This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Supreme Court recently ruled that the Court of Chancery wrongly decided to move a Swiss holding company’s dispute over Allomet Corp.’s stock from Delaware to Austria, even though the struggling metal powder coating company did not carry its burden of proof under a financing pact’s forum selection clause, in Germaninvestments AG, et al. v. Allomet Corp., et al., Del. Supr., No. 2019 (Jan. 27, 2020).

Justice Karen L. Valihura’s Jan. 27 opinion on behalf of a three-justice panel reversed Chancery’s Rule 12(b)(3) dismissal of Germaninvestments AG’s suit to force Allomet to transfer stock, intellectual property and land in return for loans and investments that kept it afloat.

The Vice Chancellor held that under European Union regulations, companies in member nations like Austria can use a mandatory forum selection clause to designate a single jurisdiction to resolve their disputes and that’s what the 2017 Allomet Restructuring and Loan Agreement did. See Germaninvestments AG, et al. v. Allomet Corp., et al., No. 2018-0666-JRS, 2019 WL 2236844 (Del. Ch. May 23, 2019).

But in its partial reversal, the high court found that the vice chancellor wrongly put the forum burden of proof on Germaninvestments AG and should have required expert testimony throughout the briefing on the complex and novel question of the application of foreign law.

Who’s burden of proof?

The appellate panel said Allomet had the burden of proof in establishing foreign law but failed to carry it, so Delaware law should be applied to the forum selection issue, and the result is that the loan agreement’s forum clause is permissive, enabling the Chancery Court case to continue.

Recognizing that there are “very few decisions from this Court that can serve as a reference  in this area,”  it said, “we hold that the party seeking application of foreign law has the burden not only of raising the issue of the application of foreign law, but also, of establishing the substance of the foreign law to be applied.”

The dispute arose over loans and investments that Germaninvestments AG — a Swiss holding company formed to manage the Herrling family’s assets — made in Allomet and the tentative joint venture that the investors and Allomet’s owners formed in 2017 to raise capital.

In May of that year, the parties drafted a Restructuring and Loan agreement to pave the way for the July 3 formation of AHMR GmbH, an Austrian holding company in which the Herrlings and Allomet pioneer Dr. Hannjorg Hereth would eventually hold all of Allomet’s stock.

No final draft

An immediate transfusion of capital in the form of a series of loans totaling $850,000 began and the temporary pact was extended; however, according to the court record, trouble began over how the loans would translate into equity for the investors and negotiations for a permanent agreement that would address that issue broke down in May 2018.

The Hereth faction took the position that the Herrlings could not claim any stock in Allomet and deserved the return of only “a fraction” of their loans and investments, sparking the Chancery Court complaint asking for a “reissue” of stock owed to them.

The Herrlings’ suit also claimed breach of the agreements and unjust enrichment as a result of the alleged failure to transfer all of Allomet’s outstanding stock, property and intellectual property to them.

The defendants won the motion to dismiss in favor of the Vienna court even though they “provided scant information to the Court of Chancery on Austrian law, citing to Article 25 of the Brussels Regulation …but no cases in support of their Rule 12(b)(3) motion on the substance of Austrian law” Justice Valihura wrote.

The plaintiffs argued that:

·     The forum clause is neither mandatory nor enforceable with respect to their stock replacement claim under Section 168 of the Delaware General Corporation Law.

·     The defendants failed to carry their burden of proof because they made only conclusory statements on Austrian law, so the forum clause is permissive under either Delaware or Austrian law.

·     Even an Austrian court would not find that the forum clause would confer mandatory jurisdiction on Vienna courts because it should be interpreted in accordance with Delaware law.

·     Article 8 of the Brussels Regulation provides that the defendants can be sued where their corporation is domiciled — in Delaware.

The high court found that the plaintiffs had supported their arguments with citations to translated Austrian cases and that in a reply in support of their motion for re-argument on the Chancery Court decision, they had provided a law school professor’s expert opinion on Austrian law.

Justice Valihura noted the Vice Chancellor’s frustration with the sparse, eleventh-hour amount of citation and expert opinion on novel foreign law issues, but said without soliciting further information from the parties, he dismissed the complaint.

“The failure to identify, early on and properly join the issues, coupled with the lack of any expert input on the numerous nuances of Austrian and European law that were ultimately raised, lead us to conclude that the Court of Chancery erred in determining that appellees had satisfied their burden of proof,” the Justice said.

However, she affirmed the vice chancellor’s finding that Section 168 — which deals with lost, stolen or destroyed stock certificates — “does not fit” for competing stock ownership claims where the certificates are “in a vault in Austria” pending resolution of this suit.