Should Delaware Have Statutory Personal Jurisdiction Over Non-Resident Controlling Stockholders?

In a recent opinion on a motion to dismiss, Vice Chancellor Travis Laster of the Delaware Court of Chancery invited a debate about the limits of the court’s personal jurisdiction over non-resident controlling stockholders of Delaware corporations. Although the current regime creates an apparent asymmetry, extending statutory consent-based jurisdiction to controllers would risk overreaching.

A minority shareholder in Profounda, Inc., a Delaware corporation, filed a complaint against Profounda directors as well as its controlling stockholder Parent, a Canadian entity. The complaint alleged breach of fiduciary duties by the directors as well as by the controlling shareholder.

The Court of Chancery dismissed the claims against the controlling shareholder for lack of personal jurisdiction. In fact, the court found that the controller had not engaged in any Delaware-directed act falling within the scope of Delaware’s long-arm statute and due process requirements. 

Statutory Framework

Delaware courts have statutory consent-based personal jurisdiction over directors and officers of Delaware companies. By accepting such positions, directors and officers implicitly consent to jurisdiction in Delaware and to the appointment of the registered agent of the corporation as an agent upon whom service of process may be made. The statute was extended from directors to officers (as defined in the same statute) beginning in 2004. However, there is no such statute for controlling stockholders.

Personal jurisdiction over controlling stockholders that are not “at home” in Delaware must therefore be determined under Delaware’s long-arm statute and constitutional due process requirements. Due process requires contacts with Delaware that make the exercise of jurisdiction consistent with traditional notions of fair play and substantial justice.

The Court’s Analysis

Consistent with its own precedent, the Court of Chancery found that the plaintiff failed to identify a specific act by the defendant that targeted Delaware or had an effect in Delaware. Instead, the complaint only claimed that Parent commandeered the directors to conspire in the breach of their fiduciary duties to the minority. 

Policy Implications

The Vice Chancellor suggested that the limitations on personal jurisdiction over non-resident controlling shareholders represent a policy issue. The decision points to an asymmetry in Delaware’s corporate jurisdictional regime: directors and officers are subject to automatic consent-based jurisdiction, while non-resident controlling stockholders—who may exercise comparable or greater practical power—are not.

However, there are reasons to distinguish between the two situations. Directors are entrusted by the statute with managing the business and affairs of the corporation. Even when shareholders exert significant influence, it is the board’s responsibility to make decisions. Regarding officers, the applicable Delaware statute (Del. Code Ann. tit. 10, § 3114(b)) only targets officers who are at the apex of the company hierarchy or who have expressly consented to be identified as an officer for the purposes of the statute.

The fact that some controllers might abuse their position does not justify imposing personal jurisdiction a priori on all the entities that control Delaware companies. The conspiracy theory from Istituto Bancario already makes it possible to exercise jurisdiction over controllers who conspire with the board as long as specific Delaware-directed acts can be identified. Otherwise, controllers remain subject to being sued in other jurisdictions where they have the necessary contacts.

_____________

Salvatore Saltarelli is an attorney admitted in New York who previously practiced as an attorney and notary in Italy.

The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.