In Bonanno v. VTB Holdings, Inc. (C.A. No. 10681-VCN) (Del. Ch. February 8, 2016), Vice Chancellor Noble granted a defendant corporation’s motion to dismiss a plaintiff shareholder’s breach of contract claim, ruling that plaintiff’s redemption claim fell within the scope of a forum selection provision contained in a transaction document signed by plaintiff that required the parties to litigate such disputes in the state courts of New York or the federal courts therein.
The action arose when plaintiff John Bonanno, a shareholder of Voyetra Turtle Beach, Inc. (“VTB”), a predecessor corporation to VTB Holdings, Inc. (“VTBH”), brought a breach of contract claim in the Delaware Court of Chancery against defendant VTBH for failure to redeem his shares after a 2014 strategic merger involving VTBH, which Bonanno claimed qualified as a triggering event for a redemption. VTBH sought dismissal for improper venue based on the forum selection clauses located in various transaction documents previously entered into among the parties, all of which required them to litigate their disputes in either New York state court or the United States District Court for the Southern District of New York. Ultimately, the Delaware Court of Chancery granted VTBH’s motion to dismiss for improper venue, holding that the redemption is a “transaction” that was contemplated in a 2011 Right of First Refusal Agreement (the “2011 ROFR”) between the parties and the 2011 ROFR contained an exclusive New York forum selection clause, which governed Bonanno’s claims as a matter of New York law.
VTB was a leading designer, developer, and marketer of premium audio peripherals. Before September 2010, seven shareholders owned all of VTB’s common stock, including Bonanno. Between 2010 and 2014, VTB significantly changed its capital and ownership structures through a 2010 financing, 2011 reorganization and 2015 merger.
The 2010 financing was led by the Stripes Group, a private equity firm that thereafter became VTB’s majority shareholder. The parties, including Bonanno, executed a Stock Purchase Agreement (“SPA”), which included as exhibits a number of form contracts that were finalized when the financing closed. The SPA and accompanying contracts contained a choice-of-law clause and a forum selection clause.
The choice-of-law clause stated that the agreements will be construed and enforced in accordance with the laws of the state of New York and United States federal law to the extent applicable.
The SPA set out that after the financing, a Stripe’s Group merger subsidiary would merge with and into VTB, converting, upon closing, Bonanno’s merger subsidiary Class B Common Stock, which was paid as consideration for the financing, into Series B Preferred Stock in VTB. After the closing of the financing and the merger, VTB filed an amended and restated certificate of incorporation that provided for Bonanno’s shares of Series B Preferred to be redeemed by VTB under certain circumstances. Bonanno and VTB also executed a Right of First Refusal Agreement (“2010 ROFR”), giving VTB the right to purchase Bonanno’s shares if Bonanno ever sold them.
In 2011, VTB reorganized such that all of VTB’s classes of shareholders swapped their VTB shares for VTBH shares in like classification, and VTB became VTBH’s wholly owned subsidiary. Additionally, Bonanno and VTBH entered into the 2011 ROFR at that time, which provided that the 2011 ROFR “shall “immediately terminate upon the redemption of all of the Series B Preferred Shares” and included the same New York forum selection clause described above. The VTBH certificate of incorporation also stated that VTBH would redeem each Series B Preferred Share in certain circumstances; however it did not include a forum selection provision.
In 2014, VTBH merged with another company, Parametric Sound Corp. (“Parametric”). VTBH became the surviving corporation after the merger, and VTBH’s common and Series A Preferred shares converted into shares of Parametric; however Bonanno’s Series B Preferred Shares in VTBH remained. Approximately one year later, Bonanno filed a complaint alleging that the merger with Parametric triggered VTBH’s obligation to redeem his Series B Preferred Shares and that VTBH had nonetheless failed to redeem them.
To analyze the defendant’s motion to dismiss, the Court first resolved two foundational issues, namely (1) which state law applied to the Court’s interpretation of the form selection provision and (2) whether VTBH had standing to enforce the forum selection provision in contracts to which it was not a party. The Court determined that the forum selection provision “unambiguously conveys the parties’ intent to make New York law, as well as applicable federal law, control interpretation of the contracts in which it appears.” In addition, the Court held that defendant VTBH could enforce the SPA’s forum selection clause despite being a nonsignatory because VTBH is closely related to VTB, its wholly owned subsidiary. The Court explained that the general rule under New York law that parent corporations may not enforce, or have enforced against them, terms of a contract, including forum selection clauses, signed by their separately existing subsidiaries, did not apply in light of the recognized “close relationship” exception that applied in these facts.
The Court then engaged in an extensive analysis of the applicability and substance of the forum selection provision itself. First, Bonanno argued that the forum selection provision related to the financing, reorganization, and merger did not apply to his redemption claim. VTBH, however, claimed that the forum selection clauses in the various agreements all applied to Bonanno’s redemption claim. The Court quickly dismissed VTBH’s assertion that stockholders agreements’ forum selection clauses applied, because VTBH failed to identify any language that indicated that claims arising from a Series B redemption fell within those agreements. Further, the Court held that the parties terminated the 2010 ROFR when they executed the 2011 ROFR; thus, the 2010 ROFR forum selection clause could not apply.
The Court then analyzed whether the forum selection clause in the SPA or the 2011 ROFR applied to Bonanno’s claim. The Court held that the forum selection language in those two agreements was “exportable”—meaning that it applied not only to disputes over the terms of the executed contract but also to disputes over transactions contemplated in other documents to which the original executed contract referred—based on a textual interpretation of the forum selection clauses. VTBH argued that the SPA’s forum selection clause applied to the redemption claim because the SPA refers to the form of merger agreement in which Bonanno’s Series B Preferred Stock was issued. The Court disagreed that the SPA’s forum selection clause could be exported through the merger agreement to Bonanno’s redemption claim because the merger agreement did not contemplate redemption. The Court found, however, that VTB’s certificate of incorporation, which included a redemption of the Series B Preferred Shares was referenced in the SPA, and therefore the SPA’s forum selection clause could apply to Bonanno’s claim. The Court recognized, however, that the link was tenuous because Bonanno’s claim sought redemption from VTBH, not VTB, and VTBH’s charter is not referenced in the SPA.
Nevertheless, the Court found that the 2011 ROFR’s forum selection clause applied to Bonanno’s claim in the event the link from the SPA to VTBH’s charter was too tenuous. The Court noted that the 2011 ROFR specifically referenced redemption of the Series B Preferred Shares. Accordingly, the Court held that the 2011 ROFR contemplated Bonanno’s redemption and, thus, the forum selection clause could be exported to his claim.
Lastly, the Court rejected Bonanno’s contention that an exclusive forum selection clause for disputes governing concerning the internal affairs of a Delaware corporation was contrary to Delaware public policy. The Court cited prevailing case law and recent legislation, including the General Assembly’s recent synopsis of Section 115 of the Delaware General Corporation Law, which showed the legislature’s unwillingness to regulate the use of exclusive forum selection provisions in contracts signed by, and later enforced against, particular stockholders and ultimately dismissed Bonanno’s claims without prejudice.