Hamilton Partners, L.P. v. Englard, C.A. No. 4476-VCP (Del. Ch. Dec. 15, 2010). This 59-page decision deserves careful and thorough reading for anyone who is planning to file or defend against a double derivative shareholder suit in Delaware.
The issues addressed in this factually convoluted case involve personal jurisdiction over the directors and the interlocking entities, as well as whether demand futility was necessary or satisfied at the parent and/or subsidiary level.
Short Summary of Ruling
The detailed legal analysis in this opinion deserves comprehensive treatment, but for purposes of this brief blog blurb I am only going to highlight some of the key issues in this ruling:
1) In a double derivative suit, because the parent corporation determines, through its 100% control of the subsidiary, whether or not the subsidiary will sue, there is no basis in law or logic to require a separate demand futility analysis at the subsidiary level. See Lambrecht (2010 Delaware Supreme Court decision summarized here).
2) Because the parent corporation was a New York corporation, and based on the internal affairs doctrine New York law controlled, the Court conducted a demand futility analysis under New York law and found that a majority of the board was independent and therefore demand was excused.
3) The Court conducted an extensive analysis of the personal jurisdiction issues involving the directors and entities in this case and that sophisticated analysis deserves close scrutiny by anyone preparing a complaint in Delaware in this type of situation.
4) Recognizing that the directors of a wholly-owned subsidiary owe fiduciary duties to the parent; and that the directors of the subsidiary are obligated to manage the affairs of the subsidiary in the best interest of the parent and its shareholders, the problem for the director defendants in this case, as explained by the Court, is that they did not act in the best interest of the parent and its stockholders, but rather allegedly acted in the best interest of one person.
5) Citing to the well-known Trenwick decision of the Delaware Court of Chancery, the Court in this case explained that a plaintiff cannot state a claim against the directors of a wholly-owned subsidiary merely by alleging that the directors acted in the best interest of the parent and to the detriment of the subsidiary. A parent-level stockholder plaintiff can still plead a duty of loyalty claim against the directors of a wholly-owned subsidiary by pleading particularized facts indicating how the directors of the wholly-owned subsidiary acted in breach of their duty of loyalty. The Court found that the plaintiff in this case satisfied that prerequisite.
6) The Court addressed an argument that forum non conveniens argued against the Court keeping jurisdiction over this case. The Vice Chancellor rejected that argument and explained the public policy reasons why in asserting jurisdiction over a double derivative action like this one, involving a foreign parent of a Delaware subsidiary, the Delaware Supreme Court has held that Delaware has an interest in providing a forum for shareholder derivative litigation involving the internal affairs of its domestic corporations and has an obligation to provide such a forum. See Sternberg, 550 A.2d at 1125. The Court also explained that it had undisputed authority to compel a named defendant over whom the Court has personal jurisdiction, to appear at trial. See 10 Del. C. § 362.
7) The Court provides copious citations to authority in connection with the issue of the Court’s reach over necessary parties who need to be subpoenaed. The Court concluded that it had the power to issue compulsory process to all likely witnesses for both discovery and trial under Rule 45 and if necessary through the commission process. See 10 Del. C. § 368.
8) After citing and discussing cases involving the interests of Delaware Courts in deciding issues of Delaware law, compared with the need to respect the interest of other states in the internal affairs of entities governed by those states, the Court concluded that based on: (i) the prominent use of a Delaware transaction vehicle in this case, (ii) the significant roles played by two Delaware entities in a highly suspicious transaction; (iii) the direct involvement of Delaware fiduciaries in an alleged loyalty breach, and (iv) most persuasively, the strong interest that Delaware has in policing against duty of loyalty violations in the misuse of its entities for fraudulent purposes, the double derivative claim against the fiduciaries of a Delaware corporation “should and will be adjudicated here.”