Ross Holding and Management Company v. Advance Realty Group LLC, C.A. No. 4113-VCN (Del. Ch. Apr. 28, 2010), read opinion here.
In light of New Jersey substantive law applying to this Delaware Court of Chancery decision, I will focus this brief overview on the Delaware procedural and jurisdictional law applied to this decision.
Open Issue of Delaware Law: What Level of Participation Makes One a Manager for Purposes of Section 18-109 of the Delaware LLC Act?
The Court emphasized that it is an “open question in our jurisprudence” in terms of “what constitutes material participation in the management of a limited liability company” to the extent that it will satisfy the implied consent statute under Section 18-109 of the Delaware LLC Act, which provides that a "manager" of an LLC agrees to service of process and jurisdiction in Delaware by virtue of agreeing to be a manager or, as the statute describes, someone who materially participates in the management of a company regardless of his title. The Court observed that the statute does not offer much in the way of guidance and the case law is only marginally more helpful.
Simply Conferring With Management Occasionally Does Not Make One a Manager
However, the Court acknowledged that Delaware decisions have stated that “simply conferring with members of management on occasion and being involved in a single issue before the Board has been found not to constitute material participation and management." See footnote 64 for citation to Fish Ventures. In addition, the Court recognized a prior decision that found that “having a direct role in the formation of a limited liability company and executing documents on its behalf" likewise did not breach material participation in the limited liability company’s management. See footnote 65.
On the other hand, where the Defendant was one of the founders of the company, maintained a large equity stake, and had at one time claimed to be its president and CEO, he was determined to be a “manager” for purposes of Section 18-109 despite the fact that he later disclaimed ever having been a manager. See footnote 66.
In sum, the Court found that there were too many factual issues to resolve this issue at the motion to dismiss stage and therefore the Court allowed jurisdictional discovery regarding the role played in the management of the LLC, after which the Court would address the issue anew. See footnote 67 for additional criteria considered in connection with the jurisdictional issue.
A few additional bullet points are noteworthy:
1) The Court determined that the issue of personal jurisdiction was not waived simply because a party had engaged in briefing a motion to disqualify and had allowed for and engaged in discovery. Although the Court recognized that a personal jurisdiction offense “may be lost by failure to assert it seasonably, by formal submission in a cause, or by submission through conduct,” in this case the Court found that the party challenging jurisdiction had “not been so actively involved in this case that it has waived the "Personal Jurisdiction Defense" that it first raised in its Answer. See footnote 47.
2) Also noteworthy was the agency theory of jurisdiction discussed by the Court. For example, the Court recognized that the agency theory may provide a basis for the exercise of jurisdiction “over a non-resident parent corporation based upon the act of its subsidiary in Delaware. However, no statute exists . . . which permits Delaware Courts to exercise personal jurisdiction over a non-resident principal based on the mere existence of a limited agency relationship where the Delaware corporate as agent.” See footnote 56. Moreover, the Court observed, that “the agency theory permits only the attribution to the principle of specific acts of the agent, not the attribution to the parent of the subsidiary’s status as a Delaware entity. Thus even under the agency theory based on a non-resident agent, the Plaintiffs would need, at least, to assert that the non-resident agent [the party seeking dismissal] could have been sued in Delaware under the long-arm statute. [10 Del. C. Section 3104.] (emphasis added.) See slip op. at 32.
Court’s Closing Comments on Service of Process Issues Generally
Lastly, as a jurisdictional issue, footnote 75 is noteworthy for its expression of doubt regarding the strength of an argument that the complaint should be dismissed for improper service of process. Although there are cases that recognize the argument, the Court also cited the cases where motions to dismiss for inadequate service of process were denied when the Defendants “had actual notice of the suit.”