Non-Signatories May Be Bound By Forum Selection Clause

In the recent matter of Highway to Health, Inc. v. Bohn, No. 2018-0707-AGB (Del. Ch. April 15, 2020), the  Court of Chancery addressed the requirements necessary to bind a non-signatory to a forum selection clause.

The directors of Highway to Health (“Highway”) sought a declaratory judgment against recipients of stockholder appreciation rights – non-residents of Delaware – (“SARs Recipients”) that the directors did not breach any fiduciary duty or any contractual obligation owed to the SARs Recipients and that a new appraiser’s valuations were binding.

The SARs Recipients moved to dismiss the DJ action for lack of personal jurisdiction.  The company contended that the court had personal jurisdiction over the SARs Recipients under the Delaware long-arm statute and the forum selection clause in a 2013 Stockholders Agreement.  The Court found for the SARs Recipients and dismissed the action.

The Delaware Long-Arm Statute

To exercise personal jurisdiction under Delaware’s long-arm statute, Plaintiffs must show that “(1) there is a statutory basis for exercising personal jurisdiction; and (2) subjecting the nonresident defendant[s] to jurisdiction in Delaware would not violate the Due Process Clause of the Fourteenth Amendment.”  Plaintiffs are entitled to reasonable discovery to meet this burden; however, the Plaintiffs here did not attempt any discovery in aid of establishing personal jurisdiction.  The Court found that Plaintiffs failed to demonstrate that “any act actually occurred in Delaware with respect to the dispute in this case” and as such, the long-arm statute did not confer jurisdiction.

2013 Stockholders Agreement

In order for the SARs recipients to be bound by the forum selection clause in the 2013 Stockholders Agreement, a three-part test must be satisfied:

(i) the forum selection clause is valid; (ii) the non-signatories are third-party beneficiaries; and (iii) the claims arise from their standing relating to the agreement.

Although the SARs Recipients disputed the second and third elements, the Court focused on the third element and found Plaintiffs failed to demonstrate that the claims arose from their standing relating to the agreement because the agreement containing the forum selection clause was not the same agreement that gave rise to the substantive claims brought by or against the non-signatories.

Read the full opinion here.

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