A recent Delaware Court of Chancery opinion should have a place in the toolbox of litigators who need to be familiar with the latest iteration of Delaware law on the nuanced aspects of the consent statute as a potential basis to impose personal jurisdiction on officers and directors of Delaware corporations by virtue of their service in that capacity. In BAM International, LLC v. The MSBA Group, Inc., C.A. No. 2021-0181-SG (Del. Ch. Dec. 14, 2021), the court engaged in a thorough analysis of the multi-faceted determinations that need to be made if jurisdiction by virtue of the consent statute can be used as the basis for personal jurisdiction–when there is no breach of the fiduciary duty that the director or officer owes to the corporation or its stockholders.
The court specifically addressed the issue of whether officers of a Delaware entity can be haled into a Delaware court for a contract-related claim despite having no relationship with Delaware other than their status as officers of a Delaware entity? This opinion remains noteworthy because Delaware law on this topic has evolved since the Delaware Supreme Court changed Delaware law on this issue not long ago, and the trial courts are still trying to clarify the contours of the jurisdictional issues involved with the consent statute at 10 Del. C. § 3114(a) and § 3114(b).
Section 3114(a) of Title 10 of the Delaware Code, applicable to directors, and Section 3114(b) applicable to officers of Delaware corporations, each impose personal jurisdiction on those who have consented to serve in those roles in two situations: (1) actions alleging breach of their duty to the corporation and its stockholders; or (2) where litigation is brought in Delaware involving the corporation, to which the officer or director is a “necessary” or “proper” party. See Hazout (Delaware Supreme Court decision, and its progeny, highlighted on these pages).
The court in this recent decision determined that although Section 3114 was satisfied, due process was not satisfied given the nature of the action and the paucity of the contacts with the state. The court observed that the plaintiffs in this case did not seek to rely on the long-arm statute, but instead relied only on the consent statute.
Jurisdiction by Contract:
By way of general reference, the court noted that parties can agree to personal jurisdiction by contract, in which case a minimum contacts analysis would not be required. See Slip op. at 14. The court described the 3-part test that Delaware employs to determine when a non-signatory is bound to a forum selection clause. See footnote 68 and accompanying text.
The court provided the historical background of the consent statute which was originally enacted with respect to directors in 1977 and extended to officers in 2004. The court described the constitutional due process issues that the consent statute raises as causing “Delaware courts some amount of headache.” See footnote 79 and accompanying text.
Because the only substantive claim against the officers in their individual capacities in this case was for tortious interference, the claim did not arise out of their duties owed to the company for which they served as officers, but instead from torts allegedly committed against another entity. Therefore, the court explained that in order to impose jurisdiction based on the consent statute, the officers must be “necessary or proper parties,” to the lawsuit against the company for whom they serve as officers.
Necessary or Proper Party:
The court provides a definition of what it means to be a “necessary party” in this context: “If her rights must be ascertained and settled before the rights of the parties to the lawsuit can be determined.” See Slip op. at 21. The court instructed that a “party is proper if she has a tangible legal interest in the matter separate from the corporation’s, and if the claims against her arise out of the same facts and occurrences as the claims against the corporation.” Id.
Although the court found that the individual officers were proper parties for purposes of the consent statute, the court also reasoned that the necessary minimum contacts to satisfy due process were not present. The court described the contract at issue in this case as a “guardian-variety commercial contract, rather than one necessarily implicating Delaware interests.” The court cited Turf Nation v. UBU Sports, Inc., 2017 WL 4535970 (Del. Super. Oct. 11, 2017), as involving a similar fact pattern and applicable analysis. As in the Turf case, the court explained that the simple commercial contract at issue does not involve Delaware corporate law nor does it involve a contract to be performed in Delaware. Rather, the court emphasized that Delaware has “no real interest in this case other than the exercise of personal jurisdiction over officers and directors, which is, in my view, insufficient in light of the constitutional due process rights owed . . ..” Slip op. at 25. The court added that the actions allegedly giving rise to liability were not taken as officers of the company that they serve nor were the harms alleged to have been committed breaches of fiduciary duties.
Lastly, the court noted that the simple fact that Delaware law governs the contract and Delaware was selected as a forum for settling disputes, is not sufficient alone to satisfy constitutional due process without more—because, in part, the officers in this case are not signatories to those agreements that called for Delaware as a forum.