Court Declines to Impute Minimum Contacts of Subsidiary to Parent Corporation under Maryland Long Arm Statute in National Fire & Marine Ins. Co. v. Advanced Lighting Technologies, LLC (U.S.D.C. Md.)

Filed: September 20, 2023

 

Opinion by: J. Rubin

 

Holding: the Court held that the relationship between the subsidiary and parent corporation, which included filing consolidated tax returns, having the same directors elected to both boards, and a trademark license issued by the parent to the subsidiary, was insufficient to establish personal jurisdiction over the parent corporation under Maryland’s long-arm statute.

Facts: The Plaintiff, National Fire & Marine Insurance Company, as subrogee of Manticorp LLC, brought this action following a fire at a commercial property leased by Manticorp. The Plaintiff alleged that the fire was caused by defective lighting products supplied by Advanced Lighting and Venture Lighting International Inc., which are associated entities. The complaint set forth various counts including Products Liability, Negligence, and Breach of Implied Warranties.

Advanced Lighting, however, contested the court's personal jurisdiction over it, citing insufficient minimum contacts with the State of Maryland. Following limited discovery on the matter, Judge Rubin concluded that the Plaintiff failed to establish grounds for jurisdiction under Maryland's long-arm statute. The court found that National Fire's allegations, even if true, were insufficient to impute Venture Lighting's Maryland contacts to Advanced Lighting for jurisdictional purposes.

Plaintiff had alleged that Advanced Lighting should be treated as the alter ego of its subsidiary, Venture Lighting, because: (1) Venture Lighting is a wholly owned subsidiary of Advanced Lighting; (2) Venture Lighting and Advanced Lighting have common ownership; (3) Advanced Lighting sets sales and earning goals for Venture Lighting; (4) Advanced Lighting consolidates financial statements and submits a single tax return for itself and its subsidiaries; and (5) Advanced Lighting does not have formal arrangements with Venture Lighting.

Analysis:

 

The Court began its analysis with the Maryland long-arm statute, which provides authority for a Maryland-based court to exercise jurisdiction over a non-resident defendant that directly conducts activities, such as providing services, selling goods, or causes tortious injury, in Maryland, or does so through an agent. Md. Code Ann. Cts. & Jud. Proc. §§ 6-103; Mylan Labs, Inc. v. Akzo, N.V., 2 F.3d  56 (4^th cir. 1993). The plaintiff alleged that Advanced Lighting could be imputed the minimum contacts of its subsidiary, Venture Lighting International Inc., essentially arguing that the subsidiary was an “alter ego” of the parent corporation for purposes of the long arm statute.

 

The Court next examined Mylan Laboratories case that establishes that under Maryland law, a parent corporation can be treated as an alter ego of a subsidiary under the “agency” test, if the parent corporation “exerts considerable control over the activities of the subsidiary.” The Mylan court discussed several factors in determining whether the parent exercises such control, such as whether significant decisions of the subsidiary must be approved by the parent, whether the two have separate books and records, employ separate accounting procedures, and hold separate directors’ meetings, along with the level of interdependence of the two corporations, and whether the parent corporation knew or should have known that its conduct would have some impact in Maryland. Mylan Labs, Inc., 2. F.3d at 61-62.

 

In the present case, the Court concluded that the parent could not be treated as the alter ego of its subsidiary, reasoning that on balance, the evidence adduced by the parties did not suggest that Advanced Lighting exerts considerable control over the subsidiary corporation, or that Venture Lighting’s significant decisions are subject to the parent’s approval. The Court reasoned that filing consolidated tax returns, being a 100% owned subsidiary where both boards are comprised of the same directors, and having a trademark license issued by the parent to the subsidiary for a product sold by the subsidiary was insufficient to impute the contacts with Maryland of the subsidiary to the parent for purposes of personal jurisdiction.

 

As a result, the Court granted Advanced Lighting’s motion to dismiss for lack of personal jurisdiction.

 

Full opinion here.

D2L Ltd. v. Biggs (Maryland. U.S.D.C.)

 Filed: August 22, 2019

Opinion by: Blake, J.

Holding: Plaintiff’s lawsuit for breach of a noncompetition agreement in Maryland against out of state defendants was dismissed for lack of personal jurisdiction as the Defendant had little contact with Maryland, did not conduct but a small percentage of business with Maryland customers, and no evidence was offered that the Defendant had induced Plaintiff’s former employee to breach his obligations under the noncompetition agreement.

Facts: Plaintiff is a “global cloud software company” incorporated in Maryland and headquarted in Canada. Kevin Biggs, a California resident and former employee, was sued by Plaintiff on the basis of Plaintiff’s allegations that Biggs had violated his non-solicitation agreement with Plaintiff. This agreement provided a consent to suit in Maryland provision. After leaving his employment with Plaintiff, Biggs began working for Defendant OneLogin, a Delaware corporation with its principal place of business in California, which also provides cloud-based services. Plaintiff advised OneLogin of the non-solicitation agreement, and subsequently alleged that OneLogin induced and materially benefited from Biggs' breach of the agreement.

 

Analysis: A state court may exercise personal jurisdiction under the 14^th amendment on an out-of-state defendant if the defendant had “minimum contacts” with the forum sufficient to put the defendant on notice that he might be sued in the forum in the future. Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). A court may exercise personal jurisdiction over a defendant based on general or specific jurisidiction.

 

The plaintiff has the burden to show that the court could exercise general jurisdiction over the defendant by demonstrating that the defendant’s contacts with the state are “continuous and systematic” making the defendant essentially at home in the forum state. Daimler AG v. Bauman, 571 U.S. 117, 127 (2014).

 

Three factors are considered to determine specific personal jurisdiction over a defendant (where the present lawsuit arises out of the defendant’s prior contacts with Maryland): “(1) the extent to which the defendant has purposefully availed itself of the privilege of conducting activities within the State; (2) whether the plaintiff’s claims [arose] out of those activities; and (3) whether the exercise of personal jurisdiction is constitutionally reasonable.” Universal Leather LLC v. Koro AR SA, 773 F.3d 553, 559 (4^th Cir. 2014). 

 

The Court found that it lacked general jurisdiction over the Defendant. The Defendant was neither organized under the laws of Maryland, nor was its principal place of business in Maryland. 

 

As for specific jurisdiction, the Court found that the Defendant only conducted a nominal amount of business in Maryland – one percent of its revenue and one to two percent of its total solicitation was derived from Maryland. Moreover, the Court found that none of these contacts were specifically connected to the allegations of breach of contract or tortious interference made by the Plaintiff.

 

The alternative theory offered by the Plaintiff was that Defendant had “encouraged,” “actively and wrongfully induced,” and “accepted the benefits of Biggs’ breach” of the agreement at issue in the case. However, the Court found that these general allegations lacked sufficient specificity as to when the solicitation happened, which employees were solicited, and where those employees were located.

 

Moreover, the Court denied the Plaintiff’s motion for jurisdictional discovery, as the Court concluded that the information sought by the Plaintiff would not provide additional facts to establish personal jurisdiction over the Defendant.

 

As a result, the Court concluded it lacked jurisdiction over the Defendant and dismissed the Plaintiff’s action against the Defendant.

 

Full opinion available in PDF.

Pinner v. Pinner (Ct. of Appeals)

Filed: March 3, 2020

Opinion by: Booth, J.

Holding: Defendant’s filing of a single lawsuit in Maryland, without further connection to the forum, did not place Defendant on notice she might be sued in a separate, though related, action by Plaintiff, and therefore such litigation violated the 14^th amendment due process clause.

Facts: Plaintiff is the son of the defendant. Both parties are residents of North Carolina. Defendant had filed a prior action in Maryland on behalf of her late husband against various Asbestos Entities for her late husband’s death due to exposure to asbestos while working in Maryland.  Plaintiff was not included in the proceedings until it his ability to intervene was barred by the statute of limitations, and Defendant received a settlement as a result of that litigation that was not deposited in her late husband’s Estate, nor was any portion of it paid to Plaintiff. 

 

Subsequently, Plaintiff filed a separate action in Maryland for his alleged share of the asbestos settlement, alleging that the Defendant was negligent and breached a fiduciary duty as personal representative of her late husband’s Estate. Defendant failed to file a responsive pleading, and Plaintiff sought and obtained a default judgment for $99,856. Defendant appealed on the grounds that the trial court lacked personal jurisdiction over her to enter a judgment.

 

Analysis: A state court may exercise personal jurisdiction under the 14^th amendment on an out-of-state defendant if the defendant had “minimum contacts” with the forum sufficient to put the defendant on notice that the might be sued in the forum in the future. Beyond Systems, Inc. v. Realtime Gaming Holding Co., 388 Md. at 1, 22 (2005). Three factors are considered to determine specific personal jurisdiction over a defendant (where the present lawsuit arises out of the defendant’s prior contacts with Maryland): “(1) the extent to which the defendant has purposefully availed [herself] of the privilege of conducting activities within the State; (2) whether the plaintiff’s claims arise out of those activities directed at the State; and (3) 

whether the exercise of personal jurisdiction would be constitutionally reasonable.” Id. At 26.

 

The Court held that the Defendant’s prior asbestos litigation was the sole contact of the Defendant with Maryland. No evidence was offered that the Defendant had actively participated in hearings or depositions in Maryland, or that she had even traveled at all to Maryland during the six year period the case was litigated. Moreover, the Court found that the present dispute involved issues arising under North Carolina law, between North Carolina residents, where the injury to Plaintiff arose in North Carolina. As to the second factor, the Court found that a breach of a fiduciary duty under North Carolina law is tenuously connected to the original asbestos litigation. 

 

As to the third factor, the Court noted that numerous specific considerations come into play with constitutional reasonableness such as: “the burden on the defendant; the interests of the forum State; the plaintiff’s interest in obtaining relief; the interstate judicial system’s interest in obtaining the most efficient resolution of controversy; and the shared interest of the several states in furthering fundamental substantive social policies.” Examining these considerations, the Court found that overall there was no efficiency in litigating North Carolina-based claims between North Carolina residents in a Maryland court, and that the Maryland court system had no interest in adjudicating such claims.

 

As a result, the Court concluded that the Maryland trial court lacked jurisdiction over the Defendant.

 

Full opinion available in PDF.

Under Armour, Inc. v. Battle Fashions, Inc. (Maryland U.S.D.C.)

Filed: July 18, 2019

Opinion by: Richard D. Bennett

Summary: Under Armour, Inc. (“Under Armour”) filed a lawsuit seeking, among other things, a declaration that its use of certain phrases in connection with its products does not infringe upon a registered trademark owned by defendant Kelsey Battle (“Battle”).  Battle, a resident of North Carolina, moved to dismiss the action for lack of personal jurisdiction.  After holding an evidentiary hearing, the court dismissed the action for lack of personal jurisdiction and transferred the matter to the Eastern District of North Carolina.

Analysis:  The court initially denied Battle’s motion to dismiss, holding that the requisite preliminary prima facie showing of personal jurisdiction had been made.  However, after holding a pre-trial evidentiary hearing, the court found that personal jurisdiction over Battle had not been established by the requisite preponderance of the evidence.  The court began its analysis of personal jurisdiction by noting that two conditions must be satisfied in order to exercise personal jurisdiction over a non-resident: (1) the exercise of jurisdiction must be authorized under Maryland’s long-arm statute [Md. Code Ann., Cts. & Jud. Procs. § 6-103(b)]; and (2) the exercise of jurisdiction must comport with the due process requirements of the Fourteenth Amendment of the Constitution.  As to that two-pronged analysis, the court noted that Maryland courts “have consistently held that the state’s long-arm statute is coextensive with the limits of personal jurisdiction set out by the Due Process Clause of the Constitution,” but that courts must address both prongs of the analyses.

As to the first prong of the analysis, the court noted that “a plaintiff must specifically identify a provision in the Maryland long-arm statute that authorizes jurisdiction”.  Here, Under Armour argued the existence of personal jurisdiction over Battle based on his transacting business in Maryland [Md. Code Ann., Cts. & Jud. Procs. § 6-103(b)(1)].  Noting that “Maryland courts have construed the phrase ‘transacting business’ narrowly, requiring, for example, significant negotiations or intentional advertising and selling in the forum state”, the court found that a small number of sales by Battle to Maryland consumers, two cease and desist letters sent by Battle to Under Armour in Maryland, and three letters sent by Battle to parties outside of Maryland in order to “put pressure” on Under Armour were insufficient to establish personal jurisdiction under Maryland’s long-arm statute.

As to the second prong of the personal jurisdiction analysis, the court noted that the Fourteenth Amendment requires that a defendant have certain minimum contacts with the jurisdiction “such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.”  Acknowledging that there was no basis to assert “general” or “all-purpose” jurisdiction over Battle, the court focused its analysis on “specific” jurisdiction, which requires that the action “arise out of or relate to the defendant’s contracts with the forum.”  Here, the controversy did not relate to marketing or selling infringing products in the forum but instead related to the activities of Battle in enforcing his trademark.  Accordingly, the court’s analysis focused on whether the two cease and desist letters sent to Maryland and the three letters sent to parties outside of Maryland were sufficient to establish specific jurisdiction over Battle in Maryland.  As to the letters sent to Under Armour in Maryland, the court held that “cease-and-desist letters alone are insufficient to confer specific personal jurisdiction.”  The court then noted that “enforcement activities taking place outside the forum state do not give rise to personal jurisdiction in the forum.”  Based on that premise, the court held that the three letters sent to parties outside of Maryland did not give rise to personal jurisdiction over Battle because those letters “did not threaten litigation, had no effect on Under Armour’s business, and did not result in any damage to Under Armour’s business relationships.”

The full opinion is available in PDF.

Payments IP Pty Ltd. v. B52 Media LLC (Maryland U.S.D.C.)

Filed: February 23, 2018

Opinion by: Ellen Lipton Hollander

Facts: Payments IP Pty Ltd. (“Payments IP”), an Australian company, allegedly contracted with B52 Media, LLC (“B52”), a Maryland limited liability company, and Maryland resident Lonnie Borck (“Borck”), B52’s owner (Borck and B52 being referred to collectively, as the “B52 Parties”), to purchase a web domain (the “Domain”).  Later that year, Payments IP allegedly discovered that the Domain had been placed on an “administrative freeze” by the domain registrar because the Domain was the subject of a lawsuit pending in California state court. In the California state case, an individual resident of California, Suraj Kumar Rajwani (“Rajwani”), asserted ownership of the Domain (the “California Case”).  Payments IP successfully intervened in the California Case.  Shortly after Payments IP moved to intervene in the California Case, Payments IP filed suit in the United States District Court for the District of Maryland (the “Maryland Case”), asserting claims similar to those asserted by Payments IP in the California Case, including a claim for declaratory judgment regarding ownership of the Domain.  Motions were filed by the defendants in the Maryland Case seeking to dismiss the declaratory judgment claim against Rajwani for lack of jurisdiction and to stay the Maryland Case for so long as the California court retained jurisdiction over the California Case. 

Analysis/Holding:  The Maryland Court first addressed Rajwani’s motion to dismiss for lack of jurisdiction, pursuant to which Rajwani argued that the Court lacked both personal jurisdiction over him and in rem jurisdiction over the Domain.  As to personal jurisdiction, the Court noted that “to assert personal jurisdiction over a nonresident defendant, two conditions must be satisfied: (1) the exercise of jurisdiction must be authorized under the state’s long-arm statute [Md. Code Ann., Cts. & Jud. Procs. § 6-103(b)]; and (2) the exercise of jurisdiction must comport with the due process requirements of the Fourteenth Amendment.”  Regarding the interaction between those two conditions, the Court noted that “the reach of the long arm statute is coextensive with the limits of personal jurisdiction delineated under the due process clause of the Federal Constitution, [and thus] our statutory inquiry merges with our constitutional examination.”  The Court ultimately denied Rajwani’s motion to dismiss for lack of personal jurisdiction, holding that, based on the pleadings and papers filed in the Maryland Case, Payments IP made a prima facie showing of personal jurisdiction because:

 (i) over the course of seven years, Rajwani engaged in extensive negotiations with the B52 Parties (who were domiciled in Maryland) with respect to the Domain;

(ii) Rajwani transferred money to B52 on four occasions, totaling approximately $600,000;

(iii) Rajwani visited Maryland on one occasion in 2015 to meet with Borck in connection with the negotiations over the Domain dispute; and

(iv) Rajwani filed a claim with the Register of Wills in Maryland against the estate of Borck predicated on the underlying transaction involving the Domain. 

However, in light of the procedural posture of the Maryland Case (i.e., early in the proceedings, without having conducted any discovery or any evidentiary hearing on the issue of personal jurisdiction), the Court held that Payments IP must ultimately prove the existence of personal jurisdiction by a preponderance of the evidence.

The Court then addressed Rajwani’s request that the Court abstain from jurisdiction under the so-called “Brillhart/Wilton” doctrine, which allows federal district courts to decline jurisdiction over declaratory judgment actions in certain circumstances; namely, if abstention would save judicial resources.  The Court denied Rajwani’s request because Rajwani sought non-declaratory relief that was so closely related to his declaratory judgment claim that abstaining from jurisdiction as to that claim would not save any judicial resources.

Next, the Court addressed Rajwani’s request for dismissal based on the so-called “Princess Lida” doctrine, which provides that “a federal court may not exercise jurisdiction when granting the relief sought would require the court to control a particular property or res over which another court already has jurisdiction.”  According to Rajwani, the Maryland Case was subject to dismissal because the declaratory judgment claim was an in rem proceeding vis-à-vis the Domain, which was already subject to the in rem or quasi in rem jurisdiction of the California court in the quiet title action.  In the Maryland Case, Payments IP sought declaratory relief against, not only Rajwani and the B52 Parties but also, “all other claimants, known and unknown”; the Court reasoned that, because it did not possess personal jurisdiction over “all other” possible claimants, it must, therefore, obtain in rem jurisdiction over the Domain in order to grant the relief sought by Payments IP.  Based on the fact that the California court had exercised jurisdiction over the Domain prior to the filing of the Maryland Case, and the fact that no one disputed the California court’s jurisdiction, the Court held that, pursuant to the Princess Lida doctrine, the Court did not have in rem jurisdiction over the Domain.  However, rather than dismissing the claim as requested by Rajwani, the Court stayed the claim, because, according to the Court, “the Princess Lida doctrine is one of abstention, rather than subject matter jurisdiction….  Thus, if the Princess Lida doctrine is implicated, this Court should dismiss or stay the declaratory judgment claim, but it does not lack subject matter jurisdiction.”

Lastly, the Court addressed the motions of Rajwani and the B52 Parties to stay the Maryland Case, pending resolution of the California Case, on the basis of so-called “Colorado River” abstention, which provides that a federal district court may, in “exceptional circumstances,” stay federal litigation that is parallel to a state suit.  Specifically, if there exists parallel litigation involving substantially the same parties and substantially the same issues (such that the state action will resolve every claim at issue in the federal action), then a stay of the federal case may be appropriate based upon a balancing of the following six factors:

“(1) whether the subject matter of the litigation involves property where the first court may assume in rem jurisdiction to the exclusion of others;

(2) whether the federal forum is an inconvenient one;

(3) the desirability of avoiding piecemeal litigation;

(4) the relevant order in which the courts obtained jurisdiction and the progress achieved in each action;

(5) whether state law or federal law provides the rule of decision on the merits; and

(6) the adequacy of the state proceeding to protect the parties’ rights.” 

Applying that analysis, the Court first held that the Maryland Case and the California Case were parallel actions because:

(a) the parties were the same in both actions;

(b) both actions concerned the same basic issue (ownership of the Domain) and transactions (the contract to buy the Domain); and

(c) the relief sought by Payments IP in the Maryland Case was “virtually identical to the relief Payments IP seeks as an intervenor in the California case.” 

The Court then held that a stay of the Maryland Case was appropriate based on a balancing of the aforesaid factors because:

(1) the California court had assumed in rem jurisdiction over the Domain (weighing in favor of abstention);

(2) the California and Maryland courts were equally convenient to Payments IP  and any minimal convenience difference as between the other parties was mitigated by the fact that, if the Maryland Case were not stayed, the parties would likely be required to litigate in both forums (either neutral or weighing in favor of abstention);

(3) it was desirable to avoid piecemeal litigation (weighing in favor of abstention);

(4) the California court obtained jurisdiction before the Maryland Court and significantly more progress had been made in the California Case than in the Maryland Case (weighing in favor of abstention);

(5) jurisdiction of the Maryland Case was based on diversity of the parties and there were no federal questions at issue (either neutral or weighing in favor of abstention); and

(6) the California Case was adequate to protect the rights of Payments IP, as evidenced by Payments IP’s decision to intervene in that action before filing the Maryland Case, as well as the progress made in that action (either neutral or weighing in favor of abstention).

The full opinion is available in PDF.

Charles A. Peterson v. Evapco, Inc. (Ct. of Special Appeals)

Filed: July 5, 2018

Opinion by: Andrea M. Leahy

Holding: Pursuant to the “closely-related” doctrine adopted from other federal and state jurisdictions, a forum-selection clause in a Confidentiality Agreement may be used to assert personal jurisdiction over non-resident, non-signatories where the clause itself was valid; the claims arose out of the non-signatories’ status in relation to the Agreement; and the non-signatories were so closely related to the contract such that it was foreseeable for them to be haled into the forum court.

Facts: Appellees purchased a North Carolina cooling tower products company (the “Company”) from two spouses who are non-residents of Maryland (“Appellant Husband” and “Appellant Wife,” respectively). As part of the stock purchase agreement, Appellant Husband signed a Confidentiality Agreement that contained a non-compete clause and a forum-selection clause designating Maryland. Appellant Husband remained an employee of the Company until his termination for the conduct that forms the basis of the underlying lawsuit.

Appellees claimed that Appellant Husband had, individually and through two companies (the “Appellant Companies”) sold cooling tower products to Appellees’ customers. Appellant Companies are wholly owned by Appellants and were organized in North Carolina and Georgia, respectively. Appellees sued for breach of the Confidentiality Agreement and tortious interference of contractual relations, among other counts. Appellant Wife and Appellant Companies filed a joint motion to dismiss for lack of personal jurisdiction. The Circuit Court for Carroll County denied the motion.

Analysis:  Appellant Wife argued that she did not consent to jurisdiction in Maryland and did not execute the Confidentiality Agreement, and even if she had, it had expired. Appellant Companies argued that they had no contact with Maryland. Appellees initially argued that Appellant Wife transacted business in Maryland by signing the stock purchase agreement, which was governed by Maryland law, and that Appellant Wife and Appellant Companies are affiliates and alter egos of Appellant Husband. On appeal, Appellees argued that no analysis under the long-arm statute or due process was necessary.

On appeal, Appellees argued that the court could assert personal jurisdiction under the “closely-related” doctrine, which holds that a non-signatory to a contract may be bound by the forum-selection clause if the non-signatory is so closely related to a dispute that it would be foreseeable that it would be bound. The Court held that the doctrine applies to non-signatory, non-residents in the context of motions to dismiss for lack of personal jurisdiction, citing case law from various jurisdictions.

The Court adopted the three-prong test articulated in Carlyle Inv. Mgmt. LLC v. Moonmouth Co. SA, 779 F.3d 214 (3d Cir. 2015). The Carlyle Court had analyzed the application of the doctrine in the context of non-signatory defendants’ motions to dismiss for lack of personal jurisdiction in several Delaware cases. Carlyle held that a defendant who had not signed a subscription agreement was nonetheless bound by its forum selection cause because several of the agreement’s provisions explicitly referenced the close relationship among the various, inter-connected defendant entities. Likewise, the various non-signatory entities on the plaintiff’s side could enforce the clause because they were affiliates. Also, but for the original subscription agreement that contained the forum selection clause, the disputes at issue—concerning, in part, subsequent release agreements—would not have arisen.

Applying the Carlyle test, the Court held: (1) that the forum selection clause was valid; (2) that Appellees’ claims arose out of Appellant Wife’s and Appellant Companies’ status in relation to the Confidentiality Agreement; and (3) that Appellant Wife and Appellant Company were closely related to the contractual relationship so that it would be foreseeable that they would be bound. To determine the third question, the Court examined the non-signatory’s ownership of the signatory, its involvement in negotiations, the relationship between them, and whether or not the non-signatory received a direct benefit from the Confidentiality Agreement.

As for Appellant Wife, her husband’s execution of the Confidentiality Agreement was consideration for the sale of the Company, and the entire case is premised on his conduct—in concert with her and the Appellant Companies—that purportedly violated the Confidentiality Agreement. She was a signatory of the stock purchase agreement, which explicitly referenced the Confidentiality Agreement. Also, through her ownership of Appellant Companies, she directly, financially benefitted from her husband’s conduct.

As for Appellant Companies, Appellant Husband was a co-owner and an officer of both; he was the registered agent of one; the principal places of business were the home address; he had signed checks and tax forms on their behalf; and records confirmed that he had conducted business on their behalf. Appellant Companies had derived a benefit, as they had conducted business with Appellees’ suppliers and competitors. Appellant Husband alone involved the Appellant Companies in the situation at issue. To ignore this would allow Appellant Husband to evade the forum-selection clause and undermine the Confidentiality Agreement. Thus, the Court affirmed.

The opinion is available in PDF here.

Gary W. Stisser v. SP Bancorp, Inc. (Ct. of Special Appeals)

Filed: November 29, 2017

Opinion by: Andrea M. Leahy

Holding: In a shareholder class action lawsuit for breach of directors’ fiduciary duties following a merger, Maryland did not have personal jurisdiction over directors of the company incorporated in Maryland, nor over the Texas-based merging company because under the jurisdictional analysis it is insufficient that the Texas-based merging company merely incorporated a subsidiary in Maryland to facilitate the merger but conduct no other business activity there, and mere directorship in a Maryland company is insufficient given the absence of factors such as: a director-consent statute, actual business activity in Maryland, and any merger-related activities directed toward Maryland.

Facts: Appellants are shareholders of a company incorporated in Maryland (the “Company”). Appellants filed a shareholder class action lawsuit for breach of fiduciary duties following the merger of the Company into a Maryland subsidiary (the “Maryland Subsidiary”) of a bank holding company incorporated under Texas law with its principal place of business in Texas (the “Holding Company”). The lawsuit named both the Company and its directors (the “Directors”), as well as the Holding Company and its Maryland Subsidiary, as the defendants. 

Appellants are not residents of Maryland. They owned shares in the Company. The Company was incorporated in Maryland, but its headquarters and principal place of business were located in Texas. The Company served as a holding company and parent of a Texas-chartered state bank. The Company did not have any offices in Maryland and did not employ any individuals in Maryland. The Directors did not reside in Maryland, nor were they employed there. The merger negotiations with the Holding Company took place in Texas. 

The Circuit Court for Baltimore City granted motions to dismiss by the defendants, finding in part that the Court lacked personal jurisdiction over the Directors and the Holding Company. The questions on appeal were whether the Holding Company subjected itself to personal jurisdiction in Maryland by forming the Maryland Subsidiary, and whether the Directors were subject to personal jurisdiction because they filed the Articles of Merger in Maryland.  

Analysis: Personal jurisdiction over out-of-state defendants must be established under Maryland’s long-arm statute and comport with the Due Process Clause of the Fourteenth Amendment. Appellants argued that Maryland had general jurisdiction over the Holding Company because it formed the Maryland Subsidiary as an instrumentality or alter ego, and exercised complete control over the Maryland Subsidiary until it was shuttered following the merger. Appellants did not argue the Holding Company was “at home” in Maryland under the traditional  general jurisdiction analysis. 

The Court held that the incorporation of and control over a subsidiary in Maryland is insufficient to establish general jurisdiction over the nonresident parent company, citing in support DaimlerChrysler AG v. Bauman, 134 S. Ct. 746 (2014). In Daimler, Argentine residents sued a U.S. subsidiary of a German parent company whose Argentine-based subsidiary allegedly collaborated in government war crimes. The Supreme Court rejected the establishment of personal jurisdiction over a parent company due merely to its control over a resident subsidiary. Thus, Appellants’ argument fails. 

Moreover, even if the Maryland Subsidiary were an alter ego of the Holding Company, the Holding Company would only be subject to personal jurisdiction upon a showing that it was “at home” in Maryland. Normally, this means the place of incorporation and principal place of business.  

The Court also rejected Appellants’ claim that the Holding Company’s actions of forming the Maryland Subsidiary and consummating the merger in Maryland subjected the Holding Company to specific jurisdiction.  The Court found that the Holding Company did not “transact business,” pursuant to Maryland’s long-arm statute, because the mere filing of the Articles of Incorporation of the Maryland Subsidiary are insufficient.  The Maryland Subsidiary was not intended to do business in Maryland and did not direct activities toward Maryland residents. The Holding Company did not have offices or solicit business in Maryland, nor did it appoint a registered agent there. Moreover, the filing of the Articles of Incorporation is only tangentially related to the underlying claims, and thus insufficient for specific jurisdiction. Additionally, the filing of the Articles of Merger is also insufficient because these were not filed by the Holding Company. 

The Court rejected the argument that by accepting directorship in the Company, the Directors are subject to personal jurisdiction in Maryland. The Maryland legislature never enacted a “director consent” statute which is necessary to provide prospective directors notice sufficient enough to satisfy the Due Process Clause in light of the Supreme Court’s ruling in Shaffer v. Heitner, 433 U.S. 186 (1977). The Court also held that the Pittsburgh Terminal Corp. v. Mid Allegheny Corp., 831 F.2d 522 (4th. Cir. 1987) ruling — which held that a director-consent statute is not always necessary because Shaffer did not require any particular statutory “words of art” — did not apply here because the Pittsburgh Terminal corporation actually did business in the forum state, unlike the Company here. 

The Court also rejected the Appellants’ argument that the Directors are subject to personal jurisdiction because the Directors caused the merger in Maryland and filed the Articles of Merger in Maryland. Appellants did not allege that the Directors directed any contact toward Maryland with respect to the merger. The Directors were non-residents who never entered Maryland in connection with Company business. The filing of the Articles of Merger was the only act that occurred in Maryland. The filing cannot be imputed to the Directors for jurisdictional purposes because the Directors did not file the Articles of Merger personally and did nothing more than participate in the merger decision.

The opinion is available in PDF here.

In re American Capital, Ltd. Shareholder Litigation (Cir. Ct. Mont. Cnty)

Filed: July 12, 2017

Opinion by: Ronald B. Rubin

Holding:  A claim that a transaction is subject to the entire fairness standard of review survives a motion to dismiss under Delaware law where a minority shareholder exercised actual control over corporate decision-making by apparently forcing a quick sale for its own short-term gain, threatening ouster of the board to pressure members to ignore other serious bids and alternative courses of action at better values, and demanding unique and unjustifiable compensation for the deal.

Facts: 

Plaintiffs are the common shareholders of American Capital Ltd. (the “Company”). Following a settlement with the Company’s directors and officers, the only remaining Defendant was a management corporation described as being an activist hedge fund. From 2014 to 2015, the Company’s board regularly considered strategic options for the Company and eventually decided on a plan to spin the Company off into a new business development company, which the Company would manage. On September 20, 2015, the Company announced the spin-off plan and requested shareholder approval.

On November 16, 2015, Defendant emailed the Company CEO reporting an 8.4% ownership interest in the Company, and stating their intention to file a preliminary proxy contesting the spin-off plan. This was followed up by a telephone call informing him of their intention to remove him, the management and the board. Shortly thereafter, Defendant sent a letter criticizing the management and board, an attack on the spin-off plan, and a press release. Defendant urged the Company to drop the spin-off plan, replace the board, and undertake a strategic review. Defendant also filed a proxy statement with the SEC contesting the spin-off and urging shareholders to vote against any proposal by the board. After threatening to publicly call for the resignation of the CEO, Defendant began to by-pass him in dealings with the Company.

Shortly thereafter, the Company announced the formation of a strategic review committee to review the Company’s prospects, including a possible sale. Defendant reported an increase in ownership to 9.1%, and on that same day, a Capital Corporation sent the CEO a letter urging the Company to enter into a transaction with them. Defendant made recommendations regarding the review and sought to meet with the committee and the Company’s investment bankers. It continued to demand a sale and to threaten to seek the replacement of the Company’s board and management. It provided a list of potential buyers and continued to report increases in its ownership. When the board announced the decision to solicit purchase offers, Defendant called it the right course of action. Defendant also requested that the Company postpone the annual shareholder meeting and director nomination deadline.

After the Capital Corporation made an unsolicited purchase offer, Defendant urged the Company to reach a deal as soon as possible. The Company’s financial advisers met with the Defendant’s representatives. Defendant encouraged the investment bankers to finalize the sale even if it meant selling at a loss. In February 2016, the Company proposed three alternative scenarios to a quick sale of the whole Company. The Company’s management believed the shareholders would receive greater returns through an orderly liquidation or by remaining a standalone company. Yet the Company’s board continued to push for a sale, as demanded by the Defendant. The board once again pushed back its annual meeting, which extended the deadline for the Defendant to file a competing proxy. Furthermore, the committee and investment bankers withheld the liquidation scenario projections from the Company’s board.

The Company received several bids to acquire it. Defendant signed confidentiality agreements with the Company affording it unfettered access to the review process, and with the Capital Corporation to view its bid information. In a meeting with the Company’s legal and financial advisers, Defendant expressed a strong preference for the Capital Corporation’s bid—even though other offers appeared to have a better value. It also expressed a preference for a quick sale over an orderly liquidation—even at a lower value.

Soon after, the Company’s board outright rejected a competing bidder who increased its proposal subject to an exclusivity provision. The Capital Corporation submitted a revised bid and negotiated a voting agreement to lock in Defendant’s support. Defendant threatened the Company that if it failed to settle with Defendant for its expenses and close the deal, the Company’s board would be reconstituted. When the Company tried to revise terms of settlement, the Defendant threatened another strategic review unless the sale closed.

In May 2016, a merger with the Capital Corporation was announced. The Company approved a settlement agreement on the following terms: if the deal did not close, the board members would be replaced by the Defendant’s selections, the chairman would resign, and another review would be undertaken. In exchange, the Defendant would not launch a proxy fight before the next annual meeting. The Company also agreed to pay the Defendant $3 million.

Defendant filed a Motion to Dismiss the Plaintiff’s Amended Complaint on the grounds that personal jurisdiction is lacking, and that the transaction is not subject to entire fairness review under Delaware law. The Court denied both Motions.

Analysis: 

Defendant satisfied the transacting business prong of the Maryland long-arm statute and the purposeful availment requirement of the Due Process clause because: the Company was headquartered in Maryland where it employed hundreds  (many of which were laid off due to the sale); Defendant initiated many calls to Maryland; Defendant triggered the process and events that led to the filing of the case when it sent the initial email (followed by many others) to the Company; and until the deal closed, Defendant enmeshed itself in the Company’s strategic review process and the board’s deliberations. These constitute repeated and intentional efforts towards the sale of a Maryland-based company. From the facts pleaded, it also appears that Defendant intentionally acquired a large portion of Company stock and increased it for a single purpose—to force a sale and make a short-term gain.

As for the substantive issue, Plaintiffs viewed the merger as the predictable result of Defendant’s pressuring the board to sell or be ousted. Defendant counters that the merger was the best value reasonably available, was vetted through a competitive bidding process, and that the Company’s board merely took the input of a large shareholder seriously.

Where, as here, a shareholder owns less than 50% of the Company’s stock, Plaintiffs must allege domination through actual control of corporate conduct. Under Delaware law, a minority shareholder is a controller if it has such formidable power that it exercises actual control over corporate decision-making. Here, Plaintiffs allege that Defendant was a controller for the specific purpose of forcing the sale, and that Defendant reaped unique benefits unavailable to the other shareholders. The controller test is a fact-based inquiry difficult to satisfy, but this case meets the threshold.

Here, the facts if proven would amount to actual control over the sale. No other shareholder received separate monetary compensation for the deal. The sale was already vetted by the financial advisers, and it is not clear what value Defendants added to merit the $3 million payment. The Plaintiffs adequately laid out the profit-making playbook for activist hedge funds, by forcing quick sales such as this one, which took only about six months.

Also, enough facts were pleaded to show that the board did not act independently. Defendant dominated the process and favored the Capital Corporation to the exclusion of other serious bidders that offered better long-term value. The board effectively took no actions to negotiate with those bidders. Collectively, the active role played by Defendant, the apparent willingness of bidders to pay a higher price, and the discount to book value of the stock gives credence to contention that the board knew the Capital Corporation undervalued the Company, but brushed this concern aside in order not to lose a proxy battle to Defendant. This amounts to a colorable claim of board domination. Thus, Plaintiffs sufficiently invoke the benefit of the entire fairness standard of judicial review.

The full opinion is available in PDF.