Chancery Court Holds Merger Agreement’s Forum Selection Clause Trumps Stockholders Agreement
By Jamie Bruce and Mark Hammes
Chancery Court finds that three individual stockholders, as beneficiaries of a merger agreement, were equitably estopped from challenging the valid forum selection clause contained therein despite the fact that they did not personally sign the merger agreement.
In McWane, Inc. v. Lanier, C.A. No. 9488-VCP (Del. Ch. January 30, 2015) (Parsons, V.C.), the Chancery Court denied a motion to dismiss or stay from three individual defendant stockholders who argued that the Court lacked personal jurisdiction over them in a dispute regarding whether certain representations and warranties in a merger agreement were violated. The court determined that a forum selection clause in a stockholders agreement they had personally signed was trumped by the forum selection clause in the merger agreement that they had not personally signed. The court determined that not only was the clause in the stockholders agreement merely permissive compared to the merger agreement’s mandatory language, but also that the stockholders agreement fundamentally related to the merger agreement and the defendants, as beneficiaries of the merger agreement, were equitably estopped from challenging the forum selection clause in the merger agreement.
The motion to dismiss or stay was brought by three individual defendants, who owned shares of Synapse Wireless, Inc. (“Synapse”), a company purchased by McWane, Inc. (“McWane”) in a reverse-triangular merger in which Synapse was the surviving corporation. The merger was effectuated through a merger agreement in which approximately 60% of Synapse’s outstanding stock was purchase by McWane, and which included an $8 million escrow amount to cover any indemnification claims brought by McWane. The remainder of the outstanding shares in Synapse were to be purchased through a series of put and call options set forth in the stockholders agreement. The merger agreement provided that Synapse stockholders were not liable for any indemnity claims in excess of their pro rata portion of the escrow amount, unless McWane succeeded on a claim of fraud or intentional or willful breach of the merger agreement. Similarly, the stockholders agreement provided for a valuation floor below which the price of the options could not fall unless certain violations of the merger agreement occurred. McWane claimed that fraudulent financial gimmicks were employed by Synapse’s management and asserted an indemnity claim against the stockholders which could exceed the escrow amount and cause a reduction in the price of the options below the valuation floor when the first options become exercisable in 2016. At the crux of this case is the relationship between the forum selection clauses in the stockholders agreement and the merger agreement.
When a dispute arose regarding the conduct of the Synapse management, the stockholder representative brought a suit in Alabama seeking a declaratory judgment that McWane was not entitled to any devaluation of the put or call options, and defendants intervened in that suit. Shortly thereafter, McWane filed suit in the Delaware Court of Chancery, and defendants sought to stay or dismiss the suit for lack of personal jurisdiction, pointing to the Alabama forum selection clause in the stockholders agreement. McWane successfully argued that the forum selection clause in the merger agreement was controlling and that the Delaware court was the correct venue for this dispute. The Court of Chancery came to this conclusion on two grounds. First, the court determined that the language in the stockholders agreement was permissive and not mandatory, whereas the forum selection clause in the merger agreement was mandatory. Second, the court determined that the doctrine of equitable estoppel prevented the defendants, who benefitted from the merger agreement, from challenging the forum selection clause, even though they were not signatories.
The defendants argued that they are not bound to the merger agreement’s Delaware forum selection clause because the clause by its very terms binds only parties to the merger agreement. The court explained that “[t]he doctrine of equitable estoppel prevents a non-signatory to a contract from embracing the contract, and then turning her back on the portions of the contract, such as a forum selection clause, that she finds distasteful.” The court applied a three part test to determine whether a nonsignatory is bound by a forum selection clause: 1) is the forum selection clause valid, 2) are the nonsignatories third-party beneficiaries or closely related to the contract, and 3) does the claim arise from their standing relating to the agreement? The court held that the defendants were unable to overcome the presumption that forum selection clauses are presumptively valid. The court further held that defendants received a direct benefit from the merger: over $5 million from the sale of their stock. The court also held that the claims arose from the merger agreement. Although the defendants’ suit for declaratory judgment in Alabama was ostensibly brought solely under the stockholders agreement, that agreement does not itself provide grounds to devalue the put or call options. Rather it is intertwined with related provisions of the merger agreement, violations of which can lead to claims for devaluation of the options. Thus, the defendants were effectively challenging McWane’s indemnification claims under the merger agreement, and such claims must be brought in Delaware. Furthermore, the court reasoned, the defendants, as plaintiffs in the Alabama case, must be asserting their claims under the merger agreement because no claims would be ripe under the stockholders agreement until the first options became exercisable in 2016.
Because all three elements of the estoppel test were met, the court held that the defendants were bound by the merger agreement’s forum selection clause, and the defendants’ motion to stay or dismiss was accordingly denied.
McWane, Inc. v. Lanier, C.A. No. 9488-VCP (Del. Ch. January 30, 2015) (Parsons, V.C.)