Delaware Court Of Chancery Exercises Subject Matter Jurisdiction Appropriate Over Merger Agreement Dispute “Legal” Claim
On January 8, 2021, Vice Chancellor Kathaleen McCormick of the Delaware Court of Chancery denied in part a motion to dismiss a complaint by former stockholders of COR Securities Holdings, Inc. (the “Company”) against the buyers of the Company. Legent Grp., LLC v. Axos Fin., Inc., No. C.A. No. 2020-0405-KSJM (Del. Ch. Jan. 08, 2021). Plaintiffs asserted a claim seeking a declaratory judgment that defendants were not entitled to indemnification under the merger agreement. The Court rejected defendants’ contention that it should decline to exercise jurisdiction because it was a “purely legal”—rather than “equitable”—claim. The Court noted that there was no dispute that it had at least discretionary statutory jurisdiction pursuant to Delaware General Corporation Law (“DGCL”) Section 111(a). Declining to dismiss the claim, the Court declared it “appropriate” to exercise jurisdiction, even if discretionary, and therefore found it unnecessary to determine whether jurisdiction under the statute is mandatory.
The buyers paid part of the consideration for the sale in the form of promissory notes. The parties agreed in the merger agreement that the amounts withheld and subject to the promissory notes would be the sole source of payment for indemnification claims that the buyers might make under the merger agreement. The buyers subsequently tendered a demand for indemnification for a purported breach by plaintiffs of the representations and warranties under the merger agreement and then allegedly defaulted on the promissory notes.
Plaintiffs asserted a declaratory judgment claim regarding defendants’ demand for indemnification, along with claims for breaches of the promissory notes. Defendants moved to dismiss for lack of subject matter jurisdiction.
As the Court explained, the Delaware Court of Chancery is Delaware’s court of equity and has jurisdiction only over equitable claims and relief or pursuant to a specific statutory delegation. DGCL Section 111(a) confers subject matter jurisdiction on the Delaware Court of Chancery over “[a]ny civil action to interpret, apply, enforce or determine the validity of the provision” of an agreement governed by DGCL Section 251, which in turn addresses agreements for mergers of Delaware corporations. The Court noted that the plain language of Section 111(a), which indicates that such claims “may be brought in the Court of Chancery,” seemed to support the proposition that jurisdiction was “permissive,” but added that would conflict with decisions that had interpreted parallel statutory jurisdiction provisions in the partnership and LLC contexts as mandatory.
Regardless, the Court explained, Section 111(a) was adopted in part “to take advantage of the Court’s special corporate expertise over certain subject matter, like the interpretation of merger agreements.” Moreover, the Court found that defendants provided “no compelling reason why this court should defer utilizing its expertise to interpret the Merger Agreement at issue in this case.” Thus, the Court denied the motion as to this claim.
The Court, however, dismissed the promissory note breach claims for lack of subject matter jurisdiction because of an arbitration provision in the notes. The Court held that it did not have subject matter jurisdiction “to resolve disputes that litigants have contractually agreed to arbitrate.”