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Delaware Update: Court of Chancery Declines to Bind a Non-signatory Parent Corporation to Forum Selection Clause

In Neurvana Med., LLC v. Balt USA, LLCNo. 2019-0034-KSJM, 2019 Del. Ch. LEXIS 995 (Ch. Sep. 18, 2019), the Court of Chancery declined to exercise personal jurisdiction over Balt International, S.A.S. (“Balt International”), a company headquartered in France and a non-signatory entity to a purchase agreement that included a forum selection clause, on the grounds that Balt International was not ‘closely related’ to a purchase agreement entered into by Balt International’s wholly owned U.S. subsidiary, Balt USA, LLC (“Balt USA”). A key takeaway for practitioners is that the court sets a fairly high bar for plaintiffs to overcome when trying to enforce a forum selection clause against a non-signatory, and further provides a helpful guidepost for foreign organizations when conducting operations through a domestic subsidiary in the United States and the likelihood of a Delaware court exercising personal jurisdiction as a result thereof.    

Neurvana Medical, LLC (“Neurvana”) and Balt USA entered into a purchase agreement, under which Neurvana subsequently brought suit against Balt USA, and further asserted claims against Balt International, arguing that despite Balt International not being a signatory to the purchase agreement, it was bound by the forum selection clause. Neurvana relied on prior case law which bound a non-signatory entity to a forum selection clause after applying a three-part test: (1) the forum selection clause must be valid; (2) the defendant must be a third-party beneficiary or closely related to the agreement; and (3) the claim must arise from their standing relating to the agreement. In making its determination in favor of Balt International, the court analyzed whether (1) the non-signatory party received a direct benefit from the agreement, or (2) it was foreseeable that the non-signatory would be bound by the agreement. As discussed in detail below, the court concluded that Balt International did not receive a direct benefit under the purchase agreement, and further it was not foreseeable that Balt International would be bound by the forum selection clause.

Direct Benefit

To determine whether a non-signatory entity received a direct benefit, Delaware courts have deemed both pecuniary and non-pecuniary benefits sufficient, though indirect benefits insufficient, to satisfy the ‘direct benefit’ inquiry. For example, in Weygandt v. Weco, LLC, No. 4056-VCS, 2009 Del. Ch. LEXIS 87 (Ch. May 14, 2009), a direct benefit existed under a purchase agreement where, pursuant to its terms, the plaintiff was to enter into a separate lease agreement with the non-signatory entity. The lease was a direct benefit to the non-signatory entity because it provided a lucrative tenant and would not have otherwise been entered into but for the purchase agreement.

The court concluded that Neurvana failed to demonstrate that Balt International received a direct benefit from the purchase agreement. According to the court, there were no facts indicating that Balt International received a benefit from the purchase agreement, nor were its terms conditioned on the delivery of a benefit to Balt International.

Foreseeability

The court next turned to whether it was foreseeable that Balt International would be bound by the forum selection clause. Rejecting Neurvana’s argument that foreseeability should be interpreted broadly to include Balt International’s active involvement in negotiating the purchase agreement, the court determined that foreseeability should be limited to “controlled non-signatories—those entities that the signatories to the agreement could manipulate in an “end-run” around the forum selection provision.” The court concluded that Balt USA did not control Balt International, which was a necessary predicate to the narrow application of the foreseeability injury.

Agency Question

Finally, as an alternative to the closely related inquiry, Neurvana attempted to use the agency theory as a basis for the court to exercise personal jurisdiction, arguing that Balt USA was an agent of Balt International. The agency theory requires that: (1) the agent have the power to act on behalf of the principal with respect to third parties; (2) the agent do something at the behest of the principal and for his benefit; and (3) the principal have the right to control the conduct of the agent. The court declined to exercise personal jurisdiction based upon the agency theory, noting that a subsidiary is not necessarily an agent of its parent and, further, that Neurvana failed to establish that Balt International controls and dominates Balt USA’s activities.

Again, for practitioners representing foreign organizations, a foreign parent may be subject to personal jurisdiction pursuant to a forum selection clause, despite not being a signatory to the agreement entered into by its domestic subsidiary, or on the basis of an agency theory as discussed above. Given the guidance provided by the Court of Chancery in Neurvana, organizing domestic subsidiaries under Delaware law may be the optimal jurisdiction for a parent organization that is sensitive to the risk of personal jurisdiction.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Stephanie L. Zeppa, Corporate Attorney, Sheppard Mullin Law Firm
Partner

Stephanie Zeppa is a partner in the Corporate Practice Group in the firm's Palo Alto office.

Ms. Zeppa has extensive experience representing both private and public companies in a wide range of transactions including mergers and acquisitions, financing, strategic transactions and corporate governance matters. She also represents emerging growth companies, founders, institutional and strategic investors in connection with formation, financing and exits of emerging growth and technology companies. 

650-815-2646
Associate

Robert Kay is an associate in the Corporate Practice Group in the firm's San Francisco office.

Areas of Practice

Robert counsels clients on a range of business transactions and corporate governance matters, with a particular emphasis on mergers and acquisitions, divestitures, restructurings and recapitalizations. He has represented corporate clients, closely-held businesses and private equity sponsors across a broad spectrum of industries, including technology, manufacturing, construction, financial services and apparel. Robert also advises entrepreneurs and start-up companies on general business matters, including entity selection and formation, structuring and day-to-day governance matters.

415-774-3282