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Feb. 26 — A Silver Dragon Resources Inc. director resident in Canada will have to face unjust enrichment and fraud claims in Delaware, after the Delaware Supreme Court Feb. 26 held that the officer had consented to jurisdiction in the state.
In affirming a Delaware Superior Court decision, the state high court found that Delaware courts had personal jurisdiction over the non-Delaware resident director under the “Necessary or Proper Party Provision” of the state's officer consent statute—10 Del. C. §114(b). The statute provides that Delaware courts have personal jurisdiction over non-resident officers of Delaware corporations when they are a necessary or proper party to a civil action brought against the corporation.
In reaching its ruling, the Supreme Court declined to follow a decades-old Delaware Chancery Court ruling—Hana Ranch Inc. v. Lent, 424 A.2d 28—that essentially nullified the provision on the basis that it ran afoul of due process concerns.
“[W]e do not believe that it is a proper role for the Judiciary to excise a clear category set forth in § 3114(b), simply because there might be cases where it is susceptible to an overly broad reach,” Chief Justice Leo E. Strine Jr. wrote for the court.
Exercising personal jurisdiction under the statute is consistent with due process as long as the minimum contacts test from the U.S. Supreme Court's landmark ruling in International Shoe Co. v. Washington, 326 U.S. 310, also is met, Strine said.
Jason M. Halper, a partner at Orrick, Herrington & Sutcliffe LLP and co-chairman of his firm’s financial institutions litigation practice, told Bloomberg BNA that while the decision doesn't expand the statute in overruling Hana Ranch, Delaware courts will be able to exercise personal jurisdiction in more circumstances.
Charles Elson, director of the University of Delaware's John L. Weinberg Center for Corporate Governance, also noted that going on a board of a Delaware corporation is a voluntary act. “In my view, that means that you have to consent to jurisdiction in the event of a dispute involving your service as a director,” he told Bloomberg BNA.
Elson added that it would be “rather odd” if the Delaware Supreme Court had found that such claims couldn't be brought in the state under such circumstances.
In the underlying lawsuit, a group of Hong Kong investors claimed that they had negotiated several agreements to lend Silver Dragon $3.4 million in exchange for, among other things, control of the Delaware corporation.
The court recounted that before all the agreements were signed, the investors sent the first $1 million to Silver Dragon based on assurances that the company's directors would soon execute the agreements. However, things fell apart after a Silver Dragon director refused to sign the agreement.
The investors claimed that rather than returning the $1 million, Silver Dragon Chief Executive Officer and director Marc Hazout, a Canadian resident, caused the company to send most of the money to Travellers International Inc., another corporation that he controlled.
After one of the investors filed claims in Delaware against Hazout, Silver Dragon and Travellers, Hazout moved to dismiss the action on the ground that Delaware courts lacked personal jurisdiction over him. Hazout argued that Delaware lacked jurisdiction because the investor hadn't alleged a breach of any duty owed to Silver Dragon.
However, the high court disagreed, finding that there was personal jurisdiction under the clear terms of Delaware's officer consent statute.
“Hazout is obviously a proper party because he has a tangible legal interest in the matter that is separate from Silver Dragon's interest, and because the claims against him arise out of the same facts and occurrences as the claims against Silver Dragon,” Strine wrote.
The court also said that it wasn't a close question as to whether the minimum contacts test under International Shoe had been met.
“By becoming a director and officer of a Delaware corporation, Hazout purposefully availed himself of certain duties and protections under our law,” Strine said. “More important, the claims against Hazout involve his actions in his official capacity of negotiating contracts that involved the change of control of a Delaware public corporation.”
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The opinion is available at http://www.bloomberglaw.com/public/document/MARC_HAZOUT_Defendant_BelowAppellant_v_TSANG_MUN_TING_Plaintiff_B.
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