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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Delaware Supreme Court Sets A New Standard And Clarifies The Spectrum Of Forum Non Conveniens Standards
Under the Cryo-Maid factors, a Delaware court may dismiss a suit on forum non conveniens grounds only after the defendant shows that litigating in Delaware would impose overwhelming hardship. Under the McWane doctrine, when a Delaware action is not the first-filed suit on the subject matter because there is a prior pending suit elsewhere, however, a Delaware court has discretion to dismiss or stay the later-filed suit whether or not the defendant faces overwhelming hardship. This decision deals with a particular convergence of these two doctrines, answering the question: when a first-filed suit elsewhere is procedurally dismissed and thus no longer pending, is a motion to dismiss for forum non conveniens in a later-filed Delaware suit still subject to the more plaintiff-friendly overwhelming hardship standard? The short answer is no. But that doesn’t mean the suit should be subject to the more defendant-friendly McWane standard instead. Rather, as the Court holds here, there is a middle ground, tilted to neither plaintiff nor defendant. The Court rules that the Cryo-Maid factors relevant to a showing of overwhelming hardship control the analysis, but requires only that the factors favor dismissal, rather than establish overwhelming hardship.
Under the Papendick v. Bosch decision, incorporating an entity in Delaware may give rise to long-arm jurisdiction over the entity’s parent, even a foreign one with no other contacts with the State of Delaware. The act of incorporating in Delaware, however, must be an “integral component” of the alleged wrongdoing. This decision explains how to meet that test, which is heightened slightly after the plaintiff conducts jurisdictional discovery. The test was satisfied in this case based on allegations that the defendant, desiring to enter the U.S. market, misappropriated the plaintiff’s trade secrets and incorporated a Delaware entity to profit from the misappropriation.
Merely incorporating a business in Delaware does not automatically subject you to personal jurisdiction in the Delaware courts. But, when the act of incorporation is part of the events forming the basis for a claim, it may be enough. This decision explains the parameters of jurisdiction based on incorporating in Delaware.
Court Of Chancery Declines To Exercise Personal Jurisdiction Based On A Choice Of Law Provision In A Stockholders’ Agreement
This decision holds that owning shares in a closely-held Delaware corporation and entering into a stockholders’ agreement containing a Delaware choice of law provision is not a sufficient basis, standing alone, for a Delaware court to exercise personal jurisdiction over a non-resident under Delaware’s long-arm statute. While these circumstances may be factors in the long-arm and due process analysis, more is required to purposefully avail oneself of Delaware law and be subject to personal jurisdiction in its courts.
As this decision explains, the Court of Chancery will not have jurisdiction based on the claim an injunction is needed to force a defendant to comply with the proper interpretation of a contract. Rather, the presumption is that once the Superior Court interprets the contract that the defendant will honor that judgment.
The Delaware LLC Act provides for personal jurisdiction in Delaware over those who manage a Delaware LLC—i.e., those who are named as managers in the LLC agreement, and those who participate materially in the LLC’s management. This decision explains what it means to participate materially in the LLC’s management by a thorough analysis of the precedents. In effect, it means the person must have the management role usually undertaken by a corporate director—a control or decision-making role. Just acting as an officer is not enough when that person is subject to the control of others.
Delaware recently amended Section 111 of the DGCL to confer jurisdiction on the Court of Chancery over certain actions arising out of asset sales. The intent was not to divest Superior Court of jurisdiction when the dispute was not really over how to interpret a sale or merger agreement’s terms, an area of Chancery expertise, but more of a straightforward asset sale. This decision explains that distinction.
This is a significant decision because it explains how filing suit somewhere other than in the contractually-designated jurisdiction does not toll the time to sue in the proper jurisdiction. Hence, if the improperly-filed suit is dismissed, it may be too late to bring suit in the proper jurisdiction.
Under Delaware law, an entity doing any business in Delaware must register to do so and thereby appoint a registered agent to receive process. For years this was held to confer general jurisdiction over that entity, even for claims that did not arise out of the business it did in Delaware. This decision reverses that old law and confines jurisdiction over non-Delaware entities to claims that arise out of what they have done in Delaware. Of course, there are still exceptions to that general rule, such as when an entity expressly agrees to jurisdiction in Delaware.
Rejecting the Court of Chancery’s narrow reading of the director/officer implied consent statute in Hana Ranch, Inc. v. Lent, 424 A.2d 28, 30 (Del. Ch. 1980), an interpretation that had been followed by lower courts for decades, the Delaware Supreme Court ruled that a non-resident officer sued in Delaware is subject to personal jurisdiction in actions brought “by or on behalf of, or against” the corporation if that officer “is a necessary or proper party” to the case, even if the case does not involve an alleged breach of the officer’s fiduciary or statutory duties. More ›
Under the fairly new provisions of Section 205 of the DGCL, the Court may validate certain “defective corporate acts,” including “any act or transaction purportedly taken by or on behalf of the corporation that is … within the power of a corporation …, but is void or voidable due to a failure of authorization.” More ›
This is the rare decision where a suit against a Delaware entity is dismissed on the basis that Delaware is a too inconvenient forum. When foreign law is both unclear and will establish the basis for any relief, a foreign plaintiff may find it hard to sue in Delaware unless the suit contains the allegation that the very formation of the Delaware entity is part of the alleged wrong.
This decision applies Delaware’s forum non conveniens law to a suit against a Delaware corporation arising out of events in India. The analysis is helpful for other cases because it deals with all the various factors to be considered, such as availability of discovery in a foreign country. As a result, it is a precedent for upholding jurisdiction over a Delaware entity is proper even if the events occurred far away.
This is an interesting decision for its discussion on what must be pled to obtain Chancery jurisdiction in a claim seeking to pierce the corporate veil. It is not enough to just allege the entity was used to defraud. Rather, the complaint must meet the more exacting standards set out in this opinion.