Tuesday, June 22, 2021
Forum Selection Clause Concealed by Management Held Unconscionable as Applied to Employee/Shareholder
Kathaleen McCormick (left) was sworn in last month to be the first woman Chancellor in the 230-year history of Delaware's Chancery Court. Just before she was nominated to that post, she issued a letter opinion in UBEO Holdings, LLC et al. v. Drakulic, indicating that the decision is of little precedential value and of interest mostly to the parties. Ah, Chancellor McCormick, you underestimate our interest!
Michael Drakulic worked for Ray Morgan, a copier and printer company. In 2018, UBEO Holdings (UBEO) acquired Ray Morgan. Because Drakulic owned a fraction of a Class B share, he was a stockholder/signatory to the merger agreement, which bound all such stockholder signatories to a five-year non-compete. All other individuals in that category retired, having made between $2 million and $22 million on the transaction. Drakulic, a mid-level manager, made the equivalent of nine-months' pay, and he continued to work. Two years later, Drakulic wanted to go to work for one of UBEO's competitors. UBEO filed suit in Delaware's Chancery Court to enforce its non-compete clause. Drakulic challenged the court's jurisdiction.
The issue in the case was whether Drakulic, having signed a signature page but never having seen the merger agreement to which it related, could be bound by a choice of forum clause in that agreement. (Then Vice-) Chancellor McCormick noted that parties are routinely bound by agreements that they have not read. But she found that Drakulic was not so bound, because: "the agreement was negotiated by people to whom Drakulic reported and who harbored undisclosed conflicts of interest; Drakulic was never provided a copy of the merger agreement and was not informed of the agreement’s forum selection provision or other provisions restricting his livelihood; and Drakulic was intentionally kept in the dark of the contents of the agreement." She granted Drakulic's motion to dismiss without prejudice to UBEO's right to file its claims in an appropriate forum.
The details of the merger negotiations are idiosyncratic but interesting. Drakulic was the only Ray Morgan shareholder who was not part of the negotiating team. The other members of the team considered the non-compete immaterial, given how much they stood to make from the transaction and their ability to obtain an equity interest in UBEO. The non-compete was not immaterial to Drakulic. During the negotiations, despite Drakulic's unique position, he was not apprised of the terms of the merger. In fact, when some details of the merger leaked out and Drakulic made requests for changes that would benefit him, the negotiating team decided to keep further information relating to the merger "close to the vest."
Actually, the negotiating team went a bit beyond that. They never shared the merger agreement with Drakulic, despite sending him a signature page, and they sent out a misleading message to employees, including Drakulic stating that there would not be “any negative impact to [them] due to this strategic financial investment.” Even after informing Drakulic of the non-compete in July 2020, UBEO did not share the agreement with him, and he only saw the the forum selection clause when UBEO attached it to its complaint.
Court's routinely enforce forum selection clauses attached to contracts that parties do not read. However, in this case, the court found that enforcement of the clause would be unconscionable. The company intentionally withheld information from Drakulic. Even in the run-up to litigation, when Drakulic requested to see the merger agreement, UBEO provided only excerpts and did not include the forum selection clause.