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Delaware Expands Jurisdiction Over Directors

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July 23, 2015
By: Edward M. McNally
Delaware Business Court Insider

A recent but little-known decision by a Delaware court may have substantially expanded the state's jurisdiction over the directors of a Delaware corporation. Delaware has long had a director-consent-to-service statute: 10 Del. C. Section 3114 (the consent statute). Under that statute, consenting to serve as a director of a Delaware corporation also concomitantly gives consent to be sued in a Delaware court. However, the statutory language seemed to limit such suits to those involving a "violation of [the director's] duty in such capacity" as a director. Focusing on that language, for almost 25 years, Delaware courts held that the consent statute could only be used if at least one count of a complaint alleged the director-defendant had breached a fiduciary duty in his role as a director. Hence, absent such a claim, the consent statute was thought not to confer jurisdiction over a director by the Delaware courts.

The June 3 decision in Ting v. Silver Dragon Resources, Del. Super. C.A. No. N14C-12-067 WCC, however, may have changed Delaware law to make it possible to use the consent statute more broadly to sue a director of a Delaware corporation in Delaware courts. Ting upheld jurisdiction over a Delaware director with no contacts with Delaware "although no fiduciary duty claims were alleged" in the complaint. This raises the possibility that the director of a Delaware corporation may now be sued in Delaware for claims not arising out of his or her role as a director. That possibility is a major issue for Delaware law.

The facts of the Ting case are unusual. The plaintiff was part of an investment group that sought to take over Silver Dragon Resources Inc. Silver Dragon was controlled by defendant Marc Hazout. The proposed deal involved an investment group loaning Silver Dragon about $3.5 million under an agreement whereby the investors would name all but one of the directors of Silver Dragon. Unfortunately for them, the investors put up over $1 million before the agreement was fully executed. The complaint alleged that Hazout then took most of that money for himself and refused to have the agreement signed or carried out.

This left the plaintiff-investors with a real jurisdictional problem. They apparently did not own stock in Silver Dragon and thus could not readily claim Hazout had violated his director fiduciary duties to them as stockholders or even to Silver Dragon. Only stockholders of a Delaware corporation could make such a claim. Nonetheless, the plaintiffs sued in Delaware, relying in part on the consent statute to get jurisdiction over Hazout. The court agreed it had jurisdiction and, in doing so, for the first time permitted the use of the consent statute to obtain jurisdiction over a director-defendant who was not being sued for a breach of fiduciary duty.

How far, then, does the Ting decision go in permitting suits against Delaware directors? To begin with, it is important to appreciate that the court in Ting limited its holding to a case involving "alleged misconduct ... adverse to [the director's] fiduciary duty to" his company. In other words, what Hazout was accused of doing was a "violation of" his director duties—conduct that fell within the very wording of the consent statute.

That is an important point for two reasons. First, Hazout was on notice that he could be sued in Delaware for conduct he took in his capacity as a director of a Delaware corporation. This is significant because the consent statute came into being after the U.S. Supreme Court had ruled that it was unconstitutional to sequester the stock of a Delaware director to force him to submit to the jurisdiction of a Delaware court. The consent statute was adopted to cure the problem of how to require directors of a Delaware corporation to submit to the jurisdiction of a Delaware court. It seems only fair that if they "consent" to do so, that should be constitutional.

Second, by basing jurisdiction on wrongful conduct as a director, the Ting court limited its holding. Merely acting as a director, such as by voting to approve a contract, will not expose a director to suit under the consent statute absent a claim for breach of fiduciary duty. Similarly, just because a person happens to be a director of a Delaware corporation will not mean he may be sued in Delaware for his actions in some capacity other than as a director. The consent statute does not permit that jurisdiction even under the Ting decision. Again, that limitation serves to support the fairness (and hence the constitutionality) of the consent statute. But equally important, by limiting what sorts of claims a director might have to defend in Delaware, Ting follows the Delaware tradition of a balanced approach to asserting Delaware's authority over persons outside of Delaware.

In short, Ting does represent an expansion of the use of the consent statute. But, that expansion could prove to be modest if this interpretation of Ting is correct. We shall see as future cases apply Ting to new claims against Delaware directors. Moreover, as the Delaware Limited Liability Company Act has a consent-to-be-sued provision for managers (6 Del. C. Section 18-109) that is similar to the consent statute, Ting may apply to LLCs' managers, too.

Delaware Business Court Insider  |  July 23, 2015

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