November 21, 2017

November 21, 2017

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November 20, 2017

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Choice Of Law Provision In Stockholder's Agreement Insufficient to Create Personal Jurisdiction Over Delaware Corporation's Former CEO

By order dated August 4, 2017, Vice Chancellor Slights dismissed the complaint seeking to enforce non-compete and non-solicitation provisions in a stockholders’ agreement in EBP Lifestyle Brands Holdings, Inc. v. Boulbain, C.A. No. 2017-0269-JRS (Del. Ch. Aug. 4, 2017), finding that the Delaware Chancery Court lacked personal jurisdiction over the defendant.  Specifically, the Court held that defendant’s execution of a stockholders’ agreement governed by Delaware law and concerning a Delaware corporation was insufficient to satisfy the statutory and constitutional requirements to establish personal jurisdiction over an individual not resident or transacting business in Delaware.

Plaintiff EBP Lifestyle Brand Holding, Inc. (“EBP”), a Delaware corporation operating in the infant products market and headquartered in California, sought to enforce the non-competition and non-solicitation provisions of its stockholders’ agreement against its former CEO, defendant Yann Boulbain (“Boulbain”).  Boulbain entered into the stockholders’ agreement as a prerequisite for exercising stock options in conjunction with his termination of employment with EBP.  In its complaint, EBP alleged that Boulbain breached these provisions by taking CEO positions with competing infant products companies and by subsequently soliciting EBP employees to join his new employers, also based in California.

Boulbain moved to dismiss for lack of personal jurisdiction (pursuant to Court of Chancery Rule 12(b)(2)) and failure to state a claim upon which relief can be granted (pursuant to Court of Chancery Rule 12(b)(6)).  Under Rule 12(b)(2), a plaintiff must demonstrate that (1) jurisdiction over a nonresident defendant is permitted under Delaware’s long-arm statute, requiring the nonresident to have transacted business in the state and the claim to have arisen from such specific transaction of business in the state, and (2) an exercise of such jurisdiction would be consistent with due process.  Citing to NRG Barriers, Inc. v. Jelin, 1996 WL 377014 (Del. Ch. July 1, 1996), EBP argued that Delaware’s long-arm statute (10 Del. C. §3104(c)(1)) permitted personal jurisdiction over Boulbain because he had entered into an agreement governed by Delaware law with a Delaware corporation, and the breach of contract claim arose from such transaction.  The Court disagreed with EBP, noting that although NRG Barriers involved a somewhat analogous stock purchase agreement, in the NRG Barriers case the defendant sought “Delaware involvement unequivocally” in connection with the negotiation and execution of the contract.  Here, by contrast, the stockholders’ agreement was a form agreement Boulbain was required to sign in connection with the exercise of stock options.  The only connection to Delaware that EBP had is that it is a Delaware corporation and that the agreement contained a Delaware choice of law provision, which cannot alone justify the Court’s exercise of jurisdiction over Boulbain.

EBP further argued that Boulbain’s direction of the businesses of EBP and his successor employers, which allegedly included the transaction of the companies’ business in Delaware, should subject him to personal jurisdiction in Delaware.  The Court disagreed, explaining that even if the employers’ business dealings in Delaware could be attributed to Boulbain for jurisdictional purposes, EBP’s claims did not arise out of such dealings.  In order for the Court to exercise specific personal jurisdiction over Boulbain under Delaware’s long-arm statute, EBP must sufficiently allege that its claims arise from defendant’s transaction of business in the state.  Here, EBP’s breach of contract claims arise out of Boulbain’s accepting a position with a competing company in California and soliciting EBP employees in California; there is no allegation that Boulbain performed in a competing position or solicited EBP employees in Delaware.

The Court further countered EBP’s arguments that an exercise of personal jurisdiction over Boulbain would not violate due process.  EBP was unable to establish that Boulbain had the requisite “minimum contacts” with Delaware, as Boulbain had not engaged in deliberate activities in Delaware such that he should have had a reasonable expectation that he would be required to defend himself in a Delaware court.  A California resident, Boulbain had never visited the state of Delaware, worked in Delaware, or owned property in Delaware.  Further, the stockholder’s agreement does not contain a forum selection clause or any other provision providing affirmative consent to jurisdiction in Delaware.  Thus, the Court could not identify grounds on which to exercise specific jurisdiction over Boulbain in this case.

As a final plea, EBP invoked “public-policy” as a basis for the Court’s exercise of personal jurisdiction in this matter.  If the Court dismissed the action, EBP argued, its only recourse would be to refile in Boulbain’s home state of California.  As California courts would be unwilling, as a matter of law and policy, to enforce the non-compete and non-solicitation provisions of the agreement, the Delaware corporation could only enforce its contractual rights if the Court of Chancery adjudicates the claims. Vice Chancellor Slights, however, rejected this position out of hand: regardless of EBP’s policy concerns, such concerns do not override the statutory and due process requirements of personal jurisdiction.

Having found personal jurisdiction lacking, the Court did not address the arguments under Rule 12(b)(6), however in a closing footnote Vice Chancellor Slights commented on what he views as applicable precedent to such argument (Ascension Ins, Hldgs v. Underwood, 2015 WL 356002 (Del. Ch. Jan. 28, 2015)), due to “remarkably similar” facts regarding Delaware and California entities and a non-compete provision, and his view that the two-year global non-competition and non-solicitation provisions at issue in the current case are likely also void under Delaware law due to unreasonable scope and duration.

EBP Lifestyle Brands Holdings, Inc. v. Boulbain, C.A. No. 2017-0269-JRS (Del. Ch. Aug. 4, 2017)

Copyright 2017 K & L Gates

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Shoshannah D. Katz, KL Gates, governance issues lawyer, transactional needs attorney
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Ms. Katz practices in the areas of securities, mergers and acquisitions, finance and general corporate matters, focusing on providing day-to-day client support and coordination of governance issues, transactional needs and specialty counsel. She advises private and public companies in connection with raising capital and issuing securities, compliance with corporate and securities laws and corporate governance practices, debt financing, and negotiation and documentation of a wide variety of corporate and commercial transactions.  Ms. Katz has significant leadership...

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Max Kaplan, KL Gates Law Firm, Complex Litigation Attorney
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Max Kaplan is an associate in the firm’s New York office practicing in the Commercial Disputes practice group. Mr. Kaplan has represented both individuals and corporate clients in an array of matters, including contract disputes, securities fraud actions, environmental regulations enforcement proceedings, and various pro bono matters. His experience includes civil jury trials, international arbitration, securities class-actions, landlord-tenant litigation, attorneys’ fees mediation, civil rights litigation, and appellate practice.

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