Chancery Finds Lack of Personal Jurisdiction Over Employee Defendants in Stock Appreciation Rights Dispute

Morris James LLP

Highway to Health, Inc. v Bohn, C.A. No. 2018-0707-AGB (Del. Ch. Apr. 15, 2020).
To establish personal jurisdiction over a nonresident defendant under the Delaware long-arm statute, 10 Del. C. § 3104, a plaintiff must show that: “(1) there is a statutory basis for exercising personal jurisdiction; and (2) subjecting the nonresident defendant to jurisdiction in Delaware would not violate the Due Process Clause of the Fourteenth Amendment.” 

In Highway to Health Inc. v. Bohn, the defendants were current and former employees of Highway to Health, Inc. (“the Company”) who were granted stock appreciation rights (SARs). Pursuant to the SARs, the defendants maintained a right to have the Company’s stock appraised each year. After the Company appointed a new annual appraiser, the defendants objected, arguing that the SARs contemplated the same appraiser for the duration of the contract, and sought to mediate the conflict. Rather than mediate, the Company and members of its board of directors filed an action in the Court of Chancery, seeking a declaratory judgment that the decision to appoint a new appraiser was valid and binding. The defendants moved to dismiss, arguing that the Court lacked personal jurisdiction because, as nonresidents, they did not have sufficient minimum contacts with Delaware.

The plaintiffs argued that the nonresident defendants were subject to personal jurisdiction under Section 3104(c)(1), which establishes jurisdiction over a nonresident who, “in person or through an agent . . . [t]ransacts any business or performs any character of work or service in the State[.]” Plaintiffs’ jurisdictional argument relied on the cumulative effect of the following actions and contacts: (1) the defendants originally held shares of a closely-held Delaware corporation and sold that stock pursuant to the contract at issue in the action; (2) the contract at issue was governed by Delaware law; and (3) the defendants availed themselves of the benefits of Delaware corporate law by invoking the contractual right to seek a mediation in the dispute. The plaintiffs relied heavily on NRG Barriers, Inc. v. Jelin, 1996 WL 377014 (Del. Ch. July 1, 1996), which concerned an action by a Delaware corporation seeking declaratory judgment that its stock purchase agreement with minority shareholders was valid and binding.

The Court of Chancery dismissed the plaintiffs’ claims for lack of personal jurisdiction, finding that the plaintiffs’ “factual allegations fail[ed] to demonstrate that any act actually occurred in Delaware with respect to the dispute in this case,” as required to establish jurisdiction under Section 3104(c)(1). First, the parties’ dispute concerned contractual rights of the defendants, who had sold their shares to a foreign entity, as opposed to the defendants in NRG, who were challenging a Delaware corporation’s capital structure. Second, the Delaware choice-of-law provision in the contract, by itself, did not confer personal jurisdiction under the long-arm statute. Third, the defendants’ invocation of the mediation right did not demonstrate a contact with Delaware, particularly as it was sent from the Philadelphia office of defendants’ counsel to the Company’s board chairman in Pennsylvania, Lastly, and most importantly in the Court’s mind, this action was distinguishable from NRG because, unlike in NRG, the plaintiffs made no showing that “Delaware lawyers were substantially involved in drafting the [SAR-related agreements].” 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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