In Highway to Health v. Bohn, No. 2018-0707-AGB (Del. Ch. April 15, 2020), a Delaware corporation’s efforts to procedurally outmaneuver its holders of stock appreciation rights with an action for declaratory judgment fell short for lack of personal jurisdiction. The “close, but no cigar” nature of the Delaware Court of Chancery’s decision reminds litigants that specific personal jurisdiction may be established in a variety of ways—including through the “cumulative effect” theory or by enforcement of a forum selection clause against nonsignatories—so long as the claims asserted against the nonresidents arise from or relate to the conduct supporting the jurisdictional theory.

Background

Highway to Health (the company) is a Delaware corporation with its principal place of business in King of Prussia, Pennsylvania. In November 2013, the company and its stockholders entered into a transaction to sell 49% of the company’s common stock. The transaction closed in December 2013.

In an effort to incentivize certain of the company’s existing employees to contribute toward the company’s post-transaction success, the company offered them the opportunity to receive grants of cash-settled stock appreciation rights (SARs), through award agreements and a stock appreciation rights plan (the SARs plan). Twenty-two then-employees of the company, none of whom reside in Delaware, received SARs (together, the SARs holders).

The SARs plan contained a Delaware choice-of-law provision and terms tying the value of the SARs to an annual appraisal of the company’s common stock. Moreover, as memorialized in the stockholders agreement, the parties to the transaction used the SARs plan to extend the board of directors’ fiduciary duties to the SARs holders as part of the company’s efforts to align the SARs holders’ interests with those of the company’s stockholders.

In 2016, the company appointed a new appraiser to value its common stock. In September 2018, the SARs holders wrote to the board of directors challenging the company’s engagement of the replacement appraiser, as well as the appraiser’s subsequent valuations. According to the SARs holders, the SARs plan contemplated use of the same appraiser for all of the company’s valuations. The September 2018 letter reminded the directors of their fiduciary obligations to the SARs holders and proposed private mediation to resolve the appraiser-related dispute.

The company did not respond to the September 2018 letter. Instead, three weeks later, the company filed an action in the Delaware Court of Chancery against the SARs holders seeking a declaratory judgment that the board did not breach any fiduciary or contractual duties by replacing the appraiser in 2016, and that the appraiser’s year-end valuations were binding on all parties.

The SARs holders moved to dismiss for, among other reasons, lack of personal jurisdiction under Court of Chancery Rule 12(b)(2).

Analysis

Use of the “cumulative effect” theory to support the exercise of specific personal jurisdiction under Delaware’s long-arm statute.

The company alleged two theories, supported by various underlying allegations, to support the exercise of personal jurisdiction over the nonresident SARs holders.

The court rejected the company’s first theory, which relied on the “cumulative effect” of the SARs holders’ alleged “actions and contacts with Delaware” to establish personal jurisdiction under Section 3104(c)(1) of Delaware’s long-arm statute.

Under Section 3104(c)(1) of Title 10 of the Delaware Code, a Delaware court may exercise specific personal jurisdiction over a nonresident who, “in person or through an agent … [t]ransacts any business or performs any character of work or service” in Delaware. Use of Section 3104(c)(1) requires a plaintiff to establish that the nonresident transacted some sort of business in the state, with some act actually occurring in Delaware, and that the plaintiff’s claims arise from that business.

In an effort to satisfy its burden, the company argued the SARs holders could expect to be hailed into Delaware based upon the amalgamation of the following actions and contacts with Delaware:

• Some, but not all, of the SARs holders originally held shares in a closely held Delaware corporation and sold those shares as part of the transaction.
• Through the September 2018 letter, the SARs holders availed themselves to fiduciary protections afforded under Delaware corporate law.
• Each of the SARs holders agreed to the Delaware choice-of-law provision within the SARs plan and other agreements.

As further support, the company cited the court’s decision in NRG Barriers v. Jelin, (Del Ch. July 1, 1996), wherein the court exercised personal jurisdiction over nonresidents for the “cumulative effect” of similar conduct.

The court rejected the company’s numerous arguments and distinguished the instant case from NRG.

First, the court was not persuaded that the sale of shares of a Delaware corporation constituted business in Delaware because only some of the SARs holders held shares in a Delaware corporation, which they sold as part of the transaction, and that those select SARs holders actually sold their shares to a non-Delaware company. The court also noted that the sale of shares was not related to the underlying claims, which concerned the interpretation of the SARs plan. In NRG, on the other hand, all of the defendants held and sold their respective shares to a director of an existing Delaware corporation, and the sales were relevant to the underlying allegations concerning the capital structure of that corporation.

Second, the court was not persuaded by the SARs holders’ sending of the September 2018 letter involved an act in Delaware because, unlike the letter sent in NRG, the September 2018 letter was not drafted or reviewed by a Delaware attorney or sent from a Delaware office. The court also took note that the letter was marked “For Settlement Purposes Only.”

Third, the court rejected the company’s reliance on the contractual choice-of-law and fiduciary duty provisions because, on their own, the provisions are insufficient “acts” of business for purposes of Section 3104(c)(1). In other words, because the company failed to allege other acts by the SARs holders that occurred in Delaware related to the SARs plan dispute, there was no “cumulative effect” to warrant the exercise of specific personal jurisdiction.

Delaware’s three-part test to enforce a forum selection clause against nonsignatories.

The court also rejected the company’s alternative theory that the SARs holders consented to personal jurisdiction in Delaware by way of their status as third-party beneficiaries to the stockholders agreement, which contained a forum selection clause.

It is well-settled Delaware law that a nonsignatory may be bound by a contractual forum selection clause if: the clause is valid; the nonsignatory is a third-party beneficiary; and the claims arise from the nonsignatory’s standing relating to the agreement.

The court concluded the company did not satisfy the third element of the test because the company’s claims against the nonsignatory SARs holders did not arise from the stockholders agreement. Instead, the company’s claims stemmed from the contractual valuation process outlined in the SARs plan, which prevented the company from invoking the forum selection clause in the stockholders agreement to establish personal jurisdiction.

Takeaways

The Highway to Health decision is consistent with well-settled Delaware precedent, but serves as a timely reminder for the type of conduct and allegations required to subject a nonresident to specific personal jurisdiction in Delaware.

For example, Delaware courts will consider the “cumulative effect” of a defendant’s various actions and conduct to support the exercise of specific personal jurisdiction over a nonresident so long as the plaintiff can allege at least one act relevant to the underlying claims that actually occurred in Delaware. That relevant Delaware-connected act is the threshold allegation required for any number of additional allegations to accumulate. Plaintiffs lacking that threshold allegation should use the “tools at hand” and avail themselves of the opportunity for limited jurisdictional discovery.

In addition, Highway to Health reminds us of the scope and force of a valid forum selection clause. Third-party beneficiaries of a contract with a valid Delaware forum clause will be expected to litigate issues related to that contract in Delaware.

Mackenzie M. Wrobel, an associate at Duane Morris, practices in the area of corporate and commercial litigation.

Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.