Monday, April 23, 2012

Chiappinelli on Director Consent After Nicastro

Eric Chiappinelli (Creighton University) has posted The Myth of Director Consent: After Shaffer, Beyond Nicastro to SSRN.

Delaware, the most important state in corporate America, routinely invokes an unconstitutional statute, section 3114, to assert personal jurisdiction over virtually every non-resident director and officer. The Supreme Court’s June 2011 decision in J. McIntyre Machinery, Ltd. v. Nicastro underscores section 3114’s constitutional problems, which were plain in 1977 when Delaware adopted it in the wake of Shaffer v. Heitner. 

My article is the first in a generation to challenge section 3114 and the first ever to consider it in light of Nicastro. I expose the Delaware Court of Chancery’s rationalizations upholding the statute and bring to light that court’s failure to conduct the required minimum contacts analysis. The reality is that the Court of Chancery routinely claims personal jurisdiction over virtually everyone sued for breach of duty as a director or officer of a Delaware corporation. 

The current fiduciary duty litigation against Berkshire Hathaway head Warren Buffett and David Sokol, his former second-in-command turned antagonist, exemplifies the statute’s continuing harm. None of the defendants and none of the named plaintiffs lives in Delaware. Berkshire Hathaway has no business office, no assets, and no employees there. No relevant events took place in Delaware, nor has any harm been suffered in Delaware. This lack of any connection to Delaware is nearly universal in Delaware corporate litigation. Simply put, no defendant has minimum contacts with Delaware.

Yet Delaware claims that Buffett, Sokol, and every other Berkshire officer and director “impliedly consents” to in personam jurisdiction simply because Berkshire Hathaway is incorporated there. The Supreme Court has rejected jurisdiction by “implied consent” for over 50 years. Sokol vehemently contests that claim and is spending a significant amount of money to litigate jurisdiction.

I propose an amenability statute for officers and directors rooted in their actual consent. This statute is workable and is constitutional under Nicastro. It will help stem the migration of corporate litigation away from Delaware, and will provide a desirable measure of neutrality in Delaware between management and stockholders.


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