Search results for: forum clause

Delaware will retain jurisdiction over a dissolution claim notwithstanding a mandatory New York forum selection clause, according to the recent Delaware Court of Chancery opinion in Seokoh, Inc. v. Lard-PT, LLC, C.A. No. 2020-0613-JRS (Del. Ch. March 30, 2021). This case involved the petition for dissolution of a Delaware LLC while litigation between the parties also was filed in New York. The LLC agreement had a deadlock provision but it was not effective for resolving the parties’ dispute. For example, there was no formula or deadline for a buyout.

Several important statements of Delaware law make this 45-page decision noteworthy (and blogworthy), as well as well-worth the time to read the whole opinion for those who need to know the latest iteration of Delaware law on the following topics:

  • Although Delaware courts generally enforce forum selection clauses, even when they require disputes to be litigated in a foreign forum–this is a notable exception: when a petition for dissolution of a Delaware LLC is filed pursuant to Section 18-802 of the Delaware LLC Act. See footnote 43. (The parties in this case agreed to the foregoing exception and the Court noted that they were correct in doing so.)
  • This opinion features a useful recitation of the factors the court will consider under Section 18-802 in order to determine if the statutory prerequisites for an LLC dissolution have been satisfied. See Slip op. at 24 to 27 and footnotes 119 to 128.

A recent blog post highlighted on these pages featured another Chancery decision addressing a deadlock in an LLC that formed the basis of a dissolution petition.

The Delaware Supreme Court recently issued a highly anticipated decision in Salzberg v. Sciabacucchi, No. 346-2019 (Del. Mar. 18, 2020).  Many law professors and other commentators have written much learned commentary and published extensive scholarly analysis of the issues raised in the Court of Chancery’s decision, and have opined on what the Supreme Court was likely to decide in this case–and how the commentators thought the appeal should be decided.  Moreover, I expect that there will be a flood of additional learned commentary and analysis about this decision in the near future.  See, e.g., recent analysis of the Supreme Court’s opinion in this case by Professor Bainbridge for the Washington Legal Foundation.

Therefore, I will only limit this post to a few highlights that should be an incentive to read all 53-pages of the court’s opinion, to which a full-length law review article could easily be devoted. The photo nearby features one of the oldest venues, the Roman Forum.

The highlights of the Chancery decision in this case can be found on these pages.

Federal Forum Clause at Issue:

Delaware’s High Court referred to the Federal Forum Selection Provisions in the certificate of incorporation of the several companies whose charter provisions were jointly challenged in this case.  In essence, the clauses purported to require that the U.S. Federal District Court would be the sole and exclusive forum for the resolution of any complaint arising under the Securities Act of 1933 and that any person purchasing shares of stock in the companies with those provisions consented to the forum selection provision.

Highlights of Court’s Analysis:

The court began its analysis with the text of Section 102 of the DGCL which governs matters contained in the certificate of incorporation.  The court emphasized that Section 102(b)(1) authorizes two broad types of provisions:  (i) Any provision for the management of the business and for the conduct of the affairs of the corporation; and (ii) Any provision creating, defining, limiting and regulating the powers of the corporation, the directors and the stockholders, or any class of the stockholders, . . . if such provisions are not contrary to the laws of this State.

The Delaware Supreme Court reviewed several key U.S. Supreme Court decisions and prior decisions of the Delaware Supreme Court, including the recent SCOTUS opinion in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061, which held that federal and state courts have concurrent jurisdiction over class actions based on the 1933 Securities Act and that such claims are not removable to federal court.

Highlights of Court’s Decision:

  • The court determined that DGCL Section 115 did no alter the scope of DGCL Section 102(b)(1). Section 115 was added as an amendment to the DGCL in 2015 and was intended to codify the Boilermakers Chancery decision to preclude a charter or bylaw provision from excluding Delaware as a forum for internal corporate claims.  Slip op. at 16-17.
  • The opinion employs general principles of statutory construction of widespread applicability and usefulness. See Slip op. at 18-24.
  • Readers will enjoy a “deep dive” into the internal affairs doctrine. The appellate analysis concluded that the Court of Chancery’s opinion defined “internal affairs” too narrowly. See Slip op. at 31-38.  See also footnote 124-126 and related text, referring to the internal affairs doctrine as a principle of “serious constitutional proportions; not just a conflict of laws matter.”
  • The decision features a thorough discussion of why Section 102(b)(1) is more expansive than Section 115–the latter focuses on internal corporate claims. See Slip op. at 38.
  • The court described the facial challenge of constitutionality in this matter and concluded that the provision at issue neither violated federal law nor federal policy. See Slip op. at 43.
  • Both Delaware case law and decisions of the U.S. Supreme Court were relied on for the well-established presumption of enforceability of forum selection clauses. See footnotes 136-139 and accompanying text.
  • Especially notable is footnote 169, which addressed a concern that many had during the appeal of this case: enforcing the federal forum provision in this matter would, perhaps by analogy, “open the flood gates” for arbitration clauses in charters. But the Supreme Court explained that at least in terms of forum selection clauses for claims involving Delaware corporate internal affairs, in part based on the synopsis of Section 115, such a concern was unfounded.

In connection with a business divorce involving several inter-related entities and two key agreements among the parties that impacted the issues disputed, the Delaware Court of Chancery in Village Green Holding, LLC v. Holtzman, C.A. No. 2018-0631-TMR (Del. Ch. Oct. 5, 2018), enforced the forum selection clause that selected Delaware courts, and imposed an anti-suit injunction to prevent the parties from proceeding in a separate action in Pennsylvania despite the second agreement containing a forum selection clause that selected Pennsylvania courts as a forum for disputes related to some, but not all, of the numerous entities involved in the business break-up. (The nearby photo of the Roman Forum is an appropriate graphic for this post.) Many other decisions interpreting forum clauses have been highlighted on these pages over the last 13 years.

Among the several important legal principles recited by the court in this useful opinion, are the following principles highlighted by bullet points:

  • The court reiterates the familiar prerequisites that must be satisfied in order for a preliminary injunction to be granted. See page 12.
  • On a more nuanced level, the court recites the additional criteria that need to be considered by the court when there is a request for an anti-suit injunction to prevent a party from proceeding in another forum. See page 13.
  • Also discussed by the court were the enhanced or modified prerequisites that must be satisfied for a “mandatory injunction,” which requires a greater showing than one needs for a typical injunction that seeks merely to maintain the status quo.
  • The court recites the basic principle, and cites to the seminal Delaware cases supporting the general rule, that a forum selection clause is enforceable in Delaware. See pages 15 and 16.
  • The court also refers to Section 18-111 of the Delaware LLC Act which gives the Court of Chancery specific jurisdiction to interpret the rights and duties in an LLC operating agreement. See page 18.
  • Exceptions to the enforceability of forum selection clauses, such as fraud, are also discussed. See page 20.
  • The necessary element of irreparable harm required for injunctive relief was described to be established when one is forced to litigate in a forum that is contrary to the selected forum provided for in a valid forum selection clause. See pages 20 and 21.
  • Although a separate agreement between the parties in this case provided for a Pennsylvania forum for only some of the involved entities, the court enjoined the parties from proceeding outside of Delaware regarding claims involving the parties and entities that were subject to the separate agreement that contained a Delaware forum selection clause.

Duff v. Innovative Discovery LLC, C.A. No. 7599-VCP (Del. Ch. Dec. 7, 2012).

Issues Addressed: The Court of Chancery addressed the following issues in this opinion:  (1) Whether a forum selection clause providing for “sole” jurisdiction in California courts should be honored when a conflicting forum selection clause in a related agreement provided for jurisdiction in Delaware courts; (2) Whether 6 Del. C. § 18-111 provided a basis for equitable jurisdiction when the agreement that gave the Court of Chancery jurisdiction only provided for money damages; (3) Whether reformation as a remedy will be allowed when the complaint did not specifically request reformation but provided notice of the elements of that form of relief.

Brief Overview

This case arose in connection with the redemption agreements and related agreements through which two members of a Delaware LLC redeemed their interests.

One of the disputes was whether the agreement should be read to cap a total tax liability for the departing members, who each received a Schedule K-1 after the redemption closed, in an amount greater than they thought the agreement allowed.

This decision provides several useful statements of Delaware law that can be effectively highlighted with bullet points.

●          Section 18-111 of Title 6 of the Delaware Code provides for Chancery jurisdiction when agreements among members or managers and their LLC are sought to be enforced.

●          Chancery rejected the arguments that this statutory basis for jurisdiction was conditioned on equitable relief being sought, and also rejected the argument that the Court had the discretion to decline the jurisdiction if a complaint met the requirements of Section 18-111.

●          The Court also explained that the “cleanup doctrine” allows the Court to decide requests for relief that are not equitable as long as there is at least one basis for equitable jurisdiction at the time the complaint was filed.”  See footnotes 30 to 34.

●          The Court reiterated the now well-established Delaware standard for a motion to dismiss under Rule 12(b)(6) as allowing a claim to proceed when there is a mere “possibility of recovery.”  See footnotes 36 to 39.

●          Even though the complaint did not specifically request reformation as a count or a remedy, the Court allowed reformation to be sought as a remedy without amendment to the complaint because the Court explained that each of the elements for reformation were contained in the complaint, even if not so named, and that gave sufficient notice to the defendant.  See footnotes 51 through 65.

●          Equally important is the ruling that a forum selection clause in one agreement that required all suits to be filed in California was not given effect because it conflicted with a forum selection clause allowing for the jurisdiction of Delaware courts in a related agreement that was incorporated by reference.

●          Delaware law was applied which holds that where one contract incorporates another contract by reference, and the forum selection language is not “crystalline,” the Court will not interpret that forum selection clause to be exclusive.  See footnote 67 through 77.

Smartmatic Corp. v. SVS Holdings, Inc. and Sequoia Voting Systems, Inc.,(Del. Ch., April 4, 2008), read opinion here. This letter opinion involved the application of New York law to multiple disputes surrounding a stock purchase agreement. Because this blog focuses on Delaware law, the only point I want to highlight in this 24-page decision is a footnote that reiterates basic Delaware law to the effect that forum clauses are generally upheld, but even as here where the law of another state is applied to the substantive dispute, Delaware procedural and remedial law will still govern. That was key here because there were cross-motions for summary judgment filed along with motions for expedited proceedings and injunctive relief–and summary judgment was granted less than 3 weeks after the complaint was filed. Here is the money quote from footnote 21:

“As a general proposition, Delaware courts will recognize and enforce contractual choice-of law provisions if the selected jurisdiction has a material connection with the transaction.”
Trilogy Dev. Group, Inc. v. Teknowledge Corp., 1996 WL 527325, at *3 (Del. Super. 1996)
(citing Falcon Tankers, Inc. v. Litton Systems, Inc., 300 A.2d 231, 235 (Del. Super. 1972)). The current dispute involves interpretation of several agreements providing that New York law governs disputes resulting therefrom. The parties conduct business in New York. New York law thus governs interpretation of this contract. Procedural matters, however, are determined by Delaware law. See, e.g., Taylor v. LSI Logic Corp., 1998 WL 51742, at *4 n.19 (Del. Ch. Feb. 3, 1998); Lutz v. Boas, 176 A.2d 853, 857 (Del. Ch. 1961) (“It is well established that the law of  the forum governs questions of remedial or procedural law.”).

Forum selection clauses have been the focus of many decision highlighted on these pages over the last 18 years. But a pending appeal before the en banc U.S. Court of Appeals for the Ninth Circuit may have an outsized impact on Delaware litigation regarding this issue. In a case involving the Gap, Inc., the federal appellate court will decide whether a forum selection clause can be enforced to require claims to be filed in the Delaware Court of Chancery that would otherwise be filed in Federal Court.

A Reuters article by Alison Frankel describes the somewhat complex and nuanced issue as follows:

… to summarize ruthlessly, the key question is whether companies can avert Exchange Act derivative suits via forum selection provisions mandating litigation in Delaware Chancery Court, which does not have jurisdiction to hear Exchange Act claims – or whether the Exchange Act’s anti-waiver provision precludes enforcement of such forum selection clauses because they require shareholders to surrender a substantive right.

One indication of the importance of the issue is that several prominent former members of the Delaware Court of Chancery and Delaware Supreme Court, including three former Chancellors, have made a submission to the Ninth Circuit to support the enforceability of the forum selection clause at issue–taking a position that is contrary to a holding by the U.S. Court of Appeals for the Seventh Circuit involving Boeing.

The submission to the Ninth Circuit by the former members of the Delaware judiciary includes the following points regarding the forum selection clause at issue:

(1) the remedies available in this derivative action are duplicative of the remedies available in Delaware derivative actions; (2) the federal derivative claim at issue in this litigation is contingent on Delaware law both for its existence and for the definition of its critical metes and bounds; (3) where a stockholder claims that a false or misleading disclosure impaired the stockholder’s right to cast an informed vote, that claim is direct,  not derivative; (4) Delaware General Corporate Law Section 115 is irrelevant to the validity of the forum selection provision at issue in this litigation; and (5) the forum selection provision at issue in this litigation is enforceable under Delaware law.

This issue deserves a comprehensive analysis and commentary in the style of a law review article. Many others have published their views, and I expect that there will be no shortage of articles about this case available online. Stay tuned.

Supplement: About two hours or so after I posted the above commentary, I was regaled by an email from Prof. Mohsen Manesh, who along with Prof. Joseph Grundfest submitted an Amicus Curiae brief to the Ninth Circuit in the above-referenced case, that the former Delaware judiciary members, referenced above, agreed with in their submission to the Ninth Circuit.

The good professor informed me that he and Prof. Grundfest already authored a forthcoming article on this topic, which addresses both the federal and Delaware law issues, and it’s available at the following link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4274616

 

A recent Chancery decision is notable for the following quote:  “A party cannot act intentionally to create harm, then invoke equity in relief of that harm.  If that is not a traditional equitable maxim, it should be.”  Pentwater Capital Management LP v. Kaz, C.A. No. 2021-1087-SG, Slip op. at 14 (Del. Ch. April 8, 2022).

The introductory sentence to this opinion is also noteworthy: “The power of the common-law courts is largely limited to awards of damages. Not so with this court of equity which in addition to damages may use its equitable puissance to order litigants to refrain from, and even to take, actions.”  Slip op. at 1. The court in this case largely refused to enforce a forum selection clause due to delay and other procedural infelicities by the moving party.  (Use of the word “puissance” should be noted.)

Countless highlights of decisions and commentary have been provided on these pages regarding forum selection clauses.  Adding to that scholarship is a recent law review article, unrelated to this case, entitled: John F. Coyle, Contractually Valid Forum Selection Clauses, 108 Iowa Law Review (2022 Forthcoming).

 

 

 

A recent Delaware Court of Chancery decision must be read by anyone interested in the latest iteration of Delaware law concerning when a non-signatory may be bound by a forum selection clause in an agreement. In Florida Chemical Company, LLC v. Flotek Industries, Inc., C.A. No. 2021-0288-JTL (Del. Ch. Aug. 17, 2021), the court provides the most thorough analysis of the titular topic that this reader is aware of, with scholarly insights and copious citations that explain the theoretical underpinnings that support a decision to bind a non-signatory to a forum selection clause, and the prerequisites for doing so.

The court granted an anti-suit injunction to prevent litigation from proceeding in Texas that was contrary to the forum selection clause to which the court found both a parent corporation and its wholly-owned subsidiary to be bound, based on the extensive reasoning provided in this opinion.

Issue Presented:

The issue presented in this decision was whether a non-signatory can be bound to a forum selection clause based on equitable estoppel or promissory estoppel. The court needed to determine whether the Flotek Sub was bound by the agreement signed by the Flotek Parent company before deciding if a particular issue was covered by the forum selection clause. The court conducted a claim-by-claim analysis to determine if the claims filed in another forum were covered by the forum selection clause at issue.

Key Facts:

The Flotek Parent in this case was a party to a Purchase Agreement with a Delaware forum selection clause. But the Flotek Subsidiary involved in this case was not a party to that agreement. Rather, the Flotek Sub was only a party to a separate Supply Agreement–that was referred to in the Purchase Agreement as an exhibit. The Purchase Agreement’s Delaware forum selection provision covered disputes related to other agreements such as the Supply Agreement. The supply agreement did not contain a forum selection provision.

Key Takeaways:

• It’s always useful to be reminded of the well-worn prerequisites for a preliminary injunction which the court provides at page 12.

• A reminder of basic Delaware contract interpretation principles is provided at pages 14-15.

• The court observes a truism of Delaware contract law that when more than one agreement is part of a unitary transaction, and when one contract is referred to in another, they are all interpreted as one contract. See Slip op. at 17-18. However, the court explained that this principle alone would not apply to require the claims of the Flotek Sub to be prosecuted in Delaware. See Slip op. at 32.

• The court restated a three-part test for determining when a non-signatory would be bound by a forum selection clause. See Slip op. at 33-48. The court modified the three-part test announced in the Chancery decision in Capital Group, 2004 WL 2521295, at *5. The first two parts of the test are as follows:

(i) the agreement contains a valid forum selection provision;

(ii) the non-signatory has a sufficiently close relationship to the agreement, either as an intended third-party beneficiary under the agreement or under principles of estoppel (such as equitable estoppel or promissory estoppel).

• The third element of the test described in the Capital Group case was the subject of extensive analysis and modification in this opinion.

• The court discussed the principles of estoppel that would bind a non-signatory to a forum selection clause: (i) a non-signatory accepted a direct benefit from the agreement; or (ii) a non-signatory had a close relationship to the agreement; a signatory to the agreement controlled the non-signatory; and the circumstances established that the signatory agreed to the forum selection provision on behalf of its controlled affiliate. Slip op. at 34. See also footnote 5. The court described the direct-benefit test as resting on principles of equitable estoppel, and the foreseeability test as introducing a measure of promissory estoppel. The court discussed at great length both the direct-benefit test and the foreseeability test. See Slip op. at 35-39.

• The third element in the Capital Group test, which the court modified, included the “same-agreement rule” that limited when a non-signatory would be bound, but that the Court of Chancery in this case decided not to follow.

• Among the extensive reasons given for not following that “same-agreement rule” in the third element of the Capital Group test are the following:

“That outcome [if the same-agreement rule applied] runs contrary to the underlying principles of estoppel that lead to the forum selection provision binding the non-signatory. When a non-signatory accepts a direct benefit under an agreement, principles of equitable estoppel demand that the non-signatory accept the burdens associated with that agreement, including a forum selection provision.”

Slip op. at 44.

• As applied to the facts of this case, the principles of estoppel called for enforcing the Delaware forum provision against the Flotek Sub. The Flotek Parent promised to litigate all claims arising out of or relating to the Supply Agreement in Delaware through the Delaware forum provision in the Purchase Agreement which encompassed related agreements among those claims that were within the forum selection provision. If the same-agreement rule were applied, it would permit the Flotek Parent to escape that promise.

• This decision interpreted the third element of the Capital Group test as asking whether the claims at issue fall within the plain language of a forum selection provision.

• This decision conducted a claim-by-claim analysis of the causes of action in a suit filed in Texas to determine whether they fell within the Delaware forum provision for purposes of an anti-suit injunction against the Flotek Parent. The court’s extensive reasoning explained why the Delaware forum selection provision also binds the Flotek Sub to the same degree as the Flotek Parent.

• The court’s holding also is based on the reasoning that it would allow parties to “enter into overarching forum selection provisions in a primary agreement without requiring that every controlled affiliate become a party to that agreement.”  The court further reasoned that the approach announced in this decision also promotes freedom of contract by enabling a controller to enter into an overarching forum selection provision and avoids the need for separate provisions in each agreement or the potentially cumbersome solution of having every controlled affiliate become a party to a primary agreement.

A recent decision by a Delaware Court of Chancery provides a useful reference for the prerequisites to obtain an injunction in Delaware to enjoin a party from pursuing claims in violation of an exclusive forum selection clause [in another jurisdiction]. In SPay, Inc. v. Stack Media Inc., C.A. No. 2020-0540-JRS (Del. Ch. March 23, 2021), the Delaware Court of Chancery described what one must establish before obtaining an anti-suit injunction based on a forum selection clause. See pages 5 and 6, and footnotes 11-15.

The court also described the elements for a claim of fraud in the inducement. See pages 9 and 10.

Also of note in this ruling is a basic principle of Delaware contract interpretation which requires a court to view a contract claim in the context of the whole relationship between the parties in order to “give sensible life” to the contract. See footnote 28 and related text.

A recent Delaware Court of Chancery opinion interpreted related agreements that included forum selection clauses that were conflicting.  In Mack v. Rev Worldwide, Inc., C.A. No. 2019-0123-MTZ (Del. Ch. Dec. 30, 2020), the court addressed forum selection provisions in two related agreements which the court treated as one because they were incorporated by reference.

The court was asked to decide whether Delaware was the proper forum when one of the forum selection clauses required courts in Texas to address certain issues–and the other forum selection provision provided for a California court to hear disputes.

Key Takeaways:
● The court recited the well-established Delaware law about the enforceability of forum selection clauses generally.  Slip op. at 15 to 17.
● The court also addressed Rule 12(b)(3) motions challenging venue and whether arguments required to be made in an initial Rule 12 motion are waived if all the grounds for such motions are not explained, as well as the impact of a second motion under Rule 12 in connection with an amended complaint.  The court explained why those arguments would generally not be waived, even if all the grounds for such a motion were not recited in the original motion.
● The court also observed that in some instances non-signatories to a forum selection clause may also be bound by it.
● The court reasoned that unlike the typical situation where conflicting forum selection clauses choose Delaware and another forum, in this instance competing forum selection clauses both required litigation in states outside of Delaware. Therefore, the court determined that because neither of the parties chose Delaware, a court in one of the other two forums selected would need to decide which of them would address the merits of the case.