COURT OF CHANCERY RULES ON THE APPLICABILITY OF FORUM SELECTION CLAUSES TO NON-SIGNATORIES TO A CONTRACT AND A PLAINTIFF’S BURDEN IN ALLEGING BREACH OF THE “COMMERCIALLY REASONABLE EFFORTS” STANDARD
By: Scott E. Waxman and Teresa Teng
In Neurvana Medical, LLC v. Balt USA, LLC et al., C.A. No. 2019-0034-KSJM (Del. Ch. Sep. 18, 2019), the Delaware Court of Chancery granted a motion to dismiss by a defendant parent company, whose subsidiary entered into a purchase agreement containing a Delaware forum selection clause. The court applied the “closely related” test in finding that the plaintiff failed to allege sufficient facts to show that the non-signatory parent entity was “closely related” to the underlying purchase agreement and as a result, plaintiff could not bind the parent entity to the agreement’s forum selection clause.
In the subsequent Neurvana Medical, LLC v. Balt USA, LLC et al., C.A. No. 2019-0034-KSJM (Del. Ch. Feb. 27, 2020), the court split its decision in granting the motions to dismiss for lack of personal jurisdiction over one of the defendant officers of the purchaser in the transaction, and for failure to state a claim with respect to all but one count of the plaintiff’s complaint. The court denied the motion to dismiss for lack of personal jurisdiction with respect to another officer of the purchaser who had also served as chairman of the board of the seller. The court also denied such defendant’s motion to dismiss on the cause of action of breach of fiduciary duty.
In September 2016, Balt International S.A.S. (“Balt International”) acquired the company Blockade Medical LLC (“Blockade”), which post-acquisition was renamed Balt USA, LLC (“Balt USA”). As a result of the acquisition, Blockade’s co-founder, David Ferrera (“Ferrera”) became the president and chief operating officer of Balt USA, and Balt International’s chief executive officer, Pascal Girin (“Girin” and together with Ferrera, the “Officer Defendants”) became the chief executive officer of Balt USA.
In connection with the transaction, Blockade also spun out several products not included in the acquisition of Blockade by Balt USA, including Titan, a catheter delivering a device to remove blood clots to a brain aneurysm during stroke. Titan was spun out into a new entity, Neurvana Medical, LLC, a Delaware limited liability company (“Neurvana”), and Ferrera was named chairman of the board of Neurvana. In August 2017, Neurvana entered into a term sheet to sell Titan to Balt USA. Despite dual roles as an executive of Balt USA and chairman of Neurvana, Ferrera was actively involved in the negotiations leading to execution of the term sheet and used his long-time corporate counsel as counsel to Neurvana. After entry into the term sheet, Neurvana secured Ferrera’s resignation from its board due to concerns that Ferrera’s counsel had not advocated Neurvana’s position adequately as against Balt USA and that Ferrera had engaged in abusive behavior towards Neurvana’s board and officers. Ferrera and Neurvana entered into a consulting agreement under which Ferrera agreed to not disparage Neurvana or divulge confidential information in exchange for allowing Ferrera to retain his equity interests in Neurvana.
In December 2017, Neurvana and Balt USA entered into a definitive purchase agreement consistent with the prior term sheet and containing a Delaware forum selection clause. Neurvana and Balt USA entered into an amendment to the purchase agreement in January 2018 specifying that Balt USA was responsible for and required to use “commercially reasonable efforts” to obtain the necessary US and European regulatory approvals for Titan. Under the amendment to the purchase agreement, Neurvana was entitled to certain earn-out payments in the event Titan received the regulatory approvals by a specified deadline; ultimately, such approvals were not obtained by the deadline and the earn-out payments were not made to Neurvana.
In January 2019, Neurvana brought a claim against Balt USA for breaching the purchase agreement through its failure to use commercially reasonable efforts to obtain the regulatory approvals, among additional causes of action. Neurvana included as defendants Balt International as well as the Officer Defendants. The complaint detailed allegations against Ferrera in particular for breach of fiduciary duty, alleging that Ferrera involved himself in negotiations for the transaction despite his officer role at Balt USA and failed to negotiate to Neurvana’s best interest as a result. In addition, the complaint alleged that after his departure from Neurvana, Ferrera sought to sabotage Neurvana using his knowledge of Neurvana’s financial condition and through disparagement of Neurvana to potential sources of capital.
Balt International and the Officer Defendants moved to dismiss the claim for lack of personal jurisdiction and all defendants moved to dismiss for failure to state a claim.
Personal Jurisdiction – Balt International
In the case of Balt International, the court laid out a three part test in order to bind non-signatories to a contract to a forum selection clause: (1) is the forum selection clause valid, (2) is the defendant a third party beneficiary of or closely related to the underlying contract and (3) does the claim arise from such defendant’s standing relating to the agreement? Balt International did not dispute parts (1) and (3) of the test, so the court analyzed part (2) and specifically whether Balt International was closely related to the purchase agreement, as Neurvana did not argue that Balt International was a third party beneficiary.
The court further broke down the “closely related” prong into an analysis of (A) whether Balt International received a direct benefit from the purchase agreement and (B) whether it was foreseeable that Balt International would be bound by the purchase agreement.
With respect to the direct benefit inquiry, the court found that Neurvana failed to allege any facts indicating that Balt International received a direct benefit from the purchase agreement or that the purchase agreement’s terms were conditioned on delivery of a benefit to Balt International. Neurvana instead alleged that Balt International would benefit from Titan’s regulatory approval to sell the device in Europe – however, no separate agreement was in place from Balt USA and Balt International that contemplated such arrangement in favor of Balt International, and the court concluded that “the mere ‘contemplation’ of a benefit does not directly confer one.”
On the foreseeability analysis, Neurvana pointed to Balt International’s active involvement in negotiating the purchase agreement. However, the court reasoned that the foreseeability inquiry should be narrowly construed and declined to use active involvement as a standalone basis for fulfilling the closely-related test and further concluded that Neurvana would also have failed to meet its burden in showing that Balt International was actively involved in the negotiation of the transaction and purchase agreement.
Lastly, Neurvana pleaded in the alternative that Balt USA was an agent of Balt International under the agency theory of personal jurisdiction. The court found that Neurvana failed to allege facts sufficient to establish an agency relationship as no meaningful nexus between the two entities was established and there were insufficient allegations showing that Balt International controlled and dominated Balt USA’s activities.
Personal Jurisdiction – Officer Defendants
In the case of the Officer Defendants, Neurvana alleged that Ferrera breached his fiduciary duty as chairman of the board of Neurvana, breached the consulting agreement with Neurvana and tortiously interfered with Neurvana’s prospective economic advantage. Ferrera brought a motion to dismiss for lack of personal jurisdiction.
Ferrera ceded that as a result of Delaware Limited Liability Company Act Section 18-109, which authorizes service of process on managers of limited liability companies relating to violation of a manager’s duties, personal jurisdiction was appropriate with respect to the count of breach of fiduciary duty. However, Ferrera argued that the remaining non-fiduciary claims were not sufficiently related to the fiduciary duty claim to warrant the court’s assumption of personal jurisdiction over those counts, as such counts related to actions taken by Ferrera after resigning from the board of Neurvana. The court noted an exception to the general rule that former directors do not owe fiduciary duties, in the case that a former director engages in a transaction that began before termination of the fiduciary relationship. Because the complaint alleged that Ferrera used confidential information and knowledge acquired prior to his resignation from the board of Neurvana, the court ruled that ancillary jurisdiction over the non-fiduciary claims was appropriate.
Neurvana sought to establish the court’s personal jurisdiction over Girin through the theory that Girin aided and abetted Ferrera is his breach of his fiduciary duties. The court specified the threshold questions for such a claim were (A) whether the complaint sufficiently pleaded a claim for breach of fiduciary duty against Ferrera and (B) whether the complaint sufficiently pleaded a claim for aiding and abetting breach of fiduciary duty against Girin.
Because the LLC Agreement of Neurvana contained an exculpation of managers from liability for breaches of the duty of care, the court examined whether Ferrera breached his duty of loyalty or otherwise acted in bad faith. Because Ferrera held both the position of president and chief operating officer of Balt USA and the role of chairman of the board of Neurvana, inserted himself into the negotiations between these two entities and installed his personal corporate counsel to represent Neurvana, the court found that it was reasonably conceivable that Ferrera was acting for a purpose other than the best interests of Neurvana. As a result, the complaint adequately alleged that Ferrera breached his duty of loyalty and acted in bad faith while chairman.
With respect to the aiding and abetting count, the court stated that the relevant standard required well-pleaded facts establishing that Girin acted with scienter or acted knowingly, internationally or with reckless indifference. Because plaintiff’s complaint did not allege facts sufficient to show that Girin knowingly participated in Ferrera’s breach (instead only pointing to the Officer Defendants’ simultaneous positions as officers of Balt USA and an email from Ferrera noting that he had discussed the business relationship between Neurvana and Balt USA with Girin), the court stated that Neurvana failed to plead the second element for asserting personal jurisdiction over Girin, and Girin’s motion to dismiss was granted.
Failure to State a Claim
Regarding the motion to dismiss brought by all defendants for failure to state a claim upon which relief can be granted, the court cited Delaware’s standard of “conceivability.” Further, for a breach of contract claim, plaintiff must prove the existence of a contract, breach of such contract, and that that plaintiff suffered damages as a result of the breach.
For purposes of the alleged breach, the court examined the meaning of “commercially reasonable efforts” in light of the other prevailing standards commonly used by transactional lawyers (including “reasonable efforts,” “reasonable best efforts,” “good faith efforts,” and “best efforts”). The court noted that while transactional lawyers draw distinctions between such efforts standards, Delaware case law finds little support for such distinctions. However, the underlying purchase agreement had further defined “commercially reasonable efforts” by reference to a market standard of what similarly situated companies in the same industry would do in a similar situation in their reasonable business judgment.
The court found that the complaint failed to point to a single company in the relevant industry comparable to Balt USA or to identify what such an entity would do in the exercise of reasonable business judgment to obtain the relevant regulatory approvals. The court contrasted this with a precedent case where the plaintiffs successfully survived a motion to dismiss as they were able to identify companies with similar resources and expertise and pointed to the actions such companies took as a standard for commercially reasonable efforts. Because Neurvana failed to plead facts regarding similarly situated entities with similar products, the court found that the complaint failed to allege facts making it reasonably conceivable that Balt USA failed to use commercially reasonable efforts to obtain the regulatory approvals. As a result, the court granted defendants’ motion to dismiss with respect to the count of breach of contract.
For the remaining counts in the complaint, with the exception of the breach of fiduciary duty by Ferrera for his pre-resignation acts (as discussed further above in the context of the personal jurisdiction analysis over Girin), the court dismissed all counts, pointing to plaintiff’s failure to provide well-pleaded facts or to show damages in its complaint.