Search results for: forum

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.

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.

A recent Court of Chancery decision is noteworthy for its analysis of the interfacing between a forum selection clause requiring Delaware jurisdiction and the law of a foreign country ostensibly granting exclusive jurisdiction to the courts of that foreign country. In AlixPartners, LLP v. Mori, No. 2019-0392-KSJM (Del. Ch. Nov. 26, 2019), the court explained, relying on Delaware Supreme Court decisions, that in only very limited circumstances will the law of a foreign country that provides for exclusive jurisdiction in that foreign country, divest Delaware courts of subject matter jurisdiction–especially when a forum selection clause between the parties before it provided for exclusive Delaware jurisdiction. (A graphic of the Roman forum seemed appropriate for this case.)

Brief Overview:

The facts of this case involve an intricate web of connected and overlapping agreements and related Delaware and foreign entities. For purposes of this short overview, the key facts are that an employee of an Italian subsidiary of a Delaware entity, who had an employment contract governed by Italian law, also signed a partnership agreement with the Delaware entity that had a non-solicitation clause and a Delaware forum selection clause. The employee was accused of downloading confidential information and related activity in violation of the Delaware agreement. However, Italian law required the claims under the employment agreement governed by Italian law to be pursued exclusively in the courts of the country of Italy, even without a forum clause in that agreement.

This case features an unusual twist on the many cases highlighted on these pages over the last 15 years involving the enforceability of forum selection clauses.

Key Takeaways:

  • The court rejected defenses based on the applicable law of Italy and the law of the European Union–which required that certain claims be pursued in Italy–and explained that such foreign laws did not divest the Delaware court of subject matter jurisdiction, especially in light of an applicable forum selection clause providing for Delaware courts to address the majority of the disputes at issue.
  • The court relied on two Delaware Supreme Court cases that addressed the very limited circumstances where a foreign country’s exclusive jurisdictions statute will divest the Delaware courts of jurisdiction. See Slip op. at 14 and footnotes 44 and 45.
  • The court also explained, relying on prior Delaware court decisions, that even a non-signatory can be bound to a forum selection clause–which is also considered to constitute consent to personal jurisdiction that satisfies a due process analysis. See pages 25 to 29.
  • The court explained that a forum selection clause supersedes any defense based on forum non conveniens as well as an argument based on international comity.
  • Nonetheless, the court found that the employment agreement involved in this case, that had an Italian choice of law clause (but no forum selection clause), supported the entry of a stay of the claims related to that employment agreement based on forum non conveniens, and that result is also supported by the fact that Italy had the most substantial relationship to all the facts, the issues and the witnesses, who likely would not be subject to compulsory process in Delaware.
  • But see footnote 138, in which the court requires the parties to meet and confer to determine if there is a way to stay the proceedings “in Delaware or Italy to avoid having both courts determine overlapping issues.” The court reserved its right to reconsider its ruling on the stay depending on the outcome of the parties’ efforts to determine whether duplication of efforts can be avoided by the courts of Delaware and Italy.

For readers who follow the law regarding forum selection clauses, a recent article by Professor Joseph Grundfest should be of interest. The good professor addresses the December 2018 Court of Chancery decision in Sciabacucchi v. Salzberg (highlighted on these pages), and the intersection of Delaware law and Federal law in the context of forum selection clauses and the internal affairs doctrine. The abstract follows to his article titled: The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi

Abstract

The Securities Act of 1933 provides for concurrent federal and state jurisdiction. Securities Act claims were historically litigated in federal court, but in 2015 plaintiffs began filing far more frequently in state court where dismissals are less common and weaker claims more likely to survive. D&O insurance costs for IPOs have since increased significantly. Today, approximately 75% of defendants in Section 11 claims face state court actions. Federal Forum Provisions [FFPs] respond by providing that, for Delaware-chartered entities, Securities Act claims must be litigated in federal court or in Delaware state court.

In Sciabacucchi, Chancery applies “first principles” to invalidate FFPs primarily on grounds that charter provisions may only regulate internal affairs, and that Securities Act claims are always external. In so concluding, Sciabacucchi adopts a novel definition of internal affairs that is narrower than precedent, and asserts that plaintiffs have a federal right to bring state court Securities Act claims. It describes all Securities Act plaintiffs as purchasers who are not owed fiduciary duties at the time of purchase. The opinion constrains all actions of the Delaware legislature relating to the DGCL to comply with its novel definition of “internal affairs.”

Sciabacucchi’s logic and conclusion are fragile. The opinion conflicts with controlling U.S. and Delaware Supreme Court precedent and relies critically on assumptions of fact that are demonstrably incorrect. It asserts that FFPs are “contrary to the federal regime” because they preclude state court litigation of Securities Act claims. But the U.S. Supreme Court in Rodriguez holds that there is no immutable right to litigate Securities Act claims in state court, and enforces an agreement that precludes state court Securities Act litigation. Sciabacucchi assumes that Securities Act plaintiffs are never existing stockholders to whom fiduciary duties are owed. But SEC filings and the pervasiveness of order splitting conclusively establish that purchasers are commonly existing holders protected by fiduciary duties. The opinion fears hypothetical extraterritorial application of the DGCL. To prevent this result, it invents a novel definition of “internal affairs” that it applies to constrain all of the Legislature’s past and future activity. But the opinion nowhere addresses the large corpus of U.S. and Delaware Supreme Court precedent that already precludes extraterritorial applications of the DGCL. It thus invents novel doctrine that conflicts with established precedent in an effort to solve a problem that is already solved. The opinion’s novel, divergent definition of “internal affairs” also conflicts with U.S. and Delaware Supreme Court precedent that the opinion nowhere considers.

Sciabacucchi is additionally problematic from a policy perspective. By using Delaware law to preclude a federal practice in federal court under a federal statute that is permissible under federal law, Sciabacucchi veers Delaware law sharply into the federal lane and creates unprecedented tension with the federal regime. Its narrow “internal affairs” definition invites sister states to regulate matters traditionally viewed as internal by Delaware, and advances a position inimical to Delaware’s interests. By propounding its divergent internal affairs constraint as a categorical restriction on the General Assembly’s actions, past and future, the opinion causes the judiciary to intrude into the legislature’s lane. And, data indicate that the opinion in Sciabacucchi caused a statistically and economically significant decline in the stock price of recent IPO issuers with FFPs in their organic documents.

In contrast, a straightforward textualist approach would apply the doctrine of consistent usage and use simple dictionary definitions to preclude any extension of the DGCL beyond its traditional bounds. Textualism avoids all of the concerns that inspire the invention of a divergent “internal affairs” definition. Textualism does not require counter-factual assumptions, conflict with U.S. or Delaware Supreme Court precedent, cause Delaware to constrain federal practice in a manner inconsistent with federal law, or advocate policy positions inimical to Delaware’s interest. Textualism also interprets the DGCL in a manner that profoundly constrains the ability of all Delaware corporations to adopt mandatory arbitration of Securities Act claims. Textualism validates FFPs in a manner that precludes the adverse, hypothetical, collateral consequences that animate Sciabacucchi’s fragile analysis, without generating Sciabacucchi’s challenging sequelae.

Keywords: Securities Act, forum selection, Delaware, jurisdiction, litigation, Section 11, charters, by-laws, internal affairs, federal forum provisions

JEL Classification: K22, K41

Suggested Citation

Grundfest, Joseph A., The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi (September 12, 2019). Rock Center for Corporate Governance at Stanford University Working Paper No. 241. Available at SSRN: https://ssrn.com/abstract=3448651 or http://dx.doi.org/10.2139/ssrn.3448651

 

There are many decisions highlighted on these pages ordering the enforcement of forum selection clauses. A recent transcript ruling is notable for granting expedited proceedings, without ruling on the merits, for a plaintiff who sought to enforce a forum selection clause even though the plaintiff was not a signatory to the agreement with the forum selection clause.

The plaintiff in this case is a law firm seeking to enforce a forum selection clause in a release and settlement agreement that released the attorneys of the signatory. See Dentons US LLP, v. Platt, C.A. No. 2019-0177-MTZ, transcript (Del. Ch. March 20, 2019). Regular readers are aware that transcript rulings may be cited in Delaware briefs.

A forum selection clause, controlled by Austrian law, was recently interpreted by the Delaware Court of Chancery as a mandatory forum selection clause requiring the dispute to be litigated in Vienna.  In Germaninvestments A.G. v. Allomet Corporation, C.A. No. 2018-0666-JRS (Del. Ch. May 23, 2019), the court also determined that the choice of law provision designating Austrian law and the forum selection clause requiring litigation in Vienna were both enforceable.

N.B. The Delaware Supreme Court reversed this decision in an opinion dated Jan. 27, 2020.

Procedural Background:

The court observed that Rule 12(b)(3), which addresses improper venue, was “the proper procedural rubric” for addressing a motion to dismiss based on a forum selection clause.  The court also explained that a motion under Rule 12(b)(3) does not “shackle” the court to the plaintiff’s complaint, but rather the court is permitted to consider extrinsic evidence from the outset.  See footnote 63. 

The court also noted that Chancery Rule 44.1 provides the procedure for presenting foreign law to the court to allow the court to interpret a document governed by foreign law.  The rule provides that a party is required to give notice in the pleadings or other reasonable written notice that the law of a foreign country will control.  Prior decisions have recognized that expert affidavits may be considered along with expert testimony.

Key Statements of Law:

·     The court explained the well-settled rule that Delaware courts will give effect to the terms of private agreements providing for forum selection clauses.  See footnote 64 and accompanying text.

·     In order for a forum selection clause to be considered exclusive under Delaware law, the “contractual language must be crystalline in stating the parties’ intent to litigate only in the designated forum.”  See footnote 66.

·     The Delaware courts also generally honor contractually-designated choice of law provisions as long as the jurisdiction selected “bears some material relationship to the transaction.”  See footnote 70.

·     A key issue is whether the forum selection clause states that it is exclusive, or whether the language will be construed as merely permissive. See footnote 80 (citing Delaware cases holding that a mandatory forum selection clause must make clear that the litigation is required to proceed in the designated forum).

·     In this instance, the applicable Austrian law applied to require litigation only in Vienna.

·     The court also rejected the argument that DGCL Section 168 applied because the statute relates to replacements for lost stock certificates, and in this instance the issue was whether the original stock certificate should have been issued.

A recent Delaware Court of Chancery decision is noteworthy for its finding that the adoption of a forum selection bylaw implied consent to jurisdiction to the extent that it required lawsuits by stockholders against the company to be filed in Delaware.  See In re: Pilgrim’s Pride Corp. Derivative Litigation, C.A. No. 2018-0058-JTL (consol.) (Del. Ch. Mar. 15, 2019).

Background:

The basic facts involved a challenge to the sale of a company that was orchestrated by the controlling stockholder who needed cash.  On the same day as the acquisition, the board of the nominal defendant approved a Delaware forum selection bylaw.  The court discussed the applicable standard of review and other topics, but the jurisdictional issues are more notable.

Key Takeaways:

·     The Court held that the controlling stockholder who appointed a majority of the board of the nominal defendant agreed to personal jurisdiction when it caused the company to adopt the Delaware forum selection bylaw—for claims covered by the forum bylaw.

·     In rejecting the parent’s motion to dismiss for lack of jurisdiction, the Court explained that:

“on the same day that the Acquisition was approved, the Board voted unanimously to adopt a forum-selection bylaw, with the Director Defendants whom Parent controlled constituting a five-member majority of the nine-member Board.  The bylaw made the Delaware courts the exclusive forum for breach of fiduciary litigation involving the Company.  This decision holds that on the facts alleged, Parent implicitly consented to personal jurisdiction in this court for purposes of claims falling within the forum-selection bylaw.”

The court explained, however, that the better practice would be to specifically provide, when drafting contractual provisions, that personal jurisdiction is expressly agreed to in a particular form.  See footnotes 5 to 8 which provide voluminous citations to authority and learned commentary on this topic.

There are many forum-selection clause cases featured on these pages, but this decision explores an aspect of forum-selection clauses that is not often analyzed directly by Delaware courts, as compared to other nuances.

A recent seminal decision of the Delaware Court of Chancery must be included in the lexicon of every lawyer who wants to understand the boundaries of Delaware law on forum-selection clauses in corporate documents. In the case of Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018), the Court determined that a forum-selection clause in a certificate of incorporation was invalid and ineffective to the extent that it purported to “require any claim under the Securities Act of 1933 to be brought in federal court” (the “Federal Forum Provisions”).

Why this Case is Noteworthy: The court reasoned in its holding that: “The constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law.  In this case, the Federal Forum Provisions attempt to accomplish that feat.  They are therefore ineffective and invalid.”

Overview of Key Points:

This opinion is destined to form part of the bedrock of foundational Delaware corporate decisions and could rightly be the subject of a lengthy law review article, but for purposes of this quick blog post, I will merely highlight a few of the more notable excerpts in bullet points.

  • A substantial basis for the court’s reasoning was a prior decision from the Court of Chancery which upheld the validity of corporate bylaws that required claims based on the internal affairs doctrine and related claims to be brought exclusively in the Court of Chancery. That decision by the current Chief Justice of Delaware, writing at the time as the Chancellor, was Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. June 25, 2018).
  • Although the Boilermakers case involved bylaws, the Sciabacucchi decision explained why that same reasoning applied to a certificate of incorporation which is governed by similar provisions in the Delaware General Corporation Law (DGCL). The court in Sciabacucchi explained that the reasoning in Boilermakers focused on the ability to enforce forum-selection clauses that related to the internal corporate matters of a Delaware corporation as opposed to external matters, such as claims arising under the Securities Act of 1933.
  • The Court buttressed its reasoning by referring to the codification of the Boilermakers decision, shortly after its publication, by means of the adoption of a new Section 115 of the DGCL. In connection with that new DGCL section, the Delaware General Assembly also passed new amendments to Sections 102 and 109 of the DGCL which prohibit fee-shifting provisions in the certificate of incorporation or bylaws particularly in connection with claims related to the internal affairs of a corporation as defined by DGCL Section 115.
  •  The Court’s reasoning was also supported by reference to what the court referred to as “first principles.” Those first principles included several basic tenets of corporate law such as the following: (i) Although the document filed with the state that gives rise to an artificial entity such as a corporation, and confers powers on it, is a contract, it is not an ordinary private contract among private actors; (ii) The certificate of incorporation is a multi-party contract that includes the State of Delaware. Unlike an ordinary contract, it also includes terms by reference that are imposed by the DGCL; (iii) Unlike an ordinary contract, a charter can only be amended to the extent that it complies with the DGCL; (iv) The DGCL specifies what provisions a charter may or may not include; and (v) Although the courts enforce both types of contracts, when enforcing relationships created by the corporate contract, the courts use an overlay of fiduciary duty. See pages 38 to 42 and footnotes 111 to 125.
  • A thorough analysis of the contours and policy behind the internal affairs doctrine is an important feature of this opinion. See, e.g., pages 41-46.

In sum, the court reasoned that the “constitutive documents of a Delaware corporation cannot bind the plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law.” The opinion provides extensive citations to substantial scholarship, case law and statutes.

Prof. Ann Lipton provides extensive insights in her blog post about this case with links to her articles on the topic. The good professor’s scholarship on this issue was also cited by the court in the above opinion.

Many cases have been highlighted on this blog regarding forum-selection clauses in private agreements. See, e.g., here and here. In some of the posts on these pages about cases involving forum-selection clauses, a graphic of the Roman Forum adds color as well as an etymological connection.

SUPPLEMENT: Professor Stephen Bainbridge, a prolific corporate law scholar, kindly links to this post on his blog.

A recent Delaware Court of Chancery decision recognized that a non-signatory to an agreement may enforce the provisions of a forum-selection clause under certain conditions. Although this holding is counterintuitive, there are other Delaware decisions which recognize that in some circumstances a non-signatory to an agreement may either enjoy the benefits of that agreement or may enforce certain terms of that agreement. See, e.g., selected cases addressing this topic on this blog over the last 13 years.

In the case of Lexington Services Ltd. v. U.S. Patent No. 8019807 Delegate, LLC, C.A. No. 2018-0137-TMR (Del. Ch. Oct. 26, 2018), two important principles of Delaware law regarding enforceability of forum-selection clauses were explained. This case involved multiple litigations in several jurisdictions, including a foreign country, regarding the disputed transfer of rights in a U.S. patent.  (The photo nearby of the Roman Forum seems appropriate to add color to an overview of a case involving a forum-selection clause.)

The first principle of well-established Delaware law recognized in this decision was the enforceability generally in Delaware of forum-selection clauses.  They are regarded as presumptively valid and should be specifically enforced absent a showing that the enforcement would be unreasonable and unjust for reasons such as fraud. See footnote 28.  Mere inconvenience or additional expense is not the test of unreasonableness. Id.

Next, this decision recognizes that Delaware law allows non-signatories to invoke forum-selection clause provisions in an agreement where they are “closely related to one of the signatories such that a non-party’s enforcement of the clause is foreseeable by virtue of the relationship between the signatory and the parties sought to be bound.” See footnote 43.  Citing well-settled case law, the court added that, for example, officers and directors of an entity subject to a forum-selection clause may invoke its benefits because they were closely involved in the creation of the entity and because they were being sued as a result of acts that directly implicated the negotiation of the agreement that lead to the entity’s creation. See footnote 44.  Likewise in this case, the defendant is an entity created to receive the patent, and the ownership of the patent and assignment to a different entity such as the defendant was foreseen in the applicable agreement.  The party being sued for his actions as a manager of the defendant entity was foreseeable and is closely related to the agreement.

Relying on prior cases, the court noted that it typically grants motions to dismiss under Court of Chancery Rule 12(b)(3) based upon a forum-selection clause where the parties use express language clearly indicating that the forum-selection clause excludes all other courts before which those parties could otherwise properly bring an action. See footnote 31.  In this case, the court imposed a stay due to the possibility that one or more issues would return to Delaware after certain aspects of the case were resolved in the original non-Delaware forum called for in the agreement.

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.