Sternberg v. O'Neil

Decision Date25 July 1988
Citation550 A.2d 1105
Parties, Fed. Sec. L. Rep. P 94,346 Richard STERNBERG, Plaintiff Below, Appellant, v. Thomas F. O'NEIL, Michael G. O'Neil, John O'Neil, Shane O'Neil, William M. Regan, Frank Shakespeare, Hubert J. DeLynn, John B. Poor, Sr., John B. Fitzgerald, Kenneth R. Frankl, David S. Henkel, Richard W. Jencks, James J. Kerley, Alfred J. Moccia, James T. Morley, A. William Reynolds, William F. Spitznagel, Richard B. Tullis, William B. Walsh, Lester Garvin, Warren J. Hayford, D. Bruce Mansfield, T.E. Pittenger, John J. Dalton, Defendants Below, Appellees. and Gencorp Inc. and RKO General, Inc., Nominal Defendants Below, Appellees. . Submitted:
CourtSupreme Court of Delaware

Joseph A. Rosenthal and Kevin Gross, of Morris, Rosenthal, Monhait & Gross, P.A., Wilmington, David H. Weinstein (argued), Harold E. Kohn, Stuart H. Savett and Stanley M. Shur, of Kohn, Savett, Klein & Graf, P.C., Philadelphia, Pa., Steven R. Rivkin, Washington, D.C., for appellant.

R. Franklin Balotti and C. Stephen Bigler, of Richards, Layton & Finger, Wilmington, Garrard R. Beeney (argued), Marvin Schwartz and Karen A. Popp, of Sullivan & Cromwell, New York City, on behalf of individual appellees.

Charles S. Crompton, Jr. (argued), Robert K. Payson, James F. Burnett, Peter M. Sieglaff and Arthur L. Dent, of Potter, Anderson & Corroon, Wilmington, on behalf of nominal appellees.

Before CHRISTIE, C.J., HORSEY, MOORE, HOLLAND, JJ., and BALICK, Judge * (constituting the Court en banc).

HOLLAND, Justice:

The appellant, Richard Sternberg ("Sternberg"), brought a double derivative suit 1 against GenCorp Inc. ("GenCorp"), its wholly owned subsidiary, RKO General, Inc. ("RKO General"), and certain past and present officers and directors of both corporations. GenCorp is an Ohio corporation qualified to do business in Delaware under 8 Del.C. § 371. RKO General is a Delaware corporation. The Court of Chancery found "that the complaint does not allege a constitutionally permissible basis for the assertion of personal jurisdiction over either Gencorp or those individual defendants who are not directors of RKO General." Sternberg v. O'Neil, Del. Ch., 532 A.2d 993, 994 (1987). The Court of Chancery also found that GenCorp was an indispensable party. Id. It, therefore, held that "the complaint must be dismissed as to all defendants." Id.

On appeal, we conclude on two bases, that the Court of Chancery erred, as a matter of law, when it determined that it lacked personal jurisdiction over GenCorp. First, when GenCorp registered to do business in Delaware and appointed an agent in Delaware to receive service of process, it consented to the general jurisdiction of Delaware courts. Second, we hold alternatively, that GenCorp's ownership of a Delaware corporation, whose alleged mismanagement is the subject of the double derivative suit, constitutes a "minimum contact" with Delaware which satisfies due process and enables Delaware courts to exercise specific personal jurisdiction over GenCorp in this matter. Therefore, we reverse the Court of Chancery's decision to dismiss the complaint as to GenCorp. However, we affirm the dismissal of the complaint as to the individual nonresident defendants, who are not directors of RKO General.

FACTS

GenCorp, an Ohio corporation, has its principal place of business in Akron, Ohio, and was known as The General Tire & Rubber Company until 1984 when it changed its name. GenCorp is qualified to conduct business in Delaware as a foreign corporation. RKO General, a Delaware corporation, has its principal place of business in New York, New York. All of RKO General's common stock has been owned by GenCorp since it was acquired in 1955. Sternberg is a shareholder of GenCorp.

Sternberg's complaint in the Court of Chancery alleged, inter alia, that the directors and officers of RKO General and GenCorp breached their fiduciary duties to the GenCorp shareholders when they made numerous false and misleading statements and omissions to the Federal Communications Commission ("FCC") about an investigation of GenCorp by the Securities and Exchange Commission ("SEC"). 2 During broadcast license renewal proceedings before the FCC, RKO General apparently first failed to disclose the SEC investigation and then denied reports about it in a competitor's FCC filing. RKO Gen., Inc. v. Federal Communications Comm'n, 670 F.2d 215, 228 (D.C.Cir.1981), cert. denied, 456 U.S. 927, 102 S.Ct. 1974, 72 L.Ed.2d 442 (1982). As a result of this omission, the FCC denied the application for the renewal of the license for WNAC-TV, a television station in Boston, Massachusetts, that was owned by RKO General. Id. at 238. The denial of the application to renew the license for WNAC-TV was affirmed on appeal. Id.

In 1980, following the FCC's denial of RKO General's renewal application for WNAC-TV, several derivative suits were filed on behalf of GenCorp and RKO General. These derivative suits were brought to recover damages for the losses caused by the nonrenewal of the WNAC-TV license. These suits were subsequently joined with previously pending derivative lawsuits against GenCorp, its officers and directors. All of the cases were settled with the approval of the United States District Court for the Northern District of Ohio. Two shareholders objected to the settlement and appealed. The United States Court of Appeals for the Sixth Circuit upheld the settlement. In re General Tire & Rubber Co. Sec. Litig., 726 F.2d 1075, 1087 (6th Cir.), cert. denied, 469 U.S. 858, 105 S.Ct. 187, 83 L.Ed.2d 120 (1984). However, the Sixth Circuit noted that it did not "understand the settlement to bar all future shareholders' claims arising out of the very serious additional F.C.C. and I.R.S. proceedings against General Tire." Id. at 1085 n. 7.

In his complaint filed with the Court of Chancery in this case, Sternberg seeks equitable relief and damages, in excess of $298 million, "which have accrued since the settlement of previous derivative suits brought on behalf of GenCorp and RKO General." According to Sternberg's complaint, the FCC currently has before it a consolidated renewal proceeding which involves fourteen of the fifteen television and radio stations still operated by RKO General. Sternberg alleges that RKO General's lack of candor in the WNAC-TV proceeding creates a strong probability that these licenses will not be renewed. Sternberg further contends that this past lack of candor "creates a strong probability of preventing RKO General from selling its stations for their full value or at all, since it is the policy of the FCC to prohibit transfer of a license until a transferor like RKO General, whose license qualifications are at issue, has first been found to be qualified to hold the license." Sternberg's double derivative claim is premised upon his allegation that the individual defendants, officers and directors of GenCorp and RKO General, failed to manage the affairs of GenCorp and RKO General in a "fair, careful and prudent manner" and that such failure constitutes a breach of their fiduciary duties.

GENERAL JURISDICTION AND CONSENT

The first question that we must address is whether Delaware courts may assert general personal jurisdiction over a foreign corporation 3 upon the basis of that corporation's qualification to do business in Delaware and its appointment of an agent to receive service of process in Delaware pursuant to a registration statute. If we determine that such registration can constitute consent to the general jurisdiction of the Delaware courts, we must then analyze the constitutional validity of that consent.

Although parties may not waive subject matter jurisdiction, they may waive personal jurisdiction. Insurance Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 703, 102 S.Ct. 2099, 2105, 72 L.Ed.2d 492 (1982). Therefore, consent has been recognized as a basis for the exercise of general personal jurisdiction. In fact, "[a] variety of legal arrangements have been taken to represent express or implied consent to the personal jursdiction of the Court." Id.; Armstrong v. Pomerance, Del.Supr., 423 A.2d 174, 176-79 (1980). 4

Express Statutory Consent

Express consent has been found to be a basis for jurisdiction when a foreign corporation appoints an agent for service of process. 5 See Neirbo Co. v. Bethlehem Shipbuilding Corp., 308 U.S. 165, 170-71, 60 S.Ct. 153, 156, 84 L.Ed. 167 (1939); Pennsylvania Fire Ins. Co. v. Gold Issue Mining & Milling Co., 243 U.S. 93, 95, 37 S.Ct. 344, 344, 61 L.Ed. 610 (1917). In Pennsylvania Fire Ins. Co., the United States Supreme Court ruled that a foreign corporation, which authorizes an agent to receive service of process in compliance with the requirements of a state registration statute, has consented to the exercise of general personal jurisdiction in that state. Id. The unanimous opinion, written by Justice Holmes, held that Missouri could constitutionally exercise general jurisdiction over the defendant foreign corporation, and "not deprive the defendant of due process", even though its only apparent contact with Missouri was its designation of the Missouri Superintendent of Insurance as its registered agent. Id. 6

Implied Consent

Implied consent has also been found to be a basis for jurisdiction over a foreign corporation. International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945). In fact, the Supreme Court's decision in International Shoe has become a landmark case because it established the modern doctrine of in personam jurisdiction by implied consent for state courts over foreign corporations (and nonresident defendants) when it held that:

due process requires only that in order to subject a defendant to a judgment in personam, if he not be present within the territory of the forum, he have certain minimum contacts with it such that the maintenance of the suit does not offend "traditional...

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