Delaware General Corporation Law Section 111: A Gateway to the Chancery?

August 8, 2022 – In 1999, the Delaware Legislature enacted 8 Del. C. § 111 for the purpose of extending the jurisdiction of the Court of Chancery of Delaware to disputes arising out of the application, interpretation, execution or validity of the Certificate of Incorporation and Articles of a Delaware corporation. The Court of Chancery is a court of limited jurisdiction, generally focused on equitable claims and requiring a specific allotment of jurisdiction.

Since its first enactment, Section 111 has been expanded to give the Court of Chancery jurisdiction over many additional instruments, including but not limited to stock purchase agreements, documents containing transfer restrictions, trustee agreements and certificates of amalgamation. It is important to note that Section 111 uses language traditionally interpreted as permissive in nature; Article 111 provides that actions relating to these acts “may be brought before the Court of Chancery”. (emphasis added). As a result, it has been questioned whether more is needed to confer jurisdiction on the Court of Chancery than face application of the law.

This issue surfaced in a 2019 decision in Helix Generation LLC v. Transcanada Facility USA, Inc. In this case, the Court held that it had the discretion, in the circumstances of this case, to transfer the case to the Superior Court, even though the case had arguably fallen. under section 111. This led to some ambiguity as to whether the Court should interpret the statute to give it the discretion to decline jurisdiction.

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The ambiguity remained until the Court’s 2022 decision in Shareholder Representative Services LLC v. DC Capital Partners Fund II, LP This case ruled that Section 111 provided non-discretionary jurisdiction in the Court of the Chancery once a plaintiff brought an action in this Court.

To resolve the ambiguity and potential conflict between the Court of Chancery’s decisions in Helix and DC Capital, the Delaware Supreme Court recently accepted an interlocutory appeal in DC Capital to determine whether Section 111 confers discretionary jurisdiction on the Court of Chancery.

The Helix decision

In Helix, the plaintiff sued for breach of contract and fraud under an asset purchase agreement and alleged that the court of chancery had personal jurisdiction under the parties’ contract. However, the plaintiff has not argued how the Court had equitable jurisdiction over his claims.

The defendants requested dismissal under Rule 12(b)(6) for failure to report. After the end of the information on the motion to dismiss the defendants, the Court, sua sponte, questioned the existence of equitable jurisdiction and asked the parties to submit additional answers on this question.

In response, the plaintiff argued that statutory jurisdiction existed under section 111, which provided that actions to interpret, apply, enforce or determine the validity of an agreement “by which a corporation undertakes to sell, lease or exchange any of its property or assets” and provides “by its terms” shareholder approval may be brought before the Court of Chancery.

The plaintiff argued that, being a subsidiary, its parent company must have approved the asset purchase agreement and that such approval could therefore be considered “by its terms” to be required. The plaintiff requested leave to amend in order to be able to assert these allegations in his complaint.

In deciding not to exercise jurisdiction over the plaintiff’s claims, the Court held that “Section 111(a), insofar as it applies, confers optional rather than compulsory jurisdiction on this Court”. The Court held that the proposed amendment to the complaint would require the Court and the parties to determine the jurisdiction of the Chancery, which could involve jurisdictional discovery, in a situation where the Superior Court had undisputed jurisdiction to hear the action ” legal”.

Ultimately, the Court determined that the potential modification and discovery would be “worthless” because the Superior Court could hear the action and the parties had agreed to stand on the complaint and be notified of the motion to inadmissibility. Accordingly, the Court sent the case back to the Superior Court.

The DC Capital Partners decision

For the next three years, Helix was the leading authority on whether Section 111 conferred permissive jurisdiction. Given the context in which the issue arose in this case, it left some doubt as to whether the Court of Chancery would have the discretion to decline jurisdiction where the original complaint adequately pleaded compliance with the Section 111. Recently, the DC Capital Court came to the conclusion that Section 111 jurisdiction was not discretionary.

In DC Capital, the plaintiff sued to compel the purchasers to pay indemnity withholdings owed under a stock purchase agreement. The parties agreed that the agreement fell within the scope of Section 111. Nevertheless, the defendants sought dismissal, arguing that: (1) the permissive wording of Section 111 grants the Court of Chancery a non-exclusive or concurrent jurisdiction; (2) the Court has the discretion to decline jurisdiction over actions brought under Section 111; and (3) the Court should exercise its discretion to decline jurisdiction because the claims did not involve the specialized expertise of the Court.

Instead, the defendants argued that there was an adequate remedy at law because the claim was primarily for monetary relief and therefore the Court of Chancery should exercise its discretion to decline jurisdiction.

The Court agreed that Article 111 gave it non-exclusive jurisdiction; however, the Court found that this jurisdiction was not discretionary. The Court held that the plain language of Section 111 favored this interpretation because the statute states that any civil action “may” be brought in the Court of Chancery and that only plaintiffs, not the Court, can bring an action. . Thus, the statute permits plaintiffs to bring the types of actions described in Section 111 in the Court of Chancery, and the Court has no discretion to deny such actions otherwise permitted.

In support of its decision, the Court relied on the 2012 Delaware Supreme Court decision in Duff v. InnovativeDiscovery LLC. In that case, the Delaware Supreme Court held that the Delaware Limited Liability Company Act, which similarly provided that “[a]Any action to interpret, apply or enforce the provisions of a limited liability company agreement…, may be brought in the Court of Chancery”, did not permit the Court to decline jurisdiction in the matter. ( underline added).

In dealing with the Helix decision, the Court emphasized the fact that the Superior Court had indisputable jurisdiction in this case. Although the applicability of Section 111 is in issue, the decision should not be interpreted as requiring a discretionary application of Section 111.

The Court also determined that there was no substantive commentary on the legislation that would provide insight into the legislature’s intent. And, when examining the canon of statutory interpretation that a statute should be interpreted with a presumption against common law changes, she provided “soft support” for the Court’s interpretation because the common Delaware law has traditionally placed great emphasis on plaintiff choice. Therefore, the Court dismissed the motion to dismiss.

Interlocutory appeal

On March 15, 2022, the DC Capital Court certified an interlocutory appeal sought by the defendants, finding that its earlier decision resolved a substantive question of law. On March 28, 2022, the Delaware Supreme Court accepted the interlocutory appeal. The briefing was over by June 16, 2022, but no arguments have yet been scheduled.

Carry

The Supreme Court’s pending decision will be an important step in determining the extent of the Court of Chancery’s jurisdiction under Section 111. It will determine to what extent, if any, a claimant will be able to use Section 111 as a gateway to the Court of Chancery in the absence of an underlying equitable claim or issue otherwise involving the specialist expertise of the Court of Chancery. If the jurisdiction is permissive, the chancery door may narrow.

These materials have been prepared for informational and educational purposes only, do not create an attorney-client relationship with the author(s) or Morris, Nichols, Arsht & Tunnell LLP, and should not be used as a substitute for legal advice in specific situations. . These materials reflect the personal views of the authors only and are not necessarily the views of Morris, Nichols, Arsht & Tunnell LLP or its clients.

Thomas W. Briggs, Jr. is a regular columnist on Delaware corporate law for Reuters Legal News and Westlaw Today.

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias by principles of trust. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.

Thomas W. Briggs, Jr.

Thomas W. Briggs, Jr. is a corporate litigation partner with the Delaware law firm of Morris, Nichols, Arsht & Tunnell LLP. He has practiced in Delaware courts for nearly two decades, focusing on commercial disputes arising from corporate governance, mergers and acquisitions, shareholder class and derivative actions, and valuation disputes. He can be contacted at [email protected]

Sarah P. Kaboly

Sarah P. Kaboly is a partner in the Commercial and Commercial Litigation Group at Delaware law firm Morris, Nichols, Arsht & Tunnell LLP. She can be contacted at [email protected]

Luisa D. Fuller