Baker v. Impact Holding, Inc., C.A. No. 4960-VCP (Del. Ch. May 13, 2010), read opinion here.
The Court of Chancery in this opinion addresses issues related to those discussed in recent articles and seminars about the exodus of cases involving Delaware corporate law to courts outside of Delaware in which Delaware corporate issues are decided by those foreign courts. See, e.g., here, here and here.
Professor Ribstein provides scholarly analysis of the case here.
The corporate issue in this case involved DGCL Section 225 and whether the director was entitled to a seat on the board of directors of the defendant Delaware corporation. However, before that substantive issue could be addressed, the Court needed to decide a motion to dismiss based on a forum selection clause in an agreement that required all suits to be filed in Dallas, Texas.
The Court of Chancery upheld the exclusive forum selection clause and dismissed the case without prejudice to it being filed in Dallas, Texas–even though Delaware corporate law clearly applied under the internal affairs doctrine.
Arguments of the Parties
Baker filed this action pursuant to Section 225 of the DGCL to seek a declaratory judgment that his removal from the board was a violation of a right embodied in a Stockholders Agreement (SHA) with the defendant Delaware corporation and the stockholder that appointed Baker. However, Baker himself was not a signatory to the SHA. He was appointed to the board by a stockholder who was a signatory.
A motion to dismiss was filed based on an exclusive forum selection clause that required all suits related to the SHA to be filed in Dallas, Texas. Because Baker relied on the SHA as the basis for his right to be appointed to the board, the Court reasoned that the suit was clearly related to the SHA.
Baker opposed the motion on the basis that it was against the public policy of Delaware to enforce an agreement that allowed a court outside of Delaware to adjudicate a matter of Delaware corporate law governed by the internal affairs doctrine and DGCL Section 225. In addition, Baker relied on the fact that he was not a signatory to the agreement.
LLC Act v. DGCL
Although a Delaware corporation was involved in this case, Baker relied on Section 18-109(d) of the Delaware LLC Act which prohibits a "member who is not a manager" from waiving its right to maintain a legal action or proceeding in the courts of the State of Delaware "with respect to matters relating to the organization or internal affairs of a limited liability company."
The problem with Baker’s argument, the Court explained, was three-fold: First, the DGCL applied in this case and not the LLC Act. Second, even if the LLC Act applied by analogy, only members were prohibited by Section 18-109(d) from waiving the right to litigate in Delaware. However, Baker was a director and by analogy would be in "the same shoes" as a manager of an LLC for purposes of applying this statute by analogy–but the LLC statute does not prohibit managers from waiving their rights to litigate in Delaware any of their disputes related to the LLC. Third, when the Delaware Legislature amended the LLC Act, it did not enact a similar prohibition in the corporate context regarding such waiver. The Court inferred from this that the Legislature did not intend to make an analogous provision applicable to corporations.
A. Public Policy
The Court ruled that "Delaware does not have an overarching public policy that prevents the stockholders of Delaware corporations from agreeing to exclusive foreign jurisdiction of any matter involving the internal affairs of such entities." Slip op. at 5. See also n. 8 (citing cases where Delaware courts routinely uphold forum selection clauses, even if they specify foreign jurisdictions.)
B. Non-Signatory Bound by Forum Selection Clause
As for the argument that Baker was not bound by the agreement because he was not a signatory, the Court reasoned that he was estopped from refusing to comply with the forum selection clause provision. Prior Delaware cases have applied a three-step analysis for determining the applicability of a forum selection clause to a non-signatory. See Slip op. at 8 (citing Weygandt v. Weco, LLC, 2009 WL 1351808, at * 4 (Del. Ch. May 14, 2009)(other citations omitted)). The first factor is whether the forum selection clause is valid. Second, the Court inquires as to whether the non-signatories are third-party beneficiaries or closely related parties? Third, the question is asked: does the claim arise from their standing related to the agreement. All three factors applied to support the conclusion that Baker should be bound by the agreement. This holding is sound notwithstanding the truism, supported by recent Delaware law, that an individual is not personally liable on a contract that he only signs in his representative capacity. See n. 14.
Thus, the motion to dismiss pursuant to Court of Chancery Rule 12(b)(3) for improper venue was granted, without prejudice.