OneScreen, Inc. v. Hudgens, C.A. No. 4545-VCP (Del. Ch. March 30, 2010), read opinion here.
This Delaware Court of Chancery opinion will be useful to include in the toolbox of litigators who need to know about the latest iteration of Delaware law on the issue of personal jurisdiction, especially as it relates to in rem jurisdictional arguments based on stock ownership in a Delaware corporation.
The issue addressed in this opinion by the Court of Chancery was whether personal jurisdiction in Delaware can be based solely on the fact that a defendant owns stock in a Delaware corporation. The short answer is that it is theoretically possible but only as a narrow exception to the general rule which the plaintiff in this case failed to satisfy.
This case involved the effort by OneScreen, Inc. to rescind the transfer of preferred stock from a former CEO based on an argument that it was in violation of Florida criminal statutes and therefore should be voided as against public policy even though OneScreen was not a party to the related stock agreements.
Plaintiff argued that it was not seeking jurisdiction over any person but rather was asking the Court to exercise jurisdiction over property–or in rem jurisdiction based on Section 169 of the Delaware General Corporation Law, and Section 365 of Title 10 of the Delaware Code. That argument was unsuccessful.
The defendant successfully moved to dismiss for lack of jurisdiction based on the seminal ruling of the United States Supreme Court in Shaffer v. Heitner and its progeny, standing generally for the position that: “Ownership of stock in a Delaware corporation, on its own, is an insufficient basis on which to hale nonresident defendants into a Delaware Court.” See footnotes 1 and 9. The Court also refers to Court of Chancery Rule 19 for the observation that personal jurisdiction over the parties to the agreement sought to be invalidated would be indispensable, and the inability to obtain personal jurisdiction over them, as opposed to merely in rem jurisdiction, would not allow the Court to proceed in any event.
Due Process Concerns
The narrow exception that would allow the Court to proceed when the only connection to Delaware is ownership of stock in a Delaware corporation would be in those limited circumstances where minimum contacts could be satisfied conceivably in a situation where an action related directly to the “rights or attributes inherent in that stock.” See footnotes 20 through 35 for cases cited.
The Court discussed a series of Delaware cases that interpret the decision of the United States Supreme Court in Shaffer to mean that “ownership of stock that has its statutory situs in Delaware does not, by itself, satisfy the minimum contacts requirement. See footnote 30. Rather, ownership of stock in a Delaware corporation may be a sufficient contact with Delaware to subject the owner of stock to jurisdiction in this Court, “but only in actions relating directly to the legal existence of the stock or its character or attributes.” See footnote 39.
Conclusion and Reasoning
The Court’s conclusion and reasoning can be summarized in the following three parts: First, this action must be dismissed because it does not relate directly to the legal existence, rights, characteristics, or attributes of stock in the Delaware corporation. Second, the complaint does not allege a defect in the corporate process by which the disputed shares were issued nor does it ask the Court to examine those shares in terms of the internal governance of a Delaware corporation. Lastly, the action challenges transactions that only incidentally involve stock in a Delaware corporation. In closing, the Court distinguished this case from corporate plaintiffs in the Hart Holding opinion of this Court in which cancellation of shares was sought as an equitable remedy for fraud. By contrast, OneScreen seeks in this case to invalidate a stock transfer in response to an alleged violation of a Florida criminal statute that does not implicate the corporate process or the validity or attributes of the corporation’s stock. Thus, there is a failure to allege sufficient minimum contacts to support the exercise by the Court of jurisdiction over the defendants.