supreme-court-building-1209701_1280 On February 28, 2017, the Missouri Supreme Court joined a growing list of tribunals to apply a strict reading of the United States Supreme Court’s seminal ruling in Daimler AG v. Bauman, 134 S. Ct. 746 (2014). In State ex rel. Norfolk So. Ry. Co. v. Hon. Colleen Dolan, No. SC95514, the Missouri Supreme Court held that Missouri courts lack the requisite personal jurisdiction, either specific or general, over a non-resident defendant, Norfolk Southern Railway Company, in a claim brought by a non-resident plaintiff who asserted a Federal Employer’s Liability Act (FELA) violation arising from his employment by Norfolk Southern in the State of Indiana. The ruling marks a significant victory for corporate defendants seeking to combat forum shopping by plaintiffs, the practice of bringing cases in jurisdictions which are more likely to provide a favorable judgment or a more lucrative verdict.

The plaintiff, Indiana resident Russell Parker, argued that Missouri courts had both general and specific jurisdiction over Norfolk based on the company’s contacts with the state. Specifically, the plaintiff cited Norfolk’s ownership of approximately 400 miles of railroad track in the state, 590 employees in the state, and approximately $232,000,000 in annual revenue from the company’s operations in Missouri. As grounds for its decision, the court found that the plaintiff’s allegations did not arise from or relate to Norfolk’s activities in Missouri so as to give rise to specific jurisdiction, nor were Norfolk’s operations in the State sufficient to give rise to a Missouri court’s exercise of general jurisdiction over a defendant such as Norfolk; a company incorporated in and with principal place of business in Virginia.

Citing the Second Circuit’s decision in Brown v. Lockheed Martin Corp., 814 F.3d 619, 627-30 (2d Cir. 2016), wherein .05 percent of the defendant’s employees and no more than .107 percent of total revenue were derived from the defendant’s activities in the state of Connecticut, the Missouri Supreme Court concluded that Norfolk’s activity in Missouri represents “a tiny portion” of the company’s business activities nationwide. Specifically, the court noted that the revenue derived from Missouri is approximately 2 percent of Norfolk’s total revenues; the tracks owned and operated in Missouri constitute approximately 2 percent of the tracks Norfolk owns and operates nationally; and the company’s Missouri-based employees account for only about 2 percent of its total employees.

The Missouri Supreme Court’s decision is particularly newsworthy for its refusal to find general personal jurisdiction based on a non-resident company’s appointment of a registered agent in the state. In its ruling, the court rejected the plaintiff’s argument that Norfolk’s compliance with Missouri’s mandatory business registration requirements for foreign corporations amounted to consent to the exercise of general personal jurisdiction by Missouri courts. To the contrary, the court held that as the relevant section of law provided only that registration is consent to service of process against non-resident corporations, “the registration statute does not provide an independent basis for broadening Missouri’s personal jurisdiction to include suits unrelated
Continue Reading Missouri Supreme Court Extends Daimler and Says No to Forum Shopping

architecture-22039_960_720“Veil piercing” is an equitable remedy that allows a plaintiff with a claim against an entity to obtain relief from the entity’s owners, in spite of laws providing for limited liability.  When the owners provide personal guarantees or otherwise contract around liability protections, or when the owners are sued in their own right based on their own conduct, it is not necessary to pierce a veil of limited liability.  True veil piercing – where the owners are asked to stand in for acts of the entity – is an extraordinary remedy to be reserved for the most extreme cases.

Courts generally have reviewed several factors, with varying degrees of emphasis, when determining whether to pierce the veil of a corporation.  These have included the existence of fraud, adherence to “corporate formalities” such as holding and documenting meetings, the level of capitalization, whether a dominant stockholder siphoned funds from the corporation, and whether investors are so active in the management of the corporation that the corporation is their “alter ego” or “instrumentality.”  Fraud may, depending on the circumstances, provide an independent basis for the liability of stockholders and others on the grounds that individuals are being found liable based on their own conduct.  Other factors supporting veil piercing also often stand in as proxies for fraud, or reasons to suspect fraudulent behavior.

As has become increasingly clear, Delaware “alternative entities” such as limited partnerships and limited liability companies are not the same thing as corporations.  While many of the same fiduciary principles applicable to corporate fiduciaries may apply under certain circumstances to the fiduciaries of an alternative entity, courts must remain sensitive to distinctions in entity law.  In the context of veil piercing, these distinctions suggest that a Delaware LLC should not be subject to true veil piercing at all, as opposed to the imposition of liability under standard concepts of fraud, fraudulent conveyance, etc.; and that assuming the LLC’s veil may be pierced, any piercing should be subject to different standards than those applicable to piercing the corporate veil.

Section 102(b)(6) of the Delaware General Corporation Law (“DGCL”) states that a certificate of incorporation “may” contain “[a] provision imposing personal liability for the debts of the corporation on its stockholders to a specified extent and upon specified conditions; otherwise, the stockholders of a corporation shall not be personally liable for the payment of the corporation’s debts except as they may be liable by reason of their own conduct or acts.”  8 Del. C. § 102(b)(6).  Thus, under the DGCL, the default rule is that stockholders are not personally liable for corporate debts based on their ownership of stock, but may be liable as a result of their own conduct, and may also agree in the charter to be liable to a specified extent and upon specified conditions.

Section 18-303(a) of the Delaware Limited Liability Company Act (“DLCCA” or “Delaware LLC Act”) states that

Except as otherwise provided by this chapter, the debts, obligations and liabilities of a limited liability company,


Continue Reading The Delaware LLC is Not a Corporation and Should Be Subject to a Different Veil Piercing Analysis

Delaware Supreme Court
Delaware Supreme Court

The Delaware Supreme Court reversed the dismissal of a derivative suit for failure to make demand, finding that the complaint alleged particularized facts sufficient to create a reasonable doubt as to the disinterestedness and independence of a majority of directors, in Sandys v. Pincus, No. 157, 2016 (Del. Dec. 5, 2016).  In Sandys, the plaintiff alleged that some top managers and directors at Zynga, Inc. were given an exemption to Zynga’s rule preventing sales by insiders until three days after an earnings announcement.

Because Zynga’s board of directors had nine members, the Court examined whether the complaint had excused a demand as to at least five directors.  Two of the directors (Reid Hoffman, and the controlling stockholder and former CEO, Mark Pincus) had participated in the trades and were considered interested in the transaction.  Another director, Don Mattrick, had been named as the new CEO, and was therefore deemed interested because the corporation’s controlling stockholder was interested in the transaction.  The Court concluded that the complaint alleged reasonable doubt as to the disinterestedness of another three directors (adding up to six of the nine directors).

One director, Ellen Siminoff, was deemed to be potentially interested because she and her husband were co-owners of a private plane with Pincus, which “signaled an extremely close, personal bond” between the two directors and their families because unlike some other assets, a private plane “requires close cooperation in use, which is suggestive of detailed planning indicative of a continuing, close personal friendship.”  The Court noted that at the pleading stage, a plaintiff need not “plead a detailed calendar of social interaction to prove that directors have a very substantial personal relationship rendering them unable to act independently of each other.”

Another two directors, William Gordon and John Doerr, were partners at a prominent venture capital firm, Kleiner Perkins Caufield & Byers, which had interlocking relationships with both directors who traded in Zynga stock.  Specifically, Kleiner Perkins also was invested in a company that Pincus’ wife co-founded, and with a company on whose board Hoffman served as a director.  According to its public disclosures, the Zynga board had determined that Gordon and Doerr did not qualify as independent directors under the NASDAQ listing rules.  The plaintiff’s books and records inspection demand did not inquire as to the board’s NASDAQ determination, and the Court of Chancery found that these directors’ independence had not been sufficiently challenged.  The Delaware Supreme Court disagreed, stating that “to have a derivative suit dismissed on demand excusal grounds because of the presumptive independence of directors whose own colleagues will not accord them the appellation of independence creates cognitive dissonance that our jurisprudence should not ignore.”  While agreeing that “the Delaware independence standard is context specific and does not perfectly marry with the standards of the stock exchange in all cases,” the Court nonetheless identified criteria of the NASDAQ rule that “are relevant under Delaware law and likely influenced by our law.”

The
Continue Reading Delaware Supreme Court Provides New Guidance on Derivative Suits: Private Planes and Venture Capital Investments May Raise Doubts at Pleading Stage

Gavel_editFor the first time since 1997, the United States Supreme Court explored the requirements for proving a federal securities fraud claim based on insider trading, in Salman v. United States (Dec. 6, 2016).  The Salman opinion confirms that a factfinder may infer a personal benefit to a tipper from a gift of confidential information to a trading relative or friend, without the added requirement of “proof of a meaningful relationship” that had been imposed by the Second Circuit in United States v. Newman, 773 F.3d 438 (2d Cir. 2015).  Salman thus resolves a circuit split that had developed between the Second and Ninth Circuits.

Historically, individuals have been found to have engaged in securities fraud under “classical” theory or “misappropriation” theory.  Under classical theory, corporate “insiders” (directors, officers, and others deemed to hold a temporary fiduciary status) either trade on inside information or tip the information to someone who does.  Dirks v. S.E.C., 463 U.S. 646 (1983).  Under misappropriation theory, the person trading or tipping inside information need not owe fiduciary duties generally to a corporation and its stockholders, but must violate some relationship of trust and confidence through which she received the information.  United States v. O’Hagan, 521 U.S. 642, 650-52 (1997).  In both cases, then, the person engaging in insider trading has committed an act of deception by violating a relationship of trust and confidence.  Also, in both cases, the actionable deception is to the source of information and not to the other party to the trade or the general trading public, even though the latter may be injured by the trader’s conduct.  See id.  The Supreme Court has not read the federal securities laws as establishing “a general duty between all participants in market transactions to forgo actions based on material, nonpublic information.”  Chiarella v. United States, 445 U.S. 222, 233 (1980).

In the 2015 Newman case, the Second Circuit further limited the ability of the government to bring insider trading cases.  The court acknowledged that language in the Supreme Court’s Dirks opinion could be read as permitting a factfinder to infer that a tipper received a personal benefit by providing confidential information to a trading relative or friend, but added that such an inference “is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”  Newman, 773 F.3d at 452.  The Newman opinion called into question hard-won victories by the federal government against insider trading defendants in the Southern District of New York.

The Ninth Circuit took a different direction in Salman.  In that case, confidential information originally was obtained by an investment banker at Citigroup, Maher Kara, who shared it with his brother Michael.  Unbeknownst to Maher, Michael then shared the information with others including the defendant, Bassam Salman, whose sister was married to Maher.  On appeal, the Ninth Circuit refused to follow Newman,
Continue Reading Supreme Court Resolves Circuit Split On Insider Trading, Partially Overruling Newman