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Assessing Subject-Matter Jurisdiction in Chancery Court

December 18, 2013
Morris James LLP
Delaware Business Court Insider

Many parties seek to litigate in the Delaware Court of Chancery, but it is not always possible to do so. Sometimes the opposite occurs and a party does not wish to litigate in the Chancery, but that party cannot escape the court's jurisdiction. As a court of equity, the Chancery Court may acquire subject-matter jurisdiction over a matter in three different ways: (1) by a party's invocation of an equitable right, such as a fiduciary duty claim; (2) by a party's request for an equitable remedy such as specific performance when there is no adequate remedy at law; or (3) by the grant of statutory authority, such as 8 Del. C. § 111, which grants the Chancery Court authority over actions to interpret the provisions of corporate documents.

The court recently addressed the latter two methods of obtaining subject-matter jurisdiction in Darby Emerging Markets Fund v. Ryan, C.A. No. 8381-VCP (Del. Ch. Nov. 27, 2013). This action arose from a dispute concerning a minority shareholder's assertion of rights pursuant to a shareholders' agreement and the articles of association of a Cayman Islands company.

Plaintiff Darby Emerging Markets Fund L.P., a Cayman Islands limited partnership, owned approximately 26 percent of nonparty Atlantica Hotels International Ltd. (AHI), a Cayman Islands company. Defendants Gregory Ryan and Paulo de Brito were the controlling stockholders of AHI pursuant to the shareholders' agreement among AHI, Darby and defendant BIH Limited. Under the shareholders' agreement, Darby had certain rights in the event of a fundamental dispute concerning the management or strategic decision of AHI. If there was a fundamental dispute, Darby could convene a meeting of the board of directors in order to achieve a resolution of the dispute. If the parties were unable to resolve the dispute in 10 business days and Darby believed the differences were irreconcilable, then it could declare a deadlock and exercise its right to sell all of its shares to AHI. The articles contained the same provisions.

Disputes arose among the AHI stockholders concerning a sale of AHI. Darby preferred an immediate sale of AHI, while BIH and Ryan wished to wait a year or two before starting a sale process. On Feb. 12, Darby submitted a notice of dispute pursuant to the shareholders' agreement and requested a board meeting Feb. 15. At that meeting, Ryan acknowledged that the parties were in dispute resolution mode under the shareholders' agreement and the articles. The parties discussed a sale process but were unable to agree on how to conduct the sale process within the dispute resolution time period of 10 business days. Darby filed a complaint March 4 in the Chancery Court and BIH filed a complaint 24 minutes later in Superior Court. Darby filed a motion to transfer BIH's complaint to the Chancery Court, which the Superior Court granted April 29. The Chancery Court consolidated the cases and heard BIH and Ryan's motion to dismiss Darby's complaint.

In their motion to dismiss, BIH and Ryan argued that the Chancery Court lacked subject-matter jurisdiction over Darby's breach-of-contract claims and that Darby failed to state a claim. Darby argued that the court had subject-matter jurisdiction under 8 Del. C. § 111 because Section 111 gives the court jurisdiction to enforce certificates of incorporation and is not limited to Delaware corporations. Therefore, Darby claimed that Section 111 would apply to its breach-of-contract claims based on the articles. The court disagreed, stating that Darby identified no authority supporting its interpretation of Section 111. The court also noted that Section 111 was part of the Delaware General Corporation Law. Even assuming Section 111 was ambiguous, the court found that the legislative synopsis, which stated that the section expanded jurisdiction to a variety of matters relating to Delaware corporations, did not support Darby's position. Accordingly, the court found it could not exercise subject-matter jurisdiction based on the articles.

The court did find, however, that it could exercise subject-matter jurisdiction based on the equitable cleanup doctrine. Under the cleanup doctrine, the court may exercise subject-matter jurisdiction over all claims, even nonequitable claims, if at least one of the claims is equitable. In this case, the court concluded that BIH and Ryan had requested equitable relief in their Superior Court complaint. BIH and Ryan sought a declaratory judgment, but in the alternative requested that the Superior Court reset the 10-business-day resolution period if it decided not to grant any of the declaratory relief requested. The court viewed this reset request, which was not contained in the shareholders' agreement or articles, as an equitable remedy and not a remedy at law. Therefore, the court had subject-matter jurisdiction over Ryan and BIH's complaint. That complaint was consolidated with Darby's complaint in the Chancery Court so the court could exercise subject-matter jurisdiction over Darby's breach-of-contract claims under the cleanup doctrine. The court concluded that exercising jurisdiction under the cleanup doctrine made sense because BIH and Darby's claims were inextricably intertwined and it would undermine judicial efficiency to have the claims proceed in different courts. The court also found that Darby stated claims for breach of contract.

Based on this decision, parties should not rely on 8 Del. C. § 111 to invoke the Chancery Court's jurisdiction over a dispute arising from breach of a non-Delaware charter. Parties may, however, be able to invoke the court's jurisdiction by requesting equitable relief or by asserting an equitable claim. Parties that do not wish to litigate in the Chancery Court should make sure not to assert equitable claims or request equitable relief, even as an alternative claim.