Do you have a Delaware registered company?
The state of Delaware is known for its business-friendly climate and well-developed business and corporate laws. For this reason, many business owners across the United States elect to incorporate or organize their businesses and limited liability companies in Delaware, even if the company does not have a physical presence in the state. As a result, it is common for the officers and directors of those companies to live elsewhere. This, coupled with a general principle that a defendant in a lawsuit has the right to be sued in his state of residence, long gave corporate officers and directors comfort that they would not be sued in their individual capacities in Delaware for conduct relating to their role with the company.
However, this long-held benefit for officers and directors of Delaware registered companies has recently been called into question by the Delaware courts.
The Delaware Supreme Court Creates Challenges for Officers and Directors of Delaware Registered Companies
In 2016, the Delaware Supreme Court handed down its decision in Hazout v. Ting, holding that directors and officers are subject to personal jurisdiction in Delaware if they are merely necessary or proper parties, regardless of whether a breach of fiduciary duty or related claim was brought against the directors and officers. Accordingly, directors and officers of Delaware corporations are now much more likely to be hauled into court there. So what? Some may ask.
Well, another recent case out of Delaware found that directors may be liable in the state of incorporation for failure to oversee company functions. In Marchand v. Barnhill, the Delaware Supreme Court found board members and executives liable for breach of the duty of oversight, which led to a listeria outbreak at an ice cream manufacturing company. In that case, a shareholder filed a derivative lawsuit, arguing that the board knowingly ignored contamination risks and failed to oversee proper food safety procedures.
The Delaware Supreme Court held that the shareholder’s complaint “supports an inference that no system of board-level compliance monitoring and reporting existed at [the company].” Therefore, the shareholder had pled an inference that the board had “undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company’s business operation,” which, in turn, supported an inference that the board had not made a good faith effort to uphold its oversight duties. In other words, the company’s officers and directors, who might not even reside in Delaware, could be found personally liable there for not properly overseeing the company’s ice cream manufacturing operations.
Personal jurisdiction over out-of-state officers and directors is not as limited as it once was. Courts are beginning to expand state personal jurisdiction statutes to cases beyond traditional breaches of fiduciary duties by conducting more fact-driven inquiries and considering due process when evaluating whether directors and officers should be liable for commercial claims arising from the exercise of their corporate powers.
Experienced counsel can help sort-out who can be sued where. Let us know if we can help.
Thank you to Allyson Mancuso, BFV’s 2020 summer associate, for her help in writing this blog post.