Virtus Capital L.P. v. Eastman Chemical Co. et al., C.A. No. 9808-VCL (Del. Ch. Feb. 11, 2015) (Laster, V.C.)
In this decision, the Court of Chancery denied a motion to dismiss for lack of personal jurisdiction brought by an individual that controlled the majority stockholders of a Delaware corporation, holding that the complaint sufficiently alleged acts in Delaware in connection with the sale of the corporation that could be attributed to the individual under a conspiracy theory of jurisdiction.
Defendant Martin D. Sass controlled investment funds that operated under the “Resurgence” trade name. Resurgence owned 56% of Sterling Chemicals, Inc.’s common stock and 100% of Sterling’s preferred stock.
In June 2011, Sterling entered into a merger agreement pursuant to which Eastman Chemical Company would acquire Sterling for approximately $100 million. The merger closed in August 2011. In June 2014, after obtaining discovery in a related appraisal proceeding, plaintiff Virtus Capital L.P. filed a plenary action alleging that Resurgence and Sass breached their fiduciary duties by causing Sterling to be sold to satisfy Resurgence’s idiosyncratic need for liquidity.
Sass moved to dismiss for lack of personal jurisdiction pursuant to Court of Chancery Rule 12(b)(2). For purposes of the motion, the Court assumed that the allegations in the complaint were true and granted the plaintiff the benefit of all reasonable inferences.
Applying the conspiracy theory of jurisdiction, the Court held that Sass was subject to jurisdiction pursuant to Delaware’s long-arm statute, 10 Del. C. § 3104(c). The Court held that the complaint sufficiently alleged that Sass was part of a conspiracy to sell Sterling “on the cheap” because Resurgence needed liquidity. In this regard, the Court noted the complaint’s allegations that Resurgence had a liquidity need due to fund expirations and redemption requests, that Sass caused his personal friend to join the board and take charge of the sale process, and that Sass ensured that Sterling’s CEO was incentivized to pursue a near-term sale.
The Court found two jurisdiction-conferring acts in Delaware that could be attributed to Sass. The first was the formation of Delaware entities, at Sass’s direction, to serve as liquidating vehicles for certain Resurgence funds. The Court held that the plaintiff was entitled to a pleading-stage inference that Sass used those entities to maintain control over Sterling and as part of his desire to obtain liquidity. The second act was the filing of the certificate of merger in Delaware in connection with Eastman’s acquisition of Sterling. The Court held that Eastman’s filing of the certificate could be attributed to Sass because Eastman aided and abetted Sass’s alleged breaches of duty and was part of the alleged conspiracy to sell Sterling.
As to whether the exercise of personal jurisdiction over Sass comports with due process, the Court noted that Sass signed the written consent approving the merger, and held that Sass should have reasonably anticipated that his involvement with the merger and the formation of the liquidating vehicles could render him subject to jurisdiction in Delaware for purposes of challenges to the merger. The Court further pointed to Sass’s formation of over seventy Delaware entities since 1972.
The Court rejected Sass’s argument that subjecting him to personal jurisdiction would disregard the separate existence of the Resurgence entities through which he controlled Sterling. The Court held that, unlike claims by third parties, the doctrine of piercing the corporate veil does not apply to claims of breach of fiduciary duty brought by stockholders against the persons who control their corporation. Thus, Delaware courts “consistently have looked to who wields control in substance and have imposed the risk of fiduciary liability on the actual controllers.” Because Sass controlled Sterling “in substance” and was personally involved in its sale, the Court held that Sterling’s stockholders could sue him personally, and that the entities through which Sass exercised control could not “screen” him from jurisdiction in Delaware.
Finally, the Court denied the motion to dismiss for lack of personal jurisdiction brought by an employee profit sharing plan that owned stock in Sterling. The Court held that because Sass controlled the plan, his acts and knowledge could be imputed to the plan for purposes of establishing personal jurisdiction.