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Delaware Court Of Chancery Finds Implicit Consent To Jurisdiction By A Foreign Controlling Stockholder In Connection With The Adoption Of A Delaware Forum-Selection Bylaw At The Time Of An Interested Transaction
03/26/2019On March 15, 2019, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery declined to dismiss a derivative suit brought by minority stockholders of Pilgrim’s Pride Corporation (the “Company”) against the Company’s controlling stockholder, JBS S.A. (“Parent”), and five of the Company’s directors affiliated with Parent. In re Pilgrim’s Pride Corp. Deriv. Litig., No. C.A. 2018-0058 (Del. Ch. Mar. 15, 2019). Plaintiffs challenged the Company’s $1.3 billion acquisition of one of Parent’s other subsidiaries in a deal that Parent solicited, alleging that the Company did not engage in “true arm’s-length bargaining” and that it paid a price unsupported by the Company’s internal analyses. Parent, an entity organized under Brazilian law, moved to dismiss for lack of personal jurisdiction. The Court held that Parent “consented implicitly” to personal jurisdiction in Delaware “when its representatives on the Board participated in the vote to adopt [a Delaware] Forum-Selection Bylaw.” The Court also found allegations of participation in the deal sufficient at the pleading stage to preclude dismissal of the claims against each of the Parent-affiliated directors, even though the board had delegated exclusive negotiation and approval authority to a special committee of independent directors.
Parent had the right to designate six of the nine board members, while the Company’s minority stockholders were entitled to elect the remaining three directors. Each of the five defendant directors was an executive officer of Parent or its controlled subsidiaries, including one director who served as CEO of the Company. Allegedly in need of cash, Parent made an initial overture regarding the sale of its subsidiary (including an indication of price) to one of these five directors, which he shared with the CEO who then engaged in further discussions with Parent. The board thereafter formed a special committee consisting of the three independent directors and delegated to it “exclusive power and full authority” to negotiate, evaluate, and implement the transaction. But plaintiffs alleged that the CEO continued to participate and advocate for the deal. Moreover, for purposes of complying with a covenant in a bond indenture, the entire board also voted to approve the transaction. Additionally, when the special committee approved the deal, the full board adopted a bylaw that selected the Delaware Court of Chancery as “the sole and exclusive forum for” disputes related to the internal affairs of the Company.
As to Parent’s personal jurisdiction defense, the Court explained that this case involves a controlling stockholder whose representatives on a Delaware corporation’s board “comprised a majority of the directors who voted unanimously to adopt a forum selection provision in conjunction with an insider transaction and who selected the courts of this state for precisely the type of litigation in which Parent would be the principal defendant.” The Court held that—on the particular facts alleged—the controlling stockholder “consented implicitly to the existence of personal jurisdiction in this state.”
The Court also rejected the five defendant directors’ argument that they were not sufficiently involved in the deal to face liability. The Court found that allegations with respect to the two directors that participated in discussions, including the Company’s CEO, were “more than sufficient” to survive a motion to dismiss. As to the other three, despite recognizing that their approval of the acquisition was “a slim reed” on which to support these claims, the Court nonetheless found that dismissal was not warranted because it was “reasonably conceivable” that, through their vote, they had “facilitated the [a]cquisition and participated in its effectuation.”
