TIMOTHY J. HARRIS, et al. v. MARY ELLEN HARRIS, et al.
C.A. No. 2019-0736-JTL
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
January 19, 2023
Date Submitted: November 9, 2022
OPINION
David A. Jenkins, Julie M. O’Dell, SMITH, KATZENSTEIN & JENKINS LLP; Wilmington, Delaware; Counsel for Mary Ellen Harris.
Steven L. Caponi, Matthew B. Goeller, Megan E. O’Connor, K&L GATES LLP, Wilmington, Delaware; Counsel for Mary Ellen Harris, Paul Petigrow, and Michael Schwager.
Kurt M. Heyman, Patricia L. Enerio, Gillian L. Andrews, HEYMAN ENERIO GATTUSO & HIRZEL LLP, Wilmington, Delaware; Counsel for Royce Management, Inc., Judith Lolli, and Charles Grinnell.
John L. Reed, Ronald N. Brown, III, Peter H. Kyle, Kelly L. Freund, DLA PIPER LLP (US), Wilmington, Delaware; Neal J. Levitsky, E. Chaney Hall, FOX ROTHSCHILD LLP, Wilmington, Delaware; Emily A. Kaller, GREENBAUM, ROWE, SMITH & DAVIS LLP, Woodbridge, New Jersey; Counsel for Harris FRC Corporation.
William M. Kelleher, Phillip A. Giordano, Madeline Silverman, GORDON, FOURNARIS & MAMMARELLA, P.A., Wilmington, Delaware; Counsel for The Mary Ellen Harris 2011 Grantor Retained Annuity Trust.
LASTER, V.C.
Dr. Robert M. Harris, Sr. formed Harris FRC Corporation (the “Company“).1 He and his spouse, Mary Ellen Harris, originally owned all of its 1,000 shares as tenants by the entirety. They gifted 190 shares to their five children (the “Siblings“), and they set up two grantor retained annuity trusts (the “GRATs“) to transfer another 490 shares to the Siblings in a tax-advantaged manner. Through these transactions, control over the family-owned entity would pass to the second generation.
In this action, three of the Siblings allege that in 2015, as Dr. Harris’s health was failing, Mary Ellen and four of her close friends and advisors schemed to seize control of the Company. After securing control, they engaged in a series of self-dealing transactions that tunneled millions of dollars out of the Company. To perpetuate their control, Mary Ellen and her advisors found ways to negate the distribution of shares from the GRATs.
The plaintiffs have asserted claims for breach of fiduciary duty and aiding and abetting breaches of fiduciary duty against Mary Ellen and the advisors based on their self-dealing. They also challenge a merger that Mary Ellen and the advisors effectuated to move the Company from Delaware to New Jersey (the “Outbound Merger“). And they contend that Mary Ellen violated the trust agreement that governed her GRAT by paying far less than equivalent value to withdraw the 245 shares it held (the “Share Withdrawal“). The plaintiffs contend that the advisors
Michael Schwager is one of the advisors. After Mary Ellen gained control of the Company, he began handling the Company’s financial and accounting work. The plaintiffs allege that because of the Company’s simplified operations, the bills for that work should run between $20,000 and $30,000 per year. Schwager has been paid $285,000 per year. As the only person performing financial and accounting work for the Company, Schwager has written the checks for the interested transactions that have tunneled funds to Mary Ellen and her associates. When preparing the Company’s financial statements, Schwager has taken steps to hide the interested transactions. When preparing the Company’s tax returns, he has deducted personal transfers as if they were bona fide business expenses.
Schwager has moved to dismiss the claims against him for lack of personal jurisdiction. A proper assertion of personal jurisdiction requires a valid method for serving process, and the assertion of jurisdiction must comply with the requirements of due process.
The plaintiffs seek to serve Schwager under Delaware’s Officer Consent Statute. Schwager argues that he cannot be served under that statute because he never served in a formal officer position. Addressing an issue of first impression, this decision holds that the Officer Consent Statute can be used to serve process on a person who serves in the role of president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, or chief accounting officer of the corporation, even if the person does not hold the formal officer position.
In this case, the court cannot yet determine whether Schwager is subject to service of process under the Officer Consеnt Statute. On the one hand, Schwager was the only person engaged in the financial and accounting function for the Company, and he was so deeply involved that one of the defendants referred to him colloquially as the Company’s Chief Financial Officer. The plaintiffs also allege that he was paid far more than what a services provider would receive. On the other hand, Schwager did not accept a formal officer role, and he says that he operated at all times as a principal of a small accounting firm. Under the circumstances, the plaintiffs are entitled to take jurisdictional discovery. A decision on whether Schwager can be served under the Officer Consent Statute and whether the resulting exercise of personal jurisdiction would comply with due process is deferred until after jurisdictional discovery is complete.
The plaintiffs alternatively seek to serve Schwager under Delaware’s Long-Arm Statute. They have identified Delaware-directed acts that could support service of process under that statute, including the Outbound Merger and the redomiciling of a trust in Delaware as part of the Share Withdrawal. The plaintiffs also have made allegations indicating that Schwager was sufficiently involved with those Delaware-directed acts to support service of process and a constitutionally proper exercise of personal jurisdiction. Nevertheless, the record remains too limited to rule on those issues. Instead, the plaintiffs are again entitled to jurisdictional discovery. A decision on whether Schwager can be served under the Long-Arm Statute and the constitutionality of exercising personal jurisdiction over him will await the completion of that effort.
Schwager has moved to dismiss the counts that name him as a defendant for
I. FACTUAL BACKGROUND
The facts are drawn from the plaintiffs’ Verified Supplemental and Third Amended Complaint (the “Complaint“) and the documents that it incorporates by reference.2 At this procedural stage, the plaintiffs are entitled to have the court credit their allegations and draw all reasonable inferences in their favor. For purposes of evaluating whether a defendant is subject to the court’s jurisdiction, “the court may go beyond the pleadings and look to affidavits and other discovery of record.” Chandler v. Ciccoricco, 2003 WL 21040185, at *8 (Del. Ch. May 5, 2003). The factual recitation therefore incorporates matters drawn from the parties’ submissions in connection with the motions to dismiss.
A. The Company
Before May 2016, the Company was a New Jersey corporation. From May 2016 until May 2019, the Company was a Delaware corporation. Since May 2019, the Company has been a New Jersey corporation. It is and always has been a family-held entity.
Currently, its only stockholders are Mary Ellen, the five Siblings, and various trusts created for their benefit. The plaintiffs in this action are three of the Siblings: Tim Harris, Kristen Harris, and Megan Harris Loewenberg. As discussed below, another Sibling previously sued Mary Ellen and the Company and reached a settlement.
Dr. Harris founded the Company after securing the patent rights for an epilepsy drug. He monetized the patent rights through a license agreement with a global biopharmaceutical company and formed the Company to hold the rights and receive royalty payments. That revenue stream historically amounted to approximately $100 million per year. The Company’s only significant function was to collect and distribute the payments. In 2020, the Company sold its patent rights for $342 million in cash. The Company currently holds a pool of cash of around $120 million. It has no operating business.
The Company has issued 1,000 shares. Originally, Dr. Harris and Mary Ellen owned all of the shares jointly as tenants by the entirety. In 2002, they transferred 38 shares to each of the Siblings, resulting in each owning a 3.8% interest. In 2011, Dr. Harris and Mary Ellen each created a GRAT and funded it with 245 shares. The GRATs would expire on December 31, 2018, and the shares would be distributed to the Siblings. Through the combination of the 190 shares they received directly and the 490 shares distributed from the GRATs, the Siblings would receive a total of 680 shares, representing a controlling 68% interest in the Company.
B. Dr. Harris’s Illness
In October 2013, Dr. Harris was diagnosed with an aggressive form of aphasia consistent with Alzheimer’s disease. As Dr. Harris’s health deteriorated, Judith Lolli insinuated herself into Mary Ellen’s financial life. Lolli and Mary Ellen are next-door neighbors in Holmdel, New Jersey. They also own adjacent beach houses in
Lolli brought Mary Ellen into contact with her own friends and advisors. Paul Petigrow is a New Jersey lawyer who served as Lolli’s personal counsel. Petigrow promptly became Mary Ellen’s personal counsel as well. Charles Grinnell is a New Jersey lawyer and career prosecutor who investigated and prosecuted the gangland murder of Lolli’s brother, then became her close friend. Schwager is Lolli’s personal accountant and another close friend. Like the Complaint, this decision refers to Lolli, Petigrow, Grinnell, and Schwager collectively as the “Advisors.”3
C. The Takeover
With Dr. Harris’s health declining, questions arose as to who would lead the Company. Mary Ellen had no experience or qualifiсations for the role. The eldest Sibling, Robert M. Harris, Jr., had worked at the Company since 2000, held the office of Vice President, and managed the relationship that generated the Company’s royalty stream.
A power struggle ensued with Mary Ellen and the Advisors on the one side and Robert on the other. In April 2015, eighteen months after his Alzheimer’s diagnosis, Dr. Harris purportedly acted by written consent to remove Robert from his position as an officer. The written consent added Mary Ellen to the board of directors (the “Board“), where Dr. Harris had been the sole director. The plaintiffs assert that Dr. Harris did not have the capacity to execute the written consent and that Lolli pulled the strings so that Mary Ellen gained control over the Company.
Immediately after the first consent, Dr. Harris and Mary Ellen executed a second consent that caused the Company to enter into “an agreement with Lolli in substantially the form submitted hereto.” Compl. ¶ 32. The consent did not attach an agreement. In June 2015, Lolli and Mary Ellen executed an employment agreement which provided for Lolli’s compensation to be determined at an unspecified future date. Petigrow drafted the agreement. The Company began paying Lolli $15,000 annually as an employee and providing her with benefits.
The Company retained Grinnell as a consultant at a rate of $110 per hour. Schwager took over as the Company’s accountant. Petigrow began doing more legal work for the Company. The Advisors had gotten their noses inside the tent.
Royce is a shell. It has no employees other than Lolli and Grinnell, and it has no other clients. It has no assets other than its contract with the Company. It operates out of the Company’s offices. It exists solely to channel money to Lolli and Grinnell. It has no expenses other than their salaries, pension contributions, distributions, and two $1,000 per month luxury car leases.
D. Dr. Harris’s GRAT
To maintain control over the Company, Mary Ellen and the Advisors had to deal with the GRATs. If the GRATs distributed their 490 shares as planned, then control over the Company would pass to the Siblings.
Around the same time that the Company began paying Royce, Lolli served as a witness when Dr. Harris purportedly amended his GRAT and executed a codicil to his will. Petigrow oversaw the drafting of the documents. The principal consequence of the amendments was to redirect the 245 shares in Dr. Harris’s GRAT from the Siblings to Dr. Harris’s marital trust. That trust benefits Mary Ellen, and she has a power of appointment over its corpus, enabling her to determine where the assets go when the trust terminates. The transaction reduced the number of Shares that the Siblings would receive from 680 to 435, below majority control.
The Advisors wanted a cooperative trustee to oversee Dr. Harris’s GRAT and the marital trust, so Lolli and Grinnell turned to Dan Selcow, a wealth manager at First Republic Bank. Lolli and Grinnell had an existing relationship with Selcow, and he was a friend of Petigrow and Schwager. Initially, they brought some of the Harris’ personal accounts to Selcow to manage. Eager for more business, Selcow arranged for First Republic Trust Company of Delaware LLC (“First Republic Delaware“) to take over as trustee.
Mary Ellen and the Advisors also took control of the family’s charity, the Golden Dome Foundation. Mary Ellen removed the Siblings from the board of the foundation and installed Schwager, Petigrow, and Grinnell. Mary Ellen viewed the foundation as a place to stash money for her future use, explaining that she could “put money in golden dome and i [sic] pay no taxes and if I ever need it I can take a salary.” Id. ¶ 51.
E. The Idea For The Inbound Merger
It was apparent that Robert might bring litigation over his removal and the events at the Company. New Jersey recognizes a claim for minority stockholder oppression, and available remedies include orders dissolving the corporation or appointing a custodian or provisional directors. A stockholder oppression lawsuit threatened to deprive Mary Ellen and the Advisors of control.
In November 2015, Petigrow drafted Dr. Harris’s letter of resignation from the Board, which he purportedly signed on November 16, two years after his Alzheimer’s diagnosis. His resignation left Mary Ellen as the sole director. Petigrow drafted a power of attorney in which Dr. Harris empowered Mary Ellen to act on his behalf. Dr. Harris purportedly signed it, and Lolli witnessed it. Petigrow also drafted two proxies that Mary Ellen could use to vote Dr. Harris’s shares, one for Dr. Harris to sign and one for Mary Ellen to sign using her power of attorney.
In December 2015, Mary Ellen provided an initial set of approvals for the Inbound Merger. She also appointed herself President and began paying herself $5 million per year for serving in that role. She continued the payments until 2019, when she resigned after the filing of this litigation. She appointed a lawyer to succeed her and paid him 11.5% of what she paid herself.
On December 7, 2015, Petigrow and Mary Ellen formed a Delaware corporation for use in the Inbound Merger. Two weeks later, Robert had his attorney send a letter to the Company that formally threatened litigation.
That same month, Petigrow wrote to the Siblings to explain why the Company was moving to Delaware. He claimed that the move would generate tax benefits and that the Inbound Merger “will have no effect on a shareholder who lives in New Jersey.” Compl. ¶ 75. After that, Grinnell decided that the Company would not provide any more information to stockholders, using Robert’s threat of a lawsuit as a pretext.
F. Value Extraction On A Larger Scale
In 2016, Mary Ellen and the Advisors stepped up their extraction of value from the Company. That year also saw Robert follow through with his threat of litigation by filing an action in New Jersey state court.
In February 2016, Mary Ellen signed a written consent approving an employment agreement with Petigrow. It paid him $600,000 per year to serve as Vice President and General Counsel for the Company. Petigrow continued to run a solo law practice out of the Company’s offices, using the Company’s personnel and resources, and without paying rent. Given his full-time law practice, Petigrow worked only part-time and sporadically as General Counsel.
In March 2016, Lolli had a physician friend declare Dr. Harris incapacitated. Petigrow drafted the physician’s certificate, which read: “I have concluded, that by reason of progressive mental dеterioration, he has, as of the date hereof, become incapacitated to act rationally and prudently in financial matters.” Ex. 4. The doctor who signed it has a longstanding relationship with Lolli and works at Bayshore Health Center, which later received a $10 million donation that was paid for by the Company and which supported the creation of an emergency care center in Dr. Harris’s name. Ex. 6.4 Grinnell witnessed the certificate. Ex. 4.
Schwager cashed in too. Given the Company’s minimal operations, the services for its accounting and taxes should have cost $20,000 to $30,000 per year. The Company entered into an arrangement with Schwager under which the Company paid him simultaneously on two parallel schedules: (i) $12,500 a month for a total of $150,000 per year, and (ii) $25,000 quarterly for another $100,000 per year. He also received annual “Merry Christmas” bonuses of $35,000. Schwager thus raked in $285,000 per year, ten times what the Company should have been paying. Plus, at the Company’s expense, Schwager provided tax and accounting services to Mary Ellen, the Advisors, and their entities, including for Royce.
On May 1, 2016, the Inbound Merger became effective, and the Company emerged as a Delaware corporation. Robert exercised dissenters’ rights and pursued an appraisal proceeding in New Jersey state court.
Now firmly in control of the Company, and believing that they had protection under Delaware law, Mary Ellen and the Advisors used Company funds to pay for an array of personal expenses. Lolli, Petigrow, and Grinnell reviewed and approved the bills. Schwager paid them. Schwager also made the payments due to Royce. The payments covered:
- a NetJets membership;
- two luxury SUVs;
- hundreds of thousands of dollars in spending at Tiffany & Co.;
- a New York Giants suite;
- personal legal fees;
- personal accounting fees;
- personal meals;
- charges for EZ Pass tolls, gas, car washes, and limousines;
- employees and contractors who worked at a farm owned by Mary Ellen (through an entity); and
- numerous charges for the farm, including for garage doors, gas, disposal, portable toilets, farm equipment and supplies, fiber optic cable, veterinary bills, ATVs, a Vespa, trailers, flooring, capital improvements, and kitchen appliances.
On the Company’s taxes, Schwager deducted the expenses as if they were business related. When Schwager prepared the Company’s financial statements, he obscured the personal expenses and the payments Royce received.
G. The Transactions To Preserve Control
During the second half of 2018, Mary Ellen and the Advisors engaged in two transactions designed to preserve their control over the Company. The first was a settlement with Robert, who was continuing to pursue his lawsuits. Mary Ellen and the Advisors understood that if Robert prevailed in his stockholder oppression action, then they could lose control. Just before Mary Ellen’s deposition, she settled with Robert by having the Company pay him more than $20 million.
The second transaction was the Share Withdrawal. Mary Ellen’s GRAT was still scheduled to expire on December 31, 2018, at which point 245 shares representing just under 25% of the Company’s common stock would be distributed to the Siblings. Under the trust agreement governing the
To support a lowball price for the Share Withdrawal, Petigrow commissioned an appraisal of the Company from EisnerAmper LLP, a valuation firm. Schwager helped furnish the firm with information.
The appraisal valued the Company at $242,863,296. Thе plaintiffs have pointed to substantial flaws in the appraisal, including a facially questionable 20% company-specific risk premium that increased the discount rate from 13% to 33%. The 20% company-specific risk premium was based in large part on a pending application by generic pharmaceutical companies for certiorari to the Supreme Court of the United States. As of November 19, 2018, weeks before what should have been a December valuation date, the Supreme Court had denied certiorari. See Accord Healthcare, Inc. v. UCB, Inc., 139 S. Ct. 574 (2018). After more questionable discounts, the report appraised the 245 shares at $52,677,000, or 21.7% of the value of the Company. The shares represented 24.5% of the Company’s capitalization, so on that basis alone, Mary Ellen was paying 88.5% of their value (21.7% divided by 24.5%) for a built in 11.5% discount. The underpricing was much greater because the Company itself was undervalued. Backing out the 20% company-specific risk premium increases the value of the Company to $325 million. A 24.5% share of that value is $79,625,000. Mary Ellen’s valuation was 66.1% of that figure, meaning that Mary Ellen was getting a 33.9% discount.
With a lowball valuation in hand, the next step was to find a trustee who would go along with the Share Withdrawal. And with the expiration date of the GRAT rapidly approaching, Mary Ellen and the Advisors needed a trustee who would sign off quickly, before December 31, 2018.
The Advisors went back to First Republic Bank, where Selcow had benefitted from managing more of Mary Ellen’s assets. Selcow secured the greenlight internally to have First Republic Delaware become the trustee. Selcow had a conflict of interest for purposes of the Share Withdrawal because his compensation depended on increasing assets under management for First Republic Bank and generating referral fees. The Advisors indicated that after the Share Withdrawal, Mary Ellen would divide the GRAT into fivе successor trusts, one for each Sibling, with Selcow managing the funds. By signing off on the Share Withdrawal, Selcow, First Republic Bank, and First Republic Delaware gained a new pool of $50 million to put in fee-generating assets. First Republic Delaware also had a conflict, because First Republic Bank loaned Mary Ellen the money for the Share Withdrawal. First Republic Bank thus had a buy-side interest in the same transaction where First Republic Delaware was supposedly evaluating the deal as a fiduciary for the seller.
Grinnell and Lolli pushed Petigrow to complete the Share Withdrawal quickly. Petigrow coordinated the legal documentation. Schwager worked on the financial side.
First Republic Delaware officially became trustee of Mary Ellen’s GRAT on December 24, 2018. Within two days after being appointed a trustee, First Republic Delaware had approved the Share Withdrawal at the valuation set by Mary Ellen’s appraiser. First Republic Delaware did not negotiate. First Republic Delaware
In the same document in which it signed off on the Share Withdrawal, First Republic Delaware secured indemnification from Mary Ellen for any liability resulting from the Share Withdrawal. Id. at 2. Mary Ellen committed to “defend First Republic with the counsel of [Mary Ellen’s] choice,” First Republic Delaware agreed not to enter into a settlement without Mary Ellen’s consent, and the two parties agreed to cooperate in any litigation. Id. When First Republic Delaware made and received those commitments, it was nominally adverse to Mary Ellen on the Share Withdrawal and obligated as trustee to sue Mary Ellen to protect the GRAT if the trust did not obtain equivalent value for the shares.
With the Share Withdrawal complete, Grinnell thanked the First Republic team for a “great job.” Compl. ¶ 108. Grinnell wrote to Lolli: “CONGRATULATIONS!!!” Id.
Also in December 2018, the Golden Dome Foundation made two $5 million irrevocable pledges to Bayshore Medical Center, where the doctor worked who had declared Dr. Harris incompetent. One $5 million pledge had a seven-year term that contemplated equal payments of approximately $715,000. The Company began paying the roughly $715,000 installments. The second $5 million pledge had no installment payments. After this litigation was filed, the Company paid the second pledge.
H. Tim Harris Hires Counsel And Asks Questions.
The Siblings had heard rumblings about the Share Withdrawal. On February 14, 2019, Loewenberg asked the Advisors about a transaction involving Mary Ellen’s GRAT. Over a month later, First Republic Delaware told Tim Harris that “Mary Ellen exercised her power to substitute the Harris FRC stock with cash.” Id. ¶ 110. That same week, First Republic Bank was in discussion with the Advisors about moving the “Mary Ellen and the Harris FRC relationship from Schwab to First Republic.” Id. ¶ 111.
On April 10, 2019, Tim Harris’s counsel in this action attended the annual meeting as his proxy. Petigrow and Grinnell attended for the Company. Mary Ellen did not attend. Petigrow chaired the meeting. Grinnell refused to identify himself. Petigrow called for a vote for the election of Mary Ellen as the Company’s sole director and exercised proxies from Mary Ellen and First Republic Delaware in favor of her election. The proxies represented a majority of the Company’s voting power. After tallying the vote, he called the meeting to a close.
Before the meeting was adjourned, Tim Harris’s counsel asked for a report on the business of the Company, then followed up with a series of specific questions. Petigrow and Grinnell failed to provide substantive answers on numerous topics. Grinnell repeatedly asserted that all stockholder questions needed to be put in writing.
I. The Outbound Merger
With Tim Harris having retained a Delaware lawyer whose questions had not been answered, the Advisors anticipated that a books-and-records demand would be coming. Immediately after the annual meeting, Mary Ellen and the Advisors started working on a plan for a merger that would take the Company out of Delaware and back into New Jersey (the “Outbound
On May 6, 2019, Tim Harris sent the Company a written demand for documents under
The Outbound Merger became effective on May 17, 2019. Mary Ellen approved the Outbound Merger as a director, and Mary Ellen and First Republic Delaware executed written consents approving it as stockholders.
The notice provided scant information about the Outbound Merger. It did not include any information about the large payments going to Royce and tо Schwager, the plentitude of personal expenses being paid for by the Company, or the numerous entities being run out of the Company’s offices. Schwager prepared the financial statements that were distributed with the notice.
J. This Litigation
The Outbound Merger stymied Tim Harris’s attempt to use
In July 2020, the Company agreed to sell its assets for $342 million in cash. That amount was $100 million more than the valuation of $242,863,296 that EisnerAmper placed on the Company for purposes of the Share Withdrawal. The amount is quite close to the figure of $325 million that results from backing out the facially implausible 20% company-specific risk premium that boosted the discount rate to 33%. Internally, First Republic Delaware noted the gulf between the two prices. First Republic Delaware then promptly signed off on the sale, without asking any questions.
In September 2021, Tim Harris filed an amended petition and complaint that added plenary claims for breach of fiduciary duty against Mary Ellen and claims for breach of fiduciary duty and aiding and abetting against the Advisors. In October, Kristen and Loewenberg joined the case as additional plaintiffs.
K. The Currently Operative Complaint
In March 2022, the plaintiffs filed the Complaint. It asserts claims against Mary Ellen, Schwager, Lolli, Grinnell, Royce, and Petigrow.
Count I of the Complaint asserts that Mary Ellen breached her fiduciary duties
- approving self-interested and unfair compensation and other personal payments to herself;
- using Company resources for personal gain, including by supporting her personal ventures and engaging in transactions to maintain her control;
- colluding with the Advisors by providing them with exorbitant compensation and benefits to pay them off for helping her engage in and cover up wrongdoing at the Company;
- sequestering distributions to oppress stockholders;
- engaging in the Inbound Merger and Outbound Merger; and
- verifying knowingly incomplete and misleading discovery responses.
This court issued a decision holding that the only theory currently at issue in Count I is a direct challenge to the Outbound Merger. Harris v. Harris, 2023 WL 115541, *2 (Del. Ch. Jan. 6, 2023) (the “Standing Decision“). The derivative claims that were originally the subject of Count I remain at issue, but as corporate assets to be valued in connection with the challenge to the Outbound Merger, rather than as independent claims that could support relief in their own right.
Skipping for the moment over Count II, Count III asserts claims for breach of fiduciary duty against the Advisors in their capacity as officers and agents. The Complaint alleges that Petigrow is a de jure officer, having agreed to serve as General Counsel. The Complaint alleges that Schwager, Grinnell, and Lolli acted as de facto officers. The Complaint alleges in the alternative that all were senior managers and agents of the Company who owed fiduciary duties in those capacities. The substance of the claims for breach of fiduciary duty against the Advisors generally tracks the claims against Mary Ellen. The Standing Decision applies to this count, so the only theory currently at issue is a direct challenge to the Outbound Merger.
Count IV alleges in the alternative that to the extent the Advisors are not accountable for breaching their own duties as fiduciaries of the Company, both the Advisors and Royce have aided and abetted the breaches of fiduciary duty by Mary Ellen, Petigrow, and any other Advisor that is found to have owed fiduciary duties. The Standing Decision applies to this count as well, so the only theory сurrently at issue is a direct challenge to the Outbound Merger.
The other two counts address the Share Withdrawal. Count II of the Complaint asserts that Mary Ellen breached the trust instrument governing her GRAT by failing to pay reasonably equivalent value in the Share Withdrawal. Count V asserts that Petigrow, Schwager, Lolli, Grinnell, and Royce tortiously interfered with the trust instrument by assisting Mary Ellen with the Share Withdrawal.
Count VI is the claim for an appraisal.
The defendants moved for dismissal on a multitude of grounds. This decision addresses (i) Schwager’s motion to dismiss Counts III, IV, and V on the theory that the court cannot exercise personal jurisdiction over him and (ii) his motion to dismiss Counts IV and V as failing to state a claim against him.
II. THE RULE 12(B)(2) MOTION
Schwager maintains that that this court cannot exercise personal jurisdiction over him for purposes of Count III, IV, or V. “Generally, a plaintiff does not
The plaintiffs’ burden in responding to a Rule 12(b)(2) motion is an evidentiary burden, not a pleading burden. Hart Hldg. Co. Inc. v. Drexel Burnham Lambert Inc., 593 A.2d 535, 538 (Del. Ch. 1991) (Allen, C.). A verified complaint satisfies the requirements for an affidavit and provides an evidentiary basis on which the plaintiff can rely. See Bruce E. M. v. Dorothea A. M., 455 A.2d 866, 869 (Del. 1983) (“A verified pleading may also be used as an affidavit if the facts stated therein are true to the party’s own knowledge.“); accord Weber v. Kirchner, 2003 WL 23190392, at *3 (Del. Ch. Dec. 31, 2003); Taylor v. Jones, 2002 WL 31926612, at *2 n.6 (Del.Ch. Dec.17, 2002).
When considering a Rule 12(b)(2) motion, the court is not limited to the allegations of the complaint and can consider evidentiary submissions provided by the parties.5 If the court has not conducted an evidentiary hearing, then a plaintiff “need only make a prima facie showing, in the allegations of the complaint, of personal jurisdiction and the record is construed in the light most favorable to the plaintiff.”6 If the court takes that approach, then the jurisdictional question technically remains open until trial, when the plaintiff must prove the jurisdictional facts by a preponderance of the evidence.7
Under Delaware law, the exercise of personal jurisdiction has two requirements. Matthew v. Fläkt Woods Gp. SA, 56 A.3d 1023, 1027 (Del. 2012). First, the plaintiff must identify a valid method of serving process. Second, the exercise of personal jurisdiction must rest on sufficient minimum contacts between the defendant and Delaware such that the exercise of personal jurisdiction “does not offend traditional notions of fair play and
A. The Officer Consent Statute
The plaintiffs initially seek to serve Schwager under Delaware’s Officer Consent Statute. The plaintiffs assert that Schwager acted as the Company’s chief financial officer or chief accounting officer, rendering him subject to service under the Officer Consent Statute. Schwager responds that he cannot be served under the Officer Consent Statute because he never formally accepted a position as an officer.
The Officer Consent Statute provides for service of process on anyone who “accepts election or appointment as an officer of a corporation organized under the laws of this State, or who after such date serves in such capacity” for purposes of “all civil actions or proceedings brought in this State, by or on behalf of, or against such corporation, in which such officer is a necessary or proper party, or in any action or proceeding against such officer for violation of a duty in such capacity.”
- Is or was the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer or chief accounting officer of the corporation at any time during the course of conduct alleged in the action or proceeding to be wrongful;
- Is or was identified in the corporation’s public filings with the United States Securities and Exchange Commission because such person is or was 1 of the most highly compensated executive officers of the corporation at any time during the course of conduct alleged in the action or proceeding to be wrongful; or
- Has, by written agreement with the corporation, consented to be identified as an officer for purposes of this section.
Determining whether
Dictionary definitions serve as an important starting point when determining plain meaning,8 and in many cases, reliance
distinguished jurist referred to dictionaries as “word museums,”10 and another commentator called them “word zoos.”11
The plain language of the Officer Consent Statute extends to anyone who “accepts election or appointment as an officer . . . , or who after [the effective date] date serves in such capacity.”
The competing reading interprets the reference to anyone “who after [the effective date] serves in such capacity” as having the more limited purpose of ensuring that when the Officer Consent Statute became effective, it immediately applied to everyone then serving as a Formal Officer, rather than only applying progressively as individuals accepted election or appointment as Formal Officers. That reading initially seems plausible, but upon further examination, it is both oddly limited and overinclusive. It is oddly limited because “serves in such a capacity” would play a role only during the transitional phase after
“Words in a statute should not be construed as surplusage if there is a reasonable construction which will give them meaning, and courts must ascribe a purpose to the use of statutory language, if reasonably possible.” Oceanport, 636 A.2d at 900 (internal citation omitted); accord, e.g., Dewey Beach Enters., Inc. v. Bd. of Adjustment of Town of Dewey Beach, 1 A.3d 305, 307–08 (Del. 2010). A reading that interprets the reference to anyone “who after [the effective date] date serves in such capacity” as a legacy of the post-enactment implementation of the Officer Consent Statute generates surplusage and is therefore unreasonable. Reading the same phrase as referring to Acting Officers avoids surplusage. It is the only reasonable reading.
Other parts of the statute support reading the “serves in such capacity” language to reach Acting Officers.
The term executive officer, when used with reference to a registrant, means its president, any vice president of the registrant in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer whо performs a policy making function or any other person who performs similar policy making functions for the registrant. Executive officers of subsidiaries may be deemed executive officers of the registrant if they perform
such policy making functions for the registrant.
To be sure,
There are other statutory provisions to account for as well.
Every corporation organized under this chapter shall have such officers with such titles and duties as shall be stated in thе bylaws or in a resolution of the board of directors which is not inconsistent with the bylaws and as may be necessary to enable it to sign instruments and stock certificates which comply with §§ 103(a)(2) and 158 of this title. One of the officers shall have the duty to record the proceedings of the meetings of the stockholders and directors in a book to be kept for that purpose. Any number of offices may be held by the same person unless the certificate of incorporation or bylaws otherwise provide.
A.2d 27, 48 (Del. 2006). And for LLCs, there is the de facto manager doctrine. See WaveDivision Hldgs., LLC v. Millennium Digit. Media Sys., L.L.C., 2010 WL 3706624, at *3 (Del. Ch. Sept. 17, 2010).
True, Delaware has applied a strict test when determining whether someone can be held liable as a de facto officer. One of the more thorough discussions of the concept appears in a decision from 1948:
The term “de facto officer” may be defined as one who is in actual possession of an office under claim and color of election or appointment and is in the exercise of its functions and in discharge of its duties, although not authorized by law to act in the official capacity he assumes. According to the weight of authority, a person, who has been duly elected to an office and who continues to exercise its functions after his title has been ended, is a de facto officer. . . . [T]hree things are necessary to constitute such an officer: (1) The office must have a de jure existence or at least one recognized by law; (2) The claimant must be in actual possession thereof; and (3) his possession must be held under color of title or authority.
State ex rel. James v. Deakyne, 58 A.2d 129, 131 (Del. Super. Ct. 1948) (citations omitted). Relying on these authorities, Schwager argues that he cannot be a de facto officer because he was never in actual possession of an office under color of election or appointment.
In Deakyne, the question was whether the de facto officer could validly take action on behalf of a governmental entity, id. at 132–33, and virtually all of the cases involving de facto officers have involved governmental entities.15 The principal exception
he formally took office as President of The Walt Disney Corporation. On appeal, the plaintiffs argued for the first time that Ovitz could have faced liability for earlier actions as a de facto officer. Disney, 906 A.2d at 48 (noting that issue was not raised below). The Delaware Supreme Court held that even if the argument were considered, the plaintiffs failed to establish that Ovitz was a de facto officer under the same test used when the validity of corporate action was at issue. Id. The high court noted that Ovitz had not purported to assume the office of Prеsident until October 1, 1995, and that the trial court had found that all of his pre-October 1 activity was preparatory in nature. Id. at 48–49. The Disney case, therefore, involved both a Formal Officer position (the office of President), and a factual finding that before he formally assumed that position, Ovitz had not acted as an officer. Id. The Disney case did not involve the question of whether a person could be treated as a de facto officer for purposes of a claim for breach of fiduciary duty if the individual performed the functions of an officer at a time when no one else was performing the role. Id. And no case has addressed service of process under
The question at this stage is not whether Schwager might ultimately be held liable for breach of fiduciary duty as a de facto officer. The question is whether Schwager can be served with process under
impose liability is necessary to support jurisdiction. It is more logical that a court could exercise jurisdiction based on a somewhat lesser showing than what is required to impose liability. Otherwise, the determination regarding jurisdiction would be case-dispositive. The strictures of the de facto officer doctrine are therefore not dispositive for jurisdictional purposes.
Another source of insight is the comparison between
positions to reach individuals who meet statutory criteria.
Finally, both sides advance policy arguments, all of which are worthy of consideration. The plaintiffs point out that if
The Company exemplifies both problems. Starting with inadvertence, the Company is a small, family-held business. The Board consists solely of Mary Ellen, a septuagenarian without a college degree or meaningful business experience. The Company does not keep minutes. With a corporation like that, some officer appointments may fall through the cracks. If
There is also the problem of evasion by design. Through Royce, the Company paid Lolli and Grinnell $208,334 per month to provide management services to the Company, and the $2.5 million that they received annually (excluding bonuses) was more than four times what Petigrow received as Vice President and General Counsel. The management services agreement designated Lolli and Grinnell as key employees, while also specifying that they were not officers. That looks like an intentional effort to eat one’s cake and still have it by getting compensated like officers while avoiding accountability as officers.
The plaintiffs posit that it would surprise the proponents and enactors of
(CFO of Enron) or Scott Sullivan (CFO of WorldCom) had hit upon the idea of creating a personal management company like Royce and providing their services solely under contract, then the architects of
in substance as the top executives at private companies, regardless of Formal Officer status. Acting Manager status under
Schwager responds with a policy argument of his own. He contends with considerable force that it is unfair to spring jurisdiction in Delaware on a contractual service provider. He fears an apocalyptic aftermath in which unwitting service providers can be swept in by a functional interpretation of
The answer is that facts always matter. In the vast majority of cases, an outside service provider faces no risk of being served using
where there is no in-house legal person and the outside lawyer is performing all of the functions of a chief legal officer, then then the calculus may be different. Responsibility and, if necessary, accountability should correspond to duties and actions, not formal titles.
The constitutional analysis can be fact intensive. Yes, a Formal Officer often has difficulty disputing the constitutional exercise of jurisdiction under
The record is currently insufficient to determine whether Schwager acted as the Company‘s chief financial officer or chief accounting officer and whether exercising jurisdiction over Schwager would be consistent with due process. But the plaintiffs have pled sufficient facts to warrant jurisdictional discovery.
When a plaintiff has asserted a non-frivolous basis to believe that a defendant could be subject to the court‘s jurisdiction, the court can permit the plaintiff to take discovery directed to the jurisdictional issues. The facts necessary to demonstrate the existence of personal jurisdiction are often in the exclusive control of the defendant. See Compagnie Des Bauxites de Guinee v. L‘Union Atlantique S.A. d‘Assurances, 723 F.2d 357, 362 (3d Cir. 1983); Surpitski v. Hughes-Keenan Corp., 362 F.2d 254, 255–56 (1st Cir. 1966). “As a plaintiff does have an evidentiary burden, [it] may not be precluded from attempting to prove that a defendant is subject to the jurisdiction of the court, and may not ordinarily be precluded from reasonable discovery in aid of mounting such proof.” Hart, 593 A.2d at 539. “Only where the facts alleged in the complaint make any claim of personal jurisdiction over defendant frivolous, might the trial court, in the exercise of its discretionary control over the discovery process, preclude reasonable discovery in aid of establishing personal jurisdiction.” Id. As long as the plaintiff has provided “some indication” that the particular defendant is amenable to suit, then jurisdictional discovery is appropriate. Hansen v. Neumueller GmbH, 163 F.R.D. 471, 475 (D. Del. 1995); see Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351 n.13 (1977) (“[W]here issues arise as to jurisdiction or venue, discovery is available to ascertain the facts bearing on such issues.“).
In this case, there are factors favoring a ruling that Schwager served as an Acting Officer. It is undisputed that Schwager was the only individual performing financial and accounting services for the Company. No one else had any involvement in thоse functions. Grinnell referred to Schwager as the Company‘s Chief Financial Officer. Schwager was also richly compensated to the tune of $285,000 per year, which the plaintiffs allege is more than ten times what the Company should have been paying an outside firm for financial and accounting services. Yet there are also countervailing factors, most notably that Schwager never took on a Formal Officer
The plaintiffs are entitled to jurisdictional discovery to explore whether Schwager served as an Acting Officer and whether the exercise of personal jurisdiction over him would be constitutional. The decision on whether the court can exercise personal jurisdiction over Schwager is deferred until after jurisdictional discovery.
B. The Long-Arm Statute
The plaintiffs alternatively seek to serve Schwager under Delaware‘s Long-Arm Statute. It provides:
(c) As to a cause of action brought by any person arising from any of the acts enumerated in this section, a court may exercise personal jurisdiction over any nonresident, or a personal representative, who in person or through an agent: (1) Transacts any business or performs any character of work or service in the State . . . .
[T]rial courts must give a broad reading to the terms of the long-arm statute[] in order to effectuate the statute‘s intent to ensure that this state‘s court may exercise jurisdiction to the full limits permissible under the Due Process Clause. In other words, the Supreme Court has instructed that trial courts should permit service under
§ 3104 if the statutory language plausibly permits service, and rely upon a Due Process analysis to screen out uses of the statute that sweep too broadly.
Sample II, 935 A.2d at 1056 (footnotes omitted). That said, there must be a sufficient nexus between the jurisdictional act and the claims that the party is asserting. LaNuova, 513 A.2d at 768 (explaining that the transaction of business only supports jurisdiction “with respect to claims which have a nexus to the designated conduct.“).
As this decision discussed previously, if a plaintiff has asserted a non-frivolous basis to think that a defendant could be subject to the court‘s jurisdiction, then the court can permit the plaintiff to take discovery directed at the jurisdictional issues. See Hart, 593 A.2d at 539. All
1. Personal Jurisdiction For Purposes Of Count V
Count V asserts that Schwager tortiously interfered with the instrument governing Mary Ellen‘s GRAT by assisting her with the Share Withdrawal. Count V offers a straightforward place to begin because this court has addressed several of the key issues relating to this count when (i) denying a motion that Petigrow made to dismiss Count V on the grounds that this court could not exercise personal jurisdiction over him and (ii) denying similar motions by Lolli and Grinnell. See Harris v. Harris, 2023 WL 193078 (Del. Ch. Jan. 16, 2023) (“Lolli and Grinnell Decision“); Harris v. Harris, --- A.3d ----, 2023 WL 165967 (Del. Ch. Jan. 12, 2023) (the “Petigrow Decision“). For Schwager, the plaintiffs have asserted a non-frivolous basis for personal jurisdiction, entitling them to jurisdictional discovery.
The first step in assessing whether personal jurisdiction exists is to identify a statutory basis for service of process. Proper service under the Long-Arm Statute requires a Delaware-directed act. In the Petigrow Decision, this court held that the act of moving the situs of Mary Ellen‘s GRAT to Delaware by appointing First Republic Delaware as the GRAT‘s trustee (the “GRAT Domestication“) was a Delaware-directed act that was sufficient to support service of process under the Long-Arm Statute. This court also held that the domestication of the GRAT was sufficiently connected to the Share Withdrawal to support the exercise of personal jurisdiction for claims related to the Share Withdrawal. Petigrow Decision, 2023 WL 165967, at *20–21. The same reasoning and rulings apply to Schwager. The question is whether Schwager was sufficiently involved with the GRAT Domestication such that the Delaware-directed act can be attributed to him.
In this case, the Complaint pleads facts sufficient to provide a non-frivolous basis to think that Schwager played a sufficient role in the GRAT Domestication to support the exercise of jurisdiction. Under the conspiracy theory of jurisdiction, when defendants have acted together to engage in tortious activity, a Delaware-directed act can be attributed to all of the co-conspirators. Under that theory,
a conspirator who is absent from the forum state is subject to the jurisdiction of the court, assuming he is properly served under state law, if the plaintiff can make a factual showing that: (1) a conspiracy to defraud existed; (2) the defendant was a member of that conspiraсy; (3) a substantial act or substantial effect in furtherance of the conspiracy occurred in the forum state; (4) the defendant knew or had reason to know of the act in the forum state or that acts outside the forum state would have an effect in the forum state; and (5) the act in, or effect on, the forum state was a direct and foreseeable result of the conduct in furtherance of the conspiracy.
Istituto Bancario, 449 A.2d at 225.
The first three Istituto Bancario elements speak to the requirements of Delaware‘s Long-Arm Statute. The third Istituto Bancario element—whether a “substantial act or substantial effect in furtherance of the conspiracy occurred in the forum state“—corresponds to the statutory requirement that the defendant have transacted business or performed work in the State. The first and second Istituto Bancario elements—the existence of a conspiracy and the defendant‘s membership in it—provide grounds for imputing the jurisdiction-conferring act to the
The first and second Istituto Bancario elements ask whether a conspiracy existed and whether the defendant was a member of the conspiracy. 449 A.2d at 225. Although Istituto Bancario literally speaks in terms of a “conspiracy to defraud,” the principle is not limited to that particular tort.22 Count V pleads a different species of tort claim: tortious interference with contract.
A complaint will support an inference of a conspiracy when it pleads facts supporting (i) the existence of a confederation or combination of two or more persons; (ii) that an unlawful act was done in furtherance of the cоnspiracy; and (iii) that the conspirators caused actual damage to the plaintiff. Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1036 (Del. Ch. 2006). The Complaint does not explicitly contain a claim for conspiracy, but that is not an impediment for purposes of analyzing personal jurisdiction, because a plaintiff does not have to plead the existence of personal jurisdiction in its complaint. See Benerofe, 1996 WL 535405, at *3.
The Complaint alleges that the four Advisors acted in combination to tortiously interfere with the trust instrument governing Mary Ellen‘s GRAT, thereby causing actual damage to the plaintiffs. The Complaint pleads specifically that the Advisors acted in
concert to engage in the GRAT Domestication. According to the Complaint, “[o]n December 24, 2018, the Advisors caused the removal of Premier Trust as the Mary Ellen GRAT trustee and installed First Republic.” Compl. ¶ 105. Schwager is one of the Advisors.
The Complaint specifically pleads facts which provide a non-frivolous basis to think that Schwager was an active member of the conspiracy. The Complaint alleges that he provided information to EisnerAmper to support the lowball valuation that the firm generated. Id. ¶ 96. He also worked to marshal the funds for the Share Withdrawal, which suggests that he also helped to secure the loan from First Republic Bank that Mary Ellen used to fund the transaction. See id. ¶ 104. Schwager also had close ties with Selcow and First Republic Bank that were likely instrumental
When evaluating Schwager‘s involvement, the magnitude of the payments he received from the Company is pertinent. The Complaint alleges that because the Company‘s business was so straightforward, the fees for the accounting and tax services it needed should have run between $20,000 and $30,000 per year. Schwager received $285,000 per year. It is reasonable to infer that he was paid to further the personal interests of Mary Ellen and the other Advisors.
Schwager‘s broader involvement with Mary Ellen and the other Advisors is also a factor. Schwager moved his offices into a suite (Suite 303) adjoining the Company‘s headquarters (Suite 304). After removing the Siblings from the board of the Golden Dome Foundation, Mary Ellen installed Schwager, Petigrow, and Grinnell as her co-trustees. Mary Ellen also made Schwager and Petigrow her co-trustees on the board of the Cardinal Acres Foundation, which is new foundation that Mary Ellen and the Advisors established after Tim Harris began asking questions about the Golden Dome Foundation. See id. ¶ 220.
Whether these allegations could support the exercise of personal jurisdiction is a close question. Unlike Grinnell and Lolli, the record lacks evidence of spoliation by Schwager that would support drawing an adverse inference at this stage of the case, so that factor is not available to tip the scales. Cf. Lolli and Grinnell Decision, 2023 WL 193078, at *19–21. Yet the allegations are more than adequate to support jurisdictional discovery. The plaintiffs have not had the opportunity to conduct any discovery regarding Schwager‘s involvement in the GRAT Domestication or the Share Withdrawal. The plaintiffs have leave to explore these issues, both for purposes of evaluating whether service of process can be accomplished under the Long-Arm Statute and for purposes of assessing whether there are sufficient minimum contacts to support the constitutional exercise of personal jurisdiction.
2. Personal Jurisdiction For Purposes Of Counts III and IV
In Count III, thе Complaint asserts that Schwager breached his fiduciary duties by (i) pursuing the personal best interests of Mary Ellen and the Advisors rather than the best interests of the Company and all of its stockholders and (ii) pursuing his own best interests rather than the best interests of the Company. In Count IV, the Complaint asserts that to the extent that Schwager was not himself a fiduciary, he aided and abetted those defendants who were fiduciaries in breaching their duties. After the Standing Decision, these counts have been narrowed to a direct challenge to the Outbound Merger.
The Standing Decision affects the analysis of Counts III and IV under the Long-Arm Statute. It is no longer necessary to examine the ongoing course of conduct that predated and post-dated the Outbound Merger to determine whether the alleged wrongdoing bears a sufficient connection to Delaware to support personal jurisdiction. What matters is whether the court can assert personal jurisdiction over Schwager for purposes of the challenge to the Outbound Merger.
To reiterate, the conspiracy theory of jurisdiction attributes a Delaware-directed act to a defendant when a conspiracy to engage in tortious conduct existed and the defendant was a member of the conspiracy. Istituto Bancario, 449 A.2d at 225. The allegations of the Complaint provide a non-frivolous basis to infer that the Advisors engaged in a conspiracy to harm the plaintiffs by engaging in the Outbound Merger and that Schwager was a member of the conspiracy.
Count III pleads a claim for breach of fiduciary duty against Mary Ellen and the Advisors. A claim for breach of fiduciary duty is an equitable tort. Metro Storage Int‘l LLC v. Harron, 275 A.3d 810, 840 (Del. Ch. 2022). As noted, a complaint will support an inference of a conspiracy when it pleads facts supporting (i) the existence of a confederation or combination of two or more persons; (ii) that an unlawful act was done in furtherance of the conspiracy; and (iii) that the conspirators caused actual damage to the plaintiff. Allied Cap., 910 A.2d at 1036. When a complaint alleges that fiduciaries acted in concert to commit a breach of duty, those allegations satisfy the requirements to plead a conspiracy to engage in tortious conduct involving those fiduciaries. Again, the absence of an explicit conspiracy claim is not fatal for jurisdictional purposes. See Benerofe, 1996 WL 535405, at *3. If the court concludes that Schwager is a fiduciary, then the conspiracy theory supports jurisdiction over him for purposes of Count III.
Count IV pleads a claim for aiding and abetting breaches of fiduciary duty against any of the Advisors who are not found to be fiduciaries. “[I]n cases involving the internal affairs of corporations, aiding and abetting claims represent a context-specific application of civil conspiracy law.” Allied Cap., 910 A.2d at 1038; accord Weinberger v. Rio Grande Indus., Inc., 519 A.2d 116, 131 (Del. Ch. 1986). Sufficiently pleading that a defendant aided and abetted a breach of fiduciary duty satisfies the need to plead a conspiracy to engage in tortious conduct involving that defendant. Virtus Cap. L.P. v. Eastman Chem. Co., 2015 WL 580553, at *12 (Del. Ch. Feb. 11, 2015). If the court concludes that Schwager is not a fiduciary, then the conspiracy theory supports jurisdiction over him for purposes of Count IV.
In this case, the Complaint pleads faсts sufficient to provide a non-frivolous basis to infer that Schwager was part of a conspiracy to harm the plaintiffs by engaging in the Outbound Merger. The Complaint alleges that Schwager worked with the other Advisors to prepare the merger documentation. Compl. ¶ 130. The Complaint points to entries on the Company‘s privilege log which identify Schwager communicating with Grinnell and Petigrow about the Outbound Merger. Id. The Complaint also alleges that Schwager did all of the accounting for the Company and prepared its financial statements. The Complaint alleges that Schwager prepared the financial statements in a manner that concealed the self-dealing payments that Mary Ellen and the Advisors received, as well as the many personal and non-business-related expenses that the Company was paying. Id. ¶ 132. The Company provided the financial
As with Count V, the magnitude of the payments that Schwager received from the Company is a pertinent factor, as are his other ties to Mary Ellen and the Advisors. It is reasonable to infer that Schwager was paid excessive amounts to further the personal interests of Mary Ellen and the other Advisors and that he went along as part of the team.
As with Count V, whether these contacts could support personal jurisdiction over Schwager presents a close question. The allegations nevertheless provide grounds to conduct jurisdictional discovery. The plaintiffs have leave to explore the connections between Schwager and the Outbound Merger both for purposes of evaluating whether he can be served under the Long-Arm Statute and to assess whether the extent of his contacts with Delaware are sufficient to make the exercise of personal jurisdiction consistent with due process.
III. THE RULE 12(B)(6) MOTION
Schwager separately contends under Rule 12(b)(6) that Counts III, IV, and V of the Complaint do not state a claim against him. A party does not have a right to a pleading-stage ruling at the start of a case. See Spencer v. Malik, 2021 WL 719862, at *5 (Del. Ch. Feb. 23, 2021); see also Pattern Energy Gp., 2021 WL 1812674, at *46 & n.612.
More generally, “Delaware trial courts have inherent power to control their dockets,” Solow v. Aspect Res., LLC, 46 A.3d 1074, 1075 (Del. 2012), and that authority includes determining how to proceed for the “orderly adjudication of claims.” Unbound P‘rs Ltd. P‘ship v. Invoy Hldgs. Inc., 251 A.3d 1016, 1030 (Del. Super. Ct. 2021) (cleaned up).
The manner of proceeding that is most likely to secure the just, speedy, and inexpensive determination of this proceeding is to defer consideration of the
IV. CONCLUSION
The plaintiffs can conduct jurisdictional discovery into whether Schwager can be served under the Officer Consent Statute or the Long-Arm Statute and into whether the exercise of jurisdiction would be consistent with due process. The scope of discovery will address the services that Schwager provided to the Company and his involvement with the GRAT Domestication, the Share Withdrawal, and the Outbound Merger. The court will defer considering Schwager‘s motion to dismiss under