Chancery Dismisses Action For Plaintiffs’ Failure to Join Indispensable Parties
Under Court of Chancery Rule 12(b)(7), a defendant may move for dismissal because of a failure to join an indispensable party as described in Rule 19. Rule 19 provides that such parties include persons who, “(1) in the person’s absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person’s absence may (i) as a practical matter, impair or impede the person’s ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest.” If such a person exists in the controversy, the Court may join the person if feasible. If joinder is not feasible, Rule 19(b) requires the Court to “determine whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed, the absent person being thus regarded as indispensable.” Rule 19(b) offers a nonexclusive list of factors to consider when determining whether the action can proceed without the absent party’s involvement. Under Rule 12(h)(2), motions to dismiss for failure to join indispensable parties may be raised up to and including trial, and are not automatically waived as a result of not raising the argument in the first instance.
In Germaninvestments AG, the plaintiffs sought to enforce a “Restructuring and Loan Agreement” (the “Agreement”) in which the ownership and assets of the defendant corporation and the defendant LLC (“Defendants”), both Delaware companies, were to be transferred to the nominal plaintiff, an Austrian holding company (“HoldCo”) formed for this purpose. The individual plaintiff (“Herrling”) was to hold 50% of HoldCo’s ownership, and a non-party (the beneficial owner of the Delaware corporation) was to hold the other 50%. Throughout the negotiation of the transaction, Herrling and Germaninvestments AG (together with HoldCo, “Plaintiffs”) allegedly transferred several million dollars to keep Defendants operating. Before the ownership and asset transfer was consummated, however, negotiations between the parties broke down, and the Defendants refused to proceed further with the transfer and also refused to return the full amount of consideration received until that point. Plaintiffs filed a complaint in the Court of Chancery seeking, inter alia, specific performance of the Agreement and several supplemental agreements thereto.
Defendants asserted several defenses, including a motion to dismiss for failure to join an indispensable party. Specifically, Defendants argued that Plaintiffs failed to join the beneficial owner of the Delaware LLC, whose assets were to be transferred under the Agreement, as well as the beneficial owner of the Delaware corporation, whose stock was to be transferred according to the Agreement. Defendants argued that without joining these parties, they would be unable to protect their interests relating to the subject of the action.
In response, Plaintiffs argued that the Court could accept as true the allegation that the non-parties had already fully performed their obligations under the Agreement and, thus, were no longer necessary parties because their rights under the contract need not be adjudicated.
The Court disagreed with Plaintiffs, however, explaining that, under Rule 19(a)(1) “there [was] substantial risk that the court cannot accord complete relief” without those parties being joined in the action and that, despite Plaintiffs’ contrary assertions, “[a]ny judgment the Court might enter for Plaintiffs necessarily would involve a determination that contracts transferring [the nonparties’] interests in [Defendants] to [Plaintiffs] are valid and enforceable." In that regard, the Court explained that it “need not and [would] not conclude that the absent parties no longer have rights simply because Plaintiffs allege that to be so.” The Court further explained that Delaware law recognizes that “when litigation places at issue the validity or enforceability of property rights, such as a party’s rights under an agreement, then the holders of the property rights have an interest in the subject matter of the action such that they should be joined as parties.” Furthermore, “when shares of a Delaware corporation are in dispute, and all parties with an interest in that property have not been joined, there is a substantial risk that the court cannot accord complete relief in the [missing parties’] absence.”
After finding that the nonparties were indispensable, the Court determined that joinder was not feasible because the nonparties were not Delaware residents and were not otherwise subject to personal jurisdiction in Delaware. The Court therefore determined that the action could not “in equity and good conscience” proceed without the absent parties and dismissed the complaint accordingly.