POSTED IN DELAWARE SUPREME COURT
UPDATES
The Delaware Supreme Court recently interpreted the statutory basis for
imposing jurisdiction on directors and officers of Delaware corporations in a
manner that is broader than the Delaware courts have held for the
last 30 years. Hazout v. Tsang, No. 353, 2015 (Del. Supr., Feb. 26, 2016).
Directors and officers of Delaware corporations are deemed to consent to
the personal jurisdiction of the Delaware courts by virtue of their agreement
to serve as directors and officers of Delaware corporations. The
prevailing interpretation of the applicable statute, Section 3114 of Title 10
of the Delaware Code, for the last 30 years or so, has been to limit personal
jurisdiction over directors and officers to claims against them in their
capacity as directors and officers only for such things as breach of fiduciary
duties or claims by stockholders that they violated sections of the Delaware
General Corporation Law.
In essence, for reasons related to concern over
minimum contacts required by due process under the U.S. Constitution, the case
law over the last three decades has, in the words of the Supreme Court,
“excised” a phrase in Section 3114 that allows the imposition of
jurisdiction where a director or officer was merely a “necessary or proper
party.”
This opinion has now rejected more than a generation of cases interpreting
Section 3114 to the extent that the Delaware courts (until a few days ago), did
not enforce the provision of the statute that allowed for the imposition of
jurisdiction over directors or officers when they were merely “necessary or
proper parties,” even if there was no breach of fiduciary duty or related
claim.
Delaware’s high court based its thorough analysis on statutory construction
principles and the intent of the General Assembly. The holding also
acknowledged the benefit, and likely legislative intent, of efficiency and
avoiding piecemeal litigation.
The Supreme Court reasoned that there is no constitutional impediment to
its conclusion because the statute requires that there be a close nexus between
the claims against the corporation and those against the officer and director,
and “that the claims against the officer and director involved conduct taken in
his official corporate capacity. In other words, this safeguard ensures
that the implied consent mechanism of Section 3114 only applies when a director
or officer faces claims that arise out of his exercise of his corporate
powers.”
The court explained that the defendant in this case satisfied the statutory
language because he was a “necessary or proper party to a civil action brought
in this State against the corporation of which he is an officer and
director.”
Moreover, he consented to suit in Delaware for certain types
of lawsuits by virtue of his service as an officer and director of a Delaware
corporation, and, moreover: (i) the dealings that gave rise to the suit were
focused on a change of control of the Delaware corporation based on an infusion
of capital or loan, and (ii) the parties to those dealings agreed to Delaware
law as their common language of commerce. Thus, the defendant had no
basis to complain that his due process rights would be offended by Delaware’s
exercise of personal jurisdiction over him.
The court’s conclusion was also bolstered by underscoring the public policy
reason why “Delaware has a legitimate interest in providing a forum for
efficient redress of claims against a Delaware corporation and a fiduciary
whose actions are at the heart of those claims.”
The court explained that the defendant was “obviously a proper party
because he has a tangible legal interest in the matter” that is separate from
the interest of the corporation involved and because the claims against him
arise out of the same facts and occurrences as the claims against the
corporation involved.
In sum, the court declined to “excise” the provisions in Section 3114 that
allow for the imposition of personal jurisdiction over directors and officers
who are either “a necessary or proper party,” even though Delaware cases have
been excising that phrase in the statute for many years as a result, apparently
misplaced, of due process concerns. Moreover, the court emphasized that
it was not enough to make that “necessary or proper party” determination, but
rather the court must also find that the exercise of personal jurisdiction, as
in this case, was also consistent with constitutional expectations of due
process.
By becoming a director and officer of the corporation involved, the
defendant purposely availed himself of certain duties and protections of
Delaware law. The claims against him involved his actions in his official
capacity of negotiating contracts that involved the change of control of the
Delaware company. The defendant executed written agreements which chose
Delaware law to govern the disputes that formed the basis of the claims.
To make the point about choosing Delaware law more colorful, the court
observed that other parties in the case were from Hong Kong and Canada, but the
court found that all the parties “understood that as to the course of their
respective actions relevant to this case, the jurisdiction that was their focus
was the home of the fried oyster sandwich, and not the home of poutin or dim
sum.” Therefore the court concluded that requiring him to defend the
lawsuit in this state does not “offend traditional notions of fair play and
substantial justice.”
No comments:
Post a Comment