The Delaware Supreme Court recently interpreted the statutory basis for imposing jurisdiction over directors and officers of Delaware corporations in a manner that is broader than the interpretation that previously prevailed in Delaware courts for the last 30 years. Hazout v. Tsang, No. 353, 2015 (Del. Supr., Feb. 26, 2016).
Directors and officers of Delaware corporations are deemed to consent to the personal jurisdiction of the Delaware courts by virtue of their agreement to serve as directors and officers of Delaware corporations. The prevailing interpretation of the applicable statute, Section 3114 of Title 10 of the Delaware Code, for the last 30 years or so, has been to limit personal jurisdiction over directors and officers to claims against them in their capacity as directors and officers only for such things as breach of fiduciary duties or claims by stockholders that they violated sections of the Delaware General Corporation Law. In essence, for reasons related to concern over minimum contacts required by due process under the U.S. Constitution, the case law over the last three decades has, in the words of the Supreme Court, “excised” a phrase in Section 3114 that allows the imposition of jurisdiction where a director or officer was merely a “necessary or proper party.”
This opinion has now rejected more than a generation of cases interpreting Section 3114 to the extent that the Delaware courts (until a few days ago), did not enforce the provision of the statute that allowed for the imposition of jurisdiction over directors or officers when they were merely “necessary or proper parties,” even if there was no breach of fiduciary duty or related claim.
Delaware’s high court based its thorough analysis on statutory construction principles and the intent of the General Assembly. The holding also acknowledged the benefit, and likely legislative intent, of efficiency and avoiding piecemeal litigation.
The Supreme Court reasoned that there is no constitutional impediment to its conclusion because the statute requires that there be a close nexus between the claims against the corporation and those against the officer and director, and “that the claims against the officer and director involved conduct taken in his official corporate capacity. In other words, this safeguard ensures that the implied consent mechanism of Section 3114 only applies when a director or officer faces claims that arise out of his exercise of his corporate powers.”
The court explained that the defendant in this case satisfied the statutory language because he was a “necessary or proper party to a civil action brought in this State against the corporation of which he is an officer and director.” Moreover, he consented to suit in Delaware for certain types of lawsuits by virtue of his service as an officer and director of a Delaware corporation, and, moreover: (i) the dealings that gave rise to the suit were focused on a change of control of the Delaware corporation based on an infusion of capital or loan, and (ii) the parties to those dealings agreed to Delaware law as their common language of commerce. Thus, the defendant had no basis to complain that his due process rights would be offended by Delaware’s exercise of personal jurisdiction over him.
The court’s conclusion was also bolstered by underscoring the public policy reason why “Delaware has a legitimate interest in providing a forum for efficient redress of claims against a Delaware corporation and a fiduciary whose actions are at the heart of those claims.”
The court explained that the defendant was “obviously a proper party because he has a tangible legal interest in the matter” that is separate from the interest of the corporation involved and because the claims against him arise out of the same facts and occurrences as the claims against the corporation involved.
In sum, the court declined to “excise” the provisions in Section 3114 that allow for the imposition of personal jurisdiction over directors and officers who are either “a necessary or proper party,” even though Delaware cases have been excising that phrase in the statute for many years as a result, apparently misplaced, of due process concerns. Moreover, the court emphasized that it was not enough to make that “necessary or proper party” determination, but rather the court must also find that the exercise of personal jurisdiction, as in this case, was also consistent with constitutional expectations of due process.
By becoming a director and officer of the corporation involved, the defendant purposely availed himself of certain duties and protections of Delaware law. The claims against him involved his actions in his official capacity of negotiating contracts that involved the change of control of the Delaware company. The defendant executed written agreements which chose Delaware law to govern the disputes that formed the basis of the claims.
To make the point about choosing Delaware law more colorful, the court observed that other parties in the case were from Hong Kong and Canada, but the court found that all the parties “understood that as to the course of their respective actions relevant to this case, the jurisdiction that was their focus was the home of the fried oyster sandwich, and not the home of poutin or dim sum.” Therefore the court concluded that requiring him to defend the lawsuit in this state does not “offend traditional notions of fair play and substantial justice.”
Supplement: A lengthier overview of this case appears in an article I wrote for the publication of the National Association of Corporate Directors. The nationally-recognized corporate law expert, Professor Stephen Bainbridge, kindly links to the article.