A recent Delaware Court of Chancery decision provides an excellent analysis of the requirements for imposing personal jurisdiction based on the Delaware Long Arm Statute, and also addresses the fiduciary duty of disclosure in a thorough manner worthy of careful reading. In Clark v. Davenport, C.A. No. 2017-0839-JTL (Del. Ch. July 18, 2019), the court provided a noteworthy explanation of the important nuances that need to be understood when personal jurisdiction is contested. This is the second opinion in two days by the same member of the Court of Chancery that addressed personal jurisdiction in the context of a motion to dismiss under Del. Ct. Ch. Rule 12(b)(2).
The factual context of this case is based on claims against those who assisted in the fraudulent inducement of the plaintiff to invest in a troubled company that was presented as being much more prosperous than it was.
Although the factual details are important to a complete understanding of the court’s analysis, and there are important statements of Delaware corporate law in this opinion, I will mostly focus on the aspects of the opinion that address the personal jurisdiction analysis, in the format of bullet points, while first mentioning a few other key pronouncements of practical value to those of us who toil in the vineyards of corporate and commercial litigation:
- The court describes the nuances of the fiduciary duty of disclosure to buyers of stock, especially as it compares to the fiduciary duty of disclosure when, for example, directors are communicating with stockholders and seeking stockholder action. See pages 17 through 20.
- The court explains that in order to be effective an anti-reliance clause must be explicit, and should not be conflated with a different clause, known as a “pro-sandbagging” clause. See page 22.
- The court explains the important difference between fraud and puffery at pages 23 through 27.
- The court explains the elements of a claim for aiding and abetting fraud at page 33.
Personal Jurisdiction Analysis:
The analysis in this case of personal jurisdiction should be compared with an equally helpful personal jurisdiction analysis in an opinion issued by the same author one day later in the matter styled Metro Storage International LLC v. Harron, C.A. No. 2018-0937-JTL (Del. Ch. July 19, 2019), highlighted on these pages here.
- In the context of a motion to dismiss based on an alleged lack of personal jurisdiction, a motion is filed under Rule 12(b)(2), and the court applies a two-part test: First, the court must determine whether the Delaware Long-Arm Statute at 10 Del. C. § 3104(c) is applicable. If so, the court must decide whether subjecting a non-resident defendant to jurisdiction would violate due process. That is, the non-resident defendant must have sufficient minimum contacts with a forum state such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice (citing Matthew v. Flakt Woods Gp. SA, 56 A.3d 1023, 1027 (Del. Ch. 2012). See generally Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery, § 3.02 (2d ed. & Supp. 2018).
- The Delaware Long-Arm Statute provides that a court may exercise personal jurisdiction over a non-resident, or a personal representative, who in person or through an agent: transacts any business or performs any character of work or service in the state. 10 Del. C. § 3104(c)(1).
- Jurisdiction under the statute can be based on a single transaction where the claim is based on that transaction. See pages 38 to 39.
- Importantly, the court underscored that the Delaware Long-Arm Statute allows that: “forum-directed activity can occur “through an agent.” 10 Del. C. § 3104(c).
Due Process and Conspiracy Theory of Personal Jurisdiction
- For purposes of due process, the question is whether the defendant had sufficient minimum contacts with Delaware such that compelling it to defend in the state would be consistent with the traditional notions of fair play and substantial justice. See page 9.
- The court also discussed the five elements of the conspiracy theory of personal jurisdiction. See pages 39-40.
- The conspiracy theory of jurisdiction was first announced by the Delaware Supreme Court in the case of Istituto Bancario Italiano SpA v. Hunter Eng’g Co., 449 A.2d 210, 225 (Del. 1982).
- The court explained that the elements for the conspiracy theory of jurisdiction satisfy both prongs of the jurisdictional test. The first three elements encompass the statutory prong regarding the requirements of the Delaware Long-Arm Statute. The third element corresponds to the statutory requirement that the defendant had transacted business or performed work in the state. The fourth and fifth elements speak to due process and whether the minimum contacts are such that the defendant should have reasonably anticipated being sued in the forum.
- The court noted in closing that the question of whether a defendant was validly served should be raised in a motion to dismiss under Rule 12(b)(5), and not under Rule 12(b)(2).