Delaware Court Of Chancery Finds Personal Jurisdiction Over LLC “Acting Manager” In Post-Closing Investor Action Challenging Merger With SPAC
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  • Delaware Court Of Chancery Finds Personal Jurisdiction Over LLC “Acting Manager” In Post-Closing Investor Action Challenging Merger With SPAC

    On October 26, 2022, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a motion to dismiss for lack of personal jurisdiction claims of tortious interference asserted against a principal of a private equity fund (the “Fund”), which had been the majority investor of a limited liability company (the “LLC”).  In re P3 Health Grp. Holdings, LLC, Consol. C.A. No. 2021-0518-JTL (Del. Ch. Oct. 26, 2022).  Plaintiff — which had been the second largest investor in the LLC — alleged that defendant tortiously interfered with its contractual rights under the limited liability company agreement in connection with the merger of the LLC with a special purpose acquisition company (“SPAC”).  The Court concluded that the complaint adequately alleged that defendant “participated materially in the management” of the LLC such that he “can be served [process] as an acting manager” and that the “exercise of personal jurisdiction over [defendant] comports with … due process.”

    The LLC was a Delaware limited liability company in the business of population healthcare management.  In advance of the merger, the Fund had the right to appoint five of the eleven members of the LLC’s board.  Defendant was not one of the members of the board, but allegedly led the negotiations on behalf of the LLC with the SPAC.  Plaintiff objected to the merger and asserted claims against several defendants after it closed.  This decision addressed only defendant’s motion to dismiss on personal jurisdiction grounds.

    The Court explained that the Delaware Limited Liability Company Act, 6 Del. C. § 18-109(a), “provides a mechanism for serving process” both on managers who are officially named as such and also on any other person who “participates materially in the management of the limited liability company.”  The Court referred to these two different types of “managers,” respectively, as “formal managers” and “acting managers.”  The Court explained that the statute provides a basis for specific personal jurisdiction over both kinds of managers with respect to claims that relate to the business of the limited liability company or for violations of duties to the limited liability company or its members.

    According to the Court, defendant was not a formal manager and did not even hold any official role with the LLC.  Nevertheless, the Court found that the complaint sufficiently alleged “specific facts” giving rise to a “pleading-stage inference” that defendant “qualifies as an acting manager for purposes of claims challenging the de-SPAC merger.”  The Court relied on, for example, allegations demonstrating that defendant purportedly (i) “made decisions on behalf of [the LLC]” in connection with the transaction, (ii) directed the LLC’s actual managers to “take action” regarding the deal, (iii) gave instructions to the LLC’s advisors, including investment bankers and outside counsel, and (iv) had access to information related to the transaction that was not made available to certain other formal managers of the LLC.  The Court also noted that defendant had a history of “taking action” on behalf of the LLC, including having led negotiations between the LLC and plaintiff when the latter invested in the LLC.

    Additionally, the Court determined that the same allegations supported a finding that the exercise of personal jurisdiction over defendant on the claims at issue is consistent with due process.  The Court also explained that “[a]n individual who chooses to become involved in the business and affairs of a Delaware entity must expect to be subject to suit in the courts of the chartering state for actions taken on the entity’s behalf.”  In this regard, the Court noted that “[a] chartering state has a strong interest in resolving disputes involving the internal affairs of the entities that it creates.”
    CATEGORIES: Corporate GovernanceSPACs