with any of its public statements during 2016.”
Francis Pileggi Joins Lewis Brisbois as Delaware Managing Partner
I’m happy to report that I am now the Managing Partner of the new Delaware office of the Lewis Brisbois firm, which has over 1,500 lawyers, in over 40 practice areas of the law, in over 50 offices. I’m very excited to share this exciting next chapter in my professional career. The Delaware Law Weekly published a nice article about my big move.
My new contact information is:
Lewis Brisbois, 500 Delaware Ave., Suite 720, Wilmington, Delaware 19801
francis.pileggi@lewisbrisbois.com
(office) 302-985-6002 and (cell) 610-457-0407
Court of Chancery lets investor sue again over banking execs quid pro quo replacement stock plan
This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
The Delaware Court of Chancery recently allowed the same shareholder who successfully challenged a 2015 Investors Bancorp Inc. director and officer compensation plan to pursue a new suit over a similar 2019 replacement plan adopted one month after the court approved the settlement of the first action in Elburn v. Albanese, et al., No. 2019-0774-JRS, memorandum opinion (Del. Ch. April 21, 2020).
Vice Chancellor Joseph R. Slights’ April 21 memorandum opinion found plaintiff Robert Elburn passed the tough pre-suit demand test by showing the IBI directors might not act impartially in response to his breach-of-fiduciary-duty charges because they had made a “quid pro quo” arrangement with two top officers that enabled the first suit’s settlement.
Corporate litigators should note the court’s rejection of the defendants’ novel argument that to clear the threshold demand hurdle, a suit must plead “newspaper facts” – i.e. who, what, when, where and how details of the alleged wrong – to satisfy the particularized pleadings requirement of Court of Chancery Rules 12(b)(6) and 23.1.
Not always fatal
Although such specifics might sometimes be required under Rule 9(b) to prove a fraud claim, “the lack of this ‘specificity’ when pleading either fraud or demand futility is not, de jure, ‘fatal’ to the claim,” and derivative plaintiffs usually have less access to the background of deals they challenge, the court said.
The April 21 decision was the second time Elburn’s sued over a $50 million IBI stock award and cleared the pre-suit demand hurdle.
The Chancery Court dismissed his challenge to the directors’ 2015 equity incentive plan that awarded stock to the employee directors – principally CEO Kevin Cummings and COO Domenick Cama – but the Delaware Supreme Court reversed and remanded, finding possible self-dealing that would negate the protection of the business judgment rule. In re Inv’rs Bancorp, Inc. S’holder Litig., 177 A.3d 1208 (Del. 2017).
A settlement of the first suit, approved June 21, 2019, called for the two executives of the Delaware-chartered bank holding company based in Short Hills, New Jersey, to give back all of their awards and for the non-executive directors to return an average of 40% of theirs for a 75% total reduction
New award, new suit
But when the board adopted a replacement plan one month later restoring all of the two top officers’ awards, Elburn filed a new derivative action claiming the executives conspired with the other board members to forfeit all of their awards — allowing the others to keep about 60% of theirs in the pact.
In return, the quid pro quo provided that as soon as the settlement won court approval, the non-employee directors would disloyally adopt a replacement plan that essentially duplicated the scope of the top officers’ award, again damaging the shareholders, Elburn’s new derivative action alleged.
Elburn said although directors have latitude to award lavish compensation to top executives, both board actions included a fatal element of self-interest—in the new case, a pact that let the non-employee directors keep most of their money from the first plan in return for replacing the executives’ award.
Moreover, the board only hinted that it might consider additional stock awards in a proxy issued in advance of a 2019 director election and never updated that disclosure after adopting the costly and unwarranted replacement stock plan, the suit said.
A chance to prove quid pro quo
Vice Chancellor Slights said the plaintiff’s allegations are sufficiently particularized to give him a chance to substantiate his conspiracy theory, noting that Elburn specifically charges that the executives and board agreed to the quid pro quo pact before the settlement of the first suit.
However, “targeted discovery is likely to reveal rather quickly if the quid pro quo agreement alleged in the complaint was actually reached,” he said. “If it was not, defendants are likely to earn summary judgment.”
The vice chancellor denied defendants’ motion for summary judgment on the fiduciary duty claims for failure make a pre-suit demand, but he refused plaintiff’s request for summary judgment on his charge that the directors violated their disclosure duty through misrepresentations and omissions in their 2019 director election proxy.
He quickly dispensed with the charge that the proxy misled investors to believe the board had only begun to consider a new stock plan when in fact that decision was imminent at the time of the proxy. The charge is “not enough to state a viable disclosure claim, much less carry his burden to earn summary judgment on that claim,” the vice chancellor said.
A material failure to supplement?
However, the disclosure claim that the directors failed to supplement the proxy to indicate that the board had approved the compensation plan may have been an omission – but was it material to the shareholders’ decision to vote for the incumbent directors, the court asked?
The answer to that question, it said in denying the motion, can be found in further discovery as to how much the shareholders understood and approved of the likely size and cost of a new stock compensation plan for their directors and officers.
He noted that “the cases plaintiff cites where this court has ordered new director elections involved far more serious malfeasance than the disclosure violations plaintiff has alleged here.”
Requirement Not Met to Bind Non-Signatories to Forum Selection Clause
Delaware law allows for non-signatories to be bound by a forum selection clause if a three-part test is met, and a recent Delaware Court of Chancery opinion provides an analysis of those factors while granting a motion to dismiss in Highway to Health, Inc. v. Bohn, No. 2018-0707-AGB (Del. Ch. April 15, 2020).
The most noteworthy aspects of this pithy decision are: (i) a reminder that Delaware enforces forum selection clauses; and (ii) that a non-signatory can be bound by a forum selection clause if a three-part test is satisfied. See footnotes 46-47 and accompanying text. The directors of a Delaware company sought a declaratory judgment against non-residents of Delaware regarding a dispute about stock-appreciation-rights (SAR) that, by contract, required the board to fulfill fiduciary duties towards the SAR holders.
Three-Part Test for Binding Non-signatories
The three-part test requires one to demonstrate that: (i) the forum selection clause is valid; (ii) the non-signatories are third-party beneficiaries; and (iii) the claims arise from their standing relating to the agreement. Slip op. at 15. The third element of the test was not satisfied based on the facts of this case because the agreement containing the forum selection clause was not the same agreement that gave rise to the substantive claims brought by or against the non-signatories.
Long-Arm Statute and Specific Personal Jurisdiction
This decision also features an analysis of the Delaware long-arm statute, and explains why the “specific jurisdiction” requirements under Section 3104(c)(1) of Title 10 of the Delaware Code were not satisfied because there was no relevant act that actually occurred in Delaware. The Court factually distinguished a case that found specific jurisdiction based on an amalgamation of factors that included: Delaware lawyers drafting the agreement at issue; a Delaware choice-of-law provision; and issues related to the sale of capital stock in a Delaware company. See NRG Barriers, Inc. v. Jelin, 1996 WL 377014 (Del. Ch. July 1, 1996).
Although the plaintiffs in this case did not avail themselves of the opportunity, the Court observed that limited discovery may be allowed in connection with the plaintiff satisfying its burden of proof to establish personal jurisdiction over defendants.
