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E-MailEric A. Chiappinelli is the Frank McDonald Professor of Law at Texas Tech University School of Law. This post is based on his recent article, and is part of the Delaware law series; links to other posts in the series are available here.
Delaware is well established as the single most influential state in corporate America. Its prominence persists as the Delaware Court of Chancery continues to be the center for stockholder litigation against corporate fiduciaries. The Court of Chancery occupies this position largely as a result of its unique system for obtaining personal jurisdiction over corporate fiduciaries: Section 3114, the director implied consent statute. My article, which appears as a chapter in the forthcoming Research Handbook on Representative Stockholder Litigation (Sean Griffith, Et Al., Eds.), details the methods by which the Delaware Court of Chancery asserts personal jurisdiction over directors and officers of Delaware corporations.
Section 3114 allows Delaware to exercise personal jurisdiction over corporate fiduciaries because of their service as directors or officers. In addition to the implied consent statute, Delaware’s general long arm statute, section 3104, permits jurisdiction over nonresidents who undertake particular actions in Delaware. Finally, the Conspiracy Theory of jurisdiction works as a sort of common law amenability scheme.
The article begins with a brief background discussion of Delaware’s unique sequestration system that was declared unconstitutional in Shaffer v. Heitner (1977). As is well known, under Pennoyer v. Neff (1878), a state could assert jurisdiction over: (1) any individual personally served with process in the state; (2) any domiciliary, even if absent from the state; and (3) any individual who consented to jurisdiction in advance or by appearance in court.
However, the expansion of nationwide businesses during the post-bellum era brought about a truly national economy, in which both people and corporations became more mobile. Businesses were increasingly incorporating in one state, but were otherwise headquartered and operating in other states. Obtaining personal jurisdiction over these pseudo-foreign corporations and their directors and officers by in-state personal service proved increasingly difficult under the Pennoyer scheme because fiduciaries no longer lived or worked in the corporation’s state of incorporation. Under these circumstances, a state could not obtain personal jurisdiction over both a corporation and its fiduciaries under Pennoyer.
Eventually, in 1927, the Delaware General Assembly responded to these issues by enacting its sequestration statute. The legal theory supporting sequestration was that, under Pennoyer, a state had dominion over the property within its borders. Under Delaware corporate law, all shares of stock in Delaware corporations were considered to be personal property located within Delaware regardless of where the certificate or stockholder was located. This allowed an out-of-state plaintiff to seize an out-of-state defendant’s property in Delaware and hale the defendant into the forum court to adjudicate the dispute even when the property was unrelated to the underlying dispute. Sequestration was the primary method of obtaining personal jurisdiction over Delaware corporate fiduciaries for 50 years, until Shaffer.
The article then describes Delaware’s current approach, in which the primary amenability statute is based on implied consent (Section 3114). The Delaware General Assembly enacted the implied consent statute only two weeks after the U.S. Supreme Court’s decision in Shaffer. Section 3114 is the preeminent method for obtaining jurisdiction over Delaware’s corporate directors and officers. The Delaware Supreme Court and the Court of Chancery have broadened the Delaware courts’ reach, increasing the number of lawsuits that can be heard in Delaware. In 2004 the statute was extended to corporate officers, too. The Delaware Supreme Court made a major expansion of section 3114 in early 2016 in Hazout v. Tsang Mun Ting, an opinion by Chief Justice Strine. Hazout is a breathtaking and constitutionally unsound extension of personal jurisdiction.
It was not until 1978, a year after Shaffer and the adoption of the implied consent statute, that Delaware adopted a general long-arm statute, section 3104. When it did so, it did what many other states did, in that it adopted verbatim the Illinois act of 1955, which was the basis for the Uniform Interstate and International Procedure Act. That act provides for amenability to service of process for claims based on, among other things, committing a tort in Delaware or transacting business there.
In an attenuated fact setting and controversial decision, Vice Chancellor Laster, in Badlands NGLs, LLC v. Cascade Capital Corp., held that section 3104 supports personal jurisdiction over a law firm and lawyer that caused a filing with the Delaware secretary of state to be made. Surely such an act is neither transacting business in Delaware nor a tort in Delaware causing injury there.
Finally, the article details the common law Conspiracy Theory doctrine of jurisdiction. This is a kind of second-order process—a common law amenability theory. The idea is that if one actor is subject to personal jurisdiction in Delaware, those with whom that defendant conspired are amenable to jurisdiction there, too, even though their actions do not meet any of the requirements of any amenability statute.
This article is a chapter in a research handbook on stockholder litigation to be published in early 2017. Some of it is derived from a trilogy of articles I recently published on the unconstitutionality of Delaware’s director consent statute. Those articles are The Myth of Director Consent (2013) (available here), The Underappreciated Importance of Personal Jurisdiction in Delaware’s Success (2014) (available here), and How Delaware’s Corporate Law Monopoly Was Nearly Destroyed (2015) (available here).
The full article is available for download here.
