Armstrong v. Pomerance

• Decision Date: 29 October 1980
• Citation: 423 A.2d 174
• Parties: E. M. ARMSTRONG et al., Defendants Below, Appellants, v. Joseph POMERANCE, Plaintiff Below, Appellee.
• Court: United States State Supreme Court of Delaware

Page 174

423 A.2d 174

E. M. ARMSTRONG et al., Defendants Below, Appellants, v. Joseph POMERANCE, Plaintiff Below, Appellee.

Supreme Court of Delaware.

Submitted June 5, 1980.

Decided Oct. 29, 1980.

R. Franklin Balotti (argued) of Richards, Layton & Finger, Wilmington, and Charles S. Crompton, Jr. (argued) of Potter, Anderson & Corroon, Wilmington, for defendants below, appellants.

J. A. Rosenthal (argued), and Irving Morris of Morris & Rosenthal, P. A., Wilmington, and Mordecai Rosenfeld, New York City, for plaintiff below, appellee.

Before McNEILLY, QUILLEN and HORSEY, JJ.

McNEILLY, Justice:

This interlocutory appeal involves two consolidated derivative actions brought on behalf of the Morrison-Knudsen Company, Inc. (hereinafter the Company), asserting breach of fiduciary duty by the named individual defendants in their capacities as directors of the Company. The suits allege misconduct in transactions involving the repurchase of Company stock from the Crane Company.

The Company is a Delaware corporation with its principal place of business in Boise, Idaho. The Company transacts no business in Delaware other than the minimum necessary to maintain its status as a Delaware corporation. None of the individual defendants are Delaware residents, and no board of directors meeting has ever been held in Delaware. The plaintiffs do not allege the defendant-directors have any connection with Delaware other than being directors in a Delaware corporation who have allegedly breached their fiduciary duties to the corporation.

Jurisdiction over the defendants and service of process on them was attempted under 10 Del.C. § 3114. ¹ After the defendants entered limited appearances to contest jurisdiction, the Court below found personal jurisdiction was properly asserted. ² The sole issue presented by this appeal is whether the Court of Chancery erred in making that determination. The defendants have raised only constitutional objections to the Court's assertion of jurisdiction.

However, the first question we must reach is whether the defendants were served properly under § 3114. One part of that section provides that serving in the capacity of director of a Delaware corporation after June 30, 1978, is consent to in personam jurisdiction in Delaware in actions relating to the defendant's capacity as director. The summonses in both actions in this appeal were issued prior to June 30, 1978. Therefore, the lower court asserted jurisdiction over the defendants prior to that time. As a result, the jurisdiction of the Court cannot be statutorily based on the fact of the defendants serving as directors.

Section 3114 also provides that accepting election or appointment to a directorship of a Delaware corporation after September 1, 1977, is a consent to jurisdiction in suits relating to the defendant's capacity as director. Jurisdiction in this case must exist, if at all, through that clause of § 3114. Indisputably, at the time service was attempted, defendants Armstrong, McMurren, Stuart, Morrison, Scott, and Spencer had been elected to their current terms as directors prior to September 1, 1977. ³ Consequently, by its terms, § 3114 did not authorize jurisdiction over those defendants when service was attempted, and those defendants should have been dismissed.

Defendants Lilly, McCabe, and Woodhead were elected as directors at the Company's annual meeting in early May, 1978. Thus, they do fall within the scope of the clause applicable to nonresidents accepting election to directorships after September 1, 1977. Their acceptance of election at the May, 1978 meeting acted as a consent to jurisdiction, and they were served properly under the statute. Having found jurisdiction over these latter defendants properly invoked under § 3114, we must now reach the asserted unconstitutionality of the statute.

The defendants argue § 3114 is unconstitutional as applied to them, because they do not have sufficient minimum contacts with Delaware to permit an assertion of jurisdiction in these actions. Their argument is that the decision in Shaffer v. Heitner, 433 U.S. 186, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977), requires the existence of sufficient minimum contacts between a forum and a defendant in any assertion of jurisdiction. Further, they argue Shaffer holds that the mere "status" of director cannot serve as a sufficient contact. They argue they "have simply had nothing to do with the State of Delaware." Id., 433 U.S. at 216, 97 S.Ct. at 2586, 53 L.Ed.2d at 705. We disagree with the defendants' characterization of their relationship with Delaware as well as their characterization of the holding in Shaffer.

While it is true that the defendants' numerical contacts with this State are minimal, i. e., limited to their acceptance of directorships in a Delaware corporation subsequent to the effective date of § 3114, the jurisdictional question must be answered by reference to the quality and nature of such contacts; the analysis "cannot be simply mechanical or quantitative." International Shoe Co. v. Washington, 326 U.S. 310, 319, 66 S.Ct. 154, 159-60, 90 L.Ed. 95 (1945). In the context of the case sub judice, the precise inquiry is whether the defendants' acceptance of Delaware corporate directorships is a sufficient contact with this State, such that requiring them to come into the State to defend suits alleging breach of their fiduciary duties to the Company does not offend traditional notions of fair play and substantial justice. See id., 326 U.S. at 316, 66 S.Ct. at 158; see also Rush v. Savchuk, 444 U.S. 320, 100 S.Ct. 571, 62 L.Ed.2d 516 (1980). "(T)he inquiry must focus on 'the relationship among the defendant, the forum, and the litigation.' Shaffer v. Heitner, supra, 433 U.S., at 204, 97 S.Ct., at 2580." Rush v. Savchuk, supra, 444 U.S. at 327, 100 S.Ct. at 577, 62 L.Ed.2d at 524.

The instant litigation seeks to hold the defendants accountable to the Company for their actions as directors of a Delaware corporation. Their status as directors and their power to act in that capacity arise exclusively under the Delaware corporation statutes. The defendants accepted their directorships with explicit statutory notice, via § 3114, that they could be haled into the Delaware Courts to answer for alleged breaches of the duties imposed on them by the very laws which empowered them to act in their corporate capacities. Compare Shaffer v. Heitner, supra, 433 U.S. at 216, 97 S.Ct. at 2586, 53 L.Ed.2d at 705. Moreover, the defendants, by purposefully availing themselves of the privilege of becoming directors of a Delaware corporation, have thereby accepted significant benefits and protections under the laws of this State. ⁴ See Hanson v. Denckla, 357 U.S. 235, 253, 78 S.Ct. 1228, 1240, 2 L.Ed.2d 1283, 1298 (1958); Rush v. Savchuk, 444 U.S. at 327-330, 100 S.Ct. at 577-78, 62 L.Ed.2d at 525; Kulko v. California Superior Court, 436 U.S. 84, 93-94, 98 S.Ct. 1690, 1698, 56 L.Ed.2d 132, 142 (1978). Under these circumstances, requiring the defendants to impliedly consent to the assertion of Delaware in personam jurisdiction over them in actions alleging breach of their fiduciary obligations to the corporation does not seem unreasonable, at least so long as the consent requirement serves a legitimate State purpose. ⁵

We believe that Delaware does have a significant and substantial interest in actively overseeing the conduct of those owing fiduciary duties to shareholders of Delaware corporations and that such interest far outweighs any burden to defendants, who have voluntarily associated themselves with such corporations by accepting directorships, in being required to submit to the jurisdiction of our courts. ⁶ Judicial interpretation of the corporation statutes and judicial enforcement of statutory and non-statutory duties of fiduciaries have long played and continue to play a significant part in the development of Delaware's corporation law. See, e. g., Bell v. Kirby Lumber Corp., Del.Supr., 413 A.2d 137 (1980); Lynch v. Vickers Energy Corp., Del.Supr., 383 A.2d 278 (1977); Singer v. Magnavox Co., Del.Supr., 380 A.2d 969 (1977). While courts of other jurisdictions may apply and enforce existing Delaware law, the development of Delaware law is quite properly the duty and responsibility of the Delaware Courts.

We stress the word "may" because it is by no means certain that another state will give appropriate deference to the substantive concerns of Delaware, as reflected in our corporation law, in shareholder derivative actions involving Delaware corporations. Contrary to the majority's inference in Shaffer v. Heitner, supra, 433 U.S. at 215-16, 97 S.Ct. at 2585-86, 53 L.Ed.2d at 704-05, choice of law analysis, either traditional or modern, does not inexorably lead to the application of Delaware law in such cases. See Silberman, Shaffer v. Heitner: The End of an Era, 53 N.Y.U.L.Rev. 33, 80-84 nn. 259, 265 and 270 (1978); see also Restatement (Second) of the Conflict of Laws §§ 6, 309 (1971).

If it be conceded, as surely it must, that Delaware has the power to establish the rights and responsibilities of those who manage its domestic corporations, it seems inconceivable that the Delaware Courts cannot seek to enforce these obligations but must, rather, leave the lion's share of the enforcement task to a host of other jurisdictions with little familiarity or experience with our law, jurisdictions which may or may not even choose to apply Delaware law depending on the vagaries of each jurisdiction's choice of law rules. We find nothing in "traditional notions of fair play and substantial justice" which compels such anomalous results.

It is appropriate here to briefly highlight some of the significant ramifications which would undeniably (and unfortunately) flow from a conclusion that § 3114 cannot constitutionally be applied to corporate directors in shareholder derivative actions, even assuming Delaware law would be applied to such...