Delaware Business Litigation Report

Court Finds LLC Manager Consent Statute Authorizes Personal Jurisdiction for Tort Claims Related to the Company, Not Just Alleged Breaches of Managers’ Duties; However, Court Dismisses Investor Defendants with Insufficient Delaware Contacts

CLP Toxicology, Inc. v. Casla Bio Holdings LLC, C.A. 2018-0783-PRW (Del. Ch. Jun. 29, 2020) & NC18C-10-332 PRW CCLD (Del. Super. Jun. 29, 2020)

In both the corporation and LLC contexts, Delaware law employs consent statutes, which authorize personal jurisdiction over officers and directors of corporations and over managers (in name or in fact) of LLCs. Despite broad language in such statutes, courts traditionally interpreted the statutes to apply to only claims related to breaches of fiduciary or statutory duties. As demonstrated here, however, the modern trend is to interpret consent statutes to apply to a broader range of claims related to the entity.

In consolidated cases from the Superior Court and Court of Chancery, Plaintiff-Purchaser alleged fraud in connection with the acquisition of a biomedical company under a Securities Purchase Agreement (“SPA”). Plaintiff’s complaint named not only the sellers but also various executives, investors and related entities. According to Plaintiff, the Seller Defendants and executives (“Individual Defendants”) fraudulently induced it to enter a Securities Purchase Agreement, the related entities and Principal Investor Defendants aided the fraud, and the remaining Investor Defendants transferred sale proceeds to insulate the proceeds from recovery by Plaintiff. The various Defendants moved to dismiss for failure to state a claim and lack of personal jurisdiction.

The Court found it had jurisdiction over the Individual Defendants under § 18-109 of Delaware’s LLC Act.  Under § 18-109, individuals acting as managers of Delaware LLCs consent to personal jurisdiction “in all civil actions or proceedings ... involving or relating to the [LLC’s] business ... or a violation by the manager ... of a duty” to the company or a member thereof. The Court rejected Defendants’ reliance on earlier precedent that limited 18-109’s reach “to actions involving alleged breaches of a fiduciary or statutory duty owed to the corporation or its stockholders by the non-resident officer or director.” Instead, the Court looked to the Delaware Supreme Court’s more recent decision in Hazout v. Tsang Mun Ting, 134 A.3d 274 (Del. 2016), in which defendants made a similar argument regarding § 18-109’s corporate analogue, 10 Del. C. § 3114.  Relying on § 3114’s plain language, the Hazout Court concluded that personal jurisdiction is proper “over a non-resident officer or director of a Delaware corporation in any civil action in which the corporation is a party” and the officer or director is a necessary and proper party. In so doing, the Hazout Court rejected the more restrictive readings of Delaware’s consent statutes.

Finding that Hazout’s logic applied just as readily to § 18-109’s language, the Court concluded that jurisdiction was proper over the Individual Defendants. Plaintiff’s claims involved Individual Defendants’ negotiation of contracts in their official capacity that involved a change of control of a Delaware entity. Thus, regardless of Individual Defendants’ official titles, the claims against them fell within § 18-109’s language. Adding this to the SPA’s provisions agreeing that disputes would be decided in a Delaware forum using Delaware law, the Court concluded that personal jurisdiction was proper and foreseeable.

By contrast, the Court dismissed Plaintiff’s claims against the Investor Defendants and one of the related entities (the “Non-Delaware Defendants”) for lack personal jurisdiction. As alleged, the Non-Delaware Defendants owned an interest in a Delaware entity, contracted with a separate Delaware entity, and received passive income from a Delaware entity. But Delaware “contacts” of this kind, without more, did not suffice to confer jurisdiction. Likewise, the Non-Delaware Defendants’ contacts were not so extensive and continuing to allow the assertion of general jurisdiction, and the purpose of the underlying transaction was not the creation of a new Delaware entity. Moreover, because Plaintiff could not establish a prima facie case for personal jurisdiction over the Non-Delaware Defendants, the Court denied jurisdictional discovery. Under the circumstances, jurisdictional discovery would have amounted to “fish[ing] for a possible basis” for jurisdiction, rather than attempting to confirm properly alleged jurisdictional contacts. Consequently, the Court dismissed the Non-Delaware Defendants.

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