McWane, Inc. v. Lanier, C.A. No. 9488-VCP (Del. Ch. Jan. 30, 2015) (Parsons, V.C.)
In this memorandum opinion, the Court of Chancery denied defendants’ motion to dismiss or stay for lack of personal jurisdiction. The Court held that a mandatory forum selection clause in a merger agreement controlled over a permissive forum selection clause in a related stockholders agreement, and that, under the doctrine of equitable estoppel, non-signatories to the merger agreement were bound by the forum selection clause. The Court also rejected the defendants’ alternative argument that the Delaware action should be stayed in favor of a first-filed action in Alabama because the parties had displaced the first-filed rule by contract.
Plaintiffs McWane Technology LLC and McWane, Inc. acquired Synapse Wireless, Inc. in a reverse triangular merger. The transaction was structured such that the buyers initially acquired a majority of Synapse’s shares in the merger and would acquire the remaining shares over a number of years through a series of annual put/call options. A stockholders agreement set forth the framework for the put/call options and provided, among other things, that the price for the put/call options would be based on the greater of the valuation of Synapse or a floor amount. Importantly, the floor amount could be reduced if the buyers suffered a loss as a result of fraud or a willful breach of the seller’s representations and warranties in the merger agreement and were awarded damages in excess of the escrow amount.
The merger agreement contained a mandatory forum selection clause requiring that all claims arising out of or relating to the merger agreement be brought in Delaware. The stockholders agreement, by contrast, contained a permissive forum selection provision, whereby the parties consented to the jurisdiction of the Alabama courts.
On March 6, 2014, one of the defendants, the stockholders representative under the merger agreement, brought suit seeking declaratory judgment in Alabama. On March 27, 2014, the remaining defendants, individual stockholders who did not sign the merger agreement, intervened in that suit. On March 31, 2014, the plaintiffs filed suit in the Court of Chancery. On May 20, 2014, the stockholder representative dismissed his claim in Alabama and the individual defendants moved to dismiss the Delaware action for lack of personal jurisdiction. On June 12, 2014, the individual defendants filed an amended complaint in Alabama, asserting that the plaintiffs could not devalue the put/call rights under the stockholders agreement.
Plaintiffs argued that personal jurisdiction existed because (i) the individual defendants were parties to the merger agreement, though they were not signatories, (ii) the individual defendants were third-party beneficiaries to the merger agreement, and (iii) the individual defendants were equitably estopped from challenging the forum selection clause in the merger agreement. The Court found that the third reason provided a sound basis for personal jurisdiction, and thus focused primarily on that argument.
Before specifically analyzing plaintiffs’ claims, the Court first addressed the relationship between the merger agreement and the stockholders agreement. The Court found that the two agreements were interrelated. The Court further found that the claims asserted by the defendants in the Alabama action arose out of the merger agreement. In particular, before the put/call rights under the stockholders agreement could be lowered, five events must happen. First, the buyers must assert a qualifying claim. Second, buyers must be awarded damages in excess of the escrow amount specified in the merger agreement. Third, the put/call option must be exercised, which cannot happen until 2016. Fourth, the damages judgment must remain unsatisfied. Fifth, McWane Technology must reduce the floor to the extent of the unpaid judgment. As of the Court’s decision, only the first condition had been met. Therefore, the defendants could only challenge plaintiffs’ indemnification under the merger agreement. Accordingly, the mandatory forum selection provision under the merger agreement governed. The Court also noted that, despite language in the stockholders agreement stating that it superseded all other agreements, the permissive language of the stockholders agreement’s forum selection clause did not supersede the mandatory language of the forum selection clause in the merger agreement.
The Court next analyzed whether the individual defendants were equitably estopped from challenging the forum selection clause in the merger agreement. Under Delaware law, non-signatories may be equitably estopped from challenging a forum selection clause in order to prevent non-signatories from embracing the benefits of a contract, while at the same time refusing to accept provisions in the contract the non-signatories find unsavory. In particular, a Delaware court will find that non-signatories are bound to forum selection clauses if (i) the forum selection clause is valid, (ii) the non-signatories are third party beneficiaries or closely related to the agreement, and (iii) the claim arises from standing related to the agreement. The Court found that the forum selection clause was valid because there was no evidence of fraud or overreaching. The Court also found that the non-signatories were closely related to the agreement because they received a direct benefit as a result of the merger (over five million dollars) and because it was foreseeable for the non-signatories to be bound to the agreement, as they were asserting claims related to the merger in Alabama. Finally, the Court found that the non-signatories’ claims related to the agreement because valuation can only be lowered as a result of breaches in the merger agreement and any claims arising under the stockholders agreement were not ripe and justiciable.
The Court also rejected the defendants’ alternative argument that the Delaware action should be stayed in favor of the first-filed Alabama action. Though the default rule is that litigation should proceed in the forum where it is first commenced, the parties can displace that rule by contract, including by use of a forum selection clause. Because the merger agreement contained a mandatory forum selection clause in favor of Delaware, the first-filed rule was inapplicable.